Overview

• Author: Christopher C. Nicholls
• Profession: Faculty of Law, University of Western Ontario
• Pages: 1-34

1

Cha pter 1

OVERVIEW

a. Int roduCtIon

There is no Mergers and Acquisitions Act to be found in the Revised Stat-

utes of Canada or in any provinci al or territorial statute books either.

“M & A” is not a discrete branch of law at all. R ather, M & A law re-

fers to a loosely related collection of legal principles and rules—drawn

mainly from corporate law and securities regulation, as well as from

tax, anti-tr ust, and a handful of other area s. This pastiche of rules and

principles touches upon various legal aspect s of the process by which

companies combine, or by which businesse s (or the shares of corpora-

tions that own business assets) are bought and sold. These rules pre-

scribe and protect the rights a nd interests of people who are affected

by these importa nt transactions. It is that eclectic collection of laws,

policies, and principles that is the subject matter of this book.

B. Growth of the fIrm

Like children and garden weed s, corporations are inclined to grow.

Unlike children and garden weed s, business f‌irms are propelled to grow

not by forces of nature but by forces of worldly ambition. Businesses

strive to “grow” their prof‌its, to “grow” their revenues, and to “grow”

their market share. All t his growing, corporate ma nagers hope, will

MERGERS AND ACQUISITIONS2

“grow” the value of their f‌irm’s shares too. Some businesspeople claim

that continuous growth is e ssential. Running a business, apparently, is

like riding a bicycle: if you don’t keep moving forward, you will collaps e.

The need for perpetual expan sion is thought to be, at least in the eyes of

these metaphorical cycli sts, a dramatic “Grow or die” proposition.

There are plenty of sound reasons for promoting corporate growth.

Larger businesse s often enjoy advantages over their smaller rival s. Lar-

ger f‌irms can achieve economies of scale: the f‌ixed costs needed to pro-

duce a single widget may be no greater tha n the f‌ixed costs needed to

make a thousand of them. Larger f‌irms can also achieve economies of

scope: it may be cheaper to market widgets alongside a complementar y

product — gadgets, for example. And larger f‌irms have more resources

to invest in expensive things, such as state-of-the-art technology as

well as research and development. Investments of this sort help large

f‌irms to innovate, continuously improve, and therefore keep pace with

their ablest competitors.

Greater resources (in other words, more money) also allow larger

f‌irms to invest more in “branding.” (Branding was once a way of mark-

ing herds of docile sheep as your own. It appears to per form an analo-

gous function for today’s business corporations.) Branding is ev idently

an exercise of increasi ng importance. Any branding consultant will

tell you so. Ours is a noisy world crowded with aggressive marketers

touting competitors’ products and services, a world where one must

struggle to ensure t hat one’s story is heard, understood, and, with a bit

of luck, at least partly believed.

Larger f‌irms m ay f‌ind it easier, too, to attract and retain top-notch

employees. Recent events notwithstanding, larger businesses a re re-

garded as more stable and often more prestigious than smaller enter-

prises. They are ty pically able to pay higher wages than sma ller f‌irms

in the same industr y precisely because greater investment in capital

leads to higher levels of per-employee productivity. And bigger f‌irms

may offer more attractive equity-based compens ation packages (shares

and share options) because shares of large public corporations enjoy

more liquid trading markets. L arger f‌irms also h ave greater bargaining

leverage with their suppliers; they are often able to negotiate greater

price concessions than t heir smaller competitors, making it possible for

them to pass on lower prices to consumers. U.S. retai l giant Wal-Mart,

for example, has frequently been credited with using its negotiating

strength to obtain favourable term s of this kind.

Overview 3

C. orGanIC (Interna l) Growth and

Growth By aCquIsItIon or merGer

There are two ways for businesses to ex pand. They can grow “organic-

ally” or they can grow th rough acquisition or merger. A large f‌irm will

enjoy the benef‌its that come from being large whether it has grown “or-

ganically” or has, in stead, merged with or acquired the busine ss of an-

other f‌irm to achieve size. So, although the advant ages enjoyed by large

f‌irms are a cr itical component of mergers and acquisitions, identifying

these advantages does not, w ithout more, account for the prevalence of

mergers and acquisitions. It is no secret why businesses may want to

grow. The trick is to understand why they choose to grow in one way

rather th an another.

1) Organic or Internal Growth

Organic or internal growth refers to the gradual process of expanding

the business’s own resources step by step. A retail business would be

said to grow organically, for example, if it chose to build one or more

new stores, or enlarged its exist ing locations to increase same-store

sales. Organic growt h can sometimes be slow. Perhaps too slow in in-

dustries where there is f‌ierce competition.

2) Growth by Acquisition (or Merger)

Growth by acquisition or by merger is much faster tha n organic growth.

A retail business that takes over existing store locations previously

operated by other companies, for example, can enter new markets

much more quickly than its organical ly growing competitors. Organic

growth may also run into hurdles as businesses tiptoe across national

or even regional borders, or venture into new lines of products or ser-

vices. It is often much more eff‌icient to buy proven expertise and ex-

perience than to tr y to generate your own, especially if smaller rivals

are f‌inding themselves constrained by their lack of sc ale and resources.

As the business pre ss sometimes puts it, a cagey acquisition can pro-

vide “turnkey” access into a new market.1 Specif‌ic ma rket condition s

1 The term turnke y is taken from t he commercial property contex t: a business or

off‌ice building i s said to be subject to a turnke y arrangement if every thing is

ready for the buyer (or lessor) to walk i n and immediately begi n operating, with

no other set up requir ed. In such a case, the buyer (or lessor) needs to do not h-

ing more than “t urn the key” to begin usi ng the premises.