Question about mergers
October 31, 2024
by a searcher from University of Minnesota - Twin Cities Campus in Marysville, WA, USA
Hi everyone! Quick question - in a merger (not an acquisition), does one party get paid cash at "close," or is the entire value in the future growth of the companies now that they're combined?
Just to clarify - and I apologize if I'm getting my terminology wrong! - when I say "merger," I mean two companies combining assets into one entity in order to continue to grow by leveraging the strengths of each of the companies. When I say "acquisition," I mean one entity buying out part or whole of another entity.
from Bentley College in Miami, FL, USA
Equity-Based Exchange: In many mergers, each company’s shareholders receive shares in the new, combined entity rather than a cash payout. The goal here is that both parties benefit from the future growth of the merged business. Each shareholder’s stake is based on an agreed valuation of both companies, aiming to reflect their contributions to the new entity.
Cash Components Are Possible but Not Guaranteed: While cash isn’t always part of the deal in a merger, sometimes a ‘cash boot’ or partial payout might be offered to balance the equity distribution or incentivize certain shareholders. However, unlike acquisitions, where one party often pays the other upfront, mergers are typically less cash-heavy at close and more focused on shared future value.
Valuation and Synergy-Driven Structure: The value in a merger usually comes from the synergy and combined strengths of both businesses – enhanced capabilities, expanded customer bases, operational efficiencies, or increased market reach. The terms are designed to create future value for both parties, and success depends on how well the combined entity can leverage these strengths.
So, while every merger is unique and some can include cash payouts, they’re often structured as an exchange of equity with an eye toward mutual growth, differing from acquisitions that usually involve one entity paying the other at close.
from The University of Chicago in Stamford, CT, USA
This concept might work in a joint venture (perhaps something like Microsoft + OpenAi, where Microsoft contributes capital and OpenAi contributes IP) or 50/50 deal, but that would only work if the parties were contributing roughly equal value. FWIW, Canada has amalgamations (a concept that doesn’t exist in US corporate law) where a merger of this sort happens (two streams flow together into a new river)
In US corporate law, typically you would see the majority asset contributor establish and run the go forward company and then negotiate certain rights with the minority asset contributor (for example: tag rights, drag rights, preeemptive rights, transfer rights, # of board seats, consent rights in the course of a sale, etc.). Often this is done through negotiating rights around a specific class of units for the initial partners and rollover documents.