Business Law Blog
THE LEGAL BLOG ON MERGERS & ACQUISITIONS
Mergers and acquisitions represents a corporate strategy through which corporate entities are acquired, divested and combined with one another so as to optimize the potential synergies attainable from such transactions. The preponderance of such transactions are acquisitions, for the sheer fact that it is very rare to have an equitable sharing of leadership between the consolidated corporate entities - instead, one party typically asserts its dominance over the combined corporate entity.
There are extreme variances with respect to the form and function of an acquisition. Certain acquisitions can be construed as friendly, wherein the various corporate entities cooperate in the negotiations with the intended aim of realizing an agreeable combination. Conversely, there are hostile acquisitions, wherein the takeover target is unwilling to be acquired or the target's board of directors has no prior knowledge of the delivered offer - such that the target corporation, its board of directors and/or its shareholders feel pressured into doing that which is not necessarily their preference [hence the hostile nature of such acquisitions].
Motivations for Mergers and Acquisitions
Mergers and acquisitions are driven by the corporate leadership's desire to increase their corporate entity's financial performance. Motivating principles may include the following:
1. Achieving economies of scale. The expectation that the merged or amalgamated company shall reduce its fixed costs by removing duplicate departments, operations and/or personnel, so as to lower the costs of the new company relative to the same revenue stream, thereby increasing profit margins.
2. Achieving economies of scope. Attempting to facilitate demand-side changes, wherein increasing or decreasing the scope of marketing and distribution of different types of products through the combined entities would improve overall financial performance.
3. Increasing revenue or market share. The intention is that the acquiring company will be absorbing a major competitor and thereby increase its market power [by capturing increased market share] to set prices and thereby improve its financial performance.
4. Cross-selling. By accessing the customer base of the acquired or merged corporation, the other corporation is capable of directly accessing that customer base which is already being serviced and/or supplied by the other corporation, thereby increasing the potential by which those customers will accept those services and/or supplies.
5. Synergy. Collaboration between the correct individuals and departments can produce results that are greater than the sum of their parts alone. It is the aspiration of leadership that such collaborative integration shall result in heightened synergies.
6. Taxation. Possible attainment of tax losses existing within the target corporation, that would enable the acquiring corporation to offset its own tax liability against those accrued tax losses. Tax laws, however, may preclude the realization of any or all of such tax losses by the acquiring corporation, based upon the particulars of the transaction and the underlying motivations, among other factors.
7. Geographic diversification. By expanding the scope of the product or service offering through an established channel, which previously had not been successfully or sufficiently engaged, so as to more effectively bring that one corporation's products and/or services to that untapped (or previously inaccessible) geographic region.
8. Resource transfer. By overcoming an uneven distribution of resources between locations, such that the integration of the target corporation's resources with the acquiring corporation's resources can create synergies through their integration and exchange of pertinent corporate resources.
9. Employees. Adding needed engineering, sales or other talent quickly.
10. Technology. Adding and integrating key technical capabilities and/or acquiring a disruptive technology.
11. Vertical integration. Represents the merging of [or alternatively, the acquiring of] upstream and downstream corporate entities.
Christopher R. Neufeld
Neufeld Legal Professional Corporation
1600, 144 - 4th Avenue SW, Calgary, Alberta
Calgary Lawyer: Business Law for Calgary, Alberta. See also Mergers & Acquisitions Law. COPYRIGHT 2010-11.