Mergers and acquisitions are highly misunderstood legal terms, and are often considered to be synonymous among small business owners and the general population. However, there are some distinct differences between the two; understanding them and how they change the dynamics of a business transaction can be critical for ensuring a company’s future success.
A merger is a business transaction in which two companies join together to form one company. Many times, one of the two companies ceases to exist. One example is the2007 merger between Digital Computers and Compaq in which Digital Computers was absorbed by Compaq.
Yet, not all mergers are the same. Instead, there are five types of mergers, all of which are listed and described below:
- Horizontal merger. This involves two companies in direct competition with one another, both in market and product line.
- Vertical merger. This is an agreement between two companies in a similar industry, but different type of business. An example would be a merger between a framing company and a drywall company.
- Market-extension merger. An agreement between companies in different markets but with similar products.
- Product-extension merger. An agreement between companies in similar markets that sell distinct products.
- Conglomerate merger. Two companies with seemingly nothing in common merge. An example would be an electronics company merging with a company that sells car parts.
An acquisition is a business transaction in which one company purchases another company. The latter of ceases to exist. In this scenario, the buyers take over the operations and decision-making of the purchased company. Many times, acquisitions have negative connotations, while mergers are viewed in a positive light. Whatever the case may be, it’s important to know that there are three main acquisitions
- Strategic Remix acquisition. This is an agreement in which the acquired asset, including operations and product line, are combined with an existing business to increase profit.
- Private Equity acquisition. This is when a company buys another business at a cheap price, pumps it full of resources, and then sells it at a higher cost.
- Alphabet acquisition. An agreement between two companies that is a hybrid of the other two types of acquisitions. When this happens, the buyers take on the operations and product line of the acquired company with the intention of waiting to see how the acquired company does. If they improve, the buyers have the choice to sell or pump in more resources and potentially keep running the company for their own profit.
If you are looking to enter the world of mergers and acquisitions, contact Stock, Carlson, Oldfield & McGrath, LLC. Backed by more than 40 years of legal and business experience, our Wheaton small business attorneys can help you make informed decisions about your organization’s future. As a small business ourselves, our legal team knows how important a transaction like this can be for your business’ future. Call 630-665-2500 to schedule a consultation with our office today.