Mergers and Acquisitions: An Introduction
Andrew J. Sherman, Partner, Dickstein Shapiro Morin and Oshinsky LLP
Mergers and acquisitions are among the most effective ways to expedite the implementation of a plan to grow rapidly. Companies in all industries have grown at lightning speed, in part because of an aggressive merger and acquisition strategy. The impact of technology and the Internet has only further increased the pace and size of deals. Buyers of all shapes and sizes have many of the same strategic objectives—to build long-term shareholder value and take advantage of the synergies that the combined firms will create—but each industry has its own specific objectives.
Technology companies, in search of new ideas, new products, trained knowledge workers, strategic relationships and additional market share, have been the most acquisitive. Deals in the pharmaceutical industry are driven by the need to put more products into development pipelines and achieve certain economies of scale in combining research and development efforts. Defense industry mergers have been driven by shrinking federal budgets and the need to win private-sector. Deregulation in the energy and financial services industries have just begun to spawn deals driven by the ability to offer a more diversified range of services.
Merger-and-acquisition frenzy has created intense competition for the same target companies, where a premium is placed on price and speed. The fear in many boardrooms is that the company will be left out or left behind if it doesn't move quickly to acquire other businesses. Deals that used to take months to get done now close in a matter of days, especially if no regulatory approvals need to be obtained and no shareholder battles will take place as a condition for getting the deal completed. In this environment, acquisitions are moving so fast and are being bid up so high that the likelihood of problems and errors has increased dramatically.
You need to be armed with as much knowledge and as many tools as possible to be an effective entrepreneur in this marketplace. This article, first in a series, offers some insights into the process of combining companies the right way.
Merger or Acquisition?
The terms "merger" and "acquisition" are often confused and used interchangeably by business and financial executives. On the face of it, the difference may not really matter since the net result is often the same: Two companies (or more) that had separate ownership are now operating under the same roof, usually to obtain some strategic or financial objective. However, the strategic, financial, tax and even cultural impact of the deal may be very different, depending on how the transaction is structured. Merger refers to two companies joining (usually through the exchange of shares) to become one. Acquisition occurs when one company, the buyer, purchases the assets or shares of another company, the seller, paying in cash, stock or other assets of value to the seller.
In a stock-purchase transaction, the seller's shares are not necessarily combined with those of the buyer's existing company. They may be kept separate as a new subsidiary or operating division. In an asset-purchase transaction, the assets to be conveyed by the seller to the buyer become additional assets of the buyer's company, with the hope and expectation that the value of the assets purchased will, over time, exceed the price paid, enhancing shareholder value as a result of the transaction's strategic or financial benefits.
Reasons for Merger-mania
There is no single explanation for the current resurgence of merger and acquisition activity, and the full impact on the economy is complex and remains to be seen, but certain themes and trends have emerged. The key reasons deals are getting done are:
Strategy. Mergers and acquisitions are clearly more strategically motivated now than were their counterparts of the 1980s and early 1990s. Jobs are often being added, not lost, as a result of these deals. Companies are being built up, not busted up.
Value.The financing behind deals is sounder and more secure than ever before. Buyers are using their stock as currency and sellers are gladly accepting this form of payment, in lieu of or in addition to cash, which forces both parties to work together on a post-closing basis to truly enhance shareholder value.
Industry trends. These include rapidly-changing technology (computer industry), (fierce competition (telecommunications and banking), (changing consumer preferences (food and beverage industry), pressure to control costs (healthcare) and reduction in demand, (aerospace and defense contracts).
Need to transform corporate identity. For example, the airline ValuJet began looking for a merger partner to provide a new image that could offset the negative publicity caused by a major crash and revelations about its spotty safety records.
Spread risks and costs. Developing new technology (as in the communications and aerospace industries, researching new medical discoveries (medical device and pharmaceutical industries) or gaining access to new sources of energy (oil and gas exploration and drilling) account for a number of recent acquisition and merger deals.
Develop an international presence and expand market share. This market-penetration strategy is often more cost-effective than trying to build an overseas foothold from scratch.
Remain competitive or offset seasonal or cyclical market trends. The retail, hospitality, food and beverage, entertainment and financial services industries carried out mergers and acquisitions in response to the consumer's demand for "one-stop shopping."
Investment. The IPO boom of the late 1990s in the technology and Internet sectors contributed to the merger and acquisition frenzy. Proceeds from IPOs created large pools of cash earmarked for acquisitions, and sellers became more willing to take the buyer's stock as currency in the transaction.
Why Bad Deals Happen to Good People
Nobody ever plans in advance to make a bad deal. Many well-intentioned entrepreneurs have undertaken mergers and acquisitions that they later regretted because of classic mistakes such as lack of adequate planning, an overly-aggressive timetable to closing, failure to really look at possible post-closing integration problems or, worst of all, assuming synergies that turned out to be illusory.
The key premise of post-closing synergy is that the whole will be greater than the sum of its parts. But inadequate communication between buyer and seller, can lead to misunderstanding of what the buyer is really buying and the seller is really selling. Few take the time to develop a transactional team, work out a joint mission statement of the deal's objectives or solve post-closing operating or financial problems on a timely basis. Subsequent articles in this series will explore motivation, preparation and taking the necessary steps to make a merger or acquisition succeed.