Mergers and Acquisitions, Part 1: Tips and Pointers

We provide legal, financial and operational teams that are able to advise on most elements of a merger/acquisition – we also onboard external experts from an extensive global network as necessary, such as technical experts in a particular field or law firms/audit firms in all necessary jurisdictions. We are occasionally also able to assist with identifying a target company for acquisition or to act as a broker on behalf of a target company that is seeking to sell. 

The next articles will cover the first steps prior to signing the Letter of Intent, the due diligence stage, financial assessments, negotiating a share purchase agreement and operational/IT considerations. These will be followed by an article that is specifically aimed at target companies and will outline how to make your company an attractive proposition for an acquisition.

These articles cover the acquisition of private companies  – corporate control for listed entities already serves as an information-processing and asset valuation mechanism for potential bidders.

Why consider a merger/ acquisition?

What is this deal giving you?

There are several reasons for considering an acquisition or a merger. These include;

1. Entering new markets
2. Acquiring new technology
3. Vertical integration – going up or down the supply chain by acquiring suppliers or purchasers
4. Horizontal integration – acquiring a competitor
5. Acquiring new employees 
6. Synergies and economies of scale

A few examples from our own experience. Our legal, financial and operational teams assisted an Asia based investment fund in the acquisition of a company that owns a very specific technology but that did not have the financial clout or the sales network necessary to market that technology – the investment fund owned another company with a client base in over 50 countries, all of whom are ideal targets for the new technology. 

In an example of vertical integration, we recently advised a European company that acquired their agent in Malta. The acquisition made sense on two fronts – they acquired a successful company that is a leader in its field, they are injecting capital and expertise that will allow it to grow operations and they also ensured increased sales of their products since the Maltese company was previously sourcing products from several different providers. 

We have also advised international pharmaceutical companies that acquire a small company as it is a quick way to onboard knowledge and IP in a very specific area, even if they have no interest in the actual financials of the target company.

How to identify a deal

Once a company has decided to go for an acquisition/merger, it is time to identify the target company. Naturally, sometimes the decision to acquire is created by the sudden availability of a target. Otherwise, the target may be approached directly or the acquirer may be assisted by deal brokers – very often advisory firms or banks. 

We will list some of the main preliminary questions that your company should be asking at this stage.

1. What exactly is the acquisition giving us?
2. Can we afford the acquisition? Can we afford the additional investment required?
3. Assess the strategic fit between the acquiring and the target company.
4. How will the market react to the deal?
5. How will my customers react to the deal?
6. How will management and employees at both entities react to the deal?

At this preliminary stage it is essential that you put yourself in the best possible position to assess risk, even before the due diligence process is started. Once that risk is assessed, you are in a better position to determine whether the potential reward is worth the risk.

Pre-due diligence considerations

First of all we strongly recommend that you contact expert advisers as early as possible. Put together a team of advisers that can handle legal, tax, operational, financial and technical areas. Define clear roles and responsibilities and establish clearly identified teams – this will avoid falling between two stools. 

Once initial contact with the target company has been established, it is time to negotiate a non-disclosure agreement and a letter of intent. 

Insist on a period of exclusivity/non solicitation of bids. If the target refuses to provide this reassurance for a reasonable time, it may be worth including a breakup fee payable by the target in case it does not follow through with the deal or sells to another entity. Unless the deal is extremely attractive, we usually recommend that you walk away from the deal at this stage if you are not granted an exclusivity term or a breakup fee arrangement. We recently advised on the potential acquisition of a regulated entity where our clients did not manage to obtain exclusivity. They decided to go ahead anyway against our advice, spent months on due diligence and intensive negotiations and incurred a significant amount of fees and expenses, only for the seller to sell to a third party at the very last minute before actually signing off on the transaction. 

Is it the entire company or only the company’s assets? Which assets are included? Does the company own all assets or are assets owned by third parties? In smaller local companies some assets used by the company are often actually owned by the shareholders and not by the company. 

Assess the expected cost of the transaction. This is always subject to due diligence but at this stage you should have a clear idea of the expected cost of the transaction and of how this will be structured. Will you be paying in cash or through shares in the acquiring company? Will there be loans? Keep in mind that flexibility may make your bid more attractive especially if buying from more than one shareholder. We advised on an acquisition of a company in the field of financial services where each individual shareholder was given the option of receiving cash or equity in the acquiring company as consideration for the sale of shares. 

Set a realistic timing for the deal. The complexity of mergers and acquisition varies hugely between one deal and another and it is essential that both the acquirer and the target have reasonable expectations as to the time required for each step of the transaction. Naturally, it is also important that your advisers are on board with these time frames as this may affect the size of the team that they need to dedicate to the project. 

Last but not least, assess the possibility of difficulty in obtaining the necessary shareholder, Board and regulatory approval for the deal to go through.