The practice of combining (or merging) two different companies certainly sounds easy enough in theory; however, in virtually every instance there is much more to the transaction than is visible on the surface. Every occurrence of a merger and acquisition (commonly abbreviated as M&A) has its own unique nuances, and their success depends on a number of factors. These include properly identifying the correct synergies between the companies, amount of due diligence performed, and ensuring that all parties are on the same page as far as the results are concerned, among many, many others.
There are many reasons for companies to enter into M&As. In virtually every instance, it’s for purely financial reasons — including increasing profit, acquiring assets, growing market share or reducing risk. There are also many flavors of M&As, including triangular mergers, vertical mergers, conglomerate mergers and market-extension mergers. The overall structure of a merger also falls under a category, such as Forward Mergers, Reverse Triangular Mergers or Short-Form Mergers.
What Is a Short-Form Merger?
A short-form merger (sometimes referred to as a parent-subsidiary merger) is generally used when the acquiring company plans on merging with a subsidiary company, although the subsidiary doesn’t necessarily have to be wholly owned by the acquiring company. There are two variations of the short-term merger:
- Most commonly, it’s considered “upstream” when a parent company acquires its subsidiary
- Far less commonly, it’s “downstream,” when a parent company is merged into a subsidiary.
In the end, either entity in the transaction can be considered the survivor of the merger. However, regulations generally require that the parent entity owns a minimum of 90% of the outstanding shares of the subsidiary’s stock, though there are a few states (Alabama, Florida and Montana) that only require ownership of 80% of outstanding shares. Though every state has fiduciary regulations regarding short-form mergers, the extent of the regulations can differ; for example, California has much more stringent legal requirements for M&A activity than other states (like Delaware) have on their books. In some circumstances, where the parent company owns less than the legal percentage of shares of the target company, shareholder approval of the acquiring company must be obtained, but that puts it into a different category than a short-form merger.
Basically, a short-form merger is a form of a tender offer. The acquiring company makes an offer (or exchange) for the target company’s shares, which is often followed with the buyer owning all of the target company’s shares, which brings us to another wrinkle in the complex world of M&As.
As with virtually every other type of legal and financial transactions, there are multiple types of short-form mergers, including the two-step merger. A two-step is basically the same concept as a short-form merger, but, as the name suggests, it’s broken up into two separate steps.
The first step is a tender offer (or exchange offer) to buy a majority of the target company’s shares; the second step (hence the name) is for the acquiring company to purchase any outstanding shares of the target company.
Benefits of Short-Form Mergers
A short-form merger is commonly used in situations where the acquiring company does not want (or need) the approval of the shareholders. In general, shareholder approval is usually necessary for any type of major corporate transaction. It is differentiated from other types of mergers by its more streamlined M&A process, which saves both time and money during the merger process and lessens the hassle that other types of mergers inherently have. The benefit of performing a short-form merger is that it is virtually always less expensive and time-consuming than other types of standard mergers.
Things To Ensure Success
Previous to the online world, M&A activity was generally confined to a physical data room — a place where the hardcopy documents resided, and all associated parties would have to visit that location to conduct due diligence and all the other business associated with the merger. These documents, legal, financial and otherwise were strictly controlled, and only the appropriate parties were allowed access to the documentation.
Today, data rooms are virtual — which allows greater security measures. You can allow for the right person to view the appropriate documents at the right time, and it doesn’t involve travel or reams upon reams of hardcopy documents. There are timestamps and tracking options, and all is performed electronically, requiring much less expense than the physical data rooms of yesteryear.
Using a VDR speeds up and lessens the cost of the entire M&A process and makes it easy for involved parties to log in from anywhere on the globe. This is particularly appealing for short-form mergers, as speed of closing is typically critically important to these transactions.
If you are planning on following through with a short-form merger, having a trusted third-party partner who provides a secure virtual data room with a user-friendly interface will pay dividends. Having access to the data room during the M&A process will prove to be one of the most valuable tools available, saving both time and money, and providing peace of mind as well. The virtual data room will help the information flow faster and easier, and increase security when it comes to sharing your confidential information with others, both within and outside your organization.
Interested in learning more about how Caplinked can streamline your short-form merger process? Start your free trial today.
Chris Capelle is a technology expert, writer and instructor. For over 25 years, he has worked in the publishing, advertising and consumer products industries.