What are Mergers and Acquisitions (M&A)?

Companies often hold minority interest positions in other companies, but sometimes they decide to merge into one company, maybe by selling-out to a bigger company, or acquiring a smaller one.

Very often, small companies are very agile and develop new technologies quickly, but do not have sufficient funds to bring them to the market. Large companies need the technologies and it is cheaper for them to buy smaller companies rather than spending money to develop them on their own.

Mergers and acquisitions (M&A) is the market space in which companies negotiate integrations and takeovers. A merger is when two companies agree to move forward as one unified company; an acquisition is when a larger company takes over a smaller one.

A hostile takeover results if the smaller company wants to remain independent and attempts to maneuver its way out of the acquisition. The larger company, or even a single investor, will attempt to buy up enough voting shares of common stock to eventually gain control of the board of directors of the smaller company.

This can be done by putting a bid out to shareholders to buy their shares for more than the current market value. The smaller company may use one of several strategies to make a takeover more difficult or unappealing.

A “poison pill” strategy, also known as a shareholder rights plan, is one in which existing shareholders or employees with stock options are given the right, if a triggering event occurs, to purchase many shares at a discount.

The ability of shareholders to purchase many additional shares at a discount, which may be during the time before or even after an acquisition (called a “flip-in” or a “flip-over”, respectively), means that the interest of the acquiring party would immediately be diluted, and it would take another large sum to regain the majority interest.

Such tactics make a takeover more expensive and unappealing. In some countries and jurisdictions, poison pill provisions have been deemed illegal, since they manipulate the market in ways favorable to the incumbent board members.

Other strategies of defense against takeover can include giving preferred stocks voting rights, which outweigh that of common stock, so that large purchases of common stock will never allow someone to gain control of the board of directors.