Mergers and Acquisitions


Mergers and acquisitions are accomplished successfully by utilizing a number of structures, which include the acquisition by a party known as the acquirer and one or more companies known as the target or acquiree. The planning process of a merger or an acquisition needs thorough considerations by all parties involved. It is essential for all parties to get aid from a business litigation lawyer in order to ensure that the entire process is smoothly and successfully conducted.

Tax Structuring And Analysis Of Proposed Transactions

The financing and structuring of mergers and acquisitions include tax consequences. This decision of acquiring shares or assets of the target company should take into consideration various factors including the tax planning, as well as the capital gains taxation at the time of transaction.

The burden of tax can be minimized with most favorable acquisition vehicle selection. The financing alternative choice should also take into consideration the deductible interest and the tax regulations of all involved jurisdictions. These tax consequences for involved parties mostly work as the deciding factors in the determination of the attractiveness and structure of any transaction.

Capital Structure Analysis

When organizations opt for mergers and acquisitions, the joined entities’ capital structure typically go through major changes. The resultant structure depends on various factors, including the type of consideration offered to the target company (shares vs. cash), and if the current debt of both organizations is in place or not. Therefore, a thorough analysis of the capital structure is conducted to make the final decision.

Mergers and Acquisitions

Financing Of Acquisition Entities

Acquisition finance is referred to as the proportions of various capital resources that are utilized to fund the process. This process is usually complex and needs extensive planning as acquisition financing structures mostly need plenty of combinations and variations, unlike other purchases.

Moreover, this financing is rarely done through merely one source. There are numerous alternatives for financing an acquisition but the most challenging part is to find the right financing mixture that provides the best capital cost.

Businesses can expand in numerous ways, for instance by targeting new customers, growing their marketing efforts, introducing new products or services, or enhancing their workforce. However, these growth strategies might not be very exciting for investors. Aside from quick growth, acquisitions might also provide other benefits like enhanced market share and economies of sale.

However, it is essential to keep in mind that the merger and acquisition of a business is a huge decision that requires significant financial resources.

Drafting And Negotiation Of Letters Of Intent (LOT)

The acquisition of private companies requires a Letter Of Intent (LOT) that aims to ensure that both parties agree on the key terms and price before moving forward. The letter can be long or short, depending on the negotiations, and the requirements of the parties involved.

Typically, the following items are included in the Letter of Intent:

  • Consideration of transaction – promissory note, earn-out, stocks or cash?
  • Purchase price adjustments – debt-free or cash-free deal? Adjustment mechanism and working capital calculation? Treatment of expenses, transaction fees, and severance costs?
  • Transaction structure – merger, outstanding shares purchase, or asset purchase?
  • Expected timeline for deal negotiation and due diligence
  • Prospective buyer exclusivity
  • Access to records, nooks and employees
  • Scope of warranties and key representations of the seller, as well as the survival period

Numerous others items are included in this letter to ensure a smooth merger or acquisition.

Due Diligence Review And Response

There are numerous aspects looked into in the due diligence process of the target company. A thorough due diligence process can help the acquirer in attaining valuable information, including:

  • The target company’s structure
  • Flow of operations
  • Culture employed within the company
  • Existing human resources
  • Relationships with partners, customers, and suppliers
  • Competitive position
  • Existing goals and future outlook

Due diligence is necessary for all involved parties to attain validation on the valuation of the deal to agree, negotiate and revise the deal accordingly.

Drafting Acquisition Agreements And Related Documents

The merger or acquisition of a target company involved drafting numerous agreements and documents, including:

Purchase Agreement

The purchase agreement is a contract that includes all the factors of the acquisition, including the target company’s detailed description, warranties and representations the buyer or seller made, an account of the purchase, as well as a timeline of the entire acquisition process.

Typically, the purchase agreement includes:

  • Signatures and exhibits
  • Agreements regarding closing the deal
  • Representations and warranties
  • Transaction description
  • Terms and definitions
  • Introduction

The introduction doesn’t have any legal authority but simply explains the transaction, the parties involved, and the type of sale.

Purchase Price Adjustments

The purchase price adjustment is utilized to verify the target company’s value at the date of closing. In most of the cases, the working capital adjustment is used as the purchase price adjustment, which decreases or increases the purchase price once a review is conducted of balance sheet specially prepared of the target company as of the date of closing. Since the financial information isn’t prepared till the closing is completed, the involved parties agree to make adjustments in the purchase price after the date of closing.

Earn-Outs

In certain cases, future performances help in determining a part of the purchase price, and it is known as an earn-out. This is usually utilized when a seller and buyer are unable to agree on the target company’s value. With the earn-out, the buyer makes half of the purchase price payment at the time of closing and the rest is paid in one or more stages when certain operation and/or financial targets are achieved.

If you are looking for a merger or want to acquire one, it is essential to get a business litigation lawyer to ensure everything goes smoothly and that you and your assets are protected. Contact Shiner Law Group and get a free case evaluation of your case by our experienced business litigation lawyers.

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