A Beginners Guide to Mergers and Acquisitions

A merger is the coalition of two companies into one singular, legally recognised entity, usually through the exchange of shares.

Merging two or more companies, which each bring unique expertise, experience, market coverage, and capital which can be combined, utilised and improved upon by the merged entity to strategise and plan for the future, offers exceptional growth and expansionary potential, and can often lead to greater market dominance and business efficiency.

The key hurdles to overcome in most mergers are, firstly, finding an agreeable corporate structure which is reflective of each company’s intended functional needs post-completion, and secondly, the implementation of the proposed structure, in a legal and proper fashion which ensures shares and assets are vested in the merged company by appropriate and legal means.

Further considerations include:

• due diligence, which, in mergers, both companies will need to undergo;
• compatibility of the multiple work cultures that will be expected to combine and synergise; and
• the cost implications that will accrue during the merging process.

These factors, in tandem with the necessary research and due diligence into all merging parties, and legalities unique to each process, can make mergers very timely endeavours.

A final hurdle that mergers face, is the Substantial Lessening of Competition test (SLC). The SLC determines if the market will become less competitive in the event a merger occurs, and if it is determined that market rivalry will be significantly damaged in the long-term, the Competition and Markets Authority (CMA) can prohibit the merger from completing

An acquisition is the purchase or procurement of a business, which is subsequently absorbed into the dominant company, along with the acquired assets. Company’s intending to acquire are usually stronger and bigger than companies set to be acquired. There is no requirement for acquisitions to be completed consensually, hostile takeovers allow companies to purchase companies in administration or assume control of a company without prior agreement.

Acquisitions offer buying Companies unique opportunities for expansion and growth. A company that has acquired another could see increases to monetary and production efficiency, access to new markets, greater exposure and presence in target markets, and ownership of new products and R&D.

Choosing the best method of acquiring a target company is usually determined by a few factors, namely:

• the tax implications of acquisition;
• commercial considerations and logistics;
• whether there are any liabilities in the target company; and
• The intended use/purpose of the acquired business after acquisition.

Acquisitions are often costly and can be time-consuming to complete because of the due diligence, planning, and financing arrangements required.

Merger and acquisition deals are generally split between public matters and private matters. The differentiating factors determining the matter type lies in the Company ownership. Public M&A involve companies whose stock is publicly traded, whereas private M&A transactions involve privately traded companies, typically founders, investment companies or small investment groups. Public transactions are typically subject to stricter legislative scrutiny, often making them lengthier and more expensive deals to complete.

Furthermore, mergers and acquisitions can be achieved in various different capacities which makes navigating and deciding on a realistic approach difficult. This is why legal experts should be consulted to assist or even complete the matter on your behalf.

Presented below are the principal methods of mergers and acquisitions, however, most transactions will require bespoke and fine tuning to be properly completed and remain legally compliant.

Generally speaking, there are two types of mergers:

1. Merging with competing businesses

The main benefit of merging with a competing company is the drastic increase to the merged company’s hold on its respective market, and there are various other benefits to this type of merger such as increased brand exposure, reduced sale fluctuation and increased economies of scale, just to name a few. This type of merger is far more prone to CMA intervention however, as the coalition of two dominant market presences could lead to the extinction of market competition. It is for this reason, that these mergers are a near-impossible opportunity for large companies to access, but for small to medium sized companies, they offer astronomical opportunity, allowing the new entity a much bigger foothold within its respective market.

2. Merging with non-competing businesses

Merging with a non-competing company is primarily done for one of two reasons; 1) to diversify brand portfolio, exposing the Company to other markets, 2) to increase efficiency and reduce costs, by merging with a company at a different level of the same market.

Each option has its own benefits, and the best choice is entirely subject to the objectives of the companies involved.

The two main methods of acquiring a business are:

1. Asset Purchase

This process is defined as when a Company purchases part, or all of a business’s assets for a specified fee. In this process, the seller retains control of assets not included in the purchase, making the asset purchase acquisition structure, typically, more expensive and complicated to prepare. That being said, asset purchases are useful in that they allow buyers to avoid unwanted liabilities and/or assets, providing flexibility and long-term assurances. This means, that should liabilities exist within the target business that the buyer does not wish to take on, the assets related to those liabilities can be singled out of the deal.

2. Share Sale –

In a share purchase, the buyer acquires the Company, its business(es), as well as all of its assets, liabilities and obligations, by acquiring the target companies share capital. These are much simpler transactions, as the acquired company continues to operate as it did prior to purchase, and the assets involved in the transaction don’t need to be listed. Share sales often lead to easier transitions too, as contracts and obligations are also transferred in the transaction, allowing the business to integrate more seamlessly into the new Company.

Choosing the most appropriate acquisition structure is dependent on many variables, ranging from tax incentives commercial considerations and any liabilities of the target company. Both approaches offer various pros and cons, making the choice individual and specific to each company, their objectives, and the specifics of the target business.

As previously mentioned, mergers and acquisitions have numerous, varying benefits, dependant on the option implemented. Company expansion, through M&A, will generally grant companies a blend of; greater leverage and control in their respective markets, improved business efficiency, and greater stability, with flexible implementation and growth expectation that would be almost impossible to match though natural growth means.

Mergers and acquisitions demand many costs, time, legislative demands and company compromises to succeed. There may also be problems due to employee complications or logistical omissions that could develop. These consequences can sometimes take a toll and may affect the long-term ambitions and objectives of the involved companies. Further, even the most straight forward transactions, with comprehensive due diligence and planning, can become challenging, or fail, when unforeseen circumstances arise. Company compromises that are unacceptable, financial concerns, regulatory issues, even small disagreements can cause bumps in the road.

It is a great time to initiate a merger or acquisition in the UK, at present. Recent trends show that the market is surging with increased activity, as companies look to enter new, upcoming, or unsaturated marketplaces, or increase their economies of scale. These benefits are elevated further in the current period of high prices, and low interest rates the UK is experiencing, making expansionary objectives much more appetising for risk taking, small-medium sized companies looking to exploit market gaps and opportunity.

Companies must be careful to ensure they don’t find themselves in a financially detrimental position or involved in a transaction that won’t be compliant with the law and given the scope of factors involved in such a decision, and the repercussions are severe if the wrong approach is chosen. It is always therefore advisable to consult a legal expert when considering which transaction would be most appropriate for your business.

The Wilson Browne Solicitors Corporate and Commercial team is uniquely qualified to deal with all aspects of mergers and acquisitions. Help can be provided at any point of the process, whether it’s helping you close the deal, drafting contracts, or even providing advice if you’re deliberating. Wilson Browne Solicitors can help your company achieve its objectives, whilst ensuring risks posed are minimised.

Wilson Browne Solicitors will always strive to provide the best client service, providing a bespoke service with regular updates. We will also work closely with accountants and financial experts to provide cost-effective, business tailored advice, which ensures your transaction is cost effective and best serves your company.