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[A brief note. M&A transactions often involve a substantial amount of regulatory, legal and taxation considerations and, as such, legal and tax professionals should be consulted for in-depth explanations on any specifics in these areas. Although the following article may make mention of legal documentation or taxation elements, it is to present types of documents that one may expect as this process is initiated. The specific area of consulting expertise is in areas of corporate finance, valuations and operations.]
written by: William F Bryant Firms large or small, public or private may, at some time in their business operations, consider purchasing another firm or being party to the selling of their existing firm. The reasons for this are numerous, the process can be complex and the terminology can be confusing, however, brief insight and explanations into the process and what to expect can clear up some of the initial questions one might have when considering an M&A transaction for their business. Of immediate note is the financial colloquialisms used to identify the sides in a transaction, the buy-side is often referred to as the acquirer and the sell-side is often referred to as the target. This seems straight forward, but it is also indicative of the tendency for all references in these transactions to be mentioned from the acquirer’s point of view. Regardless of which side you find yourself there are two things that will be of the utmost importance, first, is the transaction a merger or an acquisition and, second, how will it be financially structured. Why should these be of interest to you? These two pieces of information can summarize details of the entire transaction, from the intent of the initiator of the transaction, acquirer or target, to whether state statutes came into play or if the target entity will still exist after the transaction and any future influence the target owners may have in the acquiring company. Understanding what happens at the end of each type of transaction is just as important as the steps of the process of each type of transaction and may also open up options not considered if deciding whether a merger or acquisition is right for your company. The definitions that follow will be worded in relation to a publicly traded company, however, a private firm too has equity and reference to shares can be considered similar to private ownership percentages or membership shares in the type of incorporated entity you have chosen for your firm. An acquisition is a purchasing of either the assets or shares of another firm. From this you either have a stock acquisition or asset acquisition. In an asset acquisition, a deal is made to purchase only select assets, and possibly select liabilities, of the target. After this type of transaction both the acquirer and target corporate structures remain, the target holding the consideration, generally cash, for the assets sold and any of the remaining assets and liabilities not purchased by the acquirer. On the other hand, an offer could be made to acquire 100% equity interest or membership interest from the target company. In this case the acquirer, by default, purchases all assets, liabilities and operations of the target as the target becomes a subsidiary of the acquirer and the target’s equity owners end up with the consideration for the acquisition which generally is cash or a combination of cash and shares. A merger is pursued as a strategic objective between two, or more, corporations to combine resources and is similar to a stock acquisition except that the acquirer attempts to acquire shares through a statutory merger following statutes and governance of the state of incorporation of the target. In this situation the merger is approved by both the Board of Directors and the shareholders for which equity holders most often receive cash and shares in the acquirer after the target is merged into it and the target no longer exists. A special note to this situation of a merger is that there are ways to arrange corporate structures so that the acquirer is actually merged into the target or a subsidiary is created and the target is merged into this entity. These types of mergers all have terms of reference (forward merger, reverse merger, forward triangular merger, reverse triangular merger) and each have an intended purpose, liability shielding, avoiding shareholder consent or even a private company going public and avoiding an IPO. These structures can get extremely complicated dependent upon financing structure and participants, existing or created, regulatory bodies and taxation, but hopefully this gets across the point that there are subtle differences to mergers or acquisitions that can be identified simply through the type of transaction and how the target ends up post-closing. As noted, consideration for transactions can be in cash, shares or a combination of the two assets. The details of the structuring of the cash, whether on-hand or debt, the shares, in terms of a ratio of exchange, and the proportion of this cash to shares offered as consideration is all determined though several types of analysis and valuations of the target, the acquirer and the projected combination of the two firms post-closing. These valuations and corresponding analysis work to establish, not only the purchase price, but these exact details of how cash and shares should be worked into the price to create the best outcome for both the target and acquirer post-closing. Things that definitely come into consideration during analysis are taxes, managerial assumptions, debt to equity ratios, accretion/dilution of EPS, purchase premiums if synergies might be reached and earnings multiples to name a few. No matter how many or which valuations are chosen for a particular transaction they all start with the preliminary due diligence process of the target firm. The sale process truly kicks off with extensive preparatory due-diligence of the target by the target advisor, prior to even the preliminary due diligence conducted by potential acquirers. The target advisor meets with target management to gain a comprehensive understanding of the business operations and managements’ vision for the transaction. The advisor pays special consideration to managements’ initial financial models and assumptions, evaluating them in the way potential acquirers can be expected to scrutinize, and the advisor can additionally conduct further valuations and analysis for comparison and provide a full field of valuations. These valuations may include, DCF (discounted cash flow), LBO (leveraged buyout), Comparable Transactions, Precedent Transactions (and current market appetite), post-ProForma, Trading Overview for publicly traded companies and stock offerings and possibly liquidation analysis depending on the reason for the transaction. If you are reading this, you may have questions about any of these items as a potential acquirer or target firm. In this strategic planning phase, and your first step down the path, of a M&A transaction you may wonder what executives believe to be the most important factor to a successful transaction. When surveyed, just under one quarter of respondents (23%) believed effective integration [into their company] was the most important factor in achieving a successful transaction. (The State of the Deal – ‘M&A Trends 2019’, survey of 1000 executives) You might be thinking this is obvious; of course, integration would be a key to success. However, just like many of the stages of a merger or acquisition there is depth to even the details. Integration might comprise corporate culture, merging departments, department apps, IT infrastructure, physical office space, accounting methods, regulatory oversight, possibly even the merging of executives or any number of possibilities. The point of all this is that regardless of the size of your firm, a M&A transaction can include an incredible amount of information to analyze and consider and you may find it in your best interest to have an advisor to bounce questions off of or even bring in as one of the consultants to work on you transaction. I thoroughly enjoy working on financial deals and breaking down the corresponding analysis or modeling into easily understood terms so all parties involved can confidently make fully informed decisions over the course of the process. Please, if you are considering or in the process of a transaction and would like some insight reach out to me with your questions. A last note on the basics: There are a number of advisors that may be consulted over the course of this pursuit including legal, tax, finance, accounting, IT and HR to name a few, but this will also depend heavily on the size of the potential transaction in terms of each of these fundamental business areas. 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