Mergers and Acquisitions Explained: A Crash Course on M&A

Summary

In this introductory video on mergers and acquisitions (M&A), business attorney Brett Cenkus explains the basics of M&A, including types of deal structures like asset sales, stock sales, and mergers. He discusses why companies engage in these transactions—whether to exit a business, expand, or enter new markets—and outlines the key players involved such as business brokers, investment bankers, and corporate lawyers. Cenkus highlights his experience in handling M&A deals in the lower middle market and emphasizes the importance of professional guidance in these complex, life-changing transactions.

Takeaways

• 😀 Mergers and acquisitions (M&A) involve companies buying and selling each other, typically when a business owner wants to exit or move on.
• 😀 M&A deals can be structured in three main ways: asset sales, stock/equity sales, and mergers, each with distinct legal and operational implications.
• 😀 Asset sales involve selling individual assets of the company (e.g., equipment, contracts, etc.), while stock/equity sales transfer ownership of the entire company.
• 😀 Mergers are less common but involve two companies combining into one, where one company disappears by operation of law and the other continues.
• 😀 In lower-end deals (mainstream to lower middle market), asset sales and stock sales are more common, with mergers appearing more frequently at the higher end of the market.
• 😀 Sellers often pursue M&A for reasons like wanting to retire, feeling the business is no longer competitive, or just wanting to cash out.
• 😀 Buyers may seek to acquire companies to grow quickly, enter new markets, or gain access to technology or customer bases, as demonstrated by large companies like Google and Facebook.
• 😀 The players in M&A include business brokers (for smaller deals), investment bankers (for larger deals), corporate lawyers (who handle documentation and negotiations), and various financial and consulting professionals.
• 😀 Business brokers typically handle transactions for businesses valued up to around $1 million, while investment bankers focus on larger deals, selling to other companies rather than individuals.
• 😀 Corporate lawyers play a critical role in M&A deals by drafting purchase agreements, conducting due diligence, managing risks, and ensuring smooth transaction processes.
• 😀 Additional players may include accountants, tax advisers, and integration consultants who help with the financial aspects and smooth integration of companies post-acquisition.

Q & A

What does M&A stand for, and what does it involve?

M&A stands for Mergers and Acquisitions. It involves companies buying and selling each other. A company may decide to sell itself or acquire another company for various strategic reasons.

What are the main types of M&A deal structures?

The three main types of M&A deal structures are asset sales, stock/equity sales, and mergers. In asset sales, the buyer purchases individual assets. In stock sales, the buyer purchases ownership interests in the company. In mergers, two companies combine, and one ceases to exist.

How does an asset sale differ from a stock sale?

In an asset sale, the buyer acquires individual assets of the business, such as property, equipment, or contracts. In a stock sale, the buyer purchases the ownership shares of the company, taking control of the entire business, including all its assets.

Why are mergers less common in smaller market segments?

Mergers are more complex and are typically driven by factors like tax considerations or ease of combining operations, which are more common in larger deals. In smaller markets, asset and stock sales are more typical due to their simplicity.

What drives a seller to pursue an M&A deal?

Sellers may want to exit the business for personal reasons, such as retirement or a desire to move on to other ventures. They may also sell because the business is no longer viable or they can’t compete effectively in a changing market.

What are some reasons a buyer might pursue an M&A deal?

Buyers may pursue M&A deals to quickly enter new markets, acquire new technology, or expand their customer base. It's often faster and more cost-effective than developing these capabilities organically.

Can you give an example of a company buying another to enter a new market?

A notable example is Facebook acquiring WhatsApp. Facebook wasn't primarily interested in WhatsApp's revenue, but rather in acquiring its technology and user base, allowing Facebook to quickly enter the mobile messaging market.

What role do business brokers play in M&A transactions?

Business brokers help small businesses, typically valued under $1 million, market themselves for sale. They prepare offering documents, find potential buyers, and assist in negotiations.

How do investment bankers differ from business brokers in M&A deals?

Investment bankers work on larger deals, typically involving corporate buyers. They don't list businesses publicly but instead curate a list of potential corporate buyers, often running auctions to solicit offers.

What is the role of corporate lawyers in an M&A deal?

Corporate lawyers draft and review the legal agreements involved in M&A transactions, such as purchase agreements. They help structure the deal, provide legal advice, and ensure that both parties' interests are protected throughout the process.

What other professionals might be involved in larger M&A deals?

In larger M&A deals, accountants, tax advisors, consultants, and integration specialists may be involved. Accountants help with financial due diligence, while consultants may assist with integrating IT systems, human resources, and operations.

Why is it important to involve experts like corporate lawyers and investment bankers in an M&A deal?

Experts like corporate lawyers and investment bankers are crucial because they bring specialized knowledge and experience to the table. Corporate lawyers ensure that the deal is legally sound, while investment bankers help find the right buyer or seller, ensuring the transaction is executed efficiently and effectively.