Mergers & Acquisitions Attorney in Overland Park, Kansas

Mergers and acquisitions (M&As) worldwide set a new record in 2021 of $5.8 trillion, representing a total of 62,193 deals, according to Refinitiv. The U.S. accounted for nearly half the total, or $2.5 trillion. The activity represented a huge rebound from the M&A downturn in 2020 in face of the global pandemic.

The terms ‘mergers’ and ‘acquisitions’ are often thought of as the same thing. Though they both involve business valuations and financial arrangements between two companies, mergers and acquisitions are distinctly different.

A merger is a joint agreement between two companies to combine, whether as one company or two separate companies with the same ownership. In contrast, an acquisition is the outright purchase of one company by another. Here, the acquisition can even be unwanted by the board or owners of the target company, and sometimes the term “hostile takeover” clearly applies.

If you have a business in or around Overland Park, Kansas, and you see either a merger or an acquisition as the next step for your enterprise, contact the Coppaken Law Firm. We can provide valuable assistance in all steps of the M&A process, from negotiations to due diligence, to the drafting of implementing documents, and much more.

The Elements of Mergers and Acquisitions

Mergers and Acquisitions come in all shapes and sizes, both come with their challenges and opportunities.

A merger usually occurs when the CEOs or owners of two companies agree that it is in their best interests to join forces. For instance, Exxon and Mobil were both oil-producing giants, the first and second in size in the U.S. at the time of their merger in 1998. The deal closed at $80 billion, and in the aftermath, the new stock for ExxonMobil has soared almost 300 percent.

The largest acquisition in history involved a company not that well known in the United States, Vodafone, a mobile operator, which acquired Mannesmann in 2000 for $203 billion. The deal made Vodafone the largest cellular operator in the world.

Two businesses merging in Overland Park, Kansas, or Kansas City, Missouri, may not match the size of these two examples, but these illustrations show how the two concepts work in the real world. A solid M&A should result in increased revenues and profits.

In general, mergers occur when two separate business entities agree to become one. For example, Company A approaches Company B about merging. Through a vote of shareholders or by consent of the owners in a private transaction, the two companies become one and are managed as one.

An acquisition can be undertaken for a variety of reasons, one of which is simply to get rid of the competition. If Company A manufactures widgets but suddenly sees its market share plunge due to a new rival, Company B, it may tender an offer to the shareholders of Company B to buy it out. If they agree, Company A can either rebrand Company B or liquidate it.

On the other hand, if one company tenders an offer to acquire another company, and that company views the offer as beneficial, the deal can go through and end up being more like a merger since it is friendly, not totally unsought or hostile.

Financing Considerations

One of the key elements in M&As is the financials – figuring the value of the company to be acquired or merged with, and then raising the funds and utilizing the financial instruments necessary to complete the transaction. The acquiring enterprise can use cash on hand, offer stock in exchange for a controlling interest in the target company, a combination of the two, or even explore an IPO (initial public offering).

Different methods are employed to value a business. One method is based on the price-to-earnings (P/E) ratio. If similar companies are trading at a 12-to-1 P/E ratio, the acquiring company can start with that valuation and then enhance the offer as needed.

Another method is called EV/Sales, or enterprise-value-to-sales ratio, which can be used for both private and publicly traded companies. This calculation results in a comparison of the target company’s revenues versus industry standards.

A more complicated method is known as discounted cash flow (DCF).

Of course, the acquiring company must have the financial resources to merge with or acquire the target company. If it doesn’t have enough cash on hand, it can make both a cash and stock offer – cash plus a stated number of shares in the acquiring company to shareholders of the target company. Sometimes, the acquirer might also agree to take on the other company’s debt. In some cases, the companies can agree to an IPO, an initial public offering of shares in the merged company.

Due Diligence and Potential Pitfalls

Due diligence is like the popular saying to “kick the tires” before you buy a car. Of course, kicking the tires involves more than simply that, and so does due diligence when acquiring or merging with another company.

Valuation is a huge consideration, but beyond that, there is other pertinent information that needs to be gathered, including debt, leases, contracts, employee agreements, finances, pending lawsuits, customer data, and more. Any or all of these could present challenges that might put the M&A in jeopardy.

The due diligence process begins with the signing of a letter of intent to go through with the M&A. Then, the acquiring company assembles a team to research the target company.

The due diligence team will collect all pertinent documents to gather a picture of the company’s overall health and relative value. Documents can include contracts, company financial records, stockholder information (if a public company), leases, regulatory information, insurance, legal records including lawsuits past and pending, and much more.

Once due diligence is completed to the acquiring company’s satisfaction, the two parties can move toward closing the deal by agreeing on a price and signing a final acquisition agreement.