Mergers and acquisitions can help companies achieve a number of strategic goals, including growth acceleration, improved performance, development of new skills/technology, and elimination of competition. They are also among the most complex business transactions. Before beginning the negotiation process, it is imperative to be well-versed in the merger and acquisition terminology that will be used by the parties and their counsel.

Types of M&A Transactions

The type of transaction often dictates the legal terminology that is used. In an acquisition, one company acquires all or substantially all of the assets or stock (or other equity interests) in a target company. Whether the target company survives will depend upon whether the transaction is structured as an asset transaction or an equity transaction. In the former, the target company is often dissolved and ceases to exist after the transaction is completed. In the latter, the target company survives under new ownership and control. In a merger of the target company into the acquiring company, the acquiring company acquires all of the assets and liabilities of the target company by operation of law and only the acquiring company survives.

Mergers generally take one of the following forms:

  • Vertical: The transaction combines two companies that are in the same industry but operate in different parts of the chain of production, e.g., an ice cream shop merges with and into an ice cream manufacturer. 
  • Horizontal: In this type of merger, one company merges or takes over another company that offers similar products and/or services to the public. In many cases, the two businesses are direct competitors, e.g., one ice cream manufacturer taking over another one.
  • Concentric Merger: Concentric mergers involve entities that serve the same customers in a particular industry, but offer different products and/or services. An example would be an ice cream shop merging with a hot dog stand.
  • Conglomerate Merger: This type of transaction involves two companies from completely different industries and is generally intended to assist with diversification.

Other Key Merger and Acquisition Terms

Being able to “talk the talk” allows business owners and managers to more fully participate in M&A transactions. Below are several legal terms that may be used:

  • Dilution: The reduction in earnings or stock value that can accompany a merger when more shares are issued or when convertible securities are converted into common stock.
  • Divestiture: Also known as a “spin-off,” the term refers to the sale of a business segment, typically an entire division or product line.
  • Due diligence: The process by which one party to the transaction, most often the buyer, investigates the other company, including its assets, financial condition, and liabilities (both actual and potential).
  • Friendly mergers or acquisition: As the term suggests, the transaction has the support of the target company’s management.
  • Hostile takeover: The target company opposes the attempt by a buyer to purchase the company.
  • Leveraged buyout: The management of the company acquires the target company rather than an outside buyer.
  • Raider: An acquiring company that actively seeks out entities with undervalued assets. 
  • Shark repellant: Actions taken by a target company, such as amending its by-laws, to make itself less attractive to a hostile buyer.
  • White knight: A friendly buyer sought by the target to purchase the company instead of a hostile bidder.

This post provides only a brief look at the legal terms that may arise during a merger or acquisition. Prior to entering into any business transaction, it is imperative to work with an experienced attorney who can walk you through the process and answer any questions you may have. Therefore, if you have any questions or if you would like to discuss the matter further, please contact me, Charles Friedrich, at 201-806-3364.