Mergers and Acquisitions (M&A) are defined as the coming together of companies. Mergers refer to the union of two companies to form one while acquisition refers to one company taking over the other.
Mergers and Acquisitions are usually undertaken when in the given business environment, the companies would perform better together rather than individually. The evaluation of these opportunities is driven by the objective of wealth maximization.
Methods to conduct Mergers and Acquisitions:
1. Through the purchase of assets
2. Through the purchase of common shares
3. Through the exchange of assets for shares
4. Through the exchange of shares for shares
Types of Mergers and Acquisitions:
1. Horizontal M&A: two companies within the same industry and dealing with similar products/services come together. By merging, they essentially expand their range of the product line and not do something fundamentally new.
2. Vertical M&A: two companies within the same industry but located at different points in the supply chain come together to facilitate their functioning by improving logistics and consolidating funds, staff, etc
3. Conglomerate M&A: two companies in different industries come together to broaden their range of products/services. This set up can help reduce risk by the indulgence of business in various industries and reduce cost as back-office activities can be combined.
4. Concentric M&A: coming together of two companies that share the same customers but provide different services.
Motives for Mergers and Acquisitions:
1.Value Creation
I. revenue synergies
II. cost synergies
2. Diversification
3. Acquisition of assets
4. Increase in financial capacity
5. Tax purposes
6. Incentives for managers
Stages involved in any M&A
Stage 1: Pre-acquisition review - includes assessing the acquiring company with respect to the requirement of M&A, ascertaining the value and figuring out the growth plan through M&A.
Stage 2: Search and screen targets - includes searching and listing out suitable companies to be taken over. This is primarily carried out to find a good fit for the acquiring company.
Stage 3: Investigation and valuation of the target - detailed analysis is conducted after shortlisting of the target company. This is also referred to as due diligence.
Stage 4: Acquisition of target through negotiations - after the selection of the target company, the process of acquisition is initiated through a series of negotiations till a mutual agreement has been arrived upon by both the parties for long-term functioning of the M&A.
Stage 5: Post-merger integration - after successful completion of all the other stages, a formal announcement is made by both the companies announcing its agreement for the merger.
Documentation:
Preliminary agreements usually undertaken:
1. a term sheet, a memorandum of understanding or a letter of intent (indicating the terms of the hand-shake agreement or summarising the preliminary commercial understanding of the proposed transaction);
2. a confidentiality or non-disclosure agreement (to keep the information provided by the target to the acquirer for due diligence purposes confidential); and
3. an exclusivity agreement (requiring the parties, or generally the target, not to entertain competing bids for a specified period)
Principal Documents:
1. A merger, amalgamation or a demerger involves the preparation of the scheme of arrangement between the involved companies, their members and the creditors.
2. A share acquisition involves a share subscription agreement (for investment in new shares) or a share purchase agreement (for the purchase of existing shares). In cases where existing shareholders retain their shares or where two or more acquirers purchase a company, a shareholders’ agreement is also entered into (setting out the inter se rights and obligations of shareholders). Further, where shareholders’ agreements are entered into, a company’s articles of association are amended to reflect the agreement’s term
NOTE:
The first drafts are usually prepared by the acquirer. However, in situations where the bidding process is followed by sale, the first drafts containing the definitive agreements are prepared by the sellers, followed by a complete review by the acquirer.
By- Prabhnoor Khurana
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