Understanding Mergers, Acquisitions, Restructuring, and Investment Banking

Terminology
Key Terms Commonly Used in Discussing M&As
Mergers can be described from a legal perspective and an economic perspective. This distinction is relevant to discussions concerning deal structuring,
regulatory issues, and strategic planning. The purpose of this article is to help clarify some of the terms commonly involved in discussing M&As and other
types of corporate restructuring.
Contents

o Understanding Mergers, Acquisitions, and Other Corporate Restructuring Terminology

1.0 Mergers and Consolidations

1.1 A Legal Perspective

1.2 An Economic Perspective

2.0 Acquisitions, Divestitures, Spin-Offs, Carve-Outs and Buyouts

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Source: This article is extracted from Donald M. DePamphilis' Mergers, Acquisitions, and

Other Restructuring Activities: An Integrated Approach to Process, Tools, Cases, and
Solutions, 5th edition, Elsevier Academic Press, 2010. For more information about the 5th
edition or to buy it online, click here.
 

Understanding Mergers, Acquisitions, and Other Corporate Restructuring Terminology

Mergers, Acquisitions and 

Other Restructuring Activities 
by Donald M. DePamphilis

This article is extracted from the textbook Mergers, Acquisitions and Other Restructuring
Activities by Donald M. DePamphilis. For more information about this textbook, or to buy online,
click here.
 

1.0 Mergers and Consolidations

Mergers can be described from a legal perspective and from an economic perspective. This
distinction is relevant to discussions concerning deal structuring, regulatory issues, and strategic
planning.
1.1 A Legal Perspective

This perspective refers to the legal structure used to consummate the transaction. Such structures
may take on many forms depending on the nature of the transaction.
A merger is a combination of two or more firms in which all but one legally cease to exist, and the
combined organization continues under the original name of the surviving firm. In a typical merger,
shareholders of the target firm exchange their shares for those of the acquiring firm, after a
shareholder vote approving the merger. Minority shareholders, those not voting in favor of the merger,
are required to accept the merger and exchange their shares for those of the acquirer. If the parent
firm is the primary shareholder in the subsidiary, the merger does not require approval of the parent’s
shareholders in the majority of states. Such a merger is called ashort form merger. The principal
requirement is that the parent’s ownership exceeds the minimum threshold set by the state. For
example, Delaware allows a parent corporation to merge without a shareholder vote with a subsidiary
if the parent owns at least 90 percent of the outstanding voting shares. A statutory merger is one in
which the acquiring company assumes the assets and liabilities of the target in accordance with the
statutes of the state in which the combined companies will be incorporated. A subsidiary
merger  involves the target becoming a subsidiary of the parent. To the public, the target firm may be
operated under its brand name, but it will be owned and controlled by the acquirer.
Although the terms mergers and consolidations often are used interchangeably,
a statutory consolidation,which involves two or more companies joining to form a new company, is
technically not a merger. All legal entities that are consolidated are dissolved during the formation of
the new company, which usually has a new name. In a merger, either the acquirer or the target
survives. The 1999 combination of Daimler-Benz and Chrysler to form DaimlerChrysler is an example
of a consolidation. The new corporate entity created as a result of consolidation or the surviving entity
following a merger usually assumes ownership of the assets and liabilities of the merged or
consolidated organizations. Stockholders in merged companies typically exchange their shares for
shares in the new company. 
A merger of equals is a merger framework usually applied whenever the merger participants are
comparable in size, competitive position, profitability, and market capitalization. Under such
circumstances, it is unclear if either party is ceding control to the other and which party is providing
the greatest synergy. Consequently, target firm shareholders rarely receive any significant premium
for their shares. It is common for the new firm to be managed by the former CEOs of the merged firms
who will be co-equal and for the composition of the new firm’s board to have equal representation
from the boards of the merged firms. In such transactions, it is uncommon for the ownership split to be
equally divided. The 1998 formation of Citigroup from Citibank and Travelers is an example of a
merger of equals. Research suggests that the CEOs of target firms in such transactions often
negotiate to retain a significant degree of control in the merged firm for both their board and
management in exchange for a lower premium for their shareholders.
1.2 An Economic Perspective

Business combinations also may be classified as horizontal, vertical, and conglomerate mergers.

How a merger is classified depends on whether the merging firms are in the same or different
industries and on their positions in the corporate value chain (see Figure 1 below).  Defining business
combinations in this manner is particularly important from the standpoint of antitrust analysis in which
regulators often use the combined firms’ market share as a measure of their ability to influence
product/ service selling prices.  Horizontal and conglomerate mergers are best understood in the
context of whether the merging firms are in the same or different industries. A horizontal
merger  occurs between two firms within the same industry. Examples of horizontal acquisitions
include Proctor & Gamble and Gillette (2006) in household products, Oracle and PeopleSoft in
business application software (2004), oil giants Exxon and Mobil (1999), SBC Communications and
Ameritech (1998) in telecommunications, and NationsBank and BankAmerica (1998) in commercial
banking. Conglomerate mergers are those in which the acquiring company purchases firms in
largely unrelated industries. An example would be U.S. Steel’s acquisition of Marathon Oil to form
USX in the mid-1980s.
Vertical mergers are best understood operationally in the context of the corporate value chain depicted in Figure 1. Vertical mergers are those in which the

two firms participate at different stages of the production or value chain. A simple value chain in the basic steel industry may distinguish between raw

materials, such as coal or iron ore; steel making, such as “hot metal” and rolling operations; and metals distribution. Similarly, a value chain in the oil and gas

industry would separate exploration activities from production, refining, and marketing. An Internet value chain might distinguish between infrastructure

providers, such as Cisco; content providers, such as Dow Jones; and portals, such as Yahoo and Google.  In the context of the value chain, a vertical

merger is one in which companies that do not own operations in each major segment of the value chain choose to “backward integrate” by acquiring a

supplier or to “forward integrate” by acquiring a distributor. An example of forward integration includes paper manufacturer Boise Cascade’s acquisition of

office products distributor, Office Max, for $1.1 billion in 2003. An example of backward integration in the technology industry is America Online’s purchase of

media and content provider Time Warner in 2000. In 2008, American steel company, Nucor Corporation, announced the acquisition of the North American

scrap metal operations of privately held Dutch conglomerate SHV Holdings NV. The acquisition further secures Nucor’s supply of scrap metal used to fire its

electric arc furnaces.

Recent research indicates that horizontal, conglomerate, and vertical mergers accounted for an average of 42 percent, 54 percent, and 4 percent of

transactions globally since 1981. While pure vertical mergers are rare, studies suggest that about one-fifth of the all mergers during the same period

exhibited some degree of vertical relatedness.