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Why do they call this a merger instead of an acquisition? I assume merger means two companies merging into a new third company, versus acquisition being a larg

by pdq 10y ago

Why do they call this a merger instead of an acquisition? I assume merger means two companies merging into a new third company, versus acquisition being a larger company acquiring a smaller company into a new business unit of the parent company.

hkhanna 10y ago
M&A lawyer here. Two companies merging into a new third company is called a "consolidation" rather than a merger and its not very common, especially when public companies are involved. A "merger" is when one company merges into another and one of the two companies thereby goes out of existence. That may strike you as strange here since both LinkedIn and Microsoft will continue to exist post-merger. But to "acquire" all of a company you need to acquire all of its shares. But when a company is widely held like LinkedIn, you're probably not going to get every last shareholder to tender over their shares. So you structure the deal as a merger: Microsoft forms a shell subsidiary ("Merger Sub") that merges with and into LinkedIn. (Lawyers call this a "reverse triangular merger.") If a majority of LinkedIn shareholders approve the merger, all shareholders are bound to it. In this way, a majority of shareholders can force all the rest of the shareholders to sell to Microsoft. The Merger Sub is necessary since 1) both Microsoft and LinkedIn want to continue to exist and a merger requires that an entity blinks out of existence and 2) a vote of the shareholders of Microsoft is not required since Microsoft is not directly merging with anybody.
- Pyxl101 10y ago
  A very interesting explanation, thank you! Could you elaborate on how this results in Microsoft having control over the post-merger LinkedIn?
  - hkhanna 10y ago
    Certainly. As I mentioned above, Microsoft forms a shell company ("Merger Sub") which is the entity that actually merges with and into LinkedIn. When Microsoft forms the shell company, it actually incorporates a new company, usually in Delaware, and that new company issues all of its stock to Microsoft, which, since it's a brand new corporation, could be one share or ten million shares, it doesn't matter, since Microsoft owns all of it. Merger Sub, which doesn't operate any business, is now a wholly-owned subsidiary of Microsoft since Microsoft owns all of the stock of Merger Sub. The Merger Agreement, signed by Microsoft, LinkedIn and Merger Sub, governs what happens to this stock of Merger Sub (and the stock of LinkedIn) at the moment Merger Sub merges into LinkedIn and out of existence. Although I haven't read it in detail for this deal, what typically happens in a reverse triangular merger is that the Merger Agreement will say that all of the outstanding stock of Merger Sub will automatically convert into stock of LinkedIn. It will also say that all of the outstanding stock of LinkedIn (held by the public shareholders) will convert into a right to receive the "per share merger consideration", which is basically that shareholder's portion of the cash Microsoft paid for LinkedIn ($196 per share, in this case). When the dust settles, then, Microsoft will own all the outstanding shares of LinkedIn, since Merger Sub's shares converted into them when Merger Sub was merged out of existence. The former LinkedIn shares held by the public now is just a right to receive some cash and no longer represents ownership in LinkedIn. With Microsoft now owning 100% of LinkedIn's shares, in theory, it could elect its own board of directors of LinkedIn, thus giving them control of the company.

by pdq 10y ago

hkhanna 10y ago

M&A lawyer here. Two companies merging into a new third company is called a "consolidation" rather than a merger and its not very common, especially when public companies are involved. A "merger" is when one company merges into another and one of the two companies thereby goes out of existence. That may strike you as strange here since both LinkedIn and Microsoft will continue to exist post-merger. But to "acquire" all of a company you need to acquire all of its shares. But when a company is widely held like LinkedIn, you're probably not going to get every last shareholder to tender over their shares. So you structure the deal as a merger: Microsoft forms a shell subsidiary ("Merger Sub") that merges with and into LinkedIn. (Lawyers call this a "reverse triangular merger.") If a majority of LinkedIn shareholders approve the merger, all shareholders are bound to it. In this way, a majority of shareholders can force all the rest of the shareholders to sell to Microsoft. The Merger Sub is necessary since 1) both Microsoft and LinkedIn want to continue to exist and a merger requires that an entity blinks out of existence and 2) a vote of the shareholders of Microsoft is not required since Microsoft is not directly merging with anybody.

Pyxl101 10y ago
A very interesting explanation, thank you! Could you elaborate on how this results in Microsoft having control over the post-merger LinkedIn?
- hkhanna 10y ago
  Certainly. As I mentioned above, Microsoft forms a shell company ("Merger Sub") which is the entity that actually merges with and into LinkedIn. When Microsoft forms the shell company, it actually incorporates a new company, usually in Delaware, and that new company issues all of its stock to Microsoft, which, since it's a brand new corporation, could be one share or ten million shares, it doesn't matter, since Microsoft owns all of it. Merger Sub, which doesn't operate any business, is now a wholly-owned subsidiary of Microsoft since Microsoft owns all of the stock of Merger Sub. The Merger Agreement, signed by Microsoft, LinkedIn and Merger Sub, governs what happens to this stock of Merger Sub (and the stock of LinkedIn) at the moment Merger Sub merges into LinkedIn and out of existence. Although I haven't read it in detail for this deal, what typically happens in a reverse triangular merger is that the Merger Agreement will say that all of the outstanding stock of Merger Sub will automatically convert into stock of LinkedIn. It will also say that all of the outstanding stock of LinkedIn (held by the public shareholders) will convert into a right to receive the "per share merger consideration", which is basically that shareholder's portion of the cash Microsoft paid for LinkedIn ($196 per share, in this case). When the dust settles, then, Microsoft will own all the outstanding shares of LinkedIn, since Merger Sub's shares converted into them when Merger Sub was merged out of existence. The former LinkedIn shares held by the public now is just a right to receive some cash and no longer represents ownership in LinkedIn. With Microsoft now owning 100% of LinkedIn's shares, in theory, it could elect its own board of directors of LinkedIn, thus giving them control of the company.