M&A Terminology 101 – 4 Types of M&A Transactions Every Tech Company Founder Should Know

A primer on transactions: mergers, acquisitions, takeovers, and more

The skills and knowledge required to build up a company, especially software, IT services and digital media companies, are seldom the skills typically required in selling a company through a merger or acquisition. This is likely because building a tech company or software business seldom involves or necessitates an acquisition. Newer software companies need to gain traction and build up their presence before becoming a desirable to larger, more established tech companies for acquisition.

Even so, to many technology companies, mergers and acquisitions is likely a familiar term. Many software company founders find the prospect of being acquired an attractive one. Co-founders, employees, tech venture capitalists and investors in software companies also typically entertain the prospect of a quick payout through the facilitation of a tech company acquisition. Though a tech founder might lack a background in the nuts and bolts of acquisition financing and a deep knowledge of the benefits of mergers, at some point they need to become at the least somewhat familiar with the terms and their implications. Larger tech companies looking to boost capabilities or expand into new areas quickly understand the value of software and IT company acquisitions. Software company buyers generally look for potential tech company acquisitions with a lot of synergy and scalability.

Technology company founders should read below to find out what M&A transactions are possible and how they impact ownership, payoff, and independence.

 

Basic M&A Transaction Types

Mergers
When two companies combine together as equals, it is called a merger. In the strictest of terms, a third and new company is formed to house the previous two merging companies. More often however, many friendly acquisitions are publicly referred to as mergers, allowing the acquired company to appear stronger. Some merger types include:

  • Vertical merger – a merger of companies involved in two different parts of the product cycle
  • Horizontal merger – a merger of two companies involved in the same part of the product cycle
  • Conglomerate merger – a merger of two completely unrelated companies
  • Congeneric merger – a merger of two companies in the same industry but not direct competitors
    • Market extension merger – a merger of two companies selling the same thing in different markets
    • Product extension merger – a merger of two companies selling related products in the same market
  • Reverse merger – a merger allowing a private company to go public quickly and easily by acquiring a public company
  • Accretive merger – a merger increasing earnings per share
  • Dilutive merger – a merger decreasing earnings per share

Consolidation
Consolidation refers to the merger and acquisition of smaller companies into larger companies. A consolidation, however, differs from a merger in that the consolidated companies could also result in a new entity, whereas in a merger one company absorbs the other and remains in existence while the other is dissolved.

Acquisitions
When one controlling company takes control of another company, this is known as an acquisition. This is one of the broadest terms that can be used.

Takeovers
A takeover is simply an uninvited acquisition. In hostile acquisitions, the company being acquired usually has reservations about the acquisition and is resisting the process. There are both friendly and hostile takeovers, however, the difference between the two being whether the management of the acquired company stays or is replaced.

The Best Transaction for Your Business

The purpose of these transactions is often to reduce costs through synergy, expand a company’s reach, or sometimes to neutralize competition. The type of transaction that may be best for you and your firm ultimately depends on what your goals and values are at the moment of the transaction, the goals and values of any interested parties, the current market and the potential for synergies among interested buyers. Some tech company owners are looking to maximize their exit value to either retire or move onto their next venture. Other software company founders are most concerned about retaining control of their firm, keeping independence in the day-to-day running of their software company operations. Other young tech companies might want to retain all of their employs in the event of a tech company buyout.

A variety of factors coming from completely different motivations including personal life, market conditions both overall and specific to your industry, company fundamentals, and investor pressure can influence your decision to sell your software company. What you wish to get out of a IT acquisition transaction and what price and terms work best for you are wholly determined by those factors.

Because there is no one solution that works best for all tech company mergers, a relationship with an M&A advisory group that has your interests in mind can be instrumental in advising you accordingly. At Solganick & Co., we specialize in M&A advisory focused on the software, IT services and digital media industries. We have the advantage of an always up-to-date pulse on the very sectors of the market your tech company is involved in. As a result, we are best able to pinpoint which acquiring private equity or tech companies might be interested in an software, IT services or digital media company acquisition and for what reason. We also advise tech founders in current valuation trends in the marketplace and what factors can influence your valuation.

 

If you are interested in or are considering exploring your tech M&A options, get in touch with the advisory team at Solganick & Co.

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