Mergers & Acquisitions (M&A) Introduction

M&A Deals may have three types of deal structures, including asset purchase, stock purchase, or merger. The type of deal structure used depends on the size of the deal, the laws of the state of incorporation, and federal tax laws. Mergers are more common at the higher end of the M&A market, asset purchases are more common at the lower end of the market, and stock purchases are more common in the middle market.

(a) Asset Purchase:

Asset Purchase refers to a Buyer purchasing specific assets of a Seller, as listed in the transaction document. It could be all, or part of the assets of the business. Buyers like this deal structure as they can avoid buying unwanted assets, and don’t assume any liabilities of the Seller, thus reducing transaction risks. Buyers get better tax treatment, as they step-up the cost basis of the acquired assets; and increase losses when they later sell or dispose those assets. This requires third party consent when transferring contracts from Seller to Buyer. Sellers don’t like this, as they are left with potential liabilities. Sellers also get less favorable tax treatment, including potential double taxation (for a C Corporation) on income from sale proceeds.

(b) Stock Purchase:

Stock Purchase refers to a Buyer purchasing stock or equity interest of the target company directly from Seller’s shareholders. Company remains a ‘going concern’, including all its business, assets and liabilities. Sellers prefer this, but Buyers may be exposed to unknown liabilities, and have less preferential tax treatment (as no ‘step-up cost basis’ is available). In certain cases, Buyers can make an election to treat the stock purchase as an asset purchase, thus preserving the preferred tax treatment.

(c) Merger:

Merger is a type of acquisition when two separate legal entities come together and only one legal entity survives by action of law. All assets and liabilities of each are owned by the surviving entity. Surviving entity could be a Buyer (Forward Merger) or a subsidiary of a Buyer (Forward Triangulation Merger) or a Seller (Reverse Merger) or a subsidiary of a Seller (Reverse Triangulation Merger). It’s generally better to keep the surviving company separate by using a wholly owned subsidiary of the buyer or seller to limit liability. Mergers require approval from the Seller’s Board of Directors and a majority of the Seller’s Shareholders. Merger is taxed based on its deal structure; forward and forward triangular mergers are taxed as asset purchases, while reverse triangular mergers are taxed as stock purchases.

Who are the M&A Players?

There are several M&A Players in the market, with different roles in the M&A process. Business Brokers (for smaller deals) or Investment Bankers (for larger deals) do similar tasks, including preparing a company for sale (they prepare a Teaser and a Book for the company), and help find Buyers (by using an auction process, or marketing to a curated list of Buyers). Business or Corporate Lawyers help with preparing documents like the Non-Disclosure Agreements (NDA), Sale and Purchase Agreement (SPA), various Contracts, and detailed Due Diligence. Accountants help with doing Financial Due Diligence. Tax Advisors help confirm tax strategies and impacts. M&A Consultants help with doing Integrations, including System Integration.

Strategic Buyers are those that are doing horizontal or vertical expansions; they identify and deliver operating synergies, including (a) hard synergies (cost synergies) and (b) soft synergies (revenue synergies). Financial Buyers: are private equity firms that leverage (using bank’s money) for maximum equity returns.

M&A Process: M&A process consists of 10 steps including (1) Acquisition Strategy, (2) Acquisition Criteria, (3) Searching for a Target, (4) Early Discussion, (5) Valuing & Evaluating, (6) Negotiation, (7) Due Diligence, (8) Purchase & Sales Contract, (9) Financing, (9) Integration).

M&A Playbooks

Every M&A Transaction is different and risky, and many M&A deals fail to achieve their target goals. Companies can follow standard practices defined in M&A Playbooks, which are tweaked to match specific situations. M&A Playbooks are available for Buy Side Process, Sell Side Process, Financial Modeling, Integration Playbook, Divestiture Playbook, etc. M&A activities can be streamlined for better coordination by use of standard platforms like Smartsheet, Midaxo, Devensoft, Office 365 (SharePoint, Teams), etc.