Overview

• Author: Christopher Nicholls
• Pages: 1-38

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CHA PTER 1

OVERVIEW

A. INTRODUCTION

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

Statutes of Canada or in any provincial or territorial statute books

either. “M & A” is not a discrete branch of law at all. Rather, M & A law

refers to a loosely related collection of legal principles and rule s — drawn

mainly from corporate law and securities regulat ion, 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 corpor-

ations that own busine ss assets) are bought and sold. These rules pre-

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

by these importa nt transactions. It is th at 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 bound to grow. Unlike

children and garden weeds, 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 thi s growing, corporate managers hope, will “grow”

MERGERS AND ACQUISITIONS2

the value of their firm’s shares too. Some business people claim that

continuous growth is essential. Running a business, apparently, is like

riding a bicycle: if you don’t keep moving forward, you will collapse.

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

of these metaphorical cyclists, 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 rivals. Lar-

ger firms can ach ieve 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. L arger firms can al so achieve economies of

scope: it may be cheaper to market widgets alongside a complementary

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

to invest in expensive t hings, 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 “brandi ng.” (Branding was once a way of mark-

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

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

an exercise of increasing importance. Any branding consultant will

be happy to explain why (for a fee). Ours is a noisy world crowded

with aggressive marketers touting competitors’ products and services,

a world where one must struggle to ensure that one’s story is heard,

understood, and, with a bit of luck, at least part ly believed.

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

employees. Larger businesse s are popularly regarded as more stable

and often more prestigious than sm aller enterprises. They are typically

able to pay higher wages than smaller firms in the sa me industry pre-

cisely because greater investment in capital leads to higher levels of

per-employee productivity. And bigger firms may offer more attract-

ive equity-based compensation packages (shares and share options)

because shares of la rge public corporations enjoy more liquid trading

markets. Larger fir ms also have greater ba rgaining leverage with their

suppliers; they are often able to negotiate greater price concessions

than their sm aller competitors, making it possible for them to pass

on lower prices to consumers. All of these adva ntages suggest legitim-

ate reasons for firms to g row. There are, however, some less estimable

reasons for firm s to expand and some of those considerations w ill be

discussed l ater in this book.

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 la rge whether it has grown

“organically” or has, instead, merged w ith or acquired the business of

another firm to achieve size. So, although the advantages enjoyed by

large firms are a critical component of mergers and acquisitions, iden-

tifying these advantages does not, without more, account for the preva-

lence 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 than another.

1) Organic or Internal Growth

Organic or internal growth refers to the gradual proces s 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 expand its operations

by opening additional stores, or by enla rging its existi ng locations to

increase same-store sale s. Organic growth can someti mes be slow — per-

haps too slow for some businesses facing e specially fierce competition.

2) Growth by Acquisition (or Merger)

Growth by acquisition or by merger is much faster th an organic growth.

A retail business that takes over exist ing 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 busine sses tiptoe across national

or even regional borders or venture into new lines of products or servi-

ces. It is often much more efficient to buy proven expertise and experi-

ence than to try to generate your own, especially if sma ller rivals are

finding themselves constrained by their lack of scale and resources. As

the business press sometimes puts it, a cagey acquisition can provide

“turnkey” access into a new market.1 Specific market conditions may

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

or office buildi ng is said to be subject to a turn key arrangement if every thing

is ready for the buyer (or lesse e) to walk in and im mediately begin operat ing,

with no other set-up req uired. In such a case, the buyer (or less ee) needs to do

nothing more th an “turn the key” to begi n using the premises.