October 6, 2021
Companies eventually evolve and strive for improved operations or growth by combining their resources and efforts with other companies. Sometimes, the legal requirement for spinning off specific productive assets involves Mergers and acquisitions (M&A) and divestitures, both of which may entail structural modifications to underlying business via the sale or purchase of the entire business or its parts.
Mergers and acquisitions is basically an umbrella term used for describing the consolidation of assets or companies via different kinds of financial transactions, such as acquisitions, mergers, consolidations, asset purchase, management acquisitions, and tender offers.
With an acquisition, one company acquires another company by purchasing its assets. This means that the acquired company ceases to exist as a business or corporate body. The acquiring company, however, can use the acquired business’s name. With a merger, two companies merge assets to create a new entity or company. Mergers are very common in cases where both companies have similar power and size.
From a legal standpoint, mergers are fairly straightforward since there’s typically just one bidder, and stock is used as payment. All shareholders of both companies will need to approve the merger.
M&As are categorized by the attitudes of all involved parties, their structural impacts, and the transaction’s specific mechanisms. Generally speaking, the most common ways that businesses merge to leverage advantages in their target markets include:
Acquisitions can either be hostile or friendly, depending on either party’s attitudes toward the transaction. For example, in a friendly acquisition or merger, both companies willingly enter into the transaction and negotiate accordingly.
On the other hand, hostile mergers and acquisitions are usually spearheaded by dissident stockholders or raiders who buy in first to get a share. In such cases, the target company might have a significant amount of money, might be paying thin dividends, or might (as the hostile bidder believes) be more in favor of growth rather than stockholder return, among others.
In addition, the management teams cooperate well when communicating with stockholders during friendly acquisitions. By contrast, in hostile acquisitions, the acquiring party usually solicits the target stockholder’s votes to get adequate votes for the transaction to succeed.
There are a lot of reasons why many companies prefer external growth via mergers and rather than internal growth. However, as with all business strategies, M&As come with advantages and disadvantages.
Divestiture is the complete or partial disposal or sale of a product line, business unit, division, or subsidiary. In most cases, divestiture is considered an accepted growth strategy instead of diversification. It entails the full or partial disposition, conversion, and reallocation of money, people, plants, inventories, products, and equipment.
The main objective of divestiture is to eliminate a segment of the business so that the freed resources can be utilized for some other, more beneficial, and profitable purpose. Business segments are usually prime candidates for divestiture when they:
Divestitures are useful for correcting strategic business mistakes. They can help companies refocus on their core businesses, mitigate over-diversification, ensure that the company is in line with its corporate strategy, and get rid of negative synergies.
Businesses planning on expanding their interests and exploring resources via mergers, acquisitions, or divestitures would benefit from working with skilled legal partners who could help them mitigate the risks usually linked to such business transactions.
With help from our experienced Virginia business lawyers of McClanahan Powers, PLLC, we can explore and develop innovative strategies that will protect your interests and meet your specific business objectives. For more information on how our business lawyers in Virginia can help, call our office at 703-520-1326 or fill out our online form to arrange your appointment.