This article is written by Sarika Kumari 3rd year BALLB student of Mewar Law Institute, Ghaziabad during her internship at Le Droit India.
Keywords-Asset, acquisitions, stock, purchase, mergers
ABSTRACT
Mergers and acquisitions of companies are becoming the most strategic choice for organizational growth which includes empire-building, market dominance, and long-term survival. In simple terms, mergers and acquisitions are defined as the consolidation of companies. in general, a merger is the combination of two companies to form one new company by transferring ownership. Whereas, in acquisitions, one company takes over another company and establishes itself as a new owner of the said company. A merger and acquisition deal structure is a binding agreement between parties thereto, that outlines the rights and obligations of both parties, it states what each party of the merger or acquisition is entitled to and what each is obliged to do under the agreement. the deal structuring is a part of the merger and acquisition process, as it is the step to prioritize the objectives of a merger or acquisition of all parties.
Ways of deal structuring in mergers and acquisitions
Asset acquisitions–
In an asset acquisition, the buyer purchases the assets of the selling company. Asset acquisition is usually the best deal structure for the selling company if it prefers a cash transaction. The buyer chooses which assets it wants to purchase. Assets can be purchased with cash or stock. If stock is used, securities laws must be complied with, which can increase expense and time to close a sale. If a mixture of cash and stock is used, tax impacts might arise in corporate transactions depending on the relative proportion of each component. Asset deals provide the best liability limitation for buyers. However, their complexity may render them unwieldy for larger transactions and their use should be explored before committing to any sale.
The process can be complex and time-intensive due to the additional effort needed in finding and transferring only the specified assets. Typically, the buyer will acquire a majority of the seller’s assets for a cash payment or in exchange for its shares and ignore all liabilities linked to the assets. However, buyers may end up losing important non-transferable assets such as permits or licenses.
Stock purchase-
In a stock purchase acquisition, a majority amount of the seller’s voting stock shares are acquired by the buyer. In essence, it means control of the seller’s assets and liabilities are transferred to the buyer. The target company will remain intact, but it will now be under new ownership. The purchaser acquires all or the majority of the seller’s voting shares. The buyer fundamentally now owns all the assets and liabilities of the seller. The purchaser needs to negotiate the representations and warranties regarding the assets and liabilities of the business to ensure that the target company is accurately and completely understood.
Stock purchases are typically beneficial to sellers. The earnings of a sale are usually taxed at the lower and long-term capital gains rate. Moreover, such sales are less disruptive to the day-to-day business of the company. For buyers, a stock purchase is advantageous because the seller continues to be in charge of the operations, making the integration less expensive and shorter. The buyer owns all the assets, contracts, and intellectual property, making the derivation of value from the acquisition easier. Stock purchase negotiations also tend to be less contentious. One disadvantage is that, since all unsettled liabilities of the seller are acquired by the purchaser, the buyer may be forced to inherit financial and legal problems that, in the long run, diminish the value of the acquisition. Moreover, if the selling entity faces divergence of shareholders, a stock purchase will not prevent them from going away.
Mergers-
A merger is the result of an agreement between two separate business entities to come together as one new entity. A merger is typically less complicated than an acquisition because all liabilities, assets, etc. become that of the new entity. In a merger, when two distinct companies come together to form a single legal entity, then the shareholders of the target company obtain cash, the stock of the buyer company, or a combination of both. Either the seller’s company or the buyer’s company is reconstituted, or a fresh entity is started.
One main benefit of a merger is that it normally needs the approval of only a majority of the shareholders of the target company. The process of a merger is also relatively simple. All contracts, as well as liabilities, are passed into the new company. Hence, minimal negotiation about the terms is required. The disadvantage of this acquisition structure is that if a large enough block is formed, disapproving shareholders are capable of thwarting the merger by deciding to vote against it.
Two important documents are used to outline the M&A deal structuring process. They are the Term Sheet and Letter of Intent.
- Term Sheet: A Term Sheet is a document stating the terms and conditions of an intended financial investment, in this case, a merger or acquisition. Term sheets generally are legally binding unless otherwise stated by the parties involved.
- Letter of Intent (LOI): As the name implies, a letter of intent is a document outlining the understanding between two or more parties that they intend to formalize later in a legally binding agreement. Like the term sheet, an LOI is usually not intended to be legally binding except for the binding provisions included in the document.
Examples of merger and acquisitions deal
When Verizon agreed to pay $130 billion to buy Vodafone’s 45% share of its U.S. wireless business in 2013. The structure of the deal saw Vodafone shareholders receive $58.9 billion in cash and $60.2 billion in Verizon stock. The CEOs of both companies subsequently told reporters that the deal had been agreed upon in a matter of a few hours.
The $90 billion acquisition of Warner-Lambert in 2000 was notable, not only for its scale but also for being one of the largest hostile takeovers of all time. Warner-Lambert had agreed to merge with American Home Products (AHP) in late 1999 when Pfizer decided to step in with an unsolicited offer for Warner-Lambert’s stock. After a few months of terse exchanges between the management of both companies, Pfizer acquired Warner-Lambert three months later, leaving AHP with a considerable $1.8 billion break-up fee.
Steps for Ensuring Deal Success
- Creating an acquisition strategy-The company decides on its overarching goals for the M&A process. It’s important that there’s a good motive for undertaking M&A as it underpins the whole process.
- Refining target criteria and evaluating potential target companies-This typically means a 2-page teaser that summarizes the company and its financial results and – if the teaser raises an interest – sending a confidential sales memorandum to the interested party, which outlines the company in more detail, including providing a fuller picture of its financials.
- Making initial contact with targets-There are typically two approaches to contacting target companies – personally or through an intermediary. This step allows you to assess the target company owner’s interest in selling or entering a merger, and gain a general understanding of their valuation expectations.
- Purchase and sale contract-The buyer uses all of the information gained during due diligence to put an informed purchase contract to the target company. This phase may involve an intermediary – agreed upon by both parties to the deal – to look after escrow accounts and deeds to the target company.
- Conducting due diligence- audit or investigation of the target company, its operations, human capital, tax and legal structure, and its financials. A high-quality Deal Room will make the process significantly more productive.
- Finalizing purchase and sale contracts and closing the deal-Assuming negotiations go well, they will be followed by the interested party submitting a non-binding letter of intent (if the seller is feeling particularly bullish, they can ask for upfront, non-refundable deposit at this stage), to be followed, post-due diligence, by a legally binding share purchase agreement, outlining the terms of the deal in fine detail.
- Integrating the companies-When the company’s share certificate shave been exchanged, and the company is sold.
Conclusion
Developing a proper M&A deal structure can be quite complicated and challenging because of the number of factors to be considered. These factors include preferred financing means, corporate control, business plan, market conditions, antitrust laws, accounting policies, etc. Employing the right kind of financial, investment, and legal advice can make the process less complicated. the process needs to be agile, and all things being equal, the more efficient the process, the more value it adds. Deal Room’s due diligence software is a project management tool designed to address the M&A detail-time conundrum. It should be considered a critical element of the process by any company undertaking agile M&A. The three traditional ways of structuring an M&A deal are asset acquisition, stock purchase, and mergers. The methods can also be combined to achieve a more flexible deal structure. Asset acquisition is usually the best deal structure for the selling company if it prefers a cash transaction. In a stock purchase, the buyer acquires the stock of the target company from its stockholders. Either the seller’s company or the buyer’s company is reconstituted, or a fresh entity is started. In structuring a deal, the advantages and disadvantages must be considered along with other influencing factors to reach a conclusion on which method to adopt.
