Mergers and acquisitions are typically lumped into one category. However, they’re different, which also applies to their respective impacts on shareholders.
The reality for shareholders is very different depending on whether two companies merge to form a new entity or their shares are purchased as part of an acquisition. With this in mind, here’s how a merger could potentially impact your shareholders.
Do mergers require shareholder approval?
Upon the confirmation of merger plans, there is no requirement for shareholders to approve a merger. This is because the UK has limited regulation for private companies regarding M&As.
However, there is a quirk in the rules. If your company were publicly listed at any point in the ten years before the merger, your merger would fall under the jurisdiction of the Code on Takeovers and Mergers, known as “The Code”. In this case, shareholder approval will be required.
In the case of private companies, matters of approval depend on your own rules. For example, if you have multiple shareholders, you may require only a majority to agree; but, again, it depends on your own rules and the rights of shareholders.
Either way, seeking legal advice before proceeding is wise to avoid getting into a sticky situation later.
How are shareholders affected by a merger?
Shareholders can find benefits and drawbacks to a merger. It largely depends on the scenario.
For example, take the famous merger of AOL and Time Warner in 2000. Today, it’s widely viewed as how not to conduct a merger. Although the bursting of the Dot-Com Bubble was widely cited as getting the merged companies off to a rocky start, the deal was doomed from the start.
Former AOL CEO Steve Case, speaking to Business Insider, cited a clashing of cultures and ambitions as an example of a failed merger. Unfortunately for shareholders, the deal cost them significant value.
Likewise, mergers that go right can result in massive gains for existing shareholders; but this is just one way shareholders can be affected by a merger.
Do mergers impact shareholder voting power?
Acquisitions result in the company being acquired and seeing their shareholders bought out, meaning they are no longer shareholders. In the case of a merger, shareholders remain shareholders, but their voting power changes.
The new company’s shareholders have less overall voting power due to an increase in the number of shareholders. In other words, their power becomes diluted.
This is why it isn’t uncommon for mergers to set the stage for disputes and departures between shareholders with competing visions for the business. It underlines the importance of communicating the advantages of the merger to shareholders and listening to their concerns.
How do mergers affect share prices?
Mergers impact the shares of both companies upon the announcement of an upcoming merger. The smaller company’s shares may rise, whereas the larger company’s may dip. However, the newly formed company will typically see an overall rise in share value.
It makes perfect sense because a merger pools two distinct companies’ assets, talent, resources and opportunities, making the new entity a more valuable proposition.
How can shareholders prepare for a merger?
With these effects in mind, can shareholders do anything to prepare for a merger?
Shareholders have a part to play in understanding a merger and partaking in the process, even if their approval isn’t strictly necessary. How shareholders react sets the scene for a successful or failed merger.
Here are some ideas for how shareholders can prepare for a merger:
Consider the Terms – The first step is understanding how the merger will proceed. Ask for copies of any essential merger documents, and don’t be afraid to ask relevant personnel for clarification. Every merger is unique.
Ask Questions – Reach out and ask how your voting rights will change and any other terms that could impact the value of your shareholding.
Monitor – Keep tabs on how your investment performs before, during and after the merger. Even if you have no control over the merger, it makes sense for shareholders to determine whether their investment aligns with their goals.
Of course, your preparations will depend on the nature of your shareholding and the merger in question. There’s a big difference between being a minor shareholder in a publicly listed company and a shareholder with a significant stake in a private one.
Even though shareholder activism rarely derails mergers, it can happen if shareholders feel that a bad deal is on the table.
For example, take the proposed merger between American companies Quality Products Inc. and Exsorbet Industries Inc. in 1995. After significant public opposition from shareholders, the deal was called off with no reason given, but the announcement’s timing told the real story.
How do shareholders benefit from mergers?
Whether shareholders benefit from mergers depends on the prospects of the new entity. As with any business, underperformance will lead to a loss of value, whereas overperformance will lead to a gain in value.
Ultimately, the benefits for shareholders are confined to an increase in the value of their investments; but successful mergers depend on numerous factors, including:
Financial Health – Nothing tells the fortunes of a business like the numbers. This includes having sufficient liquidity to handle the transition and how that transition may impact other aspects of the business.
Transparency – Successful mergers happen when everybody is on the same page, and this is something shareholders should demand from any proposed merger.
Goals and Success Factors – What defines success, and how will that success be achieved? Shareholders should receive a complete roadmap of how the merger will benefit the business and, therefore, shareholders.
Transition – Competent transition teams smooth the rocky road to a profitable merger. Do shareholders have everything they need to see how the new entity will meld existing workflows, employees and cultures?
Execution – All the planning in the world won’t compensate for a lack of execution and follow-through. This is where the true value of a merger is defined, and shareholders must have confidence in the business’s ability to make things happen.
Without these five factors, shareholders stand little chance of benefiting from a merger. In reality, this could lead to a loss of value from their investments.
Do shareholders get paid in a merger?
Typically, no, shareholders don’t get paid in a merger, because nobody is purchasing their shares. Their shareholding would be transferred to the new, combined entity, with all the impacts of value and voting rights that come with that.
However, there are some scenarios where shareholders could receive a payout in the event of a merger.
One such example is the merger between Spirit Airlines and Frontier Airlines in the U.S. In February 2022, the two airlines announced a $6.6 billion merger. Under the agreement, Spirit shareholders would receive 1.9126 shares in Frontier for every share they owned. Additionally, they would also receive $2.13 in cash per share.
It’s an example of a merger of equals, where shareholders were paid in cash. Shares in Spirit Airlines spiked 40% when the announcement was made. Frontier shareholders also benefited, with a 15% jump in their share value.
Note that this isn’t the norm in the UK, but nothing prevents shareholder cash payouts as part of a merger deal.
With larger companies, cash payouts may be offered to appease shareholders concerned about the impact of a merger on the value of their investments.
Can mergers damage shareholder value?
Shareholder value is malleable, meaning mergers could increase or decrease shareholder value.
An example of a merger that had little impact on shareholder value was the merger between French energy company Gaz de France and Suez. It took the President of France, Nicholas Sarkozy, to step in personally to save the merger.
Even though the merger led to the creation of the fourth-largest energy company in the world and Europe’s second-biggest, the share price remains relatively close to where it was over a decade ago.
For shareholders, this meant a dilution in their voting power for little gain in the value of their investments.
Mergers like these should act as cautionary tales that creating a larger company doesn’t guarantee an increase in shareholder value. As with all investments, their value can rise, fall, and stay the same.
Are you considering a business merger? Then, you need to lay the groundwork for a merger that achieves your vision and provides value to your loyal shareholders, and this begins from day one. At Hilton Smythe, our team has the expertise and experience to guide you through this complex process.To learn more about how Hilton Smythe can support your business during the merger process, speak to our team now.
