A Merger and Acquisition (M&A) usually occurs when one firm or company acquires all assets and liabilities belonging to another company. There are majorly two types of mergers and acquisitions depending on what is involved (Cooke, 1988). The two forms of mergers and acquisitions are:
- Merger as a result of absorption: this happens through a combination of two or more companies into an existing company. Usually, the acquired companies lose their identity while the acquirer retains its name and identity. A classic example is the acquisition of AMC Entertainment by the Chinese Dalian Wanda Group Corporation Limited. In this case, the acquisition resulted into the loss of identity for AMC Entertainment. This is because all its assets and liabilities were assumed by Dalian Wanda Group. The assets and liabilities are inclusive of all shares held by its stakeholders.
- Mergers through consolidation: this occurs when two or more companies are consolidated or combined into a new non-existing company. This means that all companies cease to exist, legally, and a new company identity is created. In this case, the acquired company agrees to transfer all its assets and liabilities, including its shares to the acquirer (buyer) in exchange for cash or shares of the acquirer (Birnbaum, 1997).
In either case, the principal characteristic involves the takeover – by the acquiring company – of the entire ownership of other companies in the merger deal and subsequent combination of their operations and management with its own management. An important point to consider, however, is the difference between a merger and an acquisition. Though this difference appears difficult to show, an acquisition refers to an act of getting effective or significant control over assets and/or management by one company over another (acquired), without any combination of the companies (Davidson et al., 2005). An acquisition thus entails independent and separate legal units, though a change in the management of the companies may be seen. The Dalian Wanda Group Corp. Ltd case represents a complex process combining both aspects of mergers and acquisitions. However, there is a difference in the way this is carried out. An acquisition of the companies is evidenced by the acquiring of AMC Entertainment by Dalian Wanda Group Corp. Ltd; in this case, the management of AMC is left untouched as well as its employees. However, there is a complete (100%) acquisition in terms of its shares, assets and liabilities. This is in exchange for a working capital not exceeding US $0.5 billion after the deal is completed.
In a merger and acquisition deal, there is need for an elaborate evaluation and decision on the procedure involved. Three major steps are usually involved in analyzing mergers and acquisitions. These are:
- Planning: information on the firm to be acquired as well as industry-specific knowledge ought to be utilized in reviewing the objective of the M&A. This is mostly done in the context of strengths and weaknesses of the firm to be acquired.
- Screening: this entails knowing and finding relevant places to look for appropriate acquisition candidates.
- Financial evaluation: this is done to ascertain the most important aspects of the business to be acquired. Such things include cash flows, earnings, and areas of risk. It also seeks to determine the maximum price to be paid to the target company. Usually, the target company will not consider taking an offer below present market worth of its share. Indeed, it may decide to make the price of the offer above the current share value because it is deemed that the benefits of the M&A will accumulate to the acquiring company. A merger may be said to be at premium when n acquirer’s offer price is greater than the pre-merger value of the target firm. In this case, the acquirer pays the premium in the form of an incentive. This is meant to induce target company’s shareholders to sell all their stakes in order for the acquiring company to gain control of the firm (McCarthy and Dolfsma, 2013).
Conclusion and recommendation
A merger and acquisition fundamentally involves complex definitions and processes that have to be followed to the letter. In most cases, they involve complex decisions that have to be made prior to the actual deal so as to avert potential challenges and losses. This makes it important to engage legal entities in the drafting of M&A agreements to smoothen out the merging and acquisition process. An M&A often involves serious dialogue, and before any deal is made appropriate planning and analysis have to be made to prevent losses.
Birnbaum, I., Broccolo, B. M., Simonds, G., & Practicing Law Institute. (1997). Health care M & A: How to structure the transaction. New York: Practicing Law Institute.
Cooke, T. E. (1988). International mergers and acquisitions. Oxford: Blackwell.
Davidson, G. K., Pike, S. K., Plumridge, R. R., & Practicing Law Institute. (2005). Private placements, 2005. New York, NY: Practicing Law Institute.
McCarthy, K. J., & Dolfsma, W. (2013). Understanding mergers and acquisitions in the 21st century: A multidisciplinary approach. Houndmills, Basingstoke: Palgrave Macmillan.
Practicing Law Institute. (2000). Structuring mergers and acquisitions. New York, N.Y: Practicing Law Institute.