Mergers and takeovers are popular instruments used by businesses abroad, such procedures of business transformation with the participation of private and public players. This procedure consists of at most two stages: negotiations and signing papers. Like any well-planned event, this one includes many more elements than business people initially think of. Poor planning can bring severe risks because such transactions without any exaggeration involve:
Suppose you want to perform a successful sale of your company. In that case, you must be informed about all the procedural specifics of such agreements, evaluate, eliminate potential risks within your competence and control. In this article you will find crucial information from our experts. They share vital points which must be taken into consideration to avoid traps of drawbacks.
World-known abbreviation for this procedure consists of two letters only M&A. So, merger and takeover, what is behind this term? In simple words, it is about a few companies becoming one entity. One of the ways to make this change is to apply a merger: Company A becomes part of the legal entity named B. Second way of changing the company's future is to arrange a purchase deal when a more prominent juridical person purchases a smaller one for the sake of some agreed benefit.
All deals mentioned above would represent M&A.
When M&A takes place, two companies go through restructuring and are transformed into one business unit upon finishing legal and registration procedures and signing all required papers. Such large-scale changes aim to increase business efficiency if other measures cannot give similar results. Briefly we can describe the difference which differ merger from takeover as follows:
As a result of this synthesizing, two or more companies become a new legal entity. In general, the new company gets a new legal name, while property, and the employees of all companies are united through this deal. Such a decision is voluntary and agreed upon by all participants because they work towards one goal and get more perks from joining forces and resources, even if individual powers in the new organization are less potent than before the deal.
Motivation for such changes can be very different; we would provide only a few examples:
Usually, such contracts are concluded between companies of similar operational scale and power. The new company is being capitalized through issuing shares which are distributed among the owners of the mother companies within agreed proportions.
The purchase of another company means that one business purchased another one. Purchasers must get a significant controlling ownership package; thus, it should be not less than 51% of the company’s shares. Usually, more potent company B takes over weaker company A. Foreign markets had a practice of hostile acquisition when the smaller company was taken over by a bigger one without the consent of the latter one.
As you see, there are many variants of how the events may develop. Usually, upon finishing the deal a smaller company continues its existence under the name of a more prominent company. The personal future of the smaller company depends on the terms of the agreement. It could result in massive dismissal, partially retaining the manning power, or keeping only crucial specialists. The such deal does not provide issuance of new shares. The primary purpose is to get better competitive advantages, technologies, or other valuable resources to gain a more substantial market share.
Usually, the most frequent reason why businesspeople are attracted to the option of M&A is that they expect to get more benefits, increase efficiency and open a new window of opportunities, namely, it may be:
Getting these benefits takes time because the preparation and actual signing are remote. On the one hand, negotiations take time, and many details must be considered and included in the deal because they contribute to success.
The realistic time frame for such deals varies from months to years. It includes complex audits, which are costly and time-consuming but needed to get clarity, eliminate risks and understand the company’s business situation accurately.
There are many of them, and depending on your agenda, you should choose in which direction you would be heading:
If two juridical persons that decide to merge work in the same market and have related kinds of products and services, they may join forces to become dominant players in the market. The legal bodies using this combination take advantage of lower operational expenses due to the increasing manufacturing scale. Regulators accept serious checks concerning such mergers because they may lead to monopoly pressure and limit fair market competition. Still, professional M&A deal support may help you to avoid restrictions and do things right.
Vertical mergers usually happen between legal entities that work in the same field but represent different stages of the production cycle. Such refreshing the structure allows getting the following benefits:
The merger of related juridical persons provides that firms work in the same market but offer different products or services. These companies may be indirect competitors, or their products are complementary. Similar sale channels allow easy but significant expansion of substantial market share.
Merger with a complimentary product manufacturer is done to enhance the product line with maximal efficiency. If you ponder boosting the market share via the M&A agreement, remember that the second company must work in the same field. Usually, such transactions are undertaken to unite a few geographic regions.
The conglomerative merger may unite companies without similar products or work in the same field. The net merger of conglomerates allows them to continue working as separate entities within their markets. The mixed conglomerate type of merger may be intended to increase the market share or product line, or even both.
From the legal point of view, such agreements as a topic may have:
Company-purchaser keeps control in the case of assets purchase, purchase of shares, forward or forward-triangular type of merger.
A reverse type merger or reverse-triangular type merger results in a situation when the shareholders and management of the target juridical person get control over the buying company. Suppose you think of performing one of such operations to exclude avoidable financial risks. In that case, you can get competent legal advice and support to ensure that the documentary and organizational side of the transaction will go smoothly.
If the deal is accompanied by the purchase of the company's shares, the buyer acquires shares from the shareholders of the target juridical person. Such an operation may result in direct or reverse acquisition depending on the shareholders' control level during the deal's closing. Assets and liabilities of the target legal body, in this case, remain unchanged.
As the result of a direct, reverse triangular merger, two companies are united into one; as a result, they form:
Shareholders of the target legal body receive either company' shares or money or a combination of both. All assets and liabilities are part of an M&A deal. M&A deal support helps not only to eliminate multiple risks but also to value assets and prospects properly.
Triangular merger results in the creation of a new daughter company, which is created to finish the acquisition deal. As a result, the mother-daughter structure is being formed. After the reverse merger, control over the buyer is changed. Shareholders of the target legal body exchange their shares for new ones or existing shares of the buying juridical person. If you are planning an M&A transaction, it is definitely worth arranging preliminary legal consultation about the regulation of M&A and ensuring that you have high-quality legal support. The company's shares are purchased through the acquisition of shares from the target company shareholders. Such investment may result in direct or reversive purchases depending on the type of control the shareholders have over the target company. The purchase of shares of the target company does not change the commitments and assets of the target company.
Direct mergers, as well as triangular ones, transform business entities into one unit with the following results:
Shareholders of the target company get either share of the company or financial compensation or both, based on the terms of the contract. All types of assets and liabilities are included in the M&A.
The triangular type merger is a merger in which a daughter firm is created to finish the deal, forming a more complicated and non-linear structure with the mother company and daughter unit.
As we briefly mentioned, reversive merger results in a change of control over the buyer. During the reversive or triangular variant of merger, the shareholders exchange their shares for new or already emitted shares of the juridical person which is being purchased. Towards the end, the target company's shareholders gain a significant part of the shares of the buying company. Often reversive merger is applied between the private and the public sector, whereas buying a company belongs to the public segment.
An average practice buyer and the seller sit together to discuss the merger's details, benefits, procedure, and expected consequences. Confidential information is exposed when the parties sign a confidentiality agreement to eliminate the risks.
Due diligence and evaluation of the goal, making it SMART
All sorts of mergers, especially international ones, comprise multiple potential risks that must be assessed and eliminated to the maximum extent. The market has to be evaluated, especially if the buyers need to know its specifics. Financial Statements for previous periods help to complete the picture of the company's situation at this point, and the audit steps in. IQ decision has a significant portfolio of successful international mergers support; if you are interested in ensuring a successful merger, you can book a consultation with our specialists to get the complete picture of your agreement perspectives.
If the parties agree on all details and terms, they, at this stage, sign the final contracts and finish this transaction. There is a period between the signing and the actual closing of the M&A deal. It is required to fulfill all agreed details, and only after comes the money paid to satisfy the agreement.
Mergers and acquisitions are incredibly dynamic and exciting because new perspectives and updated and transformed strategies are born. At the same time, because it is a multi-layer procedure, it takes time and resources, and many decisions have to be taken weighted. Successful agreement fulfilment depends on the procedural specific, cultural difference, and legislative specific. If you consider the option of M&A for your business, ensure that from the very beginning, you get competent advice. Experts of IQ decision are happy to assist you in getting the most out of your business plans and M&A deals. Every hour of our consultative work is your investment into getting more profits and saving time. Our experience allows you to make a custom beeline route to your goals in every foreign jurisdiction.
Mergers and acquisitions or M&A is a procedure of a company's structure reorganization, comprising two or more entities into one legal entity.
A merger is when two or more companies with similar financial situations and market shares are joined into one structure. An acquisition deal means a more extensive and stronger company takes over a smaller organization. As a result, the latter becomes part of the more prominent Company and ceases its characteristics of being a separate legal entity.
Due Diligence during M&A comprises a complex analysis of the Company, which is the object of the Agreement. Due Diligence means a complex audit of the Company, allowing the buyer to evaluate potential perspectives and risks connected with the deal.