In a Merger, Do Both Companies Own Everything?
May 31st, 2022 in FAQs Categories: Business Planning, Business Tax Planning, and Mergers & Acquisitions
Mergers help businesses achieve inorganic growth and reach horizons that were beyond them initially. The two companies pull everything together – including assets and liabilities and form an entity with more economic muscle. You need to know your Merger Rights to begin this process.
The merging process can be technical, and parties are required to fulfill certain economic and legal requirements. But estate planning attorneys at NC Planning can make business, tax, and estate planning simple and easy to understand.
How is the Business Value Determined?
When two companies come together, they agree on how shareholders will transition into the new entity. All other liabilities – known and unknown – are assumed by the merger. The two separate companies basically cease to exist after the formation of the merger.
Debt holders and shareholders usually own companies. The value held by shareholders is the equity value, whereas the value held by both shareholders and debt holders is the enterprise value. Since cash and debt value vary significantly among companies, the enterprise value (EV) is usually used to compare individual companies’ worth before the merger.
Most professionals that undertake these valuations use a combination of methods, as opposed to just one. Here are some commonly used ways:
- Use of discounted cash flows (DCF)
- Relative valuation using comparable transactions
- Valuation of future maintainable earnings
- Valuation of historical earnings
- Asset valuation
What Assets Will the Merger Acquire?
One of the benefits of merging businesses is getting a pool of assets to optimize productivity. The new entity can inherit customers’ database, intellectual property, accounts receivable, contract rights, real estate property, inventory, equipment, and machinery.
Transfer of assets is not as easy as it sounds because one has to satisfy the required process. For instance, some property might have debt tied to it, and third parties should be involved in the transfer.
Moreover, other assets may not be ‘properly’ transferred without recording or registration. A skilled Cary merger and acquisitions attorney can help corporates transfer assets smoothly into the new entity.
How Will Liabilities Be Treated?
The liabilities of the old businesses are not excluded from the merger. This includes employment contracts, contract obligations, account payables, property financing debts, and bank loans. And the new entity will also have to take up other undisclosed or unforeseen liabilities.
Unlike in acquisitions, where buyers can take up a few liabilities of the disappearing business, mergers have to take up everything. Therefore, businesses that want to merge with others must conduct due diligence to get extensive information on all the company’s obligations.
Will the Merger Inherit All Employees?
Many employees frown at the idea of a merger because most wonder if their jobs are safe. Every situation is unique, and the new company may decide to offer severance packages, keep the staff, or initiate layoffs, whichever suits the new business.
If there is an overlap in some areas, the redundant employees’ employees may lose their jobs as the merger seeks to eliminate the underperforming assets. In other cases, the merger can expand its operations and create more opportunities for employees. So, the job’s nature can remain the same, or the management can decide to add or reduce employees’ responsibilities.
What Will Shareholders Own?
Notably, the value of the individual companies’ stocks usually drops just before the merger; but the new merger’s value is usually high. The company can either buy out the old shares or exchange old shares for the new ones. Shareholders can receive cash, stock, or both.
The merging companies can decide to set a ratio for exchanging stocks in the old entity for stocks in the new merger.
A market assessment of the probable future earnings of the new entity is what determines the price share. For instance, a 1-for-2 ratio means that a shareholder can exchange two old shares for one new share.
Cash mergers usually opt to pay a dollar amount for each share owned in the merging companies. The takeover offer causes the share price to rise, despite the initial drop. And the stocks will trade at a specific rate and stop trading once shareholders have been paid in cash.
Cash and Stock Combination
Sometimes, merging companies can give shareholders the option of getting cash back and exchanging the shares they had for new shares in the merged organization. The decision on how to handle shareholders is usually indicated in the merger agreements.
Does the Management Also Change?
Noticeable leadership changes are likely to occur once the formation of the merger is complete. The shuffling of board members and company executives is usually discussed and agreed upon during merger negotiations. Most companies prepare their employees for these changes, although many still struggle to adapt to the new organizational culture.
What About Merging Companies that Were Incorporated in Different States?
In cases where there is a surviving and a disappearing corporation, each will follow their specific state laws. For instance, the disappearing company will be dissolved according to its requirements of the state where it was incorporated. Similarly, the surviving corporation will be governed by the provisions of their home state going forward.
Talking to a mergers and acquisitions lawyer is necessary to avoid making mistakes that can threaten the existence of a merger. State requirements can vary significantly, but the rule of thumb is that each entity adheres to its ‘parent’ state laws.
Legal Advice for Your Business-Related-Legal Needs
Forming a new business can be challenging, and you will come across a plethora of obstacles and dilemmas. Legal challenges can hurt and bring down corporations with a lot of growth potential. And this relationship shouldn’t end after the business formation because there will be more business-related legal needs as the organization grows.
Every business owner needs insightful and timely advice that can safeguard their best interests. Business planning services are essential when you want to sell your business, buy another company, or forming a new business entity. Contact NC Planning today on (919) 900-4720 to get started.