Simply speaking, “mergers and acquisitions” refers to one company (“AcquisitionCo”) either merging with another target company (“TargetCo”), or taking it over entirely. In either case, AcquisitionCo essentially seeks to make itself a more powerful and profitable entity.
The benefits of merging with, or making an acquisition of, another company are numerous. Some of the main benefits include:
- Converting competitive businesses into additional sources of revenue;
- Increasing the profitability of both AcquisitionCo and TargetCo via the pooled use of resources available to each company; and
- Improving access to financing.
In a merger, the shareholders of the pre-existing companies would obtain a share in the newly merged entity. A merger can occur on a tax-deferred basis (under section 87 of the Income Tax Act (Canada)), which means that the parties would not realize a tax consequence on the merger transaction. Shareholders who are also officers or managers of the company may continue to act in such capacity with the newly merged entity.
In an acquisition, the shareholders of TargetCo monetize their interests. If the transaction occurs as a share sale, vendors can utilize their $800,000 capital gains exemption available for Canadian residents.
To illustrate with an example, Berger Law acted on the merger of a US public company (“USCo”) with a Toronto-based, privately held business in the food industry (“CanCo”). USCo has other food industry based businesses/subsidiaries operating in the United States. CanCo’s owner operators are seasoned veterans in the food industry and already have US based customers. Having merged with Canco, USCo now has, in addition to another revenue stream, additional resources at its disposal which can be utilized to increase profitability in its other entities.