This chapter covers transactions which are commonly referred to as mergers and acquisitions. There are, however, a number of different merger and acquisition (and consolidation) arrangements that can result in a fundamental change of a company’s structure. Below is a brief, generalized summary, in layman’s terms, of the common alternatives. Only a few of them are applicable to private companies.
Initial Public Offerings
According to IPOScope.com ®, in 2018, there were 161 IPOs in the United States. Only a few of them gained wide-spread media attention. The median deal size (amount of money raised) was $108M. The IPO process is long and arduous. Private companies need a proven track record of performance over a number of years or be a major player in a frenzy public wave. The initial offering and on-going requirements of the Security and Exchange Commission places a significant burdensome task on a company.
Although the total of 161 IPOs may seem to be a lot, there are over 30 million private companies and less than 19,000 publicly traded companies. Of that total, only 4,000 of the publicly traded companies are actively traded. So, the prospects of “going public” for most private companies are extremely low.
Private Equity Transaction
Through the creation of a fund, primarily made up of institutional investors, Private Equity firms purchase all or the controlling interest of a company with the expectation of re-selling it in the future. PE firms look for companies that appear to be undervalued or may have operational issues that the PE firm feels that they can “fix.” PE firms also purchase groups of companies with the intention of “rolling them up” into one larger organization. As an example, a PE firm may purchase several companies that only have a regional presence with the plan to provide a national or international footprint with the combination. As another example, they may purchase a number of product-related companies in an effort to provide a vertically integrated offering.
Most PE deals are in the hundreds of million dollars or billion-dollar category. In most cases, the PE firm takes a very active role in the management of the company and aggressively cuts costs and may insist on making fundamental strategic and operational changes. It is not uncommon for a PE firm to replace several of the members of the senior management team.
Similar to IPOs, very few private companies have the scope or magnitude to be attractive to PE firms.
In a merger transaction, two companies are combined with one company “absorbing” the other. The absorbed company ceases to exist with the remaining company (the acquirer) continuing operations. Some amount of property, plant, and equipment, as well as employees of the absorbed company, join the acquiring company. The level and time of the integration can vary significantly. The often-used phrase, “A merger of equals” is rarely an accurate description of the actual integration. Duplicate operations and personnel are often eliminated and certain processes and procedures of one company or the other become the standard. With these decisions, there will be “winners” and “losers” – not equal outcomes for all personnel involved. Even if all personnel are retained, job functions, titles, span of control, and responsibilities will inevitably change for virtually everyone, except, perhaps, the CEO.
In an acquisition transaction, one company purchases the majority ownership of the other company that remains as a separate entity. The amount of integration can vary widely based on the acquirer’s desire. Management, facilities, and personnel of the acquired company may remain intact or selectively eliminated. The acquisition can be as simple as a transaction in which the acquiring company gains unfettered access to the other company’s patents and other intellectual property with the acquired company continuing operations as they were before the acquisition.
A consolidation is a combination of a merger and an acquisition in which a new combined company is formed, and the two previous companies cease to exist. Just like in a merger, job functions, titles, span of control, and responsibilities will inevitably change for virtually everyone, except, perhaps, the CEO.
Clearly, the descriptions given above are simple and incomplete explanations, but for the articles in this chapter, the terms merger, acquisition, and consolidation can be used interchangeably.
There are other ways that a change in ownership can occur including:
- Ownership Succession to a family member or business partner.
- Orderly Shutdown in which the owners decided to cease operations.
- Forced Shutdown through bankruptcy or other legal proceedings.
The applicability of the articles in this chapter will vary with each ownership change category and particular circumstance.
Independent of the actual form of the transaction, there are three significant factors that always occur. Readily acknowledging these factors beforehand will save a considerable amount of heartache later.
- Independent of the business person to business person “handshake” agreement, experience attorneys must be involved. The only choice is to involve them before the deal is done or during litigation after the deal is done.
- There will be operational changes that occur after the transaction is complete. Many will have unforeseen or unintended consequences. Some will be inconvenient and some left unaddressed, may be fatal.
- All employees, including senior management, will be affected by the transaction with many unsettling issues beginning during the first stages of the transaction discussions. These distractions will, most probably, impact each company’s productivity and performance.
Of all of the comments made in all of the articles in this chapter, the three points listed above should not be forgotten – they are inevitable. Plan accordingly.