M&A 101
Mergers & Acquisitions 101
This is an introduction to M&A. Material includes a synopsis from multiple sources for easy reference for educational purposes.
M&A stands for Merger and Acquisition, and it broadly refers to a company buying or selling another company. M&A Strategy is part of a company’s growth strategy (buy versus build). Buyers buy for different reasons, and Sellers sell for different reasons, and an M&A transaction takes place when the interests of the Buyer and Seller align.
Why do Sellers sell?
Sellers may decide to sell for various reasons. A family business owner may decide to leave the business. A disruptive company may decide to sell to a competitor or a partner. Venture Capital (VC) or Angel Investor backed companies may try to exit with an appropriate Return on Investment (ROI). Founders may wish to pursue other ventures. A target company may evaluate unsolicited offers received. The Board of Directors of a company have the responsibility to act in the best interests of the company and its shareholders and may decide to sell.
Why do Buyers buy?
Buyers may decide to buy for various reasons. A company may decide to expand into new markets, new geographies, new products, a new customer base, or just expand market share. They may decide to acquire a disruptive technology (speed up growth with ‘Buy versus Build’). Buying another company can create synergies of scale and maximize efficiencies, resulting in higher returns for the shareholders of the combined company.
Different Deal Structures:
M&A Deals may have three types of deal structures, including asset purchase, stock purchase, or merger. Merger is a type of Acquisition. The type of deal structure used depends on the size of the deal, the laws of the state of incorporation, and federal tax laws. Mergers are more common at the higher end of the M&A market, asset purchases are more common at the lower end of the market, and stock purchases are more common in the middle market.
(a) Asset Purchase:
Asset Purchase refers to a Buyer purchasing specific assets of a Seller, as listed in the transaction document. It could be all, or part of the assets of the business. Buyers like this deal structure as they can avoid buying unwanted assets, and don’t assume any liabilities of the Seller, thus reducing transaction risks. Buyers get better tax treatment, as they step-up the cost basis of the acquired assets; and increase losses when they later sell or dispose those. assets. This requires third party consent when transferring contracts from Seller to Buyer. Sellers don’t like this, as they are left with potential liabilities. Sellers also get less favorable tax treatment, including potential double taxation (for a C Corporation) on income from sale proceeds.
(b) Stock Purchase:
Stock Purchase refers to a Buyer purchasing stock or equity interest of the target company directly from Seller’s shareholders. Company remains a ‘going concern’, including all its business, assets and liabilities. Sellers prefer this, but Buyers may be exposed to unknown liabilities, and have less preferential tax treatment (as no ‘step-up cost basis’ is available). In certain cases, Buyers can make an election to treat the stock purchase as an asset purchase, thus preserving the preferred tax treatment.
(c) Merger:
Merger is a type of acquisition when two separate legal entities come together and only one legal entity survives by action of law. All assets and liabilities of each are owned by the surviving entity. Surviving entity could be a Buyer (Forward Merger) or a subsidiary of a Buyer (Forward Triangulation Merger) or a Seller (Reverse Merger) or a subsidiary of a Seller (Reverse Triangulation Merger). It’s generally better to keep the surviving company separate by using a wholly owned subsidiary of the buyer or seller to limit liability. Mergers require approval from the Seller’s Board of Directors and a majority of the Seller’s Shareholders. Merger is taxed based on its deal structure; forward and forward triangular mergers are taxed as asset purchases, while reverse triangular mergers are taxed as stock purchases.
Who are the M&A Players?
There are several M&A Players in the market, with different roles in the M&A process. Business Brokers (for smaller deals) or Investment Bankers (for larger deals) do similar tasks, including preparing a company for sale (they prepare a Teaser and a Book for the company), and help find Buyers (by using an auction process, or marketing to a curated list of Buyers). Business or Corporate Lawyers help with preparing documents like the Non-Disclosure Agreements (NDA), Sale and Purchase Agreement (SPA), various Contracts, and detailed Due Diligence. Accountants help with doing Financial Due Diligence. Tax Advisorshelp confirm tax strategies and impacts. M&A Consultants help with doing Integrations, including System Integration.
M&A Playbooks
Every M&A Transaction is different and risky, and many M&A deals fail to achieve their target goals. Companies can follow standard practices defined in M&A Playbooks, which are tweaked to match specific situations. M&A Playbooks are available for Buy Side Process, Sell Side Process, Financial Modeling, Integration Playbook, Divestiture Playbook, etc. M&A activities can be streamlined for better coordination, communication and change management by use of standard platforms like Smartsheet, Midaxo, Office 365 (SharePoint, Teams), etc.
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Monty Pandey
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