DEFINITION of SEC Form 425
SEC Form 425 is the prospectus form that companies must file to disclose information regarding business combinations. A business combination could refer to a merger between two or more companies or a consolidation. Companies are required to file prospectus form 425 in accordance with rules 425 and 165 of the Securities Act of 1933.
BREAKING DOWN SEC Form 425
Five common types of business combinations require a SEC Form 425 filing:
- Conglomerate merger
- Market extension merger
- Product extension merger
- Horizontal merger
- Vertical merger
The type of merger depends on the economic function, purpose of the business transaction, and relationship between the merging companies.
In a conglomerate merger, for example, two companies merge that are involved in unrelated business activities. Conglomerate mergers can be pure (involving firms with nothing in common) or mixed (involving firms that are looking for product extensions or market extensions).
In a market extension merger two companies have built and deployed the same products but in separate markets. For example, MBDA.gov offers the instance of the acquisition of Atlantica, GA-based Eagle Bancshares Inc. by the RBC Centura. At the time of the merger Eagle Bancshares had almost 90,000 accounts and AUM of US $1.1 billion. The acquisition allowed RBC to significantly expand its financial services operations in the Atlanta Metropolitan area and North American market.
In a product extension merger two businesses combine that have similar products and operate in the same market. This type of a merger allows the two companies to access a larger set of consumers and increase their earnings.
In a horizontal merger, business consolidation occurs between firms that operate in the same space. Since competition within an industry tends to be high, a horizontal merger can offer participating firms certain synergies and potential gains in market share. This type of merger occurs frequently because of larger companies attempting to create more efficient economies of scale. Conversely, a vertical merger takes place when firms from different parts of the supply chain consolidate to make the production process more efficient or cost effective.
SEC Form 425 and the Securities Act of 1933
As mentioned above the Securities Act of 1933 covers SEC Form 425 and other SEC filings for public companies. The Securities Act of 1933 developed after the stock market crash of 1929 and has two major points. The first requires that investors receive detailed and thorough financial information about securities being offered for public sale. The second is to prohibit deceit and misrepresentations that happens during the sales of securities.