Mergers and Acquisitions Overview

Mergers and acquisitions involve the buying, selling and/or combining of two (or more) businesses.

In a merger, two companies agree to move forward together as a single entity and are combined to form one larger entity. The resulting larger entity often changes its name to reflect the combined business, for example, America Online and Time Warner merged in 2000 to form AOL Time Warner. As a result of a merger, the management teams from the two previous companies are combined. The purchase price paid to the shareholders of the target company is  typically in the form of (i) stock in the merged entity, (ii) cash, or (iii) a combination of cash and stock. Of course, there are many variations on this basic structure.

In an acquisition, a larger company usually purchases all or a portion of the business of another company. Thus, the buying company swallows the business of other company and the other company business ceases to exist. In some instances, the larger company purchases and absorbs the assets of the other company. In other situations, the larger company purchases the stock of a smaller company. In an acquisition, the management team of the target company may or may not continue to be involved in the management of the business after it is purchased. Like mergers, there are many variations on this basic structure.

Antitrust. U.S. antitrust laws are designed to prevent a company from becoming so large in its market sector that it might restrain free trade and fair pricing (i.e., becoming a monopoly). To prevent monopolies from forming through mergers or acquisitions, the Federal Trade Commission and the Department of Justice review mergers and acquisitions and have the power to block the deal. When the size of the merger or acquisition exceeds a certain dollar threshold, federal laws require the companies make a formal filing with the agencies and a formal review is undertaken.  The law requiring these reviews is called the Hart Scott Rodino Antitrust Improvements Act.