Mergers: what's involved?
Accounts and Legal is one of only a few firms in the UK that is able to offer legal advice alongside its accounting services, and that's particularly useful when considering whether to go ahead with an acquisition or merger.
Two types of merger
There are essentially two types of merger: an operational merger or a full corporate merger.
An operational merger is essentially an acquisition of one company by another, where typically the larger company conducts due diligence on the smaller company, pays for the acquisition mostly in cash and then makes the target company a subsidiary of the acquiring group.
A corporate merger takes place when both companies conduct due diligence on each other. This process helps to determine a fair valuation of each entity and enables both parties to make an assessment of the likely magnitude of the commercial synergies between the two. Once this is done, one company will swap its shares for newly issued shares in the other in a proportion that is determined by the agreed valuation of the two parts.
Merger or acquisition?
Selling to a party acquiring in cash will suit vendors who are seeking to exit the business and achieve a complete operational exit.
Mergers tend to suit business that don’t have sufficient cash reserves to purchase a target business outright, or are unwilling or unable to raise enough bank debt to do so.
However, the most compelling reason for an acquisition is where the sum of the value of the combined entities exceeds the value of the individual parts.
This might well be the case when the combined entities might be able to operate more profitably by removing some duplicative administrative processes, or when the combined purchasing power of the two companies means that they could strike better deals with their suppliers.
Equally, combining the market shares of two competitors might mean they can compete with a larger rival on a more equal footing.
The post-merger integration process is similar in both cases, and in fact it can be helpful to describe an acquisition as a merger to demonstrate the parity of the relationship when communicating the news to clients and employees. Arguably the post-merger integration process is just as important as deal itself.
Contact us to discuss how we can help
At Accounts and Legal, we have dedicated corporate solicitors who work alongside the accountants in our specialist corporate finance team. So if you are considering your exit options or contemplating purchasing a rival, drop us a line and we’d be happy to discuss it.