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Mergers: What you Need to Know

Mergers: What you Need to Know
What is a Merger?

A merger is a fundamental aspect of corporate strategy, finance and management; the process deals involves the buying, selling and combining of different companies to aid in the growth or financing of the involved business organizations. When a company merges with another, it does so to increase its market presence within a given industry. In essence, the companies who merge together join forces; they pool their resources, including their human capital, to increase efficiency in a given market place. Furthermore, a merger may also be conducted to increase specialization or aid in financing of a struggling, yet valuable company.

Difference between Mergers and Acquisitions:

Although mergers are often used synonymously with acquisitions, the two actions produce slightly different results. When one business takes over another and clearly establishes itself as the controller or new owner, the maneuver is referred to as an acquisition. From a legal point of view, the purchased company no longer exists; the buyer, in the acquisition assumes control over the company and swallows the business. In this maneuver, the buyer’s stock remains active and continues to be traded while the purchased company’s shares transfer over to the buying company.

In contrast to an acquisition, mergers occur when two firms agree to move forward as a single, newly-formed company—as oppose to two separately owned and operated companies. This process typically occurs with companies that are similar in size, market presence and capital. In a merger, both companies’ stocks are surrendered and a new stock is issued to the public in its place. A famous example of a merger took place in 1999, when GlaxoWellcome and SmithKline Beecham agreed to agglomerate their resources and form a new company, GlaxoSmithKline.

In practice, mergers of equals don’t happen often; companies are rarely the same size. In most mergers, one company will buy another and, as part of the terms and conditions expressed in the mergers contract, allow the acquired company to proclaim that the deal is a merger of equals. That being said, being bought by another company typically carries negative connotations; therefore, by stating the deal was a merger, top executives and managers at the bought firm can view the takeover as more palatable. Similar in structure, a purchase deal may also be referred to as a merger; this transaction occurs when both CEOs agree that combining resources is in the best interest of each individual company.

Benefits of Mergers:

The basic rationale used to explain mergers is that the acquiring company seeks to improve their financial performance. The following reasons provide brief explanations as to why a company would partake in a merger:

Economies of Scale: The combined company can reduce its fixed costs by removing duplicate operations or departments; by lowering the costs of the companies, relative to a fixed revenue stream, the companies will enjoy increased profit margins

Increased Revenue and Market Share: The buyer in a merger absorbs a competitor and thus increases its market power

•  Taxation: A profitable business may buy a defunct company to use the acquired firm’s losses to their advantage by reducing their tax liability.

Diversification

Resource Transfer

Mergers and Acquisitions: A Guide to Understand

Mergers and Acquisitions: A Guide to Understand

Mergers and Acquisitions Defined:

The term “mergers and acquisitions” (commonly labeled as simply M&A) refers to a fundamental aspect of corporate management, finance and overall strategy, where companies partake in the buying, selling and combining of different companies to aid, finance or increase growth in a specific sector. Rather than having to create another business entity or completely overhaul an already existing model, the process of mergers and acquisitions enables companies to increase market presence, economies of scale, and diversification through one maneuver.

Difference between Mergers and Acquisitions:

Although the terms are commonly linked together, a merger and an acquisition are two separate maneuvers. An acquisition takes place when one company purchases another; the buying company assumes or swallows the purchased company for a price. The purchased company no longer has its own stock and transfers over all control to the purchasing company. Dissimilar to this maneuver, mergers are a form of consolidation, where two companies combine together to form a new company. In a merger, the participating company’s shares transform into one all-inclusive stock. The management and resources of the company are pooled together; that being said, a merger of equals, given the differences in size, market share and capital, is unlikely. As a result, a present-day merger typically occurs when one company buys another, but utilizes the purchased company’s resources and human capital. In essence, the purchased company still has a presence, but the majority of control is transferred to the buying company.   

The process of mergers and acquisitions may be executed with private or public companies, depending on whether the acquiree is or isn’t listed on a public exchange. Furthermore, the process of mergers and acquisitions may be executed in either a friendly or hostile manner. In contrast to an acquisition, mergers occur when two firms agree to move forward as a single, newly-formed company—as oppose to two separately owned and operated companies. This process typically occurs with companies that are similar in size, market presence and capital. In a merger, both companies’ stocks are surrendered and a new stock is issued to the public in its place. A famous example of a merger took place in 1999, when GlaxoWellcome and SmithKline Beecham agreed to agglomerate their resources and form a new company, GlaxoSmithKline.

In practice, mergers of equals don’t happen often; companies are rarely the same size. In most mergers, one company will buy another and, as part of the terms and conditions expressed in the mergers contract, allow the acquired company to proclaim that the deal is a merger of equals. That being said, being bought by another company typically carries negative connotations; therefore, by stating the deal was a merger, top executives and managers at the bought firm can view the takeover as more palatable. Similar in structure, a purchase deal may also be referred to as a merger; this transaction occurs when both CEOs agree that combining resources is in the best interest of each individual company. 

Benefits of Mergers and Acquisitions:

The basic rationale used to explain mergers is that the acquiring company seeks to improve their financial performance. The following reasons provide brief explanations as to why a company would partake in a merger:

Economies of Scale: The combined company can reduce its fixed costs by removing duplicate operations or departments; by lowering the costs of the companies, relative to a fixed revenue stream, the companies will enjoy increased profit margins

Increased Revenue and Market Share: The buyer in a merger absorbs a competitor and thus increases its market power

Taxation: A profitable business may buy a defunct company to use the acquired firm’s losses to their advantage by reducing their tax liability.

Diversification

Resource Transfer

Nondisclosure Agreement

Nondisclosure Agreement

What is a Nondisclosure Agreement?

A nondisclosure agreement, which is also referred to as a confidentiality agreement, a proprietary information agreement or a confidential disclosure agreement, is a legally-binding contract formulated between at least two parties to outline confidential material, intelligence or any information that the parties wish to share with one another, but wish to restrict access to by third parties and the general public. The nondisclosure agreement is a formal contract through which the participating parties agree not to disclose pertinent company-specific information latent in the agreement. The nondisclosure agreement creates a confidential relationship between the active parties that solidifies the protection against any type of confidential or proprietary information involving the underlying company’s trade secrets or business plan. It enforces it’s participants to adhere to the stipulations of the contract; if an individual violates a nondisclosure agreement and makes the latent information public or divulges the secrets to a third party the individual will be held in contempt and may face legal charges.

How is a Nondisclosure Agreement Formed?

Nondisclosure agreements are commonly formed (or signed) when two companies, entities (for example partnerships) or individuals are considering doing business and need to understand the processes used in each other’s business dealings for the purpose of evaluating the assumed business relationship. In essence, the nondisclosure agreement is a pact that enables participating companies or individuals to evaluate the future outlook and specifics associated with a business deal. Obviously, to ensure trust and to solidify understanding, the material expressed in the nondisclosure agreement is extremely sensitive. As a result, the nondisclosure agreement enforces, through the possibility of legal persecution or the understanding of termination, the participants to keep the information themselves. A nondisclosure agreement may be initiated in a mutual setting, meaning both parties are equally restricted in using the material provided, or they can formulate the contract to restrict one of the participating parties from accessing the information. Furthermore, it is possible for an employee to sign a nondisclosure agreement with his or her employer. As a matter of fact, many employment contracts will include a clause restricting employees from using or disseminating company-owned or confidential information.

What is expressed in a Nondisclosure Agreement?

The majority of nondisclosure agreements are distributed as uni-lateral (one-way) contracts. In the typical nondisclosure agreement, one party will wish to disclose certain information to another party but needs to make sure that the information is kept secret. The information may be required to be kept confidential for a number of reasons, including to satisfy patent laws or to make sure that the receiving party does not take and use the disclosed information for their own personal game. A nondisclosure agreement may also be established in a mutual fashion, where both parties supply information that is intended to remain secret. This nondisclosure agreement is common when business entities are considering some kind of merger or joint venture. A nondisclosure agreement may protect any type of information that is not typically known; however, the agreement may also contain clauses that will protect the individual receiving the information so that if the information is obtained through other sources, they will not be held accountable or obligated to keep the information secret. 

In general, the following issues are commonly expressed in a nondisclosure agreement:

• Outlines the parties involved in the agreement

• Define what is confidential
• Define the disclosure period
• The exclusions from what must be kept confidential
• Provisions restricting the transfer of data
• The obligations of the recipient regarding the confidential information

What to Know about Spin Offs

What to Know about Spin Offs

 


What is a Spin Off?

 

 

 

A spin-off refers to a distinct corporate action where a company “splits off” sections of itself to form miniature and separate businesses. The common definition of a spin-off is the division or a business enterprise or organization, to form an independent business. The company who “spins-off” takes assets, technology, intellectual property and/or existing products from the parent organization to develop their own unique, yet connected, business model.

 

 

 

 

In a variety of situations, the management team of the Spin Off are taken from the parent organization; the Spin Off company, although a new formation, is backed by the parent company, both financially and in regards to human capital. That being said, the Spin Off, while enjoying these resources, is not negatively affected by the parent organization’s company dealings, image or even history. This characteristic awards the Spin Off with potential to take existing deals that had once been languishing in the old environment, and grow them in a newly-formed environment. Additionally, the Spin Off is able to develop new deals in a manner that is most advantageous to them; if their parent company has a solid reputation they can use its name as a strategic tool. In turn, if the parent organization has a floundering reputation, they have the ability to distance themselves entirely from the organization.
 
 
 
What is the Parent Company’s role in a Spin Off?

In the majority of spin off cases, the parent organization or company will offer support during one or more of the following stages:

• The parent company may invest equity in the new form; this injection of capital enables the spin off to fund its newly-formed operations

 

• The parent company may act as the spin off’s first customer; this enables the spin off to create cash flow 
 

• The parent company will provide tangible resources to the newly-formed spin off, such as desks, chairs, phones, internet access, human capital, financing, other office supplies, transportation, etc.
 

• The parent company will provide services to the spin off, such as legal aid, financial help and the transfer of technological applications.
 
 

How is a Spin Off Regulated?

 

In the United States, a spin off is formally regulated by the SEC (The Securities and Exchange Commission); the SEC defines a spin off as any situation that occurs when the equity owners of a parent company receive equity stakes in a newly formed company. Famous examples of spin offs include: AOL was spun from Time .Warner, Shugart was spun from IBM and Agilent Technologies was spun from Hewlett-Packard