We are probably all quite familiar with the terms ‘mergers’ and ‘acquisitions’ in our everyday lives in some shape or form.
Whether that is from reading the news or watching Netflix television shows such as Suits.
But what are the benefits and risks of mergers and acquisitions for businesses?
Karen Edwards outlines the ins and outs of mergers and acquisitions, providing a checklist for businesses looking to start somewhere.
What are the benefits of Mergers and Acquisitions?
To date, some of the largest and most successful companies have benefited from the merger and acquisition process.
For example, did you know in 2006 that Disney acquired Pixar for $7.4 billion dollars? The joint studio has since been able to release hit films such as Toy Story 3 and 4, which has generated not just millions but billions of pounds.
Although this is a very large example of an acquisition transaction, it highlights the benefits and success that acquisitions can have on companies if they are pulled off properly.
Further benefits could include access to talent, increased market share and a potential reduction in costs that may not have otherwise been available.
What are the potential risks of Mergers and Acquisitions?
Before planning any kind of merger or acquisition transaction it is important to carefully consider what legal requirements and risks are involved.
Whilst on television a merger or acquisition may seem relatively straight forward, the process is very involved and there can be numerous hoops to jump through to ensure that you get the deal you are looking for!
What is a business acquisition?
The term ‘acquisition’ can be used to describe a wide variety of corporate transactions.
This could involve the sale or purchase of the business and assets of a going concern, where the assets are things like equipment, the client list, goodwill and employees (typically called an ‘asset acquisition’).
Alternatively, you could be acquiring the shares in a company that operates a business, this being known as a ‘share acquisition’.
What’s the difference between an asset and a share acquisition?
Asset acquisition
If an asset acquisition involves the sale of a business and assets by a company, the buyer will not become the legal owner of the actual company, but rather those assets are extracted out of the selling company and put into the entity which the buyer is buying through.
This, in effect, carries less risk for the buyer, as it is generally the case that the legal liability to third parties for debts and obligations of the business remains with the selling company.
Share acquisition
A share acquisition will mean that the buyer will become the legal owner of the company and will benefit from having full control of the acquired company.
It will however also mean that the buyer will inherit the entire history, liabilities, and assets of the company.
It is important to be clear from the outset what you want from the transaction.
It is also vital that you take tax advice on any transaction as how an acquisition is structured will have different tax implications for the parties involved.
What is a merger?
A merger, much like acquisitions, usually involves the transfer of assets and liabilities and is normally intended to combine two separate businesses into a single new legal entity.
The same considerations should be had for mergers in terms of obtaining the right tax advice.
Mergers and Acquisitions checklist
Depending on the type of transaction you want to pursue, it is likely heads of terms will need to be agreed and due diligence carried out.
Heads of terms
Heads of terms are a legal document which sets out the terms of a commercial transaction agreed in principle between parties during negotiations.
They do not legally compel parties to conclude the deal on those terms or even at all but may provide some protection on points such as confidentiality, which provides reassurance to the parties that details of their respective businesses can be discussed in confidence.
My colleague Karen Edwards discusses Heads of Terms in her comprehensive guide, which can be read here.
The importance of due diligence in Mergers and Acquisitions
Due diligence may include but is not limited to collating and reviewing the following documents and information:
- Basic corporate documents (such as articles of association);
- Securities (such as charges);
- Shareholder information;
- Directors information;
- Financial information;
- Material contracts;
- Patents and Trademarks; and
- Employees.
This is not an exhaustive list and we would always recommend obtaining legal advice from the outset on any potential merger or acquisition so that you receive the right guidance on what questions to raise.
Legal advice on Mergers and Acquisitions
Here at Frettens we can advise on mergers and acquisitions on every aspect of the transaction, from Heads of terms through to preparing all of the legal documentation.
Mergers and acquisitions are not something that can happen overnight and do require in-depth legal, financial and commercial consideration so that the correct protections can be built in to minimise future risk.
If executed properly, a merger or acquisition can help your business expand and develop, which has clearly become even more vital due to the challenges businesses have faced during the Covid-19 pandemic.
If you would like to discuss a potential business merger or acquisition or have any other commercial related queries, please contact one of our Company and Commercial team and we would be happy to assist.
Corporate & Commercial Solicitors
We offer a free initial appointment to all new clients. To get in touch with our bright lawyers simply call 01202 499255 or visit our get in touch page.
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