By Saira Sadiq
Mergers and acquisitions are two methods a company can use to expand and grow. A business can merge with or acquire another company to expand into new markets, gaining new products or services, and gaining a competitive advantage. Understanding this is key for commercial awareness, as you will come across these terms often when reading the news and as a commercial lawyer.
WHAT ARE MERGERS?
Mergers involve two or more companies joining together to form one company. This also involves a structural change where the newly formed business has a new management structure and legal identity, including the name. A combined company can have more value and an increased market share, due to the increased pool of resources and customers. Larger companies can also benefit from economies of scale, increasing profit.
WHAT ARE ACQUISITIONS?
Usually, a larger company acquires a smaller target company through purchasing shares, to own a majority stake in that business. The target business usually does not undergo significant structural or operational change. Businesses do this strategically to buy out new competitors, to acquire new technology/intellectual property or to enter a new market. This can be cost-effective and help the business to expand whilst increasing their market share.
There are two forms of integration that can occur in M&A transactions:
Horizontal integration: the companies involved are competitors and operate in the same part of the value/supply chain. (Heinz and Kraft Foods merger in 2015, Facebook’s acquisition of Instagram in 2012)
Vertical integration: the companies operate at different parts of the supply chain, for example, one organisation may be a supplier in the industry. (Live Nation and Ticketmaster merger in 2010, Google’s acquisition of Motorola in 2012)
WHY IS THIS IMPORTANT FOR LAWYERS?
M&A deals happen often in commercial transactions, and they require due diligence to cover legal risks and prevent any future issues. Commercial lawyers serve as advisors to mitigate risk for their clients through these deals. Legal risks and factors such as the following (to name a few) will need to be considered:
Compliance with EU/UK regulations, such as competition law or data protection.
Financial matters, such as profitability, assets, loans and debt.
Litigation history, and ongoing disputes.
Intellectual property, existing patents, trademarks and licenses.
When approaching a question which challenges your commercial awareness on this topic, remember to consider the legal factors above and apply it to your given scenario or case study. It is important to remember what the business’ aim is in undergoing an M&A deal, the type of transaction it is, and all of the factors or legal risks that will influence its success.