What are mergers and acquisitions?
Mergers and acquisitions (M&A) deal with the merging of two companies, which consequently form a new legal entity under a new business name. An acquisition involves the purchase of another company/companies. Within M&A there are different types of transactions including consolidations, tender offers, acquisition of assets, and management acquisitions, as well as different ways of merging or combining companies into a new entity like horizontal mergers, vertical mergers, congeneric mergers, market-extension mergers, product-extension mergers, conglomerations, purchase mergers, consolidation mergers, and reverse mergers. Each type of M&A has legal ramifications that require a business law attorney who can draft, negotiate and execute contractual agreements for all parties involved.
Why do I need legal guidance on mergers and acquisitions?
Mergers and acquisitions occur in business quite frequently for a number of reasons like increasing value, diversifying business operations and offerings, acquisition of assets, a lack in financial capacity, tax purposes, and even personal interests. No matter the reason for M&A, it’s important to have a legal team in place to assist with the transaction.
Experienced M&A lawyers will work directly with clients to put in place the appropriate financing (including cash and/or stocks) for mergers and acquisitions, and advise on drafting, negotiating and executing contracts for the sale of the business or a portion of the business. When an M&A lawyer or team of lawyers work with a business in the M&A process, they will generally:
- Identify the client’s business objectives
- Flag legal issues
- Create a legal strategy for the client
- Advise on deal negotiations
- Consider tax implications
- Assess regulatory risk
- Work with local counsel (if cross-border)
- Obtain all necessary documents (e.g., consent from third-party lenders, contracts, )
- Negotiate for an agreement to close the deal or refuse a buyer’s deal if terms are not met
- Create strategies for post-closing agreements and support implementation of those strategies
At Montague Law, we specialize in M&A by working directly with buyers and sellers, as well as in-house legal counsel, executive teams, founders, senior management, and many more stakeholders. By assessing the financial, operational, and legal factors and ramifications of a merger or acquisition, we create strategic solutions to support our clients achieving their business objectives.
Mergers and Acquisitions Legal Services
When a company goes through a merger or acquisition there are a number of different ways the business transaction can be structured. Below are examples of M&A our team at Montague Law can help you and your business with:
- Acquisition of Assets – An acquisition of assets is when one company purchases assets directly from another company with shareholder approvals.
- Congeneric Merger – A congeneric merger is the merger of companies in the same industry that offer completely different products/services but might share similar distribution channels, marketing, technology, etc.
- Conglomeration – A conglomeration is the merge of companies that offer products/services that are completely different.
- Consolidation – Consolidation is the creation of a new company by combining businesses.
- Consolidation Merger – A consolidation merger is the merge of companies that are bought and combined under an entirely new business entity.
- Horizontal Merger – A horizontal merger is the merge of direct competitors that offer similar products/services in the same market.
- Management Acquisitions / Management-Led Buyout (MBO) – Management acquisitions or management-led buyout (MBO) is when a company’s executives or management team purchase all or a controlling stake in a company gaining full control of the company and taking it private.
- Market-Extension Merger – A market-extension merger is the merge of companies that offer similar products/services in different markets.
- Product-Extension Merger – A product-extension merger is the merge of companies that offer products/services complementary to each other in the same market.
- Purchase Mergers – A purchase merger is the purchase of another company that is made with cash or through debt instruments and the sale is taxable.
- Reverse Merger – A reverse merger is an acquisition where a private company purchases a public company that has no legitimate business operations and limited assets to reverse merge into the public company to become a brand-new public company with tradeable shares.
- Roll-Up Merger – A roll-up merger occurs when an investor or private equity company purchases multiple companies within the same industry and market to create a larger business that is better positioned to scale.
- Tender Offer – A tender offer is when one company offers to purchase the outstanding stock (usually not at market price) from another company.
- Vertical Merger – A vertical merge is the merger of companies that operate on the same supply chain.
What are the risks associated with mergers and acquisitions?
Without careful research, recordkeeping, analysis, and due diligence, a M&A deal can go wrong and cause financial, operational, and cultural risk. Below are examples of risks associated with M&A deals before and after the transaction is complete.
Complying with Securities Law
- Miscalculation of valuations
- Overpayment of the target company
- Possible litigation
- Unexpected costs
- Unknown liabilities (e.g., representations and warranties insurance (RWI))
- Employee distrust
- Lack of communication causing decreased employee morale, trust, and productivity
- Lack of employee engagement
- Nonexistent corporate cultural assimilation
- Shortage of synergies
- Discrepancies in interpretation of the contractual agreements
- Insufficient integration of sales, management, etc.
- Insufficient technology stack
- Intellectual property
- Lack of strategy moving forward
- Not conducting a comprehensive due diligence
- Unclear or loss of strategy and execution
- Underestimation of work
Mergers and Acquisitions FAQ’s
The terms mergers and acquisitions are often used interchangeably but there are major differences between the two.
Mergers are a business transaction that occur when two business entities consolidate into one. Mergers will generally end amicably with the reduction of power between two companies in an effort to create a more profitable and successful business under one legal entity.
An acquisition is when one company purchases and takes over ownership of another company—often referred to as a takeover—meaning one company will end all operations and not exist after an acquisition. A company may seek to acquire another company in order to corner the market, expand product offerings, grow internal technology services, obtain intellectual property, reduce production costs, optimize tax strategies, as well as a number of other reasons.
Often the terms “acquisition” or “takeover” have a negative connotation and thus businesses have started to refer to acquisitions as “mergers” even if the term is not technically true. Also, recently, there has been the emergence of the term “mergers and acquisitions,” or “M&A” has become a term more commonly used as a general consolidation or combining of companies through a financial transaction whether that be through an acquisition, merger, tender offers, etc.
A hostile takeover is an acquisition made by the acquirer (company making a purchase of another company) of a target company (company that is being bought). The acquisition will occur when the acquirer goes through the shareholders to purchase stake in the target company or combat the target company’s management to gain ownership. This type of acquisition is considered hostile because the target company’s management does not wish to be acquired but are forced into an acquisition because the acquirer has purchased controlling interest of the company. In a hostile takeover situation, the target company will often seek legal counsel to fight off the acquirer.
The first part of the process in deciding which is the appropriate M&A strategy for your company is to review the most up-to-date financial reports, annual reports from the past three to five years, tax returns, shareholder agreements, a fair valuation of the company, and company structure (e.g., number of employees, structure of the company) of each company that will be potentially involved in the transaction. Once his information is carefully reviewed and analyzed a determination of the suitable M&A strategy can be made.
A merger must be approved upon by the majority or two-thirds of shareholders owning stake in a company.
When a merger occurs, the surviving organization will own all assets and liabilities of the two or more companies that have merged together. When an acquisition occurs, the acquirer can create a structure to transfer assets (and those assets’ liabilities) from the target company it has acquired without taking on other liabilities of the target company.
Companies must do their due diligence on the financial side of the business before approaching negotiations for acquisitions. By reviewing the most up-to-date financial report, year-over-year financial reports, tax returns, shareholder agreements, a fair valuation of the company, and structure of the target company, as well as other factors, can help mitigate overpaying in an acquisition.
It cannot be expressed enough that when going through a M&A deal a strong team needs to be set in place in order to do the company’s due diligence to avoid failure. An organization will need to put together a team of legal, financial and business professionals with expertise specifically in the M&A strategy that is being proposed. Often, these teams can consist of in-house and outside professionals. Legal counsel outside of the company are favorable as M&A lawyers have expertise in intellectual property, negotiations, contracting, cross-border negotiations, tax implications, M&A strategy, identifying regulatory issues, plus much more related to merger and acquisition deals.
Glossary of Important Terms
Here are some important terms to learn when it comes to mergers and acquisitions:
An acquirer is a company that wishes to purchase another company.
A target company is a company that an acquirer wishes to purchase.
A surviving organization is the business that pre-existed or was created as a biproduct of a merger.
To find out how Montague Law can help you with your merger and acquisition opportunities, please call us at 904-234-5653 or fill in the form below.