One of the ways a business grows and expands is through merging with or acquiring another business. The major difference between mergers and acquisitions is that mergers happen between consenting companies that are the same size. While on the other hand, an acquisition involves a larger corporation acquiring a smaller one. For a more detailed explanation of the difference between the two, I would recommend reading What’s the Difference Between Mergers & Acquisition?
Types of Acquisitions
The interaction between the two companies during the acquisition period can be either:
- Friendly Acquisition; meaning the larger company gives the smaller one some sort of choice or control in the acquisition process.
- Hostile Takeover; meaning the larger company hasn’t given the smaller one a choice in the matter.
In a friendly acquisition, the smaller company agrees to be acquired by the larger one. They agree to certain terms that both the companies benefit from the acquisition. Initially, the larger company will perform an internal evaluation of the benefits of the acquisition. They will also consider whether they can pull the resources to buy it. Then, they will then evaluate the smaller firm, perform due diligence and present them with a deal.
The larger company will want to buy the stock or assets of the smaller company in order to acquire it. This allows the board of directors to by-pass the need to obtain shareholder approval. The larger company should be aware of any obligations the stock has over it before purchasing it. Once the details have been ironed out, both companies will fulfill any legal obligations and then proceed with the sale. A merger and acquisition lawyer will be useful to consult at any stage in the process, especially for any legal advice or assisting with the legal requirements.
In a hostile takeover, the board of directors in the smaller company do not have to give consent for the larger company to acquire them. If a larger company has to resort to a hostile takeover, it usually means the smaller company is resisting an acquisition or that it is severely undervalued.
The larger company does this by buying all the shares in the company from shareholders so that they now hold majority shares. Usually, this means buying shares at a higher rate than market value. With the majority shares, the larger company will be able to control the company and its board, forcing the acquisition.
Companies can defend themselves from a hostile takeover by buying a large portion of its shares so that larger companies won’t be able to buy enough shares for a controlling interest. Again, a merger and acquisition lawyer will be able to provide you with some advice in defending against a hostile takeover.
Acquisitions usually occur when the two companies are not equals. The larger company may be looking to increase market power and is, therefore, acquiring all the companies in the market. Or, the larger company may be interested in the smaller one for one particular product or service it offers. Either way, the larger company may be able to strike a deal with the target company or face some resistance from it, which will require it to take a more rigorous approach to acquire it.