When a profitable business is bought out by other business it’s known as an acquisition. The end result is similar to a merger in that the purchased company merges into the parent company.
Companies like Alphabet (Google) and Amazon are particularly known for this practice.
Nest was growing in popularity and were making all kinds of widely adopted advancements in home automation. Google wanted to expand in that market, so they bought Nest, essentially giving Google all that knowledge and Nest’s intellectual property overnight.
The same motivation led to Amazon’s acquisition of Ring. Those were both successful businesses that got merged into juggernauts because they were so successful.
The terms buyout and acquisition are sometimes used interchangeable.
There are a few specific types of buyouts, including management buyouts and leveraged buyouts.
A management buyout is when a company’s management buys more of their own company’s stock, giving them greater control over decision making.
A leveraged buyout is when one company, managers or an investment firm borrows money to finance the buyout of a company.
Both management buyouts (MBOs) and leveraged buyouts are often used to take a company private (putting all the shares in the hands of management or another company).
Control over a company requires at least 50 percent of a company’s shares. Some private investors, investment funds or private equity firms will seek out companies that are underperforming for correctible reasons or companies that are undervalued, acquire them, turn them around and then sell them or take them public for a profit. There are even specialized buyout firms that can help a company’s management initiate leveraged management buyouts.
MBOs are popular for both private and public companies. Some companies may want to consolidate their resources on a core business function and encourage leaders in some ancillary part of their operations to buyout that part of the business.
Mergers in the traditional sense generally happen when relatively equal companies combine. The companies come to an agreement where they trade common stock (Company A gives half of their common stock to Company B and vice versa) in a stock-for-stock agreement. This exchange of stock isn’t on a one-to-one basis. It may be something like Company A gets one share of the new company for 2.5 shares of their own stock.
Shareholders generally get a vote on stock-for-stock mergers, but the average consumer investor likely doesn’t have as much sway as large institutional investors that hold significant percentages of the involved companies.
Small and medium sized businesses frequently buyout or merge with local competitors. Even more frequently a business owner who is about to retire will want to pass ownership of their company on to children or the managers they’ve been training for decades.
Any person either buying or selling a business should work with experienced CPAs, business accountants and business consultants who can help with thoroughly analyzing the books of a potential acquisition. The team at H&H Accounting Services can assist with valuation and analysis to ensure your business’s merger or sale a good, fair investment.
Call (480) 561-5805 for help with your business accounting needs.
