The Basics of Mergers and Acquisition Deals

External development is a form of business growth that results from the acquisition, association, participation, or control of companies, or assets of other companies, expanding their existing businesses or entering into new ones.

Mergers are unions of two or more companies that give rise to a third company more significant than the previous ones. Acquisitions, on the other hand, consist of the purchase of one or more companies by another. Generally, mergers and acquisitions companies are carried out to gain a greater dimension and competitiveness in the market to face opportunities or threats that have been detected. In either case, a corporate law attorney team is always in place to ensure a smooth transition.

The most notable and recent example in the Spanish economy has been the mergers and acquisitions that have taken place in the banking sector as a result of the economic crisis, with the fundamental objective of gaining size to rationalize structures, taking advantage of the lower value of competitors to acquire a business network where there was no implementation and achieving a critical mass of customers to be profitable. As a result, the minimum capital requirements of the current banking regulations have also been met. 

Mergers are classified into two groups:

Pure merger:

It consists of the union of two or more companies, resulting in creating a new one, distinct from the previous ones.

Merger by absorption:

A merger by absorption consists of a company acquiring and integrating into its legal entity the businesses of other companies, maintaining the initial legal identity of the acquiring company.

Although there is no classification for corporate acquisitions, there are different types, also applicable to mergers, defined by who the buyer is and how the merger or acquisition is financed. Thus, there are the following modalities:

Leveraged Buy-Out (LBO):

This consists of purchasing a company by obtaining financing whose primary collateral will be the company’s assets. It is also known as a “leveraged buy-out.” The funding for the purchase will be satisfied with the cash flows generated by the acquired company. In addition, it is common to establish “ratchet” systems (payment with shares) as remuneration for the executives so that with the passage of time and fulfillment of objectives, the ownership of the acquired company will pass into their hands.

Leveraged Employee Buy-Out (LEBO):

This is the LBO modality whereby the company’s employees acquire ownership with the help of external financing.

Management Buyout (MBO):

This is the purchase of the company by its management team, generally supported by a financial investor.

Management Buy-In (MBI):

This consists of the purchase of the company by a management team other than the current one. This operation usually occurs when external agents, mainly financial, perceive that the current management team will be unable to make the business profitable.

Buy-In Management Buy-Out (BIMBO):

This is the combination of MBO and MBI, i.e., the company’s purchase by both internal and external managers.

Depending on the type of relationship established between the companies, they can be classified as follows:

  • Horizontal: The companies are competitors of each other and belong to the same industry.
  • Vertical: The companies are located at different stages of the complete cycle of exploitation of a product.
  • Conglomerates: The companies have very other activities.
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