What Is SEC Form 425?

SEC Form 425 is the prospectus form companies must file in order to disclose information about their business combinations. A business combination may 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.

Key Takeaways

  • SEC Form 425 is the prospectus form companies must file in order to disclose information about their business combinations or mergers.
  • Companies are required to file prospectus form 425 in accordance with rules 425 and 165 of the Securities Act of 1933.
  • The most common types of business combinations are conglomerate mergers, market extension mergers, product extension merger, horizontal merger, and vertical merger.

Understanding Form 425

The Securities Act of 1933, also referred to as the Truth in Securities law, covers SEC Form 425 and other Securities and Exchange Commission (SEC) filings for public companies. The act was 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 any securities that are being offered for public sale. The second is to prohibit deceit and misrepresentations that may happen during the sales of securities.

Public companies must disclose vital information about their businesses, especially when it comes to changes that may affect shareholders. This information may include things like changes in ownership, annual reports, security sale proposals, initial registration, and even business combinations.

Public companies must disclose vital information about their businesses, especially when changes may affect shareholders.

Business combinations take place when two or more businesses combine or merge to form a single entity. This means one business acquires control over the other. Instead of growing organically, it may be easier for businesses to expand by merging together. There are generally five main types of business combinations require a SEC Form 425 filing:

  • Conglomerate merger
  • Market extension merger
  • Product extension merger
  • Horizontal merger
  • Vertical merger

Types of Business Combinations Under Form 425

As we mentioned, companies must file Form 425 when they go through certain business combinations or mergers, some of the most common are explained in more detail below. The type of merger depends on the economic function, purpose of the business transaction, and relationship between the merging companies.

Conglomerate Merger

A conglomerate merger involves two companies which are unrelated in their business activities. Conglomerate mergers are fairly rare. They can be pure—involving firms with nothing in common—or mixed—involving firms that look for product extensions or market extensions. One example of a conglomerate merger is the one that took place between Amazon and Whole Foods. The e-commerce giant purchased the supermarket for $13.7 billion in 2017.

Market Extension Merger

A market extension merger consists of the combination of two companies that build and deploy the same products, but in separate markets. Let's use the acquisition of Eagle Bancshares by RBC Centura. At the time of the merger Eagle Bancshares had almost 90,000 accounts and assets under management (AUM) of US $1.1 billion. The acquisition allowed RBC to significantly expand its financial services operations in the Atlanta area, as well as the North American market as a whole.

Product Extension Merger

In a product extension merger, two businesses that operate in the same market with similar products merge. This type of a merger allows both companies to access a larger set of consumers and increase their earnings.

Horizontal and Vertical Mergers

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.

A vertical merger, on the other hand, takes place when firms from different parts of the supply chain consolidate to make the production process more efficient or cost effective. These firms tend to have the same type of good or service in production or on the market. By undergoing a vertical merger, companies reduce the amount of competition. For example, an automaker may decide to merge with a tire manufacturer, allowing the former to reduce the cost of tires for its automobiles.