How Mergers and Acquisitions Work: Reading Deal Announcements

A merger or acquisition is a transaction in which one company combines with another or buys it, whether by merging the two legal entities, by purchasing the target’s shares, or by purchasing its assets. Public deal announcements follow a similar arc: a signed agreement is disclosed, regulators and shareholders review it, conditions are satisfied, and the deal closes or is terminated. Understanding that arc makes a merger announcement much easier to read, because each phrase in the press release points to a step that has not happened yet.

In brief

• “Merger” and “acquisition” describe different legal structures, and the structure decides who votes, what is bought and how long the process takes.
• Signing a definitive agreement is the moment most public companies announce a deal, usually through a press release and a Form 8-K.
• Closing depends on conditions: shareholder approval, antitrust clearance, other regulatory consents and the absence of a material adverse change.
• The consideration can be cash, stock or a mix, and the mix determines how risk is shared between the two sets of shareholders.
• A deal announced is not a deal completed. Agreements contain termination rights, and some deals fail.

Merger versus acquisition

In everyday use the terms overlap. Legally, they describe three common structures.

In a statutory merger, two companies combine under a state corporate law, and one survives. In Delaware, for example, Section 251 of the General Corporation Law lets two or more Delaware corporations merge into a single surviving corporation under an agreement approved by each board and, in most cases, by the stockholders. The surviving company succeeds to the assets and liabilities of the other by operation of law.

In a stock purchase, the buyer acquires shares from the target’s owners. When the target is private and has a few owners, that can be a simple contract. When the target is public, the buyer cannot negotiate with thousands of holders one by one, so it either uses a merger vote or makes a tender offer directly to the holders.

In an asset purchase, the buyer acquires selected assets and assumes selected liabilities from the seller, which stays in existence. The next guide in this series covers how asset and stock deals differ.

Many public deals are mergers in form but acquisitions in substance. A large company forms a subsidiary, merges the subsidiary with the target, and the target becomes a wholly owned subsidiary of the buyer. News reports call that an acquisition even though a merger agreement governs it.

The timeline, step by step

Preliminary talks and confidentiality

Deals often begin with an approach to the target’s board or a banker, followed by a confidentiality agreement. Companies generally do not announce talks, because early disclosure can move the stock price and complicate negotiations. When rumors appear, companies often decline to comment.

Due diligence and the letter of intent

The buyer reviews financial statements, contracts, litigation, tax and intellectual property. A non-binding letter of intent or term sheet may record the headline price and structure. In public deals, this stage may be skipped in favor of going straight to a merger agreement.

The definitive agreement and the announcement

The merger agreement fixes the price, the form of consideration, the conditions to closing, the deal protections and the termination rights. For a public company, entering a material definitive agreement outside the ordinary course is reportable under Item 1.01 of Form 8-K, and Form 8-K instructions generally call for the filing within four business days. Most companies announce the deal by press release and file the agreement the same day or soon after.

Regulatory review

Large deals may need antitrust clearance in the United States under the Hart-Scott-Rodino Act. The FTC explains that parties to a reportable transaction file a notification and may not close until the waiting period passes or the government grants early termination. The filing thresholds are adjusted every year, and the FTC publishes the current figures on its website, so check the agency page instead of relying on a number from a news article. Deals can also require approval from sector regulators, such as banking agencies, and from foreign authorities.

Shareholder approval and the proxy

Most public mergers need a vote of the target’s stockholders. For a Delaware corporation, Section 251(c) provides that the agreement is adopted if a majority of the outstanding stock entitled to vote is voted for it, after notice of the meeting given at least 20 days in advance. The company mails a proxy statement describing the deal, the board’s reasons and the background of the negotiations. When the buyer pays in its own stock, it also registers those shares with the SEC, typically on Form S-4, which combines a prospectus with the proxy material.

Delaware law has a shortcut. Section 251(h) allows a merger without a stockholder vote when the buyer completes a tender offer for all outstanding stock and certain other conditions are met, a route that is used in deals that start with a tender offer. Our tender offer guide covers that mechanism.

Closing

When the conditions are met, the parties close, the merger becomes effective, and target shareholders receive the consideration. Form 8-K Item 2.01 requires the buyer to report completion of an acquisition of a significant amount of assets. If the target’s shares were listed, they usually stop trading and are delisted.

Who is involved

• The boards of both companies, which owe duties to their stockholders and approve the agreement.
• Investment banks, which advise on valuation and structure, and which often provide a fairness opinion to one or both boards.
• Law firms, which draft the agreement and handle antitrust, securities and tax analysis.
• Regulators: the SEC for disclosure, the FTC or the Department of Justice for competition, and sector authorities where relevant.
• Shareholders, who vote, tender or, in some cases, seek appraisal.
• Arbitrage and event-driven funds, which trade on the spread between the deal price and the target’s market price.

Consideration: cash, stock or both

A cash deal gives target shareholders a fixed dollar amount and removes exposure to the buyer’s share price. A stock deal gives them shares of the buyer based on an exchange ratio, so the value they receive moves with the buyer’s price until closing. Mixed deals do both. Stock deals involve a registration statement, and the target’s holders may owe tax on cash received, while an all-stock deal can sometimes be structured to defer tax for them. Tax outcomes depend on the facts, so the proxy statement and professional advice are the right places to look.

Appraisal rights

Delaware’s Section 262 gives some stockholders who do not vote for a merger, and who follow the statute’s procedures, the right to ask a court to determine the fair value of their shares instead of taking the deal consideration. The right depends on the type of deal and the form of consideration, and it carries costs and uncertainty. Merger proxy statements explain whether appraisal is available and how to demand it.

A worked example

Imagine that Company A, a public company, announces it will buy Company B, also public, under a merger agreement. B’s holders will receive $10 in cash plus 0.5 shares of A for each B share. These figures are invented for illustration.

• If A’s stock is $40 on announcement day, the package is worth $10 plus 0.5 times $40, which is $30 per B share.
• If A’s stock falls to $36 before closing, the same package is worth $28, because the exchange ratio is fixed and only the stock part floats.
• The agreement is signed, so the companies announce it and file an 8-K with the agreement attached.
• Each company files a joint proxy statement and registration statement. A files a Form S-4 because it is issuing shares. Both sets of stockholders vote.
• The parties file under Hart-Scott-Rodino, wait out the waiting period and obtain any other consents.
• When all conditions are satisfied, the deal closes and B’s shares stop trading.

If A’s stockholders vote no, or a regulator blocks the deal, the merger agreement’s termination provisions determine what happens next, including whether a termination fee is owed.

Reading deal announcements

A merger announcement usually answers the same questions, and it is worth looking for each of them.

• Price and form of payment, with the implied premium to the recent trading price.
• Expected closing timing, which tells you how long regulatory review is expected to take.
• Approvals needed, such as shareholder votes and antitrust clearance.
• Financing, meaning whether the buyer has cash or is raising debt.
• Deal protections, such as a no-shop clause or termination fees, described in the 8-K and the merger agreement.
• Forward-looking statements, which flag the risks that the deal may not close.

FAQ

What is the difference between a merger and an acquisition?

A merger combines two companies into one legal entity, while an acquisition is a purchase of the target’s shares or assets. In headlines the words are used loosely, and many deals described as mergers are acquisitions of one company by another.

Why does a deal take months to close?

The parties may need to prepare proxy and registration documents, obtain stockholder votes, wait out antitrust review and secure other approvals. Cross-border and regulated-industry deals take longer.

Does the target’s share price equal the deal price?

Usually it trades somewhat below the offer price, and the gap, called the spread, reflects the market’s view of the time and risk before closing. In stock deals, the target’s price also moves with the buyer’s price.

Can a deal fail after it is announced?

Yes. Stockholders can vote it down, regulators can block or condition it, financing can fall through, or another bidder can appear. The merger agreement specifies the consequences.

What is the 8-K for in a deal?

It is the SEC’s current report form. Item 1.01 covers entry into a material definitive agreement and Item 2.01 covers completion of an acquisition, which together mark the start and end of most public deals.

Where do I find the actual terms?

In the merger agreement filed as an exhibit to the 8-K, and later in the proxy statement or Form S-4 on the SEC’s EDGAR system.