Q: My corporate-oriented agency and another one in town are considering a merger, but we need some guidance. What's the difference between a merger and an acquisition? If we want to merge, how do we go about it? What are the issues that we need to address together before we go ahead? Can one attorney represent both parties to a merger?
A: In a merger, both of the owners become shareholders of the surviving company. In an acquisition, one owner buys out the other one.
Another difference is that a merger is usually tax-free to both parties, as the owners get new stock for their old stock, and stock-for-stock transactions are generally not taxed. On the other hand, trading your stock or assets for money in an acquisition is a taxable event.
A merger can take one of several forms, but in each case, the former owners end up as partners. For example, one corporation can be merged into the other, or the two companies can be combined to become a third, surviving company.
The legal structures involved in a merger are relatively unimportant. What really matters are business and personality issues.
There are actually very few mergers in the travel business compared with the number of acquisitions. In my experience, perhaps 2% of such transactions are mergers.
The low percentage is probably due to two factors: first, entrepreneurs typically have no partners and do not want any, so they avoid transactions where they will effectively end up in partnership with another entrepreneur. Second, to effect a merger, you need to evaluate both companies, and the prospective owners usually cannot agree on the relative value of both entities.
Assuming that you are willing to have a partner and can agree on relative values, here are a dozen, practical issues that two corporate agencies need to consider and agree on before merging:
- Are transaction fee policies reasonably compatible?
- Do the agencies have the same preferred suppliers?
- How will combined market shares affect override payments?
- Will any GDS contract ratio requirements be affected if your partner has a different system?
- Will there be new opportunities for enhanced supplier relationships?
- Are salary scales and benefits reasonably comparable?
- Which employees and departments could be eliminated to achieve economies of scale?
- Should the new name be just one party's name, a combined name or a new name?
- Do both owners have similar views on what personal expenses can be taken out?
- Do both owners have similar views on the need to invest in technology?
- What if one owner wants to buy out the other or be bought out?
- What if one owner is disabled or dies?
If you and your prospective merger partner can agree on all these issues, you will be ready to merge.
A merger requires a merger agreement, and one attorney cannot represent both parties to an agreement, except in the very unusual case where the parties have relevant experience and have already agreed on all the business terms. Even then, the attorney should obtain a waiver from both sides acknowledging that the attorney has a potential conflict of interest if the parties disagree.
Since disagreement during negotiations is almost inevitable, it is definitely advisable for each side to have its own attorney. Once the merger agreement is signed, one attorney can represent the surviving company.