Mergers and Acquisitions
While the terms merger and acquisition are often used synonymously, the terms are not the same.
A merger takes place when two firms agree to combine into a single new company rather than remain separately owned and operated. When an acquisition takes place, one company remains in business while the other ceases to operate as a separate, business. While an acquisition, technically and legally results in the dissolution of the acquired firm, it is common for the management and employees of the acquired firm to become an important part of the firm that made the acquisition.
Mergers and acquisitions take place only when both parties believe the value of the combined firms will be worth more than the sum of the two firms operating separately. If value is created as a result of a merger or acquisition, the owners of both firms can profit by the transaction.
Some of the reasons cited for mergers and acquisitions include:
- Often the combined company can reduce its fixed costs by eliminating duplicate costs, operations, and departments. Operating costs as a percentage of gross income can usually be reduced, improving the bottom line.
- Often special knowledge and experience of the owners and/or senior managers can be put to greater and more profitable use with a larger business and more employees. This is a form of leverage.
- When a company is larger, its cash flow tends to be more stable because the number of transactions taking place during each accounting period usually increases.
- Additional locations help the company improve its service to existing clients / customers and attract new ones. Your company also becomes more visible which helps to attract new business. More locations result in geographical diversification which is also beneficial.
Corporate Pyramiding Maximizes Control Using Leverage
Corporate pyramiding takes place when the controlling shareholder of a corporation uses that corporation to control another corporation and that corporation controls another and so on. For example, a 51% shareholder of corporation A acquires a 51% stake in corporation B. Corporation B now acquires a 51% stake in corporation C and so on down the line. The ability to leverage the original investment is huge. Contact Michael Chulak for corporate consulting services.
Golden Parachutes
A golden parachute is when substantial financial benefits are granted to owners and/or top executives if a company is sold or merged with another company. Golden parachutes are named as such because they are intended to provide a soft landing for high valued executives who may lose their jobs. Golden parachutes are also used to discourage hostile takeovers bids and to encourage key employees to stay with the company until a sale or merger is finalized. Benefits may consist of generous cash bonuses and stock options.
Due Diligence Checklist for Business Acquisitions and Mergers
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