Although often used synonymously, mergers and acquisitions are not actually the same thing. A merger is when two companies combine to become one entity, while an acquisition is when one entity absorbs another. In this article, we’ll go over a few of the top considerations when thinking about these kinds of exit strategies.

Whenever serious M&A deals are on the horizon, there are a few important themes that you should keep at the forefront of your mind before agreeing to any terms. 

Key Mergers & Acquisitions considerations:

  1. Synergies between both entities - in other words, the “pros” of the union.
  2. Transaction details - deciding how the buyers buy and the payers pay.
  3. Ownership effects - the pro forma and your bottom line.
  4. Tax treatment for these deals - making the right choice to increase profits

 1. Establish the benefits of the deal

Mergers and acquisitions usually occur for one of two reasons: either a financial reason or a strategic reason. 

Financial mergers or acquisitions are usually spurred by the need for a quick cash influx or a future investment. 

Strategic mergers and acquisitions, on the other hand, are a solution to a different corporate problem - like filling in the gaps of a product offering, an easy way to gain talent or IP, or even to absorb a new business model. 

At the end of the day, M&A deals happen because profits, earnings, or credibility can be increased by combining forces.

However, without synergy, an M&A deal is destined to fail. Mergers and acquisitions that do not have abundant synergies can result in negative consequences: like culture clashes between both entities, a loss of brand strength and differentiation, or could even result in wasted time.

2. Get into the ownership details

There are multiple ways to compensate individuals and entities during a merger or acquisition - and they can get intricate quickly! 

The buyer will usually pay for the assets they are receiving in either cash, company stock, or a combination of both. The main distinction in this kind of deal is when the buyer is paying in cash, they are taking on the majority of the risk involved in the acquisition. On the flip side, stock payments share the risk among shareholders and are proportional to how much of the stock they are purchasing. 

3. Merger and Acquisition analysis and modeling

After a deal closes is when the effects of the acquisition or merger can be seen - which is why pro-formas are created and analyses run prior to determining what the deal will look like. The buyer will want to model the merger or acquisition to see the evolution of their EPS (earnings per share). 

Through accretion and dilution analyses, buyers can decide whether they think their earnings will be worth more after the deal (accretion) or less (dilution). This kind of analysis is also typically how both parties decide to either merge or pursue the acquisition route.

4. Factor in taxes

When it comes to the logistics of a merger or acquisition, not only do the buyers and sellers need to factor in how they are going to conduct the transaction, but they also need to take into account how much they are going to owe the government. 

There are two types of purchases that can happen in these situations: either an asset purchase or a stock purchase. 

Asset purchases occur when the buyer obtains assets from the seller, instead of their company’s stock. Assets can often be subject to deductions, so these types of transactions are usually quite favorable for the buying entity. 

However, asset sales do require the seller to pay taxes immediately on the amount they receive from the buyer for the sale of their assets. For this reason, it is not usually favored by sellers - they tend to prefer stock sales. 

When it comes to making momentous decisions for your company - such as deciding between a merger or acquisition - it’s very important to carefully consider the implications of either outcome and clearly prepare for your desired path forward. 

Fidelity expedites your transactions by allowing you to model pro-formas and exit scenarios in the platform, keeping your cap table up to date, and automatically connecting it to an organized data room. 


Fidelity does not provide legal or tax advice. The information herein is general in nature and should not be considered legal or tax advice. Consult an attorney or tax professional regarding your specific situation.