Mergers and Acquisitions

(M&A)

Presented by: Isabelle S. Bañadera

 Definition of Terms:

1. Merger
Transaction in which two firms combine to form a single firm.

2. Acquisition
 Purchase of one firm by another.
 Types of Transactions

1. Stock Purchase

 the buyer purchases the stock of the target company directly from the
target's shareholders.

 The company remains an existing going concern after the purchase, and its
business, assets and liabilities continue unaffected by the transaction.

 A buyer may prefer a stock purchase when the buyer wishes to continue
the operation of the target company after the purchase.

 One consideration for the buyer is that it will not get 100 percent control
unless all stockholders agree to sell their stock.
Advantages :
 The acquirer doesn’t have to bother with costly re-valuations and retitles of
individual assets.
 Buyers can typically assume non-assignable licenses and permits without
having to obtain specific consent.
 Buyers may also be able to avoid paying transfer taxes.
 More simple and commonly used than an asset acquisition. Hedge funds are
known for commonly conducting M&A transactions in the form of a simple
stock purchase.
Disadvantages:
 The main disadvantage is that an acquirer receives neither the “step-up” tax
benefit nor the advantage of handpicking assets and liabilities.
 All assets and liabilities transfer at carrying value.
 The only way to get rid of unwanted liabilities is to create separate agreements
wherein the Target buys them back.
 Applicable securities laws, of course, have to be dealt with, and this can
complicate the process, especially when the Target has a lot of shareholders.
Additionally, some shareholders may not wish to sell their stocks, and this can
drag out the process and increase the cost of acquisition.
 Goodwill is not tax deductible when it exists in the form of a share price premium.
2. Statutory Merger or Consolidation

a.) Statutory Merger

 Type of merger where one of the companies in the merger gets to keep its own legal
entity even after the merger.
 This type of merger is just like an acquisition.
 A company acquires another company and still the acquirer keeps its legal entity and the
acquired one one loses its identity

Example:
Company A and Company B enters into a statutory merger. Now, as per the rules of such
merger, one company of these two will keep its legal entity intact. And another will cease
to exist.
b.) Statutory Consolidation
 When two companies are merging, they lose their own identities. And a
new successor is being created that will represent a combined version of
both of these entities.

For example:
Company C and Company D come together into a statutory consolidation.

 Company C and Company D both will lose their existence and new
successor Company E will be born that will represent a combination of
Company C and Company D.
3. Asset Purchases

 The buyer purchases only those tangible and intangible assets and assumes only
those liabilities that are specifically identified in the purchase agreement.

 The asset purchase structure is often used when the buyer is looking to acquire a
single division or business unit within a company.

 Third-party consents will often be required in order to transfer certain contracts from
seller to buyer, as many contracts specifically state they are not assignable or require
consent to assign. Since the process of identifying and obtaining consents may take
considerable time, the parties should identify all required third-party consents
at an early stage of the transaction to avoid delay at closing.
 Preparing the Merger and Acquisition

1. Planning the merger and acquisition

 Mergers and acquisitions (M&A) process has many steps and can often take
anywhere from 6 months to several years to complete.

10-step process:
1.) Develop an acquisition strategy – Developing a good acquisition strategy revolves
around the acquirer having a clear idea of what they expect to gain from making the
acquisition – what their business purpose is for acquiring the target company.
Example: expand product lines or gain access to new markets.

2.) Set the M&A search criteria – Determining the key criteria for identifying potential
target companies .
Example: profit margins, geographic location, or customer base
3.) Search for potential acquisition targets – The acquirer uses their identified
search criteria to look for and then evaluate potential target companies.

4.) Begin acquisition planning – The acquirer makes contact with one or more
companies that meet its search criteria and appear to offer good value; the purpose
of initial conversations is to get more information and to see how amenable to a
merger or acquisition the target company.

5.)Perform valuation analysis – Assuming initial contact and conversations go well,

the acquirer asks the target company to provide substantial information (current
financials, etc.) that will enable the acquirer to further evaluate the target, both as a
business on its own and as a suitable acquisition target.

6.)Negotiations – After producing several valuation models of the target company,

the acquirer should have sufficient information to enable it to construct a
reasonable offer; Once the initial offer has been presented, the two companies can
negotiate terms in more detail.
7.) M&A due diligence – Due diligence is an exhaustive process that begins when the
offer has been accepted; due diligence aims to confirm or correct the acquirer’s
assessment of the value of the target company by conducting a detailed
examination and analysis of every aspect of the target company’s operations – its
financial metrics, assets and liabilities, customers, human resources, etc.

8.) Purchase and sale contracts – Assuming due diligence is completed with no major
problems or concerns arising, the next step forward is executing a final contract for
sale; the parties will make a final decision on the type of purchase agreement,
whether it is to be an asset purchase or share purchase.
9.) Financing strategy for the acquisition – The acquirer will, of course, have explored
financing options for the deal earlier, but the details of financing typically come
together after the purchase and sale agreement has been signed.

10.) Closing and integration of the acquisition – The acquisition deal closes, and
management teams of the target and acquirer work together on the process of
merging the two firms.
2. Issues to be Considered

A.) Price/Consideration Issues

 The price and type of consideration are issues that will need to be addressed early
in the process, preferably in the letter of intent, and these go beyond agreeing on
the “headline” price.

B.) Escrow/Holdback Issues

 In many acquisitions of privately held technology companies, an escrow or
holdback of a portion of the purchase price is negotiated to protect the buyer
from losses due to breaches of the seller’s representations and warranties or
covenants or specified contingencies (such as a shareholder’s exercise of
dissenters’ rights). Sometimes there is a second escrow or holdback to help
protect the buyer in the event of a post-closing price reduction based on a
working capital adjustment provision.
C.) Representations and Warranties of the Seller
 The representations and warranties of the seller can be all-encompassing,
covering all elements of a seller and the business operations of the seller,
including financial statements, corporate authorization, liabilities, contracts,
title to assets, employee matters, compliance with law.

D.) Representations and Warranties as to the Seller’s Liabilities

 Buyers in acquisitions of technology companies typically ask for a broad
representation and warranty that the seller has no liability, indebtedness,
obligations, expense, claim, deficiency, or guaranty, whether or not accrued,
absolute, contingent, matured, unmatured, known, or unknown, except as
specifically disclosed to the buyer.
E.) Employee and Benefits Issues
 M&A transactions, particularly in the case of technology companies where the use
of stock options to incentivize employees is more common than in the case of
other private companies, will typically involve a number of important employee
and benefits issues that will need to be addressed in the acquisition agreement.

F.) Representations and Warranties Related to Intellectual Property

 The seller’s representations and warranties as to its intellectual property (“IP”)
are among the most significant representations and warranties in the acquisition
agreement.

G.) Representations and Warranties Regarding Contracts

 The representations and warranties section of the acquisition agreement will
include a key section regarding the seller’s contracts, and particularly the
“material” contracts of the seller as defined in the agreement.
H.) Conditions to the Closing
 If there will be a delay between signing and closing, the acquisition agreement
will need to set forth the conditions to closing, both with respect to the buyer
and the seller. Some of these conditions are parallel (such as the need for
antitrust or regulatory approval), but most of them are unique to one party or
the other.

I.) Indemnification Provisions

 A buyer will demand that the seller (or in the case of a transaction structured as
a merger or stock sale, its shareholders) indemnify the buyer post-closing for
breaches of representations, warranties, and covenants as well as certain other
matters. Negotiating the terms, conditions, and limitations of these
indemnification provisions is one of the most important negotiations in an M&A
deal, since an indemnification payout by the seller or its shareholders can
significantly reduce the net return from the original sale proceeds.
 Due Diligence

 A process of verification, investigation, or audit of a potential deal or

investment opportunity to confirm all facts, financial information, and to
verify anything else that was brought up during an M&A deal or investment
process.

 Completed before a deal closes to provide the buyer with an assurance of

what they’re getting.
 Importance of Due Diligence

 Transactions that undergo a due diligence process offer higher chances of

success. Due diligence contributes to making informed decisions by
enhancing the quality of information available to decision makers.

From a buyer’s perspective

 Due diligence allows the buyer to feel more comfortable that his or her
expectations regarding the transaction are correct. In mergers and
acquisitions (M&A), purchasing a business without doing due diligence
substantially increases the risk to the purchaser.

From a seller’s perspective

 Due diligence is conducted to provide the purchaser with trust. However,
due diligence may also benefit the seller, as going through the rigorous
financial examination may, in fact, reveal that the fair market value of the
seller is more than what was initially thought to be the case. Therefore, it is
not uncommon for sellers to prepare due diligence reports themselves prior
to potential transactions.
Reasons For Due Diligence:

 To confirm and verify information that was brought up during the deal or
investment process.

 To identify potential defects in the deal or investment opportunity and thus

avoid a bad business transaction.

 To obtain information that would be useful in valuing the deal.

 To make sure that the deal or investment opportunity complies with the
investment or deal criteria.