July 25, 2021

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How do you structure a Merger & Acquisition

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This article is written by Uma Narayanan, pursuing a Diploma in M&A, Institutional Finance and Investment Laws (PE and VC transactions) from LawSikho.

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Both mergers and acquisitions play a vital role in corporate industry. These unique and complex transactions that can happen through many means and they play a larger role in maintaining competition and economic stability. 

The definitions of merger & acqusition are not limited one because of the different transactions like takeovers, assets purchasing etc, that conclude a merger & acquisition. Creating a new organisation by consolidating the assets of two companies is a merger and the acquired company becomes a part of the acquirer and takes it’s name. In an acquisition, a majority stake of the acquiring company is secured in target organisation and both companies get to keep their individual names.

These both terms suggest the combination of two companies/businesses and enhance the value of promise both buyer and seller made to each other. For example, the horizontal integration removes competition and vertical integration results in efficient supply chain, provides a chance for new products in market. However, if the merger is unsuccessful, it totally destroys the values of both companies. Factors for such unfortunate event could be overestimation, poor due diligence, improper integrations etc.

Mergers and Acquisitions being of high value and importance demands a great potential from all the parties of the company and requires the companies involved to be on the same page. 

Business Valuation is an important aspect while negotiating, nevertheless, merger & acquisition deal structure. There are basically three structures – Asset Acquisition, Stock Acquisition and Mergers (Direct and Indirect). 

  • The acquiring company purchases shares from the target company – also known as share sale, where target company’s shareholders stock are purchases by acquiring company. There is not merging here avoiding all the complex transactions but has a new owner.

Advantages 

  1. Easier for Buyer to Carry on the Operations of the Target Company;
  2. Consent from Third Parties Not Needed;
  3. Better Tax Treatment (Seller).

Disadvantages

  1. Exposure to Unknown Risks;
  2. Shareholder Holdouts and Approvals;
  3. Less Favorable Tax Treatment (Buyer).
  • The acquiring company purchases assets from the target company – where specific assets were chosen by the acquiring company and purchases them from target company. There is no liquidation or merger. This may include brands, customer lists, trademarks, patents, physical inventory etc. Though this structure sounds simple enough in theory it is not the same in practicality. 

Advantages (Buyers) 

  1. Avoid Unwanted Assets and Liabilities;
  2. Better Tax Treatment;
  3. Less Chance of Picking Up Unforeseen or Undisclosed Liabilities.

Disadvantages (Buyers)

  1. Failure to Buy Sufficient Assets;
  2. Time Consuming and High Transaction Costs;
  3. Seller Could Retain Enough Assets to Compete;
  4. Subject to Sales or Transfer Tax;
  5. Third Party Consent.

Disadvantages (Sellers)

  1. Seller Left with Unsatisfied Potential Liabilities;
  2. Less Favorable Tax Treatment.
  1. Direct Statutory Merger – where the acquiring company acquires all assets and liabilities of target company, which is further considered liquidated operating under the name of surviving company. 
  2. Forward Triangular/Indirect Merger – where the target company merges with acquiring company’s subsidiary but not directly into the acquiring company protecting itself from target company’s liabilities. 
  3. Reverse Triangular Merger – where the subsidiary of acquiring company merged with target company after purchasing it and wholly owns it to have control over the continuity of business. The acquiring company is protected from target company’s liabilities as in indirect merger. 

Advantages (Sellers)

  1. No Contingent Liabilities;
  2. Only majority Consent Required;
  3. Shareholder Appraisal Rights;
  4. Tax Free Treatment (Buyer).

Disadvantages 

  1. Cannot Pick and Choose, must assume all (Buyer);
  2. Third Party Consent.

Keeping in mind all the outcomes of these structures, a potential buyer and potential seller will have to choose the most suitable way for their business stability and growth. Making wrong choices would lead to difficulties in negotiations, closing deals and disadvantages in tax

Various studies show the majority of these Mergers and Acquisitions were of telecom, media and energy sector companies, the main reason being the usage of internet/ digital progress with increased competition in e-commerce industry. On the other hand, political scenarios of the country do affect the mergers and acquisitions. Persistence of unfavorable laws against foreign countries impact the investment prospects however certain initiatives by Indian government have been a great support in quickening the mergers and acquisition pushing India to 63rd ranking by World Government in Business. 

Examples 

  1. Telecom Industry – Vodafone- Idea merger as a result of the entry of Reliance Jio.
  2. Walmart Acquisition of Flipkart – as a result of Walmart’s war against Amazon resulting in expansion of Flipkart’s logistics. 

When we decide to merge the companies what we aim at is to have a better place in the market and gain a recognition. It is like reducing the smaller branches of the trees and combining to become the bigger branch where we can increase the capacity of storage of goods and provide faster services. The variety offered can also increase in the scale and provide better quality products, extension in the distribution channel which would also lead to better network building of customers.

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The ten major public sector banks would be amalgamated and only 4 public sector banks would exist. This was a good decision but also in a way bad decision because many staffs would lose their employment as part of this merger that has happened. The mergers that took place are as follows:

  1. Oriental Bank of Commerce (OBC) and United Bank and United Bank of India merged into the Punjab National Bank (PNB) has become the second largest public sector bank after State Bank of India (SBI).
  2. Indian Bank was merged into Allahabad bank.
  3. Syndicate Bank was merged into Canara Bank, which has now become the fourth-largest public sector lender.
  4. Union Bank of India was merged with Andhra Bank and Corporation Bank.
  5. Customers, including depositors of merging banks will be treated as customers of the banks in which these banks have been merged with effect from 1 April 2020.
  6. After the merger, there will be 12 PSUs – six merged banks and six independent public sector banks.

The above said bank mergers has also created confusions in the mind of customers and a lot of trouble from changing of pass books and cards issued to changing of cheque books and so on. The staff is suffering in learning the procedures to be followed and are still in the training process in the pandemic situations. We need to note that, mergers should make things easy and viable rather then create difficulty and confusion in providing customer services.

I personally felt this merger leading to a lot of hassle and changing of applications, changing internal software applications and loss of customers. The customer is tired of these mergers and must have withdrawn accounts to better service-providing banks. When we investigate the previous merger of the various State Bank combining into one single State Bank was a huge process and it took people almost 2 years to settle into and get their transactions into a normal procedure. It created a huge lot of confusion unnecessarily. It could have been structured much better, to make it simpler for the employees and the customers.

It is very important for us to structure a merger properly and study the acquiring company and its past performance, as a wrong decision would leave to huge losses. The need to study the market and the future goals achieved and having a proper plan is a quite essential part in merger & acquisition. The structure of the Merger should be for the benefit and not for destruction or lead to the miseries or the worst. The goal of plan and stage wise actions would help better. 

  1. https://www.genesislawfirm.com/asset-acquisition-stock-purchase-and-merger-structures
  2. https://www.financialpoise.com/ma-deal-structures/

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