Business

Understanding Business Mergers

One thing to understand in the healthcare business is that mergers do happen. These happen all the time and the best thing to do is to first understand the concepts involved of what is happening during a merger, and what are things to consider regarding business mergers.

What is a Merger?

For certain reasons, businesses would go through mergers – the combination of one company to another. While that may be the simple answer, the definition of a merger has to be explained more in detail as other terms are involved such as acquisitions, consolidations, and such.

Mergers and acquisitions are a bit similar to each other with key differences such that in acquisition, a company purchases another company (possibly by getting majority stake) without having any change in name or structure in the acquired company. On the other hand, merging companies can result in a change in name and organizational structure.

Mergers can also absorb the purchased company – this is when the company ceases to exist and becomes an extension of the purchasing company. Another type of merger is called the consolidation. By definition, it is when two companies combine their resources to form a new company, in the hope of becoming a stronger entity.

The kind of companies involved in the merger is also considered when discussing the structure of the merger. Horizontal mergers involve companies that are in direct competition with each other. These are companies that have a similar product or service line and cater to the same market.

A vertical merger involves two companies that can be viewed as customers and suppliers. An example of this would be a pastry company purchasing a flour company. A congeneric merger is the combination of two companies that produce different products but generally cater to a similar market.

With these things in mind, the basics of mergers are laid. However, here are some things to consider when it is actually happening.

Mergers Can Take A While

Healthcare businesses are complex to navigate as there are so many moving parts within these organizations. This results in business mergers taking quite a long time. From marketing, negotiating, to closing, a period of 4 months to half a year should be expected but it wouldn’t be surprising as well if it takes even longer.

However, there are things that can help speed up the process. A company that is ready to sell should have things prepared such as an investment banker or financial advisor to control the auction process, a prepared draft disclosure schedule, an organized database of all the company’s contracts, records, financial statements, patents, and such.

The company’s leaders should also be prepared to explain the value added by purchasing their company and answer questions regarding financial projections. Having all materials and people involved prepared, then the total time of the merger is greatly expedited.

Under A Microscope

With a large purchase possible on the horizon, it is not surprising that the purchasing company will exhibit significant due diligence in investigating and learning about the company they wish to purchase. This is why it was mentioned above that an organized database of all the company’s contracts, records, financial statements, patents, and such would be extremely helpful for the purchasing company and would be of great help to expedite the entire process.

Typically, the company being reviewed would only provide the purchasing company with limited access to their data, or access to a subset of all their files. Limiting access, especially when catering to multiple bidders, helps reduce skepticism among potential buyers as it would seem problematic if a company they wish to acquire has already disclosed all its data to other competitors.

Companies also record how often other potential buyers access their data. This is an easy metric or indicator for them to sense how interested a particular company is in purchasing them.

The Need for Great Counsel

It is imperative for healthcare businesses to have a great legal team to assist in the merger. The attorneys needed for this kind of move need to be ones particularly specialized in mergers and acquisitions. Since mergers face numerous deal structures, agreements, and legal challenges, it is a must that the attorneys acquired for this event are those well-versed in the challenges that accompany mergers.

The legal team is typically composed of various attorneys, each with a specific specialization. This is a much more recommended roster for the legal team instead of a larger team composed of less experienced legal counsel. This is not only a more efficient decision, but the bill might come out lower.

Intellectual Property

Healthcare businesses tend to have a lot of intellectual property related to the industry. This is of great concern and interest for the companies involved as the question is, “what happens to the intellectual property and rights after a merger?” Well firstly, the selling company has to be prepared with a list of all its intellectual property. This will help the purchasing company decide regarding the purchase. The purchasing company will then investigate whether or not the intellectual property of the selling company is actively involved and crucial to the business.

Employees and Benefits

A problematic and sensitive issue regarding mergers is about the employees and benefits. Structural changes such as these are typically not covered in their contracts, leaving employees of a selling company to be vulnerable.

However, the result is primarily controlled by the purchasing company and the best way for people in the selling company to be prepared is to know what questions to ask. Are there any retention agreements? What happens to their stock options? If terminations are involved, who covers the severance costs?

Conclusion

Mergers are quite tedious and exhaustive events for the parties involved. However, oftentimes these things do benefit most stakeholders involved. Healthcare businesses that would have to go through this should be armed with the information regarding mergers to make it a smoother transition for everyone involved.