M&A Deals

Purchase and Sale Agreement

A Purchase and Sale Agreement is the contract that documents all of the terms agreed upon between the buyer and the seller in an M&A transaction. Sometimes, this document is referred to as the Definitive Agreement. In M&A deals, this is THE document as it controls the actual closing and any open or unresolved issues part-time.

A purchase and sale agreement can take the form of a merger agreement, tender offer document, or a stock or asset purchase agreement. All of these forms of purchase and sale agreements contain a number of important clauses and terms relating to the transaction. Therefore, it’s important for both the buyer and seller to have an experienced lawyer and a good M&A team to make sure the agreement is fair for both parties. Obviously, some of the terms are more important than others.

m&a deals - purchase and sale agreement continued

There are several key sections of a purchase and sale agreement including the following: valuation/consideration, execution provisions, representations and warranties, covenants, conditions to closing, termination provision, break-up fees, etc.

• Execution provisions detail the way in which the deal is structured and the form of consideration. For example, an asset purchase and an all cash consideration.

• Representations and warranties outline exactly what is being sold and that the seller is delivering a clean title which is proof of ownership.

• Covenants are the agreements made between the buyer and seller. For example, a seller could be required by the buyer to keep certain employees.

• Conditions to closing are conditions that must be met such as regulatory approval prior to the closing of the transaction.

• Termination provisions are conditions in which the transaction could be terminated. For example, if the buyer cannot finance the acquisition.

• Break-up fees are the fees that must be paid in the event that one party backs out of the transaction.

These are only some of the many topics covered in a purchase and sale agreement. These agreements are comprehensive documents that are legally binding to all parties involved in the transaction. An experienced M&A advisor knows, from experience, when and where to compromise on certain issues. Furthermore, a good M&A advisor will work closely with their client's lawyer to make sure that whether the client is on the buy-side or the sell-side that they receive a fair document for closing.

M&A Deals - Confidentiality

A confidentiality agreement or Non-Disclosure Agreement (“NDA”) is a legally binding contract between the company interested in selling and the potential buyer. The NDA governs the sharing of confidential company information and prohibits certain other activities. Typically the confidentiality agreement is drafted by the selling company’s M&A advisor or the company’s attorney. It is distributed to potential interested buyers along with a teaser of the target company, which provides some details on the acquisition opportunity, but not enough so that the company for sale can be identified. Upon execution of the confidentiality agreement or NDA, a detailed confidential information memorandum (“CIM”) of the selling company is released to the potential acquirer. It also paves the way for the buyer and seller to have frank conversations about the selling company’s business.

Typically, the NDA will include the following governing provisions: how the information may be used, the term, permitted disclosures, non-solicitation of employees, no contact provisions for customers, suppliers, etc., and return of confidential information when negotiations cease. In some cases, the buyer is allowed to destroy the confidential information and may be required to supply a certificate indicating that the information was, in fact, destroyed.

The use of information provision states that any disclosed information is confidential and can be used only to make a decision with regard to a proposed transaction. There is usually a term of one or two years for which the information must remain confidential. The permitted disclosures outline what confidential information a potential buyer can disclose and prohibits the disclosure of negotiations for a possible transaction between the buyer and seller. The non-solicitation provision prohibits the hire of the selling company’s employees by the potential buyer for a particular period of time. Many times, the buyer will “carve out” certain hiring, like general solicitations that do not target the selling company or the permitted hiring of people that have been terminated or have left the selling company.

A good M&A advisor should be able to advise you as to what provisions are important and how to negotiate this very important document. The M&A advisor does not replace your attorney or good common sense; however, they do know what is reasonable and what buyers are willing to accept as they work with hundreds or thousands of buyers each year. The key is to obtain as much protection as possible, but also not to make it so impossible that buyers won’t give your potential transaction the attention it deserves.

M&A Deals - Buyer Motivation - Synergy

What is the primary motivation for the acquisition of another firm? The answer can vary significantly depending on the buyer’s strategies and the structure of the business. Most of the time, M&A transactions are utilized in order to achieve synergies between two companies. Synergy can be realized through multiple sources including operating economies, differential efficiency, financial economies, tax effects, and increased market share. Each of these sources can lead to cost reductions or revenue growth synergies. If done properly, the acquiring company will be more cost effective and will enhance its opportunities for growth.

Cost synergies can be achieved through economies of scale and economies of scope between the two firms. The newly combined company should be able to reduce fixed costs as more units will be produced at a lower cost. The average total cost of production will also decrease as the company spreads costs across its now expanded product line. Furthermore, as the new company removes duplicate departments or operations, the overhead expenses will be reduced thereby increasing profit margin. Revenue synergies can be achieved by selling new products through existing distribution channels which creates new opportunities for growth. Another way revenue synergies can be reached is by utilizing the acquired firm’s technology or geographic reach to improve the acquiring company’s existing products or services or the delivery thereof.

Both revenue and cost synergies can ultimately be realized as a result of differential efficiency. This is the concept whereby the targets firm’s assets will be better utilized because the acquiring firm has a more efficient management team. During the process of an M&A transaction, this is usually a key buyer motivation as it will greatly benefit the shareholders of the acquiring company and some of that potential value can be paid to the shareholders of the company being acquired. Of course, the more value that can be paid to the shareholders of the target company, the more likely they are to agree to being acquired.

It is critical that the investment bank assisting the buying company understand the buyer’s motivation in an M&A transaction. This will help in the process of selecting target firms and valuing acquisition targets based on the potential synergies. A team of highly skilled and experienced M&A advisors will be crucial in assisting buyers in this regard. Similarly, an experienced M&A firm would be able to assist the target or selling company to realize the full value for their company.

M&A Factoid - LLC and C Corporation

Limited Liability Company (LLC)

A Limited Liability Company is a type of corporate structure designed to limit the founders’ losses to the amount of their investment. It is a hybrid structure that combines the characteristics of a corporation and sole proprietorship. An LLC does not pay taxes like a traditional corporation; instead, its owners pay taxes on their proportion of the LLC profits at their individual tax rates. Unlike a corporation, an LLC must be terminated upon the death or bankruptcy of a member. An LLC is not an appropriate corporate structure if the company hopes to go public in the future. It should also be noted that the limits on liability could be exceeded if there is fraud.

C Corporation

A C Corporation or C-Corp is a type of ownership structure that allows any number of individuals or companies to own shares. It is a stand-alone entity that limits its owner’s legal and financial liabilities that may arise due to the actions of the company. In this type of corporation, income is taxed at the corporate level and is taxed again in the form of income taxes when it is distributed to its shareholders. While double taxation is a drawback of this corporate structure, the limited liability it provides to owners as well as the ability to reinvest profits in the company at a lower corporate tax rate are advantages of C Corporations. Once again, it should be noted that the limitation on liability could be exceeded if there is fraud.

M&A Deals - 2014

M&A deal volume in 2014 was quite robust – almost US$4 trillion of transactions were completed worldwide, which was an increase of over 50 percent from 2013.
43,613 transactions were completed across the globe in 2014. The Americas and Europe experienced approximately the same M&A volume with Asia Pacific trailing by a few points.

2014 M&A Deals By Region

 
By sector, excluding financials, high tech was the most active followed by industrials, consumer products and services, and materials. Although telecom had the lowest number of transactions completed in 2014, deals in this sector were very large, resulting in over US$260 billion of deal value.

2014 M&A Deals by Sector

About Versailles Group, Ltd.

For over 28 years, Versailles Group's skill, flexibility, and experience have enabled it to successfully close M&A transactions for companies with revenues between US$2 million and US$250 million. Versailles Group has closed transactions in all economic environments, literally around the world.

Versailles Group provides clients with both buy-side and sell-side M&A services, and has been completing cross-border transactions since its founding in 1987.

Advantages of a Reverse Triangular Merger

During an M&A transaction, a possible purchasing tactic that can be used by an acquiring company is a reverse triangular merger. A reverse triangular merger is when the buyer forms a wholly-owned subsidiary which in turn works as a purchasing vehicle to acquire the target firm. To execute the deal, the target firm and wholly-owned subsidiary will merge giving the acquiring firm control of the target company. This newly merged company will function as a wholly-owned subsidiary of the acquiring firm so it will own all of its assets (tangible and intangible), liabilities, contracts, etc.

The advantages and disadvantages are the same as a direct merger; however, this type of acquisition is easier to execute since the only shareholder of the acquisition subsidiary is the purchasing firm which provides certain advantages, e.g., shareholder approval easy to obtain.

A reverse triangular merger allows the acquiring firm to gain control of the target company’s non-transferable assets and contracts which is not always possible with other acquisition techniques. Typically, acquirers have difficulty transferring contacts, particularly contracts with the government or governmental agencies when it is an asset transaction. This technique, i.e., utilizing a reverse triangular merger, while not perfect, does help. The downside is that the acquiring company does acquire all of the liabilities of the company as it is essentially a stock transaction.

M&A Factoid

Asset Purchase Agreement

In an M&A transaction, the asset purchase agreement or “APA” is a definitive agreement between the buyer and seller that identifies, among other things, the assets (and usually selected liabilities) being acquired from the seller and the total consideration paid for these assets. The assets and selected liabilities being acquired are detailed in a schedule in the APA. Similarly, any assets excluded from the purchase are also itemized in a separate schedule. The APA will include many important provisions such as representations and warranties, restrictive covenants, financing, solicitation, etc. Unlike a Letter of Intent, the APA is binding on both parties and clearly defines the final deal terms of the transaction. It is important to note that in an APA no shares of the company are being acquired - only the assets (and selected liabilities) of the company for sale are purchased by the buyer. Therefore, the buyer does not acquire any of the seller’s other liabilities, including past obligations that might not even be known on the day of closing.

Stock Purchase Agreement

In an M&A transaction, the stock purchase agreement or “SPA” is a definitive agreement between the buyer and seller that finalizes all terms and conditions related to the acquisition of the seller’s shares. In a SPA, unlike an asset purchase agreement, title to both the seller’s assets and all liabilities are conveyed as a result of the acquisition of the seller’s shares. It is extremely important for the seller to review the representations and warranties section of the SPA to ensure there are no statements that are believed to be untrue. False representations and warranties could result in legal action even after the deal is closed.

What is M&A

Mergers and acquisitions or “M&A” involves the sale of a company, business division, or assets to another company in an attempt to enhance shareholder value. M&A is a critical part of many corporate strategies as it is used to increase growth or can be used to reduce risk and protect shareholder value. In order to complete successful M&A transactions, companies usually enlist the help of investment banks on both the sell-side and buy-side of the deal.

Sell-Side M&A Advisory

A sell-side M&A advisor will work closely with the selling company in order to effectively market its sale. One of the main responsibilities of the sell-side M&A advisor is to produce a Confidential Information Memorandum (“CIM”) or Offering Memorandum, which describes the company in detail, highlighting the firm’s strengths, growth opportunities, and why it would make a good acquisition. The sell-side advisor will also play a critical role in identifying qualified buyers and contacting these buyers in order to complete a sale. The sell-side M&A advisor’s objective is to maximize the consideration paid for the company and to meet the seller’s additional goals. These additional goals may include retaining an equity stake in the acquired company, having a continued role in the company such as a consulting arrangement, retaining a board seat in the company, etc. Sell-side advisors also help facilitate the transaction in many ways, including helping the seller and buyer navigate due diligence, structuring and negotiating the transaction, etc.

Buy-Side M&A Advisory

A buy-side M&A advisor will assist a company in identifying appropriate targets to acquire and complete the purchase in an efficient and orderly manner. The main objective of the buy-side M&A advisor is not only to make sure its client does not overpay for a target, but to ensure the target fits within the acquirers overall corporate strategy and growth objectives. The M&A advisor seeks to complete a transaction that will build shareholder value for its client long after the transaction is closed. The buy-side advisor will also help the buyer navigate due diligence, structure and negotiate the transaction, among other tasks towards the completion of a successful transaction.

Private Placement

Private placements are securities offered by issuers to a select group of potential buyers rather than the open market. Since these securities are not available to the public, they are usually out of the scope of SEC registration and are considered exempt transactions. Although these securities are private, they are still subject to federal securities anti-fraud regulation. In order to qualify for private placement exemption, purchasers of the securities must be sophisticated investors, have access to information normally provided in a prospectus, must be able to bear the investment’s economic risk, and agree not to resell or distribute the securities to the public. Since the placements are private rather than public, the average investor is usually only made aware of the placement after it has occurred.

Venture Capital

Venture capital is a segment of the private equity industry that focuses on investing in new companies with potentially high growth rates. Venture capital firms are an important source of funding for startups that do not have access to capital markets. Venture capital investors provide money to start-up firms and small businesses with perceived long-term growth potential. In return, these investors typically receive equity in the startup and a seat on the company’s board of directors. Venture capital investments are extremely risky but also have the potential for above average returns. Most venture capital comes from a group of wealthy investors, investment banks, and other financial institutions that put together their investments or form partnerships.