Ways to Structure an M&A Deal

What is an M&A Deal?

The structure of an M&A deal is a contractual arrangement between parties to a merger or acquisition (M&A) that specifies all parties’ rights and obligations. It determines what each party is entitled to do with the merger or acquisition and what each party is obligated to do under the agreement. Simply stated, the terms and conditions of an M&A can be referred to as a contract structure.

Basics of an M&A Deal

Mergers and acquisitions involve the coming together (synergizing) of two business entities to become one for economic, social, or other reasons. Only when there is a shared understanding between both parties is a merger or acquisition necessary. The negotiated terms on which these organizations are prepared to come together are known as an M&A agreement structure.

Deal structuring is part of the M&A process; it is one of the steps in a merger or acquisition that must be taken. It is the process of prioritizing the goals of a merger or acquisition and ensuring that all parties concerned are satisfied with the top priority goals and take into account the weight of risk that each party must bear. Initiating the structuring process of the deal requires all concerned parties to state:

  • Their position on negotiation;
  • Observable latent risks and how they can be controlled;
  • How much risk they can tolerate; and how much risk they can tolerate;
  • Conditions in which it is possible to terminate talks.

Due to the number of variables considered, designing a proper M&A deal structure can be very complicated and challenging. These variables include preferred means of funding, corporate control, business strategy, conditions of the industry, antitrust laws, accounting policies, etc. The process can be less complicated by employing the right kind of financial, investment, and international law firm.

Ways to Structure an M&A Deal

There are three well-known conventional ways to arrange a merger acquisition agreement. At the same time, business companies have recently been interested in other, more innovative and versatile methods of structuring the transaction. Asset acquisition, stock purchasing, and mergers are the three conventional ways of structuring an M&A transaction. To accomplish a more versatile contract layout, the strategies can also be combined.

Asset Acquisition

In an asset purchase, the buyer buys the selling company’s assets. An asset purchase is typically the best deal structure for the selling firm if it prefers a cash transaction. The buyer selects which assets it wants to purchase.

Purchase of Stock

Unlike an asset sale, assets are not directly transacted in a stock purchase where there is a direct exchange of assets. The buyer purchases a majority of the seller’s voting stock shares in a stock purchase acquisition. In essence, this implies that ownership of the seller’s assets and liabilities is passed to the buyer.

Merger

Although the term “merger” is often used interchangeably with “acquisition,” a merger is, in a strict sense, the result of an arrangement to come together as one new entity between two different business entities. A merger is usually less complicated than an acquisition since the new company is responsible for all liabilities, properties, etc.

The advantages and disadvantages must be taken into account in structuring a contract and other contributing factors, to draw a decision on which approach to follow.