Mergers and Acquisitions For Dummies (5 page)

Chapter 1

The Building Blocks of Mergers and Acquisitions

In This Chapter

Becoming familiar with the main vocabulary of mergers and acquisitions

Understanding the rules of the road

Opening your eyes to potential costs

Figuring out where your company fits

M
ergers and acquisitions is a complicated field, so this chapter provides a basic overview: an introduction to the basic terms and phrases, a discussion of decorum and the basic M&A process, a look at the players and the category of deals, and my handy-dandy guide to helping business owners determine what kind of businesses they have.

Defining Mergers and Acquisitions

Mergers and acquisitions
(or
M&A
for short — the M&A world is rife with acronyms and initialisms) is a bit of a catchall phrase. For all intents and purposes, M&A simply means the buying and selling of companies. When you think about it, mergers and acquisitions aren't different; they're simply variations on the same theme.

In the strictest sense, a
merger
is a combination of two or more entities where each merging entity has an equal stake in the new enterprise and each merging entity has a very clearly defined role in the new entity. This ideal is the vaunted
merger of equals.
Daimler's 1998 combination with Chrysler was a merger of equals. In a more practical sense, so-called mergers of equals are rare; one side usually ends up controlling the enterprise. For example, the years following the Daimler-Chrysler merger showed that Daimler executives planned all along to control the combined entity.

Although actual mergers do occur, most of the activity in the M&A world centers on one company buying another company, or the acquisitions category. I like to think using the word
merger
keeps the uninitiated on their toes; plus, talking about combining two companies as equal partners rather than about committing a hostile takeover sounds much more egalitarian.

Mergers are far less common than acquisitions. An
acquisition
is when one company buys another company, a division of another company, or a product line or certain assets from another company. Actually, an acquisition is when any kind of business purchases another part (or all) of another business. Although some companies grow
organically
(from within by creating and selling products or services), an acquisition allows a company to bypass the growth stage by simply buying existing sales and profits. Starting up a new product line may be less expensive than buying an existing one, but the market may take a while to adapt to the new product, if it does at all. For this reason, buying other companies rather than relying on organic growth may make sense for a particular company.

The fact that one can transfer a company's ownership through a sale often comes as a bit of surprise to many people (including many business owners, believe it or not). Business owners, especially owners of middle market and lower middle market companies (with revenues between $250 million and $1 billion [middle market] and between $20 million and $250 million [lower middle market]), have spent their careers building a company, so the process of selling a business is often something new and foreign to them.

In addition to being an activity, M&A is an industry. As this book illustrates, the steps to doing a deal, the names of documents and processes, the conventions, and the sundry tips and insights I provide are all based on de facto industry standards that have developed over time, and my humble hope is that this book helps introduce you to those standards and conventions.

Introducing Important Terms and Phrases

Like any topic, M&A has a language that you have to get a handle on to understand the field. Although I introduce many more terms and phrases throughout the book, the following words are part of the basic building blocks of M&A.

The
lingua franca
of M&A is an amalgam of accounting and banking terms sprinkled with initialisms, acronyms, and words and phrases adjusted and twisted to suit certain needs at certain times. Pay close attention to the terms I define throughout the book. Although some are tricky, I use them all for a reason.

Buyer

You can't sell something unless you have a buyer for it. Although Buyers (both potential and actual) are typically companies or entities, I often refer to them as individuals for clarity.

In documents and contracts and agreements, you usually see
Buyer
as a defined term, which means it's capitalized. When you read those documents,
Buyer
looks like the name of a person. In fact, to make it seem really formal, M&A professionals often drop the word
the
from
Buyer.

“Buyer” isn't a one-size-fits-all category. A Buyer may acquire all or part of a company, the stock of the company, or certain or all assets and even assume some of the liabilities. Despite this wide variety of possibilities, Buyers typically fall into four broad types:

Strategic Buyers:
These Buyers are other companies planning to combine operations of the two companies to some extent (as opposed to buying strictly for financial reasons). For example, when Oracle buys a company, Oracle is considered a strategic Buyer because it buys companies that have some sort of synergy to its business.

Financial Buyers:
Financial Buyers
are funds of money that buy companies. Financial Buyers of middle market and lower middle market companies are typically private equity (PE) funds, which are essentially large pools of money (see Chapter 4 for more).

Other companies backed by PE funds:
The company will be the new owner of the acquired company, but another entity (the fund) is providing the dough to do the deal.