Structuring issues involved in M&A deals

Introduction
The structured form of merger and acquisition is apprehended from a binding
agreement between the parties that highlights the rights and obligations to be
performed in merger and acquisition. It prefers to present the duties each party
is entitled to perform under the agreement. In simple words deal structure refers
to the terms and conditions to be fulfilled in M&A Agreement.
The main motive of merger and acquisition is to join or synergizing of two
business entities or organisations together to become one entity for different
reasons. It is known to be mutual agreement between both the parties which are
willing to come together as per the formation of deal structure of M&A process.
Deal structuring is a part of the M&A process; it is one of the steps that must be
taken in a merger or acquisition. It is the process of prioritizing the objectives of
a merger or acquisition and ensuring that the top-priority objectives of all
parties involved are satisfied, along with considering the weight of risk each
party must bear. Initiating the deal structuring process requires all parties
involved to state:
 Their stance on the negotiation;
 Observable latent risks and how they could be managed;
 How much risk they can tolerate; and
 Conditions under which negotiations may be canceled.
Developing a proper M&A deal structure can be quite complicated and
challenging because of the number of factors to be considered. These factors
include preferred financing means, corporate control, business plan, market
conditions, antitrust laws, accounting policies, etc. Employing the right kind of
financial, investment, and legal advice can make the process less complicated.

Ways of Structuring an M&A Deal

There are three well-known traditional ways of structuring a merger acquisition
deal although, in recent times, business entities have engaged in other, more
creative and flexible deal structuring methods. The three traditional ways of
structuring an M&A deal are asset acquisition, stock purchase, and mergers. The
methods can also be combined to achieve a more flexible deal structure.
1. Asset Acquisition
In an asset acquisition, the buyer purchases the assets of the selling company.
An asset acquisition is usually the best deal structure for the selling company if
it prefers a cash transaction. The buyer chooses which assets it wants to
purchase.
Advantages of an asset acquisition may include:
 The buyer can decide which assets to buy from the seller and which not
to.
 The selling company continues as a corporate entity after the
sale, containing the remaining unsold assets and liabilities.

Disadvantages of an asset acquisition include:

 The buyer may not be able to acquire non-transferable assets, e.g.,
goodwill.
 An asset acquisition may lead to high-impact tax costs for both the seller
and the buyer.
 It may also take more time to close the deal, compared to other deal
structures.

2. Stock Purchase
Unlike an asset acquisition, where there is a direct transaction of assets, assets
are not directly transacted in a stock purchase. In a stock purchase acquisition, a
majority amount of the seller’s voting stock shares are acquired by the buyer. In
essence, it means control of the seller’s assets and liabilities are transferred to
the buyer.
Advantages of a stock purchase acquisition:
 Taxes on a stock purchase deal are minimized, especially for the seller.
 Closing a stock purchase deal is less time-consuming since negotiations
are less complicated.
 It may be less expensive.
Disadvantages of a stock purchase acquisition:
 Legal or financial liabilities may accompany a stock purchase acquisition.
 Uncooperative minority shareholders may also be a problem.

3. Merger
Though the term “merger” is commonly used interchangeably with
“acquisition,” in a strict sense, a merger is the result of an agreement between
two separate business entities to come together as one new entity. A merger is
typically less complicated than an acquisition because all liabilities, assets, etc.
become that of the new entity.
In structuring a deal, the advantages and disadvantages must be considered
along with other influencing factors to reach a conclusion on which method to
adopt.

Creating a Proper M&A Deal Structure

To create a great deal structure, aim for a win-win scenario, where the interests
of both parties are well represented in the deal and risks are reduced to the
barest minimum. Most often, win-win deal structures are more likely to lead to
a sealed merger or acquisition deal and may even reduce the time required to
complete the M&A process.
There are two important documents that are used to delineate the M&A deal
structuring process. They are the Term Sheet and Letter of Intent (LOI).
 Term Sheet: A Term Sheet is a document stating the terms and
conditions of an intended financial investment, in this case, a merger or
acquisition. Term sheets generally are legally binding unless otherwise
stated by the parties involved.
 Letter of Intent (LOI): As the name implies, a Letter of Intent (LOI) is a
document outlining the understanding between two or more parties that
they intend to formalize later in a legally binding agreement. Like the
term sheet, an LOI is usually not intended to be legally binding except for
the binding provisions included in the document.