Comprehensive guide on structuring a M&A deal

How to create a bullet-proof M&A deal structure

Many companies enter into mergers and acquisitions to diversify, expand in size, or strengthen their position in the competitive market. We call the agreed-upon criteria under which these firms are willing to join forces the M&A deal structure.

The deal structure for mergers and acquisitions (M&A) describes how the terms and conditions of a merger or acquisition are arranged and reached.

An M&A deal's structure can largely impact how well it goes and the potential risks and rewards for all parties.

Developing a successful M&A deal structure is no small task. It is crucial to consider several variables when structuring an M&A deal, including the parties' financial and strategic objectives, tax ramifications, and regulatory obligations.

This article provides a comprehensive guide on structuring a mergers and acquisitions deal and making the process as smooth as possible.

Ways to Structure an M&A deal

There are different ways to structure a merger or acquisition (M&A) deal, each with its advantages and disadvantages. Let us examine each structure separately to determine which will benefit your company.

1. Asset acquisition AKA Slump sales.

In the asset acquisition approach, the buyer purchases all of the selling company's assets. A Business Transfer Agreement (BTA), which may be a Deed of Conveyance or an Agreement to Sell, will be used to execute the deal. However, if the agreement is in the form of a contract to sell, the stamp duty is avoided.?

A Scheme of Amalgamation authorized by the court is another way to carry out Slump Sales. But this takes time. So, it's best to opt for a BTA as a sale agreement.

This strategy provides the following benefits:

• Even after the sale, the selling company will continue to exist as a corporate entity, with its unsold responsibilities and assets.
• You can decide which assets you want to buy from the seller and which you don't.

Now here are some downsides to this approach:

• Compared to other M&A deal structuring methodologies, the deal may take a long time to close.
• An asset acquisition may lead to a higher tax burden for the buyer, as the assets are typically purchased at their fair market value, which may be higher than their book value.
• You may be unable to acquire the necessary assets to continue the business operations of the target company. This can lead to additional costs and disruptions as you attempt to purchase the missing assets or find replacement assets.

2. Stock Purchase

The stock deal allows you to acquire the target company's shares, becoming the majority shareholder and gaining control of the company.?

It is a more straightforward and quicker process than an asset deal. Still, it also means you can take on all of the target company's liabilities. The acquisition is carried out through Share Purchase Agreements, Share Subscription Agreements, and Shareholders' Agreements.?

This approach has the following advantages:

• It is a less costly way.
• Because it is simpler and requires fewer negotiations, closing this contract will take less time.
• ?This transaction has low taxes, especially for the seller.

The disadvantage of this method is:

• The stock buy transaction may result in financial and legal issues. Minority stockholders who are uncooperative may have a problem with this.

3. Merger

Though "merger" and "acquisition" are frequently used interchangeably, a merger results from an agreement between two commercial companies to combine as one new entity. It is often less complicated than an acquisition because all liabilities, assets, and so on are transferred to the new business.

Many companies opt for a merger for the following reasons:

• Increased market share and competitiveness
• Cost savings through economies of scale
• ?Increased financial stability and growth opportunities

But you may want to consider the following downsides for a merger:

• Risk of cultural conflicts and loss of employee morale
• Integration challenges and increased complexity
• ?Difficulty in achieving synergies and cost savings

4. Leveraged Buyout (LBO)

A Leveraged Buyout (LBO) is a type of acquisition in which a company is acquired using a significant amount of debt to increase the financial returns for the acquirer.?

In an LBO, the acquirer, typically a private equity firm, raises capital for the purchase through a combination of debt and equity, with most of the funding coming from debt. The acquirer then uses the assets and cash flow of the acquired company to pay off the debt over time.

Some companies find this method interesting because:

• It allows the acquirer to acquire a company with a relatively small amount of equity capital while still maintaining control of the company, and?
• ?It can provide a way for a company to go private, which can be great for companies struggling in the public markets or facing pressure from activist shareholders.?

But LBOs also come with some potential drawbacks:?

• The acquired company may be over-indebted, with a high debt-to-equity ratio, which makes it problematic for the company to weather economic downturns or unexpected events.
• ?LBOs also can lead to the cutting of expenses, including jobs, to meet debt payment obligations and increase the EBITDA. This can lead to a negative impact on the company's reputation and employee morale.

One must be careful with LBOs. It would help if you worked closely with a legal and financial advisor to determine the best structure.?

Steps to follow in M&A deal structuring

Mergers and acquisitions (M&A) deal structuring is a complex and multi-faceted process involving several considerations and steps.?

The process typically includes these key steps:

• ?Identifying and evaluating potential targets
• ?Negotiating and agreeing on the terms of the deal
• Due diligence to verify the financial and legal condition of the target company
• ?Drafting and finalizing the purchase agreement
• Obtaining regulatory and shareholder approvals
• Closing the deal and integrating the companies

Each step requires careful consideration and attention to detail to ensure a successful and mutually beneficial transaction.?

Again, it is crucial to work with experienced legal, financial, and operational professionals throughout the process to navigate the complexities of M&A deal structuring.

What do you need to create a win-win M&A deal?

The goal of every M&A process is to achieve a win-win result. That means you aim for a situation where the interests of everyone are fairly represented.?

Win-win deal structures are more likely to result in a closed merger or acquisition deal and may even shorten the time required to complete the M&A process.

All parties must enter a Term Sheet and a Non-disclosure Agreement before initiating an M&A deal to protect sensitive information.?

You need the following transactional agreements based on the appropriate M&A deal.

• Term sheet

A term sheet is a document that states the terms and conditions of anticipated financial investment. Term sheets are usually legally binding unless otherwise stated.?

You should enter a non-binding term sheet with the target company during the negotiation stage. When a non-binding term sheet is signed, clauses such as secrecy, exclusivity, non-compete, non-solicitation, confidentiality, controlling law, and dispute resolution become binding.

• A non-disclosure agreement (NDA)

You can either engage in an NDA separately after signing a term sheet or have a separate clause addressing confidentiality terms and conditions in the respective transaction instrument.?

However, it is advisable to enter into a separate NDA for two reasons:

First, it contains detailed terms and conditions regarding confidentiality, and?

Second, an NDA provides a precautionary measure if there is an extended time after signing the term sheet.

• Agreement for Business Transfer (BTA).

Both parties must enter a BTA for an asset acquisition, which can be modeled after an ‘Agreement to Sell’ or a ‘Conveyance Deed.’?

No additional document is required when the BTA serves as a conveyance deed and the property is transferred through it. However, a BTA designed as an Agreement to Sell is preferred since the stamp duty is less expensive than a BTA modeled as a Conveyance Deed.

• The asset purchase agreement.

While transferring cherry-picked assets, both parties must engage in an asset acquisition agreement. The reason is that it outlines the specific terms and conditions of the asset transfer.

By outlining the specific terms of the asset transfer, the APA helps to ensure that both the buyer and the seller understand their rights and responsibilities and can move forward with the transaction with a clear understanding of the terms.

Create a successful M&A deal structure?

Creating a bullet-proof M&A deal structure is a critical process that requires a deep understanding of the different deal structures outlined in this article, key documents, and potential risks.?

It is essential to identify and assess potential risks and contingencies and implement measures to mitigate them. This includes negotiating and finalizing key deal documents such as the Letter of Intent, Term Sheet, and Asset Purchase Agreement.?

Furthermore, it is vital to guarantee that you have all the required regulatory licenses secured and have done due diligence.

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