Joining two companies can have substantial benefits: the combined entity can expand its capabilities while increasing efficiency and maximizing profitability. There are multiple ways that companies can restructure to combine their operations, the most common of which are merger and acquisition. Although these terms are often used interchangeably, the actual processes are quite different and have very different outcomes for the two businesses involved.
Mergers
A merger occurs when two separate entities join together to form an entirely new entity under a new name. Typically, the companies are of a similar size and mutually agree to collaborate. In a merger agreement, both companies cease to exist, and stocks in each company are surrendered. Each company surrenders some of its autonomy, and the CEOs must agree to a new management structure moving forward.
There are several reasons why companies might pursue a merger. Each company gains access to the other’s resources, including trade secrets, technology, talent, and market share. It decreases competition and allows the new entity to more strategically position themselves in the marketplace. Both companies’ leadership contributes to the formation of the new company, and shareholders receive stock in the new entity to replace their shares in the dissolved companies.
Acquisitions
A merger of equals is becoming less common as more entities pursue acquisitions. An acquisition occurs when one company, which is typically significantly larger and more powerful, absorbs another company under their existing banner. The company being purchased, known as the target company, ceases to be an independent entity, and the purchaser establishes themselves as the new owner. The buyer continues to exist and trade stock under the same name, but their operations and resources will grow instantaneously.
While a merger is usually a friendly, mutually beneficial consolidation, an acquisition can be a hostile takeover in some cases. Once the buyer acquires more than 50 percent of the target company’s shares, they can announce their ownership of the target company and start making decisions related to staffing, management structure, allocation of resources, etc. In other cases, however, the management of the acquired company may want it to be purchased and actively seek a buyer, either to alleviate financial difficulties or to allow them to focus on other endeavors.
Mergers and acquisitions are both effective strategies to make the resulting entity more competitive and take advantage of tax benefits. Both require a period of transition, however, and employees may see significant changes in their operations or corporate culture. An experienced business lawyer can help guide companies through this process and make sure that their interests are protected.
Philadelphia Business Lawyers at Harty Law Group Provide Customized Solutions for Businesses
The business lawyers at Harty Law Group have the knowledge and resources to handle all types of mergers and acquisitions with companies of all sizes. Whether you are merging with another entity, acquiring another company, or selling your company’s assets, our attorneys will tailor a legal strategy to meet your needs and protect your business interests. With offices conveniently located in Philadelphia and Haddonfield, we represent businesses throughout Pennsylvania and New Jersey. Call us today at 267-383-3899 or contact us online to speak to a Philadelphia business lawyer.