Mergers and acquisitions is a legal and business term that refers to the aspect of corporate strategy, financing and project management of buying, selling or restructuring different legal entities. Mergers and acquisitions are particularly relevant to rapidly expanding businesses that want to establish themselves in new business fields or geographical locations without creating brand new legal entities such as companies or entering into joint ventures. In modern times, the formal distinction between the terms “merger” and “acquisition” has become less significant, as particularly in business sense both create the same result. For clarity, however an acquisition happens when a business buys another business, taking full control over it. A merger is when a business partially absorbs another business, ultimately not fully controlling it but sharing the decision-making with the old owner.
What are the main commercial advantages of mergers and acquisitions?
- Expansion of business know-how and processes. By acquiring or merging with another business, you can expand your current knowledge about a particular field. With acquisition or merger, you will get access to already experienced workforce and efficient processes in place.
- Cost-effectiveness – in long term, acquisition or particularly merger might be cheaper than building entirely new unit with brand new infrastructure and human capital. .
- Expanding into new markets – acquisitions and mergers offer great way of reaching new audiences and markets. You can buy or merge with a well-known brand in another country and gain access to new customers.
- Business portfolio diversification – businesses that specialise in certain aspects such as import and wholesale of certain goods can easily acquire retail distribution chains to diversify their operations and decrease chances of business failure.
- Business Power – merger with another business of a similar or bigger size can help your brand not only to look more global and strong but also actually provide increased financial capabilities of joint budgets.
- Monopolisation – so long as you comply with the EU laws you may want to take over your competitors and dominate certain market.
- Speed of Growth – some projects require more expertise and power than when first anticipated. In such cases, it may be more time-efficient to acquire a new business with the requisite capacity than to recruit and build the necessary resources internally.
Share vs Asset Acquisition
There are two main methods of acquisitions, namely share purchases and asset purchases. Despite achieving perhaps similar business goals, both have significantly different legal implications.
- Share Acquisition
Here, majority of shares of the target company are purchased by the acquirer. The target company remains separate legal entity preserving its all assets, liabilities, employees and obligations. Major advantage of share acquisition is that all client contracts need not to be novated or assigned. In fact, the clients do not need to be informed of the acquisition.
- Asset Purchase
With asset purchase only a specific part of the target company is bought by the acquirer. All assets, liabilities and obligations of the target company remain with it, which can be advantageous to the buyer. On the other hand, any relevant contracts with clients need to be novated and require their consent. Some clients might not be happy with the change and terminate their contracts. It is also important to note that although employees automatically do not transfer if certain conditions are met the employment continuity is preserved under the Transfer of Undertakings (Protection of Employment) Regulations. For instance if an employee worked in the acquired business unit for over 36 months and TUPE applies it would mean that his employment with you is going to continue and not be counted from start.
Mergers and Acquisitions: Deal Checklist
It is important to make sure that you speak to relevant professionals including lawyers and accountants about due diligence of any merger or acquisition deal.
Some of the points to worth to remember about during acquisition or merger process include:
- Checking that the target business is actually fully owned by the people that you are dealing with.
- Checking whether there have been or are any legal disputes.
- Analyse legal obligations and liabilities with customers, suppliers and employees.
- Consider the legal consequences of acquisition or merger on employment and client contracts.
- Ensure that all key facts about the target business are legally warranted by the seller. Your lawyer should request that in a formal written statement. Normally, warranted things include records about debtors and creditors, state of assets, audited company’s accounts or legal disputes.
- Ensure that the contract includes an indemnity clause in respect of any potential liabilities that may arise out of undisclosed things. This may include lawsuits or unexpected tax bills.
If you are considering either a merger or acquisition, Darlingtons offer a highly practical, commercial and cost effective approach at charge out rates which are highly advantageous when compared with City law firms. Contact me for further information or advice.