By Anton Braun
The term 'Mergers & Acquisitions' or 'M&A' is thrown around a lot in the corporate world and is a term that any future corporate professional should thoroughly understand. We will give a quick explanation of what it means, why it is so popular, and the process of an M&A.
M&A can be broken down into its 'Merger' and 'Acquisition' aspects. An acquisition is where one company purchases and takes over another company (the 'target'), becoming the new owner of it. There are two ways in which this could happen: through a stock deal or an asset deal. A stock deal is where the buyer purchases all the stocks in the target company from the existing shareholders. This is what happened in 2022 when Elon Musk acquired Twitter by buying all of its shares. It is often part of an agreed-upon deal where the target company, its management, and shareholders are happy for the acquisition to happen. It can also happen that the target company does not wish to be acquired, so the buyer independently purchases a large stake in the target company's shares and thereby gains a controlling interest. This is called a hostile takeover.
The other type of acquisition is an asset acquisition. Here, the buyer purchases parts or all of the assets of the target company while leaving the rest of the company untouched. This means that a buyer can purchase only what they need for their business, for example, the IP rights, the physical machinery, or the software. More importantly, however, the buyer can avoid purchasing any liabilities of the target company that they would otherwise have to deal with post-acquisition. Asset deals are often carried out as part of a company going through bankruptcy. This deal type allows it to liquidate its assets while protecting buyers from acquiring the whole of the struggling target company.
A merger, on the other hand, is where two companies, often of similar size, join forces to become a single new company. The buyer and target company merge, and only one remains. A recent example of this is the merger of law firms Allen & Overy and Shearman & Sterling, which became the single law firm 'A&O Shearman'.
The reason Allen & Overy gave for merging is the ability to combine 'leaders in their respective markets to create an integrated global elite firm'. That is generally the reason for mergers: it allows companies with expertise in different areas or a presence in different markets to combine forces and benefit from the strength of the other company. Another purpose of a merger between companies in the same industry is to reduce competition and increase market share, thereby gaining an advantage over other competitors in the industry.
As can be seen with the A&O Shearman example (which took 8 months), M&A deals can take a long time before completion. This is partly due to the extensive procedures taken before the actual closing of a deal. The process starts with the target company holding an auction in which buyers can make bids. This usually involves the target company hiring an investment bank to prepare teasers (letters stating that there is a company for sale in industry X that is valued at Y and how to contact them), which it sends out to a list of potential buyers. It will also provide a more extensive offering memorandum with financial information to interested parties. However, all potential buyers must sign a non-disclosure agreement before they receive this and further information.
At the end of the auction period, the winner is chosen, and they start the due diligence process. This means they look at the target company and ensure that the facts they received about the company are true and that there are no major issues. Here, the principle of caveat emptor applies: let the buyer beware. The onus is on the buyer to protect themselves against potential risks involved in the deal. To do so, the buyer may get the target company to include representations and warranties in the final purchase agreement to agree that everything is in order and no major lawsuit is pending. If such an event does happen, indemnities may be included in the contract to specify what will happen in that case. This could be monetary compensation up to a certain amount (as decided by the parties). Such arrangements ensure that the buyer does not buy a company for $10 million and then pay, for example, $5 million in compensation to employees that worked at the company before the buyer even knew of the company.
Once the contract is signed, the parties prepare for closing. They will check whether the deal complies with competition laws (see Microsoft's acquisition of Activision for an illustration of this) and how to best structure the deal for tax purposes, and they will finalise the financing (e.g., take out a loan from the bank). Lastly, they will prepare for the actual integration, like changing the management team. Only after all of this has been done will the closing happen. That's the merger or acquisition done!
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