If we talk about the complex world of business and commercial law, mergers and acquisitions are an important event that can dramatically shape the company’s future. But what is a merger, and how does it happen?
Simply put, a merger is when two existing companies unite into one new company. Knowing important elements and understanding laws and regulations is essential for handling complicated transactions or considering joining forces. The following blog discusses everything you should know about mergers and includes special terms.
How Many Different Kinds of Mergers Are There?
Before we talk about complex business and commercial law regarding mergers, let’s first look at t:
1.   Horizontal Merger
This happens when two businesses, who are usually competitors in the same industry, join together. As in the case of two retail chains joining forces to boost market share and drive out rivals. For example, the $26 billion merger of Sprint and T-Mobile in 2020.
2.   Vertical Merger
A business unites with a distributor or supplier further along its value chain in a vertical merger. For example, a vehicle manufacturer may buy a tire company to streamline operations and lower production costs.
3.   Conglomerate Merger
When companies from completely unrelated industries merge, it is known as a conglomerate merger. This often happens when a larger company is looking to diversify its portfolio.
4.   Market-Extension Merger
This type of merger happens when companies selling similar products in different markets combine. The goal is to expand their reach into new geographical areas.
5.   Product-Extension Merger
Companies in the same market with related products merge to enhance each other’s offerings, known as a product-extension merger. For instance, a printer company might merge with one that specializes in ink cartridges.
Key Legal Terms of Mergers in Business and Commercial Law
Knowing these guarantees that each party understands their rights and responsibilities and agrees with the other. Here are the most important ones:
1.   Vigilance
Due diligence must be done on both businesses before a merger is finalized. The goal of this thorough inquiry is to evaluate the other party’s operational structure, legal obligations, intellectual property, and financial standing. Why does this matter? Suppose you were buying a car; would you buy it without looking into the engine or its background? Obviously, no. Similarly, to identify any risks and guarantee that both parties are making an educated decision, due diligence is important in business mergers.
2.   Valuation
The process of estimating the target company’s value in a merger is known as valuation in business and commercial law. The firm’s worth is determined using a variety of techniques, including market capitalization, earnings before interest and taxes (EBIT), and similar company analysis.
The conditions of the merger, including the amount the acquiring business will pay and whether it will be a cash or stock transaction, are directly impacted by the valuation. This is an important aspect of any merger since wrongly assessing a company’s worth could have disastrous financial repercussions for all parties.
3.   Purchase Agreement
The acquisition agreement is the legally binding document crafted following business and commercial law. It outlines every detail of the merger. Important elements include the purchase price, the closing circumstances, and the representations and guarantees made by each party. This agreement also specifies how the assets and liabilities of the purchased firm will be managed, as well as how the purchase price will be paid in the form of cash, stock, or a mix of the two.
4.   Confidentiality and Non-Compete Clauses
Non-compete agreements forbid former executives or owners of the acquired company from launching a rival company for a predetermined period to protect the interests of the merging companies. On the other hand, confidentiality agreements guarantee the privacy of any sensitive information shared throughout the merger process. By guaranteeing that trade secrets and private information don’t fall into the hands of rival companies, these clauses protect both parties.
5.   Severance Agreements and Employee Retention
Managing the workforce is one of the trickiest parts of any merger. The combining businesses must choose which workers to keep on board and how to handle layoffs when they come up. Moreover, retention agreements help in keeping important staff members on board, while severance agreements can facilitate the transition for laid-off workers. For example, when Facebook acquired Instagram in 2012, retaining Instagram’s development team was important to the platform’s ongoing success.
To Wrap Up
If we talk about mergers from a business and commercial law perspective, we will see that they have both benefits and drawbacks. What is necessary is that all parties involved must understand the essential terms. This means that every stage of the process, from regulatory permission and employee agreements to due diligence and valuation, should be fully agreed upon.
Even though these concepts can be complicated, seeking help from a professional can help you understand them thoroughly, which can mean the difference between a successful merger and an expensive mistake. At Monteleone Law office, we help you with everything, whether you are planning a merger or are simply looking for information. Need help? Give us a call today!