How Do You Know When to Merge or Acquire

In 2006, the Walt Disney Company finalized its acquisition of Pixar Animation Studios. Disney’s current CEO, Bob Iger, describes the Pixar acquisition as his proudest decision as CEO of the company. At the time, Disney struggled to expand and take advantage of economies of scale. Pixar brought new technology, expertise, and fresh products to Disney’s portfolio of offerings. The acquisition allowed Bob Iger to realize the dream he had for Disney.

Merging with or acquiring a company can be a great way to expand your business quickly. A good merger or acquisition can boost market share, create value, and increase profits. On the other hand, a lousy merger or acquisition can diminish your company.

So, when should you merge or acquire businesses? Answering this question requires careful consideration of complex dynamics.

What Is an Acquisition?

Acquisitions are when one company purchases most or all of another company and gains control. After an acquisition, both companies usually continue to exist as separate entities, but the purchased company is owned and controlled by the purchaser. 

Acquisitions can be either friendly or hostile. During a friendly takeover, the acquired company puts itself up for sale and willingly sells itself to the parent. During a hostile takeover, the parent accumulates enough ownership of the acquired company to control it against the acquired company’s wishes.

What Is a Merger?

A merger is when two or more companies combine to form a single entity. After a merger, the single entity is usually a completely new company.

In some mergers, a larger company absorbs a smaller company into itself. Other times, similar-sized companies can merge to create a bigger, more powerful company.

The dynamics of a merger can be complicated and require extensive planning. Aspects of the deal, such as fair consideration, new leadership, and the tax implications of different types of mergers, will be critical points of discussion.

When Do You Merge or Acquire a Business?

You should pursue a merger or acquisition only to improve your business. There are many avenues through which mergers or acquisitions can improve an underlying company.

Economies of Scale

Economies of scale is a term that describes the cost savings associated with a business operating at a large scale. Companies can make processes more efficient when they spread costs over a larger amount of goods or services.

Network Effects

Network effects are the concept that the value of a product or service increases as more people use it. A merger or acquisition can increase a business’s network effects by expanding a company’s base of customers.

Disney+ is an example of Disney capturing the value of network effects. Without the additional consumer base and content provided by the Pixar acquisition and the many other acquisitions Disney engaged in, Disney+ would probably not exist.

Vertical Integration

Vertical integration is when a company absorbs another company on a different level of the production chain. Controlling multiple levels of the supply chain can help companies control costs and reduce supply chain risks.

New Expertise or Technology

Acquiring new expertise and technology can help a company improve its products and services. It can also reduce costs. 

Acquiring knowledge and technology was a significant factor in the Disney-Pixar acquisition. Pixar had advanced animation technology that Disney did not have access to, along with storytelling and technology experts.

Tax Benefits

Tax benefits are one of the least talked about but most common reasons companies pursue mergers and acquisitions. Profitable companies can often acquire companies that carry forward tax losses at a discount. An acquiring company can use these losses to offset its tax burden. Tax law is extremely complicated, and there are many reasons a merger or acquisition can carry massive tax advantages.

Other Advantages

The potential benefits of mergers and acquisitions are too numerous to capture in a single list. Understanding when to merge with or acquire a business is critical to successfully growing a business. A merger and acquisition lawyer can help you identify the essential dynamics and weigh the pros and cons of each.

How to Merge or Acquire a Business

Mergers and acquisitions can be a complicated process. Common steps that business owners must take to ensure a successful merger or acquisition include:

  1. Assemble a merger and acquisition team.
  2. Set the specific goals for the merger or acquisition.
  3. Identify the merger or acquisition target.
  4. Research how much the acquisition target is worth. 
  5. Approach the acquisition target to begin negotiations.
  6. Iron out the terms of the merger or acquisition.
  7. Write a purchase and sale agreement.
  8. Finalize the deal.
  9. Integrate the acquired company into the operations of the parent company.

As you can see, there are a lot of moving parts in a merger or acquisition. Keeping everything straight is one of the primary reasons you need an experienced business attorney in your corner during the process.

We Can Help

If you are thinking about when to merge or acquire another company, BrewerLong can help. Our experienced attorneys will provide clear and practical guidance throughout the merger or acquisition process. We have helped both sides in many mergers and acquisitions, and we would love to put our experience to work for you. Contact BrewerLong today, and we will give your merger or acquisition the close personal attention it deserves.

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