Understanding Mergers and Acquisitions

Hardly a day goes by when we don't read about mergers and acquisitions, or M&A as they are known to corporate financial institutions and law firms. It seems like more and more companies are doing whatever they can to cut losses and keep their shareholders happy. In today's shaky economy, it's more important than ever for companies of all sizes to understand how mergers, acquisitions, takeovers, and merger control work. Knowing what to expect if your company is part of a merger or acquisition is essential to protecting your interests and assets.

Strictly speaking, mergers occur when two similarly matched companies combine by exchanging their stock for the stock of the newly integrated firm, with both firms retaining partial ownership and all wealth pooled for the good of the new company. The goal of a merger is to benefit the shareholders better and faster than could be done if the companies remained separate. There are a couple main types of mergers:

Horizontal integration: Also known as lateral integration, this type of merger includes similar firms that were previously competitors or in different industries. If a merger happens between different industries, it is known as a conglomerate integration.

Vertical integration: Also known as a vertical merger, this type of merger is between companies that were once each other's supplier or customer in a single production or distribution chain. Vertical integration can either be backward (where the consumer acquires its supplier) or forward (where a manufacturer of goods buys its avenues of distribution).

Acquisition, on the other hand, occurs when one firm buys another. The company being bought is known as the target, and all or parts of its liabilities, assets, and stocks are drawn into the purchasing company.

On their face, these transactions are meant to appear like mutual decisions, but they are sometimes hostile. Laws vary between states regarding how well companies are protected by hostile takeovers, but as we've seen Microsoft's attempts to take over Yahoo!, things can turn ugly before they are even official.

Since such business deals are so complex, mergers and acquisitions are usually discussed as one and the same. They have similar outcomes and risks, and much has to do with how the integration is viewed by the media, the shareholders, and the companies' employees.

Monopolies occur when all of the providers of a service or product are under a single company. A commonly cited example of this is the Bell monopoly in the telecom industry in the 1980s. Since then, strict anti-trust laws have sought to prevent a single firm getting all of a market. Merger control allows mergers and acquisitions to be reviewed under anti-trust law, with the goal of preventing the loss of competition in a market.