This article is written by Yashwardhan Yadav. This article has been edited by Ruchika Mohapatra (Associate, Lawsikho).
This article has been published by Sneha Mahawar.
Table of Contents
Introduction
Business mergers and acquisitions in a business are crucial to helping a business expand in size or territory and assisting a business in diversifying risk. In an M&A environment, value isn’t defined by the price of a transaction but by what you can unlock through a carefully considered value creation strategy. According to PWC, there is a rapid increase in M&A transactions, as there were only 234 deals worth $500 million to $1 billion until 2020; in 2019, that number increased to 375. The deal value of $1 billion to $5 billion in the year 2020 was 241 and in the year 2019 it was 209, but this gradually increased in the year 2021 when it went to 430 and the deal value over $5 billion went from 59 in 2019 to 54 in 2020 to 99 in 2021. While a major aspect of the acquisition is the manner of funding the acquisition, ensuring the smooth and cost-effective transfer of the transferee company is also important to the purchase of the undertaking.
Pre-transaction
Foran M & A transaction to be successful, there are some points that one should keep in mind before the transaction takes place. This includes the time taken for the entire transaction process. The M&A transaction is a time-consuming process that can last up to six months, depending on the parties and their mutual understandings. Looking out for a potential buyer is a good idea, as for the transaction to go smoothly, one should look for someone with the same motives and intent. A strong and organised team of legal experts and lawyers is needed as they will be the ones laying the stepping stones in the transaction.
Partners’ trust and communication between them
The choice of the right partner for the transaction is essential in an M&A transaction as it can be very easy to achieve common goals with allies having the same potential. Trust between them is of the utmost importance. A faithful and healthy transaction with mutual interests is a good one. The goals and targets of the parties should be the same, as when they go with the same common interests, they are likely to grow more and achieve more.
Due diligence
A quality due diligence report is a must; good observation is the key. An in-depth study of the financial reports of the entity is needed before the transaction takes place. The basic premise can be that the entity should not have acquired any debts in order for goodwill to develop.
A well-thought-out M&A structure
One of the steps in merging or acquiring is the M & A structure. It is important to build a framework for appropriate agreements by taking into account the most important objectives of the parties involved. A proper deal structure will result in a successful merger or acquisition agreement.
While doing a transaction, we can go through any of the following methods
Asset sale
In this method, the buyer can choose between the assets and the liabilities of the entity that he wants to go with. In an asset sale, a firm sells some or all of its actual assets, either tangible or intangible. The seller retains legal ownership of the company that has sold the assets but has no further recourse to the sold assets. The buyer assumes no liabilities in an asset sale.
Slump sale
A slump sale also referred to as a business transfer, is the transfer of a business undertaking as a whole, on a “going concern” basis, wherein the acquirer wants to acquire the whole setup of a business undertaking along with all assets and liabilities of the target company but without acquiring the target company that houses the business.
Stock sale or share sale
In the stock market, the buyer buys a share in the company rather than just the assets. The buyer buys the company, a separate legal entity. In general, the company continues to maintain its assets and liabilities. The transaction is between the company’s shareholders and the buyer of the shares. The acquirer is looking to acquire the whole business without disturbing the house currently running the business by just acquiring more than 50% of the shares in the company.
Amalgamation
When two different companies come together to become one, they usually lose their identity in any form of newly amalgamated company. Shares of both the companies vest together and form a new one. An amalgamation is the combination of two or more companies into a new business. Amalgamations are different from mergers because no affiliated company continues to exist as a legal entity. Instead, a completely new business is created that keeps the combined assets and liabilities of both companies.
Demergers
Usually done through a court-driven process, companies opt for this method to focus on a particular vertical of the entity. A demerger is a type of business restructuring in which the business functions of a business are divided into one or more components. It is a discussion about merging or acquisition. A demerger can be a spin-off by distributing or transferring shares to a subsidiary holding a business to the company’s shareholders who conduct the split. A demerger is also possible by transferring the right business to a new company or business where the shareholders of that company are given shares. Conversely, segregation may also “delay” a merger or acquisition if assets are sold out rather than stored under a renamed business. Demergers can be made for a variety of business and non-commercial reasons, such as government intervention, in the form of fraudulent legislation, or by removing cartelization.
Payment method
Now the basic question that strikes the mind is, “How will the seller get paid or how will the buyer pay?” The payment usually includes cash, company stocks, a payable note, or all of them together. The buyer usually obtains the funding through debts or equity.
Accounting in an M & A transaction
The next thing that will impact the purchase is earnings per share. The assets of the two merged companies will need to be analysed using the merger model. The purpose of this analysis is to determine how the buyer’s earnings per share (EPS) will change as a result of consolidation. An increase in EPS is called “accretion,” and a decrease is called “dilution.”
Then, to determine the goodwill in the M&A transaction, the Purchase Price Allocation (PPA) is prepared, which is calculated as the purchase price minus the net identifiable assets.
Intellectual property
The position of the intellectual property of the seller and how the buyer will receive it is an important point to consider during M&A contracts. Consumer company ratings are affected by intellectual property rights. Intellectual property representation and guarantees ensure that there is no misuse or infringement of the intellectual property rights of the commercial company.
M & A tax
The implications of a merger or acquisition tax should always be a key consideration in negotiating a deal and the purchase price. Tax evasion is the thorough investigation into the various types of taxes that may affect the performance and identification of potential breaches of the agreement. It is very important to identify the current and estimated tax liabilities of the target company and consider how they will be reflected in the agreement. Usually, asset purchases are good for buyers, and share sales minimise the taxes.
Sellers often choose to share sales for tax purposes. The share sale is generally considered to be a long-term financial gain (assuming the trader has been interested in the company for more than one year). Therefore, they are taxed at a higher tax rate of 20%, with an income tax rate of about 3.8% potential investment (NIIT). On the other hand, the sale of goods may produce a combination of normal income (currently a tax with a maximum value of 37%) and higher profits. Exploring alternative planning methods before starting a formal marketing process offers a few benefits.
First, it enables the seller to identify the preferred property and set expectations for potential buyers at the beginning of the process. Second, understanding the implications of tax allows the seller to anticipate how the buyer will view the design of the proposed transaction. Lastly, it allows the seller to assess whether they can negotiate a higher price if they agree to a bargaining agreement in favour of the buyer. Stamp duty and tax implications differ in each of the sale types according to state policies.
Post-transaction
After the transaction, the steps and procedures taken to merge the two companies that have completed the merger or acquisition of funds into one business to operate a new union Reasons given by the union during the courtship process can include: expanding new markets, increasing product portfolio, increasing market share, leveling the economy, technological change, and more.
Plan execution
Naturally, everything starts with a well-organized, detailed program: the organisation decides how the goal will be achieved, and this should be done in a comprehensive plan based on common sense. The most important factor in the post-work phase is the “high-quality implementation policy implementation.” Once an agreement has been reached with the right strategy, the practice must reflect the plan as closely as possible. Poor communication creates confusion among the executives. Changing management and a reasonable cost estimate during the process make the changes more efficient.
Cultural impacts
Additionally, you should consider how the target strategy aligns with that of the initiator: If the target has assets and related strategies, only a few adjustments are required, but if not, an integrated company needs to change to ensure strategic alignment. Organizational equity is achieved by ensuring that the parallel structures in the two organisations are successfully united. Since two companies are operating in the same industry, this is likely to improve much more easily than when different sectors are involved. However, in this case, it is often possible to combine departments such as human resource management and marketing. Cultural equality does not always manifest itself. Studies show that the location of groups has a very small impact, which benefits international integration or acquisition. But combining different world cultures or, to a lesser extent, corporate cultures, can lead to more miscommunication. Here, in particular, thoughtful management is needed.
Conclusion
Mergers and acquisition activities are identified as key areas of organisational growth. The advantages of M & A are evolving and aid in the long-term development strategy. Perhaps the effectiveness of M&A depends on the board’s strategy, the flexibility of the length of the negotiations, and the enthusiasm of the parties. Yet they can achieve their objectives if they are well-planned and aimed at combining ethics and effective acquisition. Achieving corporate dreams and ambitions may involve the external acquisition of goods and services needed for expansion, a step that may be greener than inward growth. If the buyer accurately pays the value of the trading business on an independent basis, then any profit earned on intentional adjustment, i.e., synergy is a benefit to the seller. Conversely, if the buyer does not contribute to the seller’s performance, then paying the actual amount no longer gives the client a certain advantage and disadvantage. As a result, we must exercise caution before engaging in M&A to avoid the unintended consequences of money and time. Each feature board should use law firm consulting services or the provision of financial consulting services to improve the quality of preparation and negotiation times. Finally, I want to emphasise the importance of M&A in group development. M&A has already been shown to be one of the most effective strategies for overcoming modern problems and improving corporate development. M&A is a major factor in the growth of the global economy as it enables disadvantaged companies to keep and increase their capital and human assets. Therefore, corporate competitive advantages lead them to success and prosperity.
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