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M&A: What's an M, and what's an A?

When we at The Firm Advisors talk with people outside the industry to explain our business, the response is sometimes: “Oh, like Richard Gere in Pretty Woman.”

No. Not like Richard Gere in Pretty Woman.  

Mergers and acquisitions are linked together by acronym and by result – the transfer of company ownership from one entity to another. However, in reality these things are quite different.

A merger is when two companies join forces, such as T-Mobile and Sprint plan to do in a deal that was approved by a judge on February 11, 2020 (see the New York Times article here). In this scenario, the third- and fourth-largest wireless carriers in the country are combining forces to be able to compete with Verizon and AT&T. This typically results in a new entity being formed which comprises both existing businesses.

Contrast this large-scale merger with a smaller merger of two middle-market-sized, family-owned call centers in the Southeast (one in Birmingham, the other outside Nashville) and it’s easy to see that not all mergers are created equal. No judge had to approve it, no customers will be affected on a day-to-day basis, but consolidating back office functions over a long period of time will lead to increased profits.

On the other hand, an acquisition can mean when one company purchases any majority stake in another company, meaning 50% or more of the shares. At our level, and within our organization, these are never done without the approval of the target company’s current ownership structure. That type of an acquisition is known as a “hostile takeover,” and doesn’t apply to what The Firm Advisors and its M&A consultants do on a day-to-day basis. We don’t do hostile takeovers. (THAT is what Richard Gere did in Pretty Woman.)

Is it better to merge or to acquire? Consider the following:

  • Do I intend to combine two businesses, or after the purchase, will they be separate?
  • Do I intend to share stock with the existing business owner, or is this an exit strategy?
  • Am I looking to enter a foreign market, making an international organization?
  • Am I trying to buy a competitor to increase market share?

Whichever path your purchase takes, an existing, reputable company is often less risky than starting anew.

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