Mergers
A merger occurs when two (or more) companies reach a mutual agreement to create a new legal entity that combines all parties’ assets, liabilities, and business operations. The post-merger entity often uses a different name than the pre-merger companies, even if it is just a combination of their names. For example, one of the most notable mergers in Texas history was that of Exxon Corporation and Mobil Corporation, which formed ExxonMobil in 1998. At the time, it was the largest merger in U.S. history.
Acquisitions
In contrast with a merger, an acquisition occurs when one company purchases another company. The acquired company will then either continue to exist as a subsidiary of the parent company or be absorbed into the parent company and cease to exist altogether. An acquisition does not necessarily require the parent company to take 100 percent ownership of the subsidiary. For instance, if a company purchases 51 percent of another company’s stock, that is sufficient to acquire effective majority control even though other investors control the remaining 49 percent.
Friendly vs. Hostile
Mergers are almost always “friendly” in the sense that both sides enter into the deal voluntarily. An acquisition, however, can be “hostile” if the purchaser makes an unsolicited bid. This often happens with publicly traded companies.
For example, in the recent acquisition of the former Twitter, Inc., Elon Musk made an unsolicited $44 billion bid to acquire Twitter. The Twitter board attempted to prevent a takeover but accepted Musk’s bid. When Musk subsequently tried to back out of the deal, Twitter took him to court to enforce the terms of the final acquisition agreement. Musk later closed the deal and acquired Twitter, Inc., which he subsumed into a new legal entity called X Corp.
Complexity and Cost
Acquisitions are often more straightforward from an operational standpoint, particularly when the acquiring entity plans to keep the acquired company as a standalone subsidiary. A merger, in contrast, means creating an entirely new entity and figuring out the best way to combine the previous operations of the merging firms. On the other hand, an acquisition often has a far greater upfront cost than a merger, especially when dealing with a hostile takeover bid.
Contact a Texas Mergers & Acquisitions Lawyer Today
In the press, many deals are labeled as a merger when they are, in legal terms, an acquisition. This is likely because “acquisition” is negatively associated with hostile takeover bids. So, people often describe all corporate transactions as “mergers and acquisitions” (M&A) even though they are different processes.
If your company is involved in any current or potential mergers and acquisitions activity and requires legal advice on how to proceed, contact the Mergers and Acquisitions team at Structure Law Group today to schedule a consultation with a member of our staff.