Mergers & Acquisition: An Overview

27th November, 2023 - 9:17 am Categories: Mergers & Acquisition 0 Comments

In the business world, two of the most misinterpreted terms are mergers and acquisitions. Although both terms are constantly used to describe the merger of two businesses, there are important distinctions in their applicable operation.

When two distinct realities come together to form a single, new association, this is known as a merger. On the other hand, an acquisition is the taking over of one company by another. Acquisitions and mergers can be carried out in an trouble to increase a company’s request share or reach new heights for its shareholders.

 KEY TAKEAWAYS

• A merger occurs when two separate entities combine forces to produce a new, common organisation.
• An acquisition refers to the precedence of one reality by another.
• The two terms have come decreasingly amalgamated and used in confluence with one another.

Mergers

According to the law, a merger calls for the consolidation of two businesses into a single new company with a new management and ownership structure, presumably including employees from both businesses. Differentiating a deal more frequently involves determining if the purchase is hostile (acquisition) or friendly (merger). While they don’t cost money to complete, mergers lessen the authority of each individual company.

[Image sources: Shutterstock]

In reality, amicable mergers of equals don’t happen very often. It is not common for two businesses to gain from joining forces and for two CEOs to consent to cede some control in order to achieve those advantages. When this occurs, the shares of both businesses are given up, and new shares are issued in the new company’s name.

Mergers are typically made to increase revenue and profits, penetrate new markets, and lower operating costs. Typically, voluntary mergers involve businesses of similar sizes and scope.

• Due to the negative connotation, many acquiring companies refer to an acquisition as a merger even when it is clearly not.

Acquisitions

There is no chance to establish a new company through an acquisition. Rather, the smaller business is frequently absorbed by the larger one, going out of business and having its assets integrated into it.

Compared to mergers, acquisitions—also known as takeovers—generally have a more negative connotation. Because of this, even though an acquisition is obviously a takeover, the acquiring company may refer to it as a merger. When one business assumes full responsibility for another’s operational management choices, this is known as an acquisition. Large sums of money are needed for acquisitions, but the buyer has all the power.

Businesses can purchase out another business to obtain their supplier and benefit from economies of scale, which drive down unit costs as production rises. Businesses may want to increase their market share, cut expenses, and launch new product lines. Businesses make acquisitions in order to acquire the target company’s technologies, which can help avoid years of costly R&D and capital expenditures.

The terms “merger” and “takeover” are often used interchangeably because mergers are relatively rare and takeovers are perceived negatively. Instead of just being called mergers or acquisitions, modern corporate restructurings are more often referred to as merger and acquisition (M&A) transactions.  The practical differences between the two terms are slowly being eroded by the new definition of M&A deals.

Real-World Examples of Mergers and Acquisitions

Here are two of the most significant mergers and acquisitions over the years, though there have been many.

Merger: Exxon and Mobil

Exxon Corp. and Mobil Corp. completed their merger in November 1999 following approval from the Federal Trade Commission (FTC). Exxon and Mobil were the top two oil producers, respectively in the industry prior to the merger. The merger resulted in a major restructuring of the combined entity, which included selling more than 2,400 gas stations across the United States.[1] The joint entity continues to trade under the name Exxon Mobil Corp. (XOM)[2] on the New York Stock Exchange (NYSE).

Acquisition: AT&T Buys Time Warner

On June 15, 2018, AT&T Inc. (T) completed its acquisition of Time Warner Inc., according to AT&T’s website[3]. However, due to intervention by the U.S. government to block the deal, the acquisition went to the courts, but in February 2019, an appeals court cleared AT&T’s takeover of Time Warner Inc.[4]

The $42.5 billion acquisition will realize cost savings for the combined entity of $1.5 billion and revenue synergies of $1 billion, which are expected to be realized within three years of the close of the acquisition. On May 17, 2021, AT&T announced that it would spin off its Warner Media business and merge it with Discovery.[5]

Mergers & Acquisitions: The 5 stages of M&A transaction are

1.     Assessment and preliminary review

It is common procedure for an M&A transaction process to start with an information memorandum in the event that a buyer is still absent. The vendor usually drafts and publishes the information memorandum with the intention of determining market interest and, in the end, selling the business or a portion of it for the highest possible price.

Without revealing any sensitive or private information about the target company or business, an information memorandum typically provides the prospective buyer with enough information to decide whether to pursue the acquisition.

A Non-Disclosure Agreement (NDA), which is intended to protect the target company’s confidentiality and the sensitive data pertaining to its business, would typically be entered into by an interested purchaser, or purchasers, if there were more than one.

2.     Negotiation and letter of intent

The due diligence process, which is described below, typically comes before this second phase when multiple potential buyers are involved. But, in the event that there is just one buyer in the running, it is customary for the parties to begin deliberating over some issues prior to the sale’s contractual phase, either before or at the same time as the due diligence process begins. These issues consist of the following:

• competition/antitrust law implications, and whether such transaction necessitates pre-clearance from the Office for Competition;
• employment law considerations;
• licensing matters; and
• fiscal implications, amongst others.

Additionally, it is customary for the vendor and prospective buyer to include a letter of intent outlining the terms and conditions that would govern the acquisition.

3.     Due Diligence

At this point, it is standard procedure to conduct a due diligence investigation on the target business or company. When there is only one possible buyer, the due diligence process is typically completed by advisors hired by that buyer; in this scenario, it is known as buyer due diligence.

Due diligence may be performed by a vendor on its own behalf for a variety of reasons. The main purposes of a vendor’s due diligence are to either help a sale go through (in which case the prospective buyer may choose to rely on the due diligence and protect its position through warranties and indemnities) or identify any potential problems that could interfere with the sale, affect the price or negotiations, or have an  impact on the warranties that it can provide to the purchaser.

The major goals of a due diligence exercise are to identify the major risks that could result from a potential transaction, establish fair pricing, and strengthen bargaining power. Due diligence may cover legal, fiscal, and financial areas. Legally speaking, in order to fully investigate the target or its operations, the due diligence process itself may cover a variety of topics, including corporate matters, contractual and commercial obligations, employment, data protection, intellectual property, insurance, and regulatory and compliance matters.

4.     Negotiations and Closing

Following the completion of the due diligence process, the buyer-to-be will usually review the results with its advisors to determine how significant they are to the deal. The parties would usually negotiate the specifics of their transaction, including all terms and conditions, should the buyer still be interested in moving forward with the acquisition. Depending on whether the transaction involves the purchase of shares or the business, this may also entail negotiating the final price or agreeing on a mechanism that would determine the sale price and the specifics of the warranties, indemnities, and any limitations that will then be included in a Share Purchase Agreement (SPA) or an Assets Purchase Agreement (APA).

5. Post-closure integration/implementation

It is customary for the SPA/APA to contain provisions that take effect after the closing, such as additional duties that must be fulfilled by the parties, completing the transfer of additional assets, getting approvals, sending out notices, implementing a price adjustment mechanism, or signing other ancillary contracts.

In addition to executing these post-closing matters, the parties might think about going through a post-closing integration exercise to merge the two businesses or companies and maximize synergies to guarantee the deal’s success.

Author: Aditya Sharma, in case of any queries please contact/write back to us via email to chhavi@khuranaandkhurana.com or at Khurana & Khurana, Advocates and IP Attorney.

[1] Federal Trade Commission. “Exxon/Mobil Agree to Largest FTC Divestiture Ever in Order to Settle FTC Antitrust Charges; Settlement Requires Extensive Restructuring and Prevents Merger of Significant Competing U.S. Assets

[2] ExxonMobil. “Investor Relations

[3] AT&T. “AT&T Completes Acquisition of Time Warner Inc

[4] U.S. Court of Appeals for the District of Columbia Circuit. “United States of America v. AT&T, Inc. et al

[5] AT&T. “AT&T’s Warner Media and Discovery, Inc. Creating Standalone Company by Combining Operations to Form New Global Leader in Entertainment