What is the difference between a merger and an acquisition? Mergers and acquisitions are common terms in corporate finance. They are often referred toby the English abbreviation M&A (Mergers and Acquisitions). In this blog we dive deeper into this subject and we will highlight different aspects of a merger and acquisition process.
What is the difference between a merger and acquisition?
Although mergers and acquisitions are regularly used interchangeably as synonyms, they are two different concepts with different meanings.
Mergers
When companies merge, they continue together, often under a new name, as one new company. Shareholders of both separate entities become partial shareholders of a new company. In practice, these are often companies of equal size that continue together. In this way they expand their position in the market while reducing competition.
Takeover
An acquisition often involves companies of unequal size. In this, there is a larger company that buys a smaller one. The acquired company fully integrates into the buyer's business. It is also possible that the acquired company continues to operate semi-autonomously. It still operates under its own name, but with a different owner.
Different forms of mergers and acquisitions
The difference between an acquisition and a merger also determine which form one takes. Both mergers and acquisitions have different forms. Which form is relevant depends on the situation.
Merger forms
In the field of mergers, we distinguish between two different forms; the legal merger and the administrative merger. We briefly explain these below.
Legal Merger
A legal merger involves two or more legal entities continuing as one legal entity. This can be a new legal entity or an existing legal entity.
Administrative merger
In an administrative merger, two or more foundations or associations merge. This is called an administrative merger , because foundations and associations do not transfer control through shares.
Takeover forms
In the case of acquisitions, a distinction is made between two forms, namely the asset-liability transaction and the share transfer. The choice for one of the two forms is determined by the purpose of the acquisition and the legal entity of the seller.
The share transfer
Suppose a company transfers its activities to a B.V. or N.V.. It is then possible to transfer the legal and economic ownership of the company by selling the shares. The sale of the company is then recorded in a purchase agreement. Hereby all the shares of company A, 100% are transferred to company B.
The asset-liability transaction
It also happens that the seller uses a legal form in which there is no distribution of capital via shares. The acquisition is realized in the form of an assets/liabilities transaction. In an asset-liability transaction one does not sell the shares of the company. Instead, one sells, in part, the assets and debts of the company. It can also happen that a B.V. chooses an asset-liability transaction when the seller wants to sell only part of the business. In this case the sales agreement describes which part of the company is sold and what rights and obligations are attached.
What does the process look like in a merger or acquisition?
The steps in a merger or acquisition process depend on whether you are on the buy or sell side. Below we explain the steps in an acquisition process from the seller's perspective.
Preparatory phase
An important aspect of selling your business is in the preparation. The sales readiness of your company is determined by a large number of questions. These questions relate to the business model as well as financial, legal and tax issues. Based on this information a sales memorandum, an information package about your company, is prepared. Potential buyers can view this, after signing a confidentiality agreement. The list of potential buyers is drawn up in consultation with you. This is called the longlist.
Valuation
The analyses in the preparatory phase are very important for making an assessment of the value of the company. This is an important aspect because a valuation provides insight into the feasibility of the intended acquisition. There are several methods to accurately determine the value of a company.
Market approach
Interested parties on the longlist will be approached by a teaser in consultation with you. A teaser is an anonymous document of about one page. In it you present the most important features of your company.
To begin, interested parties must sign a confidentiality agreement. Then they receive the sales memorandum of your company. Parties who are still interested after studying the sales memorandum are invited to a management meeting. At this meeting, the parties get to know each other and decide whether they will continue negotiations.
Negotiations
Based on the information memorandum and the management meeting, an offer can be made. Initially, this is a non-binding offer with which negotiations start. If an agreement is reached between the parties, a letter of intent is signed. After this it is time for the next phase: the audit.
Letter of intent and books examination
First, the letter of intent establishes the buyer's intention to enter into and negotiate a transaction. Second, it records agreements on the negotiation process. Thirdly, it also records the important subjects that have been agreed upon. Subsequently, a book examination takes place. The buyer who signs the letter of intent gets exclusivity. This gives the potential buyer insight into the legal, fiscal and financial data of the company.
Transaction documentation
Once the book search is satisfactorily completed, the transaction documentation can be prepared. The transaction documentation sets out, among other things, the terms of the sale.
What stakeholders play a role in a merger or acquisition?
Important stakeholders during a merger or acquisition process are the corporate finance advisors and lawyers. Corporate finance advisors assist you throughout the process and ensure that you can continue to focus on your business. Lawyers often play an important role in drafting the transaction documentation.
Another important group of stakeholders are the employees. When, as an entrepreneur, you choose to (re)purchase or merge a company, this has a major impact on the employees. They are the first to notice the consequences of changes in mission, vision and strategy. It is therefore important to take their interests into account in the choices you make.
For companies with more than 50 employees, you are required to establish a works council. The works council represents the employees and often has an advisory role during a merger or takeover process. Other important stakeholder groups that will be affected by a merger or acquisition are customers, suppliers and shareholders.
What is the role of a corporate finance advisor during a merger or acquisition?
In short, the difference between merger and acquisition is huge. In addition, buying or selling a business is something that most entrepreneurs do not have experience with. Given the complexity of the process, it is wise to engage an advisor to assist you. An advisor has the right specialized knowledge, experience and skills. For example, an advisor has extensive experience in negotiating and knows what the focal points are during the process.
Florijnz has an extensive network, which helps in finding suitable candidates, for your move or purchase process and we take care of the general process management.
Would you like more information about what we can add to a merger or acquisition process or schedule a no-obligation introductory meeting? You can contact us using the form below or the contact information.
Florijnz tries to distinguish itself as an advisor by focusing on sustainable transactions where entrepreneurs can look back on the long term with a satisfied feeling. In addition, we at Florijnz attach great value to the personal click with the entrepreneur, so that we as advisors can work with you to cash in on your passion.
