Austin, Dallas-Fort Worth, Houston, and San Antonio serve as the primary economic forces that drive the Texas economy. Together, they represent the birthplaces and principle places of business for entities in varying stages, ranging from start-up to fortune-500 companies, and cover areas such as finance, real estate, health and medicine, science and technology, and oil and gas. As entities grow and develop, their structure, formation, and purpose will often pivot to remain competitive in the marketplace. Sometimes, when a company needs to make a significant or fast change in their business, whether in its size or scope, the entity will undergo a merger or acquisition.
A merger or acquisition is a transaction where two separate companies combine their assets and liabilities to form one company. Often, mergers and acquisitions occur in one of three scenarios: a horizontal merger or acquisition, where one company merges with or acquires another company that is in the same or substantially similar business, which effectively eliminates a competitor in the marketplace; a vertical merger or acquisition, where one company merges with or acquires a customer or supplier, which removes one of the middle-men companies in the stream of commerce, which often results in higher returns for the surviving business; and a conglomerate merger or acquisition, which covers all other scenarios where the merger or acquisition transaction has no direct competitive or relationship advantages between the conjoining entities.
While the types of mergers and acquisition are relatively few, there are many methods used to execute the merger or acquisition transaction. The transactions of a merger or acquisition can take the form of an asset purchase, stock acquisition, forward merger, forward triangle merger or reverse triangle merger, which each allow companies to negotiate, strategize, and agree to terms that yields the most benefit.
An asset purchase, as the name suggests, is a transaction when the acquiring entity can select which assets it is purchasing, as well as the liabilities it is assuming. This freedom allows the acquirer to purchase as few assets as it decides, such as equipment or inventory, and even includes purchases up to 100% of the targeted company’s tangible and intangible properties and rights.
A stock acquisition occurs when the acquiring company purchases the target company’s stock from the company’s shareholders and occurs in the form of either a forward or reverse acquisition, further explained below, and is dependent on the control of the target company’s shareholders at the close of the transaction. Furthermore, in a stock acquisition, the assets and liabilities, as well as the day-to-day operations, often remain unchanged, and the only changes occur to the company at the ownership level.
Forward and forward triangle mergers both involve two companies combining into one, which results in either a single corporate entity or a parent-holding and subsidiary company structure. For forward mergers, the target company merges with the acquiring company, which eliminates the target company’s existence. The acquiring company then assumes the target company’s rights and liabilities. Alternatively, a forward triangle merger, also referred to as an “indirect merger”, the acquiring company forms a third entity, which serves as the merger subsidiary or “shell company” for the transaction. The subsidiary receives funding from the parent company to complete the acquisition of the target company. Similar to a forward merger, the target company merges into the subsidiary, and the subsidiary assumes the target company’s assets and liabilities.
A reverse or triangle reverse merger or acquisition results in a change of control in the acquiring company. These transactions are achieved when the target company’s shareholders exchange their shares in the target company for shares of either the acquiring company or the newly formed subsidiary company involved in the transaction. At the end of the transaction, the shareholders of the target company own a majority of the acquiring company, and the target company becomes wholly owned by the acquiring company.
As business conditions and economic climates shift, companies will need to be aware of the available methods to adapt their business to remain competitive in the marketplace. Mergers and acquisitions provide a flexible and quick solution and allow companies to creatively structure and strategize their business plan moving forward.
The information contained in this post is for general information and educational purposes only. The application and impact of laws can vary widely based on the specific facts involved. Given the changing nature of laws, rules and regulations, and the inherent hazards of electronic communication, there may be delays, omissions or inaccuracies in information contained in this publication. Accordingly, the information on this post is provided with the understanding that the author and publishers are not herein engaged in rendering legal, accounting, tax, or other professional advice and services. As such, it should not be used as a substitute for consultation with professional accounting, tax, legal or other competent advisers. Before making any decision or taking any action, you should consult a professional.