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Mergers and Acquisitions Law
Mergers and Acquisitions Law Definition
1. DEFINITION OF M&A
When we talk about “Mergers and Acquisitions” (hereinafter, M&A), it is very difficult to give a definition that is able to include and identify all activities involved in the process aimed at carrying out an acquisition. An M&A transaction requires the participation of different professionals and involves different matters. Generally, M&A refers to all legal, economic, tax, and strategic activities performed to run a merger or similar transaction. Professionals require a wealth of knowledge and experience that allows them to define the structure of the acquisition process and to understand and detect economic consequences and the most relevant risk profiles.
2. THE PURPOSE
M&A transactions allow the growth and reorganization of a company, without starting a new business. Usually, a buyer would acquire a target company because the future cash flows of the combined business, discounted risks, would ultimately net the buyer’s existing shareholders more money. In particular, the real reasons pushing a company to carry out a merger or an acquisition can be different and – among others – the following:
a. taking advantages of economies of scale, i.e. with the acquisition the buyer can have lower average manufacturing costs or by elimination of redundancies in the organization;
b. increasing the number of clients and suppliers;
c. diversifying the main business into different areas to change is risk profile;
d. carrying out a defensive acquisitions to face a severe downturn in its business;
e. obtaining a new and better management;
f. acquiring a control premium.
3. THE FIVE BASIC ACQUISITION STRUCTURES.
Without any intention of completeness and accuracy, according to the interests of the parties at stake, there are many ways to structure an acquisition and, among these, it may be useful to point out:
a. Stock purchase: when the buyer or a subsidiary of the buyer purchase the outstanding stock of the target directly by the shareholders of the target.
b. Merger: when the target is merged, pursuant to the applicable state merger statute, with the buyer or with a subsidiary of the buyer that has formed for the purpose effecting the merger.
c. Asset purchase: when the buyer or a subsidiary of the buyer purchase all or defined part of the assets of the target.
d. Joint venture: it is a partnership between two companies with the purpose to start a new business together and enjoy earnings proportionally to the contribution of each one. It is very useful to reduce the cost and to share the business risk with the other partner instead of undertaking a new business alone.
e. Capital increase: it is a very particular, innovative and interesting way to enter into a company from the inside instead of the outside. Substantially, the target deliberates a capital increase limiting the subscription right, provided for the shareholders, in favor to third parties. In this way, there will not be a buyer and a seller, but simply an investor and a target: the first wishes to invest in the target and he invests directly in company itself, and the owner will have a lower stake as consequence of the capital increase entirely subscripted by the investor, who will obtain usually the controlling stake.
4. THE ACQUISITION PROCESS.
The acquisition process is divided into different steps, each one strictly linked and dependent on the overcoming of the previous step:
a. Confidentiality agreement: it is the first document signed by the parties and it defines confidential information very broadly and obligates the buyer to keep information in strict confidence.
b. Letter of intent: this letter, usually prepared by counsel of the purchaser, indicates the nature of the contemplated transaction and summarizes its basic terms, including term of payment and the principal conditions of the closing.
c. Term sheet: it is different from the letter of intent, because it defines the basic principles of the future agreement, while letter of intent regards more business matters. Quite often the letter of intent and the term sheet are merged in one document.
d. Due diligence: after signing of the above document, the buyer can obtain and analyze all information about the company.
e. Share and Purchase agreement: it contains all details of the transactions and it is in the form of a preliminary agreement to execute the transaction.
f. Closing: it is the last phase of the process in which there will be the effective execution of the deeds and documents provided for under the Share and Purchase agreement and the M&A is effectively implemented.
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