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M&A Transactions: Share Deals, Asset Deals and Legal Mergers and Divisions

Joris Kersten, MSc

M&A Advisory + Business Valuations

发布日期: 2020年5月10日

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M&A Transactions: Share Deals, Asset Deals and Legal Mergers and Divisions

May 10th 2020, Uden/ The Netherlands

www.joriskersten.nl

Consultant & Trainer: Joris Kersten

Joris (1980) is an independent Corporate Finance consultant and trainer with his firm “Kersten Corporate Finance” and www.joriskersten.nl with his office in Uden/ The Netherlands.

Concerning consulting, he provides advise in Mergers & Acquisitions (deal making), valuation and financial modelling for medium sized companies in The Netherlands.

And concerning training, he provides training in valuation and financial modelling at leading (“bulge bracket”) investment banks in New York, London, Hong Kong and the Middle East.

Moreover, he provides training/ lecturing in valuation at Universities, and inhouse at corporations, all over the globe (e.g. Mongolia, Surinam, Kuwait, Peru, Luxembourg, Saudi Arabia, Dubai etc.).

And in The Netherlands he teaches in Finance & Accounting as adjunct faculty at the Universities: TIAS Business School, Nyenrode University and the Maastricht School of Management.

(Open) training programs

The open training programs of Joris Kersten in The Netherlands take place at the dates below.

And for registration just write an email ([email protected]) or look at www.joriskersten.nl.

· 17, 18, 19, 20 and 22, 23 June 2020: 6 days - Business Valuation & Deal Structuring. Location: Uden/ The Netherlands;

· 24, 25, 26, 27 and 29, 30 June 2020: 6 days - Business Valuation & Deal Structuring. Location: Uden/ The Netherlands;

· 19, 20, 21, 22 and 23 July 2020: 5 days – Training with Certificate in Investment Banking. Location: Dubai/ United Arab Emirates;

· 16, 17, 18, 19 and 20 August 2020: 5 days – Training Master Financial Modelling Specialist. Location: Riyadh/ Saudi Arabia;

· 28, 29, 30, 31 October 2020 + 2, 3 November 2020: 6 days - Business Valuation & Deal Structuring. Location: Amsterdam Zuidas/ The Netherlands;

· 16, 17, 18, 19 November 2020: 4 days - Financial Modelling in Excel. Location: Amsterdam Zuidas/ The Netherlands.

Blogs/ articles on valuation

In addition, Joris writes blogs here on linkedin on the following topics (sequences):

1) Net Debt: Cash & debt free + Cash like & debt like items;

2) Financial modelling with "keyboard excel shortcuts";

3) Various topics: Operating lease adjustments, acquisition finance, locked box/ completion accounts closing, purchase price allocation;

4) Bonds & bond markets;

5) Funding & Valuation of startups;

6) Cost of capital: Betas, equity market risk premium, country risk, illiquidity discount, control premium, minority discount, small firm premium;

7) Football field valuation: LBOs, DCF, comps, precedent transactions, accretion/ dilution (M&A model);

8) Valuation of Banks;

9) Valuation of oil & gas companies;

10) Debt & leverage worldwide;

11) Weighted average cost of capital (WACC) – Step by step;

12) Energy transitions to renewable energy.

And new “sequences” of blog topics that I will start soon are:

13) Financial Due Diligence;

14) Derivatives;

15) Distressed M&A and distressed Valuation;

16) Debt crises;

17) How inflation works;

18) Tax and tax evasion;

19) Financial modelling in excel: step by step model building;

20) Hedge funds;

21) Central banking and the supply of money (quantitative easing);

22) Advanced Valuation;

23) Finance for non-financials.

You can find the links to already published articles (for free) at the end of this blog (>50 articles).

M&A Transactions: An introduction

In this sequence of blogs on Mergers & Acquisitions (M&As) I will talk about the following subjects:

1. Deal structure: Asset deals, share deals and legal Mergers & Divisions;

2. Private share deals – In more detail;

3. Asset deals – In more detail;

4. Legal mergers and divisions – In more detail;

5. Financing an acquisition;

6. Fiscal aspects in M&A transactions (taxation).

I have used the book below as a source. I really like the book since it is very practical and clear.

And it looks at M&A transactions from a legal and fiscal perspective. And both perspectives are very important next to the “financial economic” perspective.

The book is available in the Dutch language:

· Book: Fusies & Overnames in Nederland (2017). Authors: T.M. Stevens & S.B. Garcia Nelen. Ars Aequi Libri Nijmegen.

By the way, I am an independent M&A consultant, but from my background I am a “financial economist”, so I am NOT a lawyer or tax lawyer.

I have a basic understanding of the legal and fiscal issues in M&A transactions since I followed an additional 1-year training in the “legal & fiscal aspects in M&A transactions”. But this does NOT make me a specialist.

So always involve legal and fiscal specialists (lawyers + tax lawyers) in M&A transactions.

Share deals: An introduction

Before I will look at "asset deals" and "legal mergers and divisions", I will look at "share deals".

In M&A the most used structure is a share deal.

Actually when we are talking about acquisitions, it is almost normal to assume that we talk about a share deal.

Although a share deal actually is not really a “logical” choice from the basis.

This in a sense that with this type of transaction the “enterprise” is actually not bought.

This because the “assets & liabilities” just stay in ownership of the “legal entity”.

And only the shares in this “legal entity” are bought.

So in the meantime, the assets & liabilities stay where they are, so they just stay inside the bought legal entity.

And the "assets & liabilities" (the enterprise) is bought “indirectly” with the shares.

(Source used: T.M. Stevens & S.B. Garcia Nelen, 2017)

Share deals: Continued

Advantages of Share Deals

Concerning acquisition structure, a share deal is most used because of its (relative) simplicity.

This since transferring all the assets and liabilities separately is a lot of work (like in asset deals).

And the execution of doing an asset deal carries risks, like for example risks with “taking over contracts”.

This since with an asset deal contracts can only be taken over when the counterparty agrees.

A share deal also provides flexibility in order to decide at what moment the company is “economically” transferred to the buyer.

This because the "enterprise" will stay in ownership of the "legal entity", as mentioned before.

So the profits of the enterprise will flow in first instance just in to the legal entity. And then buyer and seller can decide (contractually) who is entitled to this profit.

In addition, because the enterprise does not change ownership (since it just stays within the same legal entity), no re-valuation of assets is needed (in principal).

Although in the end, in practise this does not work like this.

Since due to the book keeping rules (e.g. IFRS) we need to put the assets for a “fair value” on our balance sheets (purchase price allocation).

I have written a blog already on how this works in practise. I will give you the link in case you are interested:

Article: Consolidation of M&A targets and Purchase Price Allocation (PPA)

https://www.dhirubhai.net/pulse/consolidation-ma-targets-purchase-price-allocation-joris/

From a fiscal perspective structuring an acquisition is still an issue.

Since in an asset deal "paid goodwill" can be amortised, which results in tax benefits for the buyer.

And seller needs to pay corporate tax on the “profits of the net assets” (goodwill) and this is a disadvantage again (this is the situation in The Netherlands, where I am from).

In principle this is not the case with a "share deal" due to so called “participation exemption” (in The Netherlands).

(Source used: T.M. Stevens & S.B. Garcia Nelen, 2017)

Share deal: Disadvantages

The disadvantage of share deals is that buyer actually buys something different than what he/ she really wants.

He/ she wants to buy the “enterprise” (activities + assets + liabilities), but he/ she buys “shares” in the legal entity which holds this “enterprise”.

And because this “legal entity” is bought the buyer gets all the "rights and obligations" on this entity, no matter what they are.

Obviously he/ she can protect them-self for the risks associated with this in negotiated warranties and safeguards in the acquisition contracts.

(Source used: T.M. Stevens & S.B. Garcia Nelen, 2017)

Asset deals

An “enterprise” can also be “really” transferred.

This in a sense that another legal entity gets ownership of this enterprise (assets + liabilities + activities).

And with this type of deal all the assets and liabilities need to be transferred separately.

Advantage

The big advantage of an asset deal is “cherry picking”.

The buyer can just buy the assets and liabilities that he/she really wants (obviously there need to be legal consent).

So one of the most important reasons for an asset deal is the fear of a buyer for a later claim, or legal liability, when they buy a (part of a) “legal entity” with shares.

And this can not be the case with an asset deal, because every part of the deal is separately considered and transferred. In other word, you exactly know what you bought.

Moreover, another advantage of an asset deal is that it can take place in stages, because all assets are transferred separately.

Disadvantage

As mentioned before, asset deals are a lot of work since all components need to be transferred separately.

And this also makes the transaction costs relatively high.

(Source used: T.M. Stevens & S.B. Garcia Nelen, 2017)

Legal merger and division

With a legal merger (in The Netherlands) all assets and liabilities of one legal entity go over to another legal entity.

With a legal division the same thing happens, but then for certain assets and liabilities.

But in both situations the “purchase price” contains out of “shares”. The possibility to pay the “purchase price” in money is (about) impossible.

I will talk in more detail about legal mergers and divisions later in this sequence of blogs.

(Source used: T.M. Stevens & S.B. Garcia Nelen, 2017)

This was the first blog in the sequence “Mergers & Acquisitions”.

The next one is about “Private share deals”.

1. Deal structure: Asset deals, share deals and legal Mergers & Divisions;

2. Private share deals – In more detail;

3. Asset deals – In more detail;

4. Legal mergers and divisions – In more detail;

5. Financing an acquisition;

6. Fiscal aspects in M&A transactions (taxation).

Source used for this blog

I have used the book below as a source. I really like the book since it is very practical and clear.

And it looks at M&A transactions from a legal and fiscal perspective. And both perspectives are very important next to the “financial economic” perspective.

The book is available in the Dutch language:

· Book: Fusies & Overnames in Nederland (2017). Authors: T.M. Stevens & S.B. Garcia Nelen. Ars Aequi Libri Nijmegen.

Under here you can find the links to my previous free articles (about 50) on business valuation.

Earlier blogs on “net debt” (cash & debt free)

Article 1: Valuation: Introduction to "net debt" (cash & debt free)

https://www.dhirubhai.net/pulse/valuation-introduction-net-debt-cash-free-joris-kersten-msc-bsc-rab/

Article 2: Valuation: Net debt (cash & debt free)

https://www.dhirubhai.net/pulse/valuation-net-debt-cash-free-joris-kersten-msc-bsc-rab/

Article 3: Valuation: Adjusted net debt – Cash like items

https://www.dhirubhai.net/pulse/valuation-adjusted-net-debt-cash-like-items-kersten-msc-bsc-rab/

Article 4: Valuation: Adjusted net debt – Debt like items

https://www.dhirubhai.net/pulse/valuation-adjusted-net-debt-like-items-joris-kersten-msc-bsc-rab/

Earlier blogs on “valuation of banks”

Article 1: Valuation of Banks: Business models of Banks

https://www.dhirubhai.net/pulse/valuation-banks-business-models-joris-kersten-msc-bsc-rab/

Article 2: Bank Valuation: Financial Statements of Banks (part 1)

https://www.dhirubhai.net/pulse/bank-valuation-financial-statements-banks-part-1-joris/

Earlier blog on “Valuation of Oil & Gas Companies”

Article 1: Valuating Oil & Gas Companies: The Oil Industry

https://www.dhirubhai.net/pulse/valuating-oil-gas-companies-industry-joris-kersten-msc-bsc-rab/

Earlier blogs on “Debt & Leverage”

Article 1: Debt: Ratio “debt/ GDP” in the US, The Netherlands, Germany and Japan

https://www.dhirubhai.net/pulse/debt-ratio-gdp-us-netherlands-germany-japan-kersten-msc-bsc-rab/

Article 2: Debt: Why global debt increased over the last 100 years

https://www.dhirubhai.net/pulse/debt-why-global-increased-over-last-100-years-kersten-msc-bsc-rab/

Article 3: Debt of companies: Leverage, Private Equity, Solvency and Bankruptcy

https://www.dhirubhai.net/pulse/debt-companies-leverage-private-equity-solvency-kersten-msc-bsc-rab/

Earlier blogs on “Weighted Average Cost of Capital (WACC) – step by step”

Article 1: Capital Market History Lessons – Corporate Finance (part 1)

https://www.dhirubhai.net/pulse/capital-market-history-lessons-corporate-finance-part-joris/

Earlier blogs on Financial Modelling

Article 1: Financial Modelling in Excel: Circular references, interest calculations and iterations

https://www.dhirubhai.net/pulse/financial-modelling-excel-circular-references-kersten-msc-bsc-rab/

Article 2: Excel basics for Finance: SUM, MAX, MIN, AVERAGE, IF, cell referencing, named ranges

https://www.dhirubhai.net/pulse/excel-basics-finance-sum-max-min-average-cell-named-joris/

Article 3: Excel for Valuation: COUNTIF, VLOOKUP, INDEX and MATCH

https://www.dhirubhai.net/pulse/excel-valuation-countif-vlookup-index-match-kersten-msc-bsc-rab/

Article 4: Excel for Business Valuation: OFFSET, FORECAST and CHOOSE

https://www.dhirubhai.net/pulse/excel-business-valuation-offset-forecast-choose/

Article 5: Excel for Business Valuation: NPV, IRR, PMT and EOMONTH

https://www.dhirubhai.net/pulse/excel-business-valuation-npv-irr-pmt-eomonth-kersten-msc-bsc-rab/

Article 6: Excel for Business Valuation: Custom Formatting, Conditional Formatting and Sparklines

https://www.dhirubhai.net/pulse/excel-business-valuation-custom-formatting-sparklines-joris/

Earlier blogs on “various topics”

Article 1: Financing a M&A transaction: An introduction

https://www.dhirubhai.net/pulse/financing-ma-transaction-introduction-joris-kersten-msc-bsc-rab/

Article 2: Valuation: How to adjust for “Operating Lease” (under Dutch GAAP)

https://www.dhirubhai.net/pulse/valuation-how-adjust-operating-lease-under-dutch-gaap-joris/

Article 3: M&A closing mechanisms: Locked Box & Completion Accounts

https://www.dhirubhai.net/pulse/ma-closing-mechanisms-locked-box-completion-accounts-joris/

Article 4: Scoping a financial model built primarily for business valuation:

https://www.dhirubhai.net/pulse/scoping-financial-model-built-primarily-business-joris/

Article 5: Consolidation of M&A targets and Purchase Price Allocation (PPA)

https://www.dhirubhai.net/pulse/consolidation-ma-targets-purchase-price-allocation-joris/

Earlier blogs on “bonds”

Article 1: Bonds - An introduction

https://www.dhirubhai.net/pulse/corporate-finance-bonds-introduction-joris-kersten-msc-bsc-rab/

Article 2: Bonds & Bond Markets

https://www.dhirubhai.net/pulse/bonds-bond-markets-corporate-finance-joris-kersten-msc-bsc-rab/

Article 3: Bonds, Rating Agencies and Credit Ratings

https://www.dhirubhai.net/pulse/bonds-rating-agencies-credit-ratings-joris-kersten-msc-bsc-rab/

Earlier blogs on “Valuation & funding of start-ups”

Article 1: Valuation & funding of start-ups - Funding rounds

https://www.dhirubhai.net/pulse/valuation-funding-startups-rounds-joris-kersten-msc-bsc-rab/

Article 2: Startup valuation: Pre-money and post-money valuation

https://www.dhirubhai.net/pulse/startup-valuation-pre-money-post-money-joris-kersten-msc-bsc-rab/

Article 3: Valuation methods for Startups (early stage) – Part 1

https://www.dhirubhai.net/pulse/valuation-methods-startups-early-stage-part-1-kersten-msc-bsc-rab/

Article 4: Valuation methods for Startups (early stage) – Part 2

https://www.dhirubhai.net/pulse/valuation-methods-startups-early-stage-part-2-kersten-msc-bsc-rab/

Article 5: Startups in Silicon Valley: The beginning – Part 1

https://www.dhirubhai.net/pulse/startups-silicon-valley-beginning-part-1-joris-kersten-msc-bsc-rab/

Article 6: Startup Funding & Convertible Debt (part 1)

https://www.dhirubhai.net/pulse/startup-funding-convertible-debt-part-1-joris-kersten-msc-bsc-rab/

Earlier blogs on “Business valuation to Enterprise Value”

From June until August I have written the following blogs on valuation:

1) Leveraged Buyout (LBO) Analysis:

https://www.dhirubhai.net/pulse/leveraged-buyouts-lbos-joris-kersten-msc-bsc-rab/

2) M&A Analysis – Accretion/ Dilution:

https://www.dhirubhai.net/pulse/ma-model-accretion-dilution-joris-kersten-msc-bsc-rab/

3) Discounted Cash Flow Valuation:

https://www.dhirubhai.net/pulse/discounted-cash-flow-valuation-dcf-joris-kersten-msc-bsc-rab/

4) Valuation Multiples 1 – Comparable Companies Analysis:

https://www.dhirubhai.net/pulse/valuation-multiples-1-comparable-companies-analysis-joris

5) Excel Shortcuts & Business Valuation:

https://www.dhirubhai.net/pulse/excel-shortcuts-business-valuation-joris-kersten-msc-bsc-rab

6) Valuation Multiples 2 – Precedent Transaction Analysis:

https://www.dhirubhai.net/pulse/valuation-multiples-2-precedent-transaction-kersten-msc-bsc-rab

Earlier blogs on “Energy Transition”

Article 1: Energy transition: Introduction to Sustainable/ Renewable Energy

https://www.dhirubhai.net/pulse/energy-transition-introduction-sustainable-joris-kersten-msc-bsc-rab/

Article 2: Energy transition: Energy mix of The Netherlands & Goals for co2 reduction

https://www.dhirubhai.net/pulse/energy-transition-mix-netherlands-goals-co2-reduction-joris/

Earlier blogs on Wall Street

Article 1: Wall Street – A general introduction

https://www.dhirubhai.net/pulse/wall-street-general-introduction-joris-kersten-msc-bsc-rab/

Article 2: Wall Street – The Federal Reserve banking system

https://www.dhirubhai.net/pulse/wall-street-federal-reserve-banking-system-kersten-msc-bsc-rab/

Earlier blogs on the “cost of capital”

Article 1: Valuation & Betas (CAPM)

https://www.dhirubhai.net/pulse/valuation-betas-capm-joris-kersten-msc-bsc-rab/

Article 2: Valuation & Equity Market Risk Premium (CAPM)

https://www.dhirubhai.net/pulse/valuation-equity-market-risk-premium-capm-joris-kersten-msc-bsc-rab/

Article 3: Is the Capital Asset Pricing Model dead ? (CAPM)

https://www.dhirubhai.net/pulse/capital-asset-pricing-model-dead-capm-joris-kersten-msc-bsc-rab/

Article 4: Valuation & the cost of debt (WACC)

https://www.dhirubhai.net/pulse/valuation-cost-debt-wacc-joris-kersten-msc-bsc-rab/

Article 5: Valuation & Capital Structure (WACC)

https://www.dhirubhai.net/pulse/valuation-capital-structure-wacc-joris-kersten-msc-bsc-rab/

Article 6: International WACC & Country Risk – Part 1

https://www.dhirubhai.net/pulse/valuation-international-wacc-country-risk-part-1-joris/

Article 7: International WACC – Part 2

https://www.dhirubhai.net/pulse/valuation-international-wacc-part-2-joris-kersten-msc-bsc-rab/

Article 8: Present Values, Real Options, the Dot.com Bubble

https://www.dhirubhai.net/pulse/valuation-present-values-real-options-dotcom-bubble-joris/

Article 9: Valuation: Different DCF & WACC techniques

https://www.dhirubhai.net/pulse/valuation-different-dcf-wacc-techniques-joris-kersten-msc-bsc-rab/

Article 10: Valuation of a company abroad

https://www.dhirubhai.net/pulse/valuation-company-abroad-joris-kersten-msc-bsc-rab/

Article 11: Valuation: Illiquidity discounts, control premiums and minority discounts

https://www.dhirubhai.net/pulse/valuation-illiquidity-discounts-control-premiums-joris/

Article 12: Valuation: Small firm premiums

https://www.dhirubhai.net/pulse/valuation-small-firm-premiums-joris-kersten-msc-bsc-rab/

Earlier blogs on Financial Due Diligence