Carrying out mergers and acquisitions

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:

• Human resources and a lot of manning hours;
• Legal and paperwork;
• Financial resources to cover the expenses connected to all the work mentioned above pieces;
• It has nothing to do with investment matters.

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.

Merger and takeovers: short introduction

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.

 

Is there a difference since it's all 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:

• The merger means the creation of a new legal entity out of the ones which are uniting their forces;
• Purchase of the company takes place when one, usually a smaller and, in some aspects, the weaker company, is bought by the stronger player on the market. The purchased company ceases its existence because everything, including its assets, belongs to the buyer.

Few details about the Merger

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:

• getting a more significant share of the market;
• getting stronger to enter a new market;
• lowering operating expenses;
• increasing profit.

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.

Unveiling the truth about acquisition

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.

Merger is:

• From a procedural point of view: Two or more companies are united to form one legal entity
• Decision: Parties agree with the deal and are interested in such change in their structure;
• Balance of powers: Usually, there is an even distribution of powers;
• Company name: The company gets a new legal name;
• Shares: The Company emits new shares, which are distributed between the shareholders of the mother-companies.

Acquisition is:

• From a procedural point of view: One organisation takes over the other one in full;
• Decision: The decision to purchase a smaller business can be taken unilaterally by a more prominent company;
• Balance of powers: Purchaser has absolute control over the purchased company;
• Company name: Purchased company loses its name and works under the brand of the buyer;
• Shares: No emission of new shares takes place.

Perks, goals, and procedural specific of M&A deals

 

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:

• More significant market share (primarily if two legal entities work in the same market segment);
• Getting new logistic opportunities and areas of company influence, forming a giant network;
• Reduction of operational expenses due to using of less personnel;
• Low-cost headhunting (good specialists can be booked in HR reserve);
• Expanded financial opportunities.

 

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.

Variety of mergers and acquisitions

There are many of them, and depending on your agenda, you should choose in which direction you would be heading:

• Horizontal;
• Vertical;
• Related type of merging;
• Market expansion and product type mergers;
• Conglomeration.

 

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:

• Optimization of manufacturing processes;
• Boosting efficiency;
• Enhancing logistics together with lowering delivery costs.

 

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.

The regulatory part of different types of M&A deals

From the legal point of view, such agreements as a topic may have:

• Assets purchase;
• Purchase of the company's shares;
• Forward merger;
• Direct or reverse triangular merger.

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:

• One legal entity;
• Mother-holding and daughter company.

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.

Direct mergers, as well as triangular ones, transform business entities into one unit with the following results:

• Creation of one legal entity;
• Formation of Mother-holding and daughter company.

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.

Getting acquainted with the demands and standards for Merger and Acquisition deals

• M&A deal support comprises many stages:
• Preliminary negotiations and agreement on confidentiality;
• Complex audit and detailed determining of the goal;
• Signing the contract and closing the deal;
• Integration or post-document stage.

Preliminary negotiations and confidentiality agreement

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. IncFine 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.

The signing of the merger agreement and closing of the deal

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.

What's next, when is the M&A deal closed?

It is the last but not minor stage. It is not all over; it is the large-scale integration phase. Detailed plans have to be elaborated within the first stages of the process when a principal agreement on the merger is reached.

Conclusion

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 IncFine 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.