Mergers and acquisitions (M&A) are forms of corporate restructuring that are becoming increasingly popular. The motive for wanting to merge with or acquire another company comes from management trying to achieve better synergy within the organization. This synergy is thought to increase the competitiveness and efficiency of the company.
Mergers usually occur between companies of equal size that believe a newly formed company can compete better than the separate companies can on their own. Mergers usually occur on an all-stock basis. This means the shareholders of both merging companies are given the same value of shares in the new company that they owned in one of the old companies. Therefore, if a shareholder owned $10,000 worth of shares before the merger, he or she would own $10,000 in shares after the merger. The number of shares owned would most likely change following the merger, but the value would remain the same.
However, mergers are rarely a true merger of equals. More often, one company indirectly purchases another company and allows the target company to call it a merger to maintain its reputation. When an acquisition occurs in this way, the purchasing company can acquire the target company using all stock, all cash or a combination of both.
When a larger company purchases a smaller company with all cash, there is no change to the equity portion of the parent company's balance sheet. The parent company has simply purchased a majority of the common shares outstanding. When the majority stake is less than 100%, the minority interest is identified in the liabilities section of the parent company's balance sheet. On the other hand, when a company acquires another company in an all-stock deal, equity is affected.
When this occurs, the parent company agrees to provide the shareholders of the target company a certain number of shares in the parent company for every share owned in the target company. In other words, if you owned 1,000 shares in the target company and the terms were for a 1:1 all-stock deal, you would receive 1,000 shares in the parent company. The equity of the parent company would change by the value of the shares provided to the shareholders of the target company.
(To learn more, see: The Basics Of Mergers And Acquisitions.)