This article is written by Kanishk Gambhir, pursuing a Diploma in M&A, Institutional Finance and Investment Laws (PE and VC transactions) from Lawsikho.com. Here he discusses “What are the factors to be kept in mind by the board of a target company while choosing between different acquirers?”.
Choosing an acquirer for your company is a very difficult task. Sometimes people may think that money is the sole factor in the selection of an acquirer but it is not necessarily a wise choice as the highest offer many times is not the best one. One of the reasons could be higher requirements for a higher payment, sometimes acquirers’ future visions may not meet with the company’s etc. So selecting a lower bid during those times may be a better idea. So this is not a simple maths equation but includes multiple factors ranging from the financial needs of the company to understating the needs of human resources of the company.
Thus, the board of a target company has to keep multiple factors in mind while choosing between different acquirers. Some of the essential factors are-
1. Purchase price
The purchase price you would receive for the stake in the business is the most important factor while choosing an acquirer. At the end, the biggest factor behind selling the stake in the company would be the capital infusion by the new acquirer of the company, so higher the price per share the better it is for the company. The purchase price would depend on multiple factors like goodwill, market valuation, losses/profits, debt, assets/liabilities etc. So once the board has set a minimum selling price then they should start looking acquirers who are willing to pay more than the base price. So after getting the best offers above the set price than all the other factors would usually come into the picture.
So, depending on the situation the company is in, especially if it is going through a cash crunch or is in need of capital, the purchase price would in all likelihood constitute the biggest factor behind selecting an acquirer.
2. Guaranteed vs Contingent Purchase Price Compensation
Once the purchase price for your deal is decided then notice has to be given on the guaranteed and contingent price. The guaranteed price is the amount that you will receive in surely once the deal goes through and the contingent price is the amount that is contingent if certain goals are met the buyer.
So, while choosing the acquirer important notice is to be given on the guaranteed purchase price and the contingent price. The board should make sure that even if an acquirer is paying more majority of it is a guaranteed price and not contingent price. Out of the whole agreed purchase price, more than 50% of the price should be guaranteed.
3. Getting the payment now vs later
Now the board has to even look at how much money the company is receiving upfront and how much the money would be received later, also known as Deferred M & A purchase price compensation, which is a part of compensation which would be paid later upon an agreed-upon time frame and an agreed-upon interest. Generally, getting money upfront is preferable but depending upon circumstances deferred payment is not a bad option as it earns interest for the company.
However, the board while deciding this should look at the reason due to which the stake is being sold at the first place, so it is done for infusion of capital or fighting a cash crunch then a deferred payment would not be much useful.
4. Escrow holdback
Usually the acquirer wouldn’t pay the whole amount at the first go and hold some money in the escrow account which would be paid once all the warranties and guarantees are fulfilled. But the percentage of money that is going to be held back in the escrow account is important. As sometimes deals take months, so the percentage of money which is going to held in the escrow account should be taken into consideration.
So, the board would have a look into the money being held as sometimes there is an immediate need of money and the money being held back can be detrimental to the company.
5. Time frame
Time frame constitutes an important factor in any deal. So, the time frame should be decided first. The buyer always requires a period of due diligence but there should a set time period for all the work is done. Acquirers would usually try for a longer time frame but here the board has to decide on the time frame which suits the company’s interest best. Even though the board should be flexible if providing some more time leads to a better offer but at the same time waiting might cause a lot of loss for the company and it increases the chances of the deal not going through.
Therefore, if even though the board should provide a flexible time frame to the acquirer they should choose the acquirer who is ready to work along with their time frame instead of the one who requires a lot more time. The waiting period can be harmful to the board should keep the time period in the mind while selecting a time period in mind.
6. Employees future
The future of employees of the company is another factor to be considered while seeing a majority stake in the company. So, if the company has decided to sell a majority stake in the company, then the board also should think about the employees’ future before selling to an acquirer. One acquirer might want to continue the company while others might just want to strip off the assets and dismantle the company. So the board should look into this factor as well.
7. Company’s vision
The company vision is very important while selecting an acquirer. The company plan for growth and vision must match with the acquirer’s aim and vision for the company. Otherwise, it would create multiple problems once the deal is done as if the acquirer’s vision is different, it would become very difficult for the company to work properly if there is friction between the acquirer and company.
So, the board before selecting an acquirer must make sure that both the company’s vision and the acquirer’s vision must be at par.
Tax payable might be one of the most important factors to be considered while selecting the deal. Sometimes, even if you select the highest bid, it might turn out that the deal is structured in such a way that you end up paying a very high tax rate to the government reducing your profits by a huge margin. However, another deal which is less offer than the top bid but is structured in such a way that reduces the tax burden on the company and provides a higher yield for the company.
So, the board has to keep the tax factor in mind and make sure that the deal is structured in such a way that tax payable on the deal is less. Thus, the board has to choose that the acquirer who is ready to provide a better-structured deal.
9. Buyers ability
The board should consider a buyer’s ability to go through the deal before going through the whole process of intense due diligence as securing funding for purchase is very difficult. If the buyer is dependent on bank financing, a commitment letter from the institution is a must and the board should look at the acquires history of closing such deals before accepting the offer.
10. FDI norms and policies and anti-competitive laws
The country of the acquirers plays an important role nowadays before closing such deals. Reason for the same is the FDI rules and regulations and requirement of the government’s approvals for such deals. So while selecting the acquirer the board must look whether such a deal would be permissible under the country’s FDI norms and what are the chances of the government approving such deals.
Further, nowadays if the acquirer belongs to the same sector then the approval of anti-competitive regulatory is a must.
So, the board must look into the FDI norms, approved FDI in the sector and the government chances of approving such deals. Also, the board must look into the fact that whether such acquisition would be allowed by the anti-competitive body.
11. Exit strategy
The board before making the offer to sell must make an exit strategy and a list with the minimum amount of requirements that a buyer has to fulfil before buying the stake in the company which could consist of multiple of above-mentioned factors. So, the board should select that acquirer that fulfils most of the requirements of the checklist so that exit strategy is fulfilled.
Hence, even though the purchase price for the company is one of the most important factors to be considered by the board while choosing between different acquirers for the business but none the less it cannot be the sole factor while choosing. Various other factors need to be considered for a proper selecting of an acquirer so that the company does not end up with a bad exit deal while choosing the one the highest purchase price. So, the company should make a decision after considering all the requisite factors so that they take a lucrative deal which is good in the long term and choose the best acquirer.
Students of Lawsikho courses regularly produce writing assignments and work on practical exercises as a part of their coursework and develop themselves in real-life practical skill.