Article by Lim Seng Siew.

Businesses do get married. There are a number of terms used to describe the various forms of business ‘marriages’: acquisitions or takeovers, mergers, joint ventures are among the common terms. Dealing with each in turn.

Acquisitions or Takeovers

An acquisition or takeover happens when one company (the acquirer) acquires most or all of the shares of another company (the target) to gain control of the target company. Most of the time, the acquirer pays cash for the target’s shares. Sometimes, the acquirer swaps its shares for the shares of the target company, termed ‘shares-for-shares’ swap.

‘Shares-for-shares’ swaps that result in the acquirer becoming a subsidiary of the target company are known as ‘reverse takeovers’. This often happens when a privately held company (technically, the target but in actual terms, the acquirer) with strong prospects ‘reverse’ acquires a listed shell company (technically the acquirer but in actual terms, the target) which has no legitimate business operations and limited assets.

While in theory all the acquirer needs is to acquire 1 share plus 50% of the target company’s issued shares (ie 50% + 1) to gain control of the target, in practice this rarely happens. This is especially so when the target company is privately held, ie not listed on any stock exchange. Why would you, as a seller, give up control of your business to another without realising a substantial immediate financial gain? After all, there is always the possibility of the business failing because the acquirer doesn’t understand your business.

Most acquisitions of privately held companies are friendly and happen with the mutual agreement of both the acquirer and the shareholders of the target. This does not mean that the negotiations for the deal will therefore be easy. Each party will still negotiate hard to extract the maximum gain from the deal. However the hard bargaining should be tampered by the bigger picture of the mutual benefits that can arise if the deal is successful.

Some acquisitions can be hostile, commonly termed as ‘hostile takeovers’. The shareholders of the target company do not agree to the takeover. For listed companies, there are rules governing parties’ conduct during a takeover. The rules ensure transparency and fairness for all concerned in the deal. Takeovers of listed companies, especially hostile takeovers, are beyond the scope of this article.

Mergers

Closely related to an acquisition is a merger. In a merger, 2 separate business, usually of almost equal characteristics (in terms of size, market share, employees, scale of operations etc), join together to form a new legal entity. The 2 original businesses are usually dissolved after the merger is completed.

Joint Venture

A joint venture (or JV) is a business arrangement in which 2 or more parties agree to pool their resources for a specific project. The participants of a JV maintain their own businesses. The JV can be in the form of a separate company (JV Co) in which the participants are its shareholders. It can also be a partnership or a mere contractual arrangement commonly termed ‘consortium’.

Once the project ends, often the JV Co is liquidated, the partnership is dissolved or the consortium disbanded.

Other Forms of Business ‘Marriages’

Sometimes, instead of the acquirer acquiring the shares of the target company, only the assets, contracts and businesses of the target company are acquired, ie ‘asset acquisition deals’. This typically happens when the target company is facing bankruptcy proceedings.

There is also a management buyout, ‘MBO’ for short, where the company’s executives purchase a controlling stake in the company.

There is another form of a deal called “Acqui-hire’ where the acquirer is not really interested in the business of the target but in the talent (ie key personnel) in the target company.  It happens fairly often in the start-up world where talent is in short supply. Acqui-hires are also used as a ‘soft landing’ by the start-up’s founders and employees when the start-up fails to raise more money for its needed capital. The irony with ‘acqui-hires’ is that the team from the failed start-up enters the office of the acquirer in an elevated position, with lots of money and guaranteed employment contracts, all thanks to a business that went broke.

We have talked about what the various terms mean in a business ‘marriage’. In the next part, we will talk about the processes involved in an acquisition.