2 Aug | Written By Hailey Ng
The day my favourite grocer was acquired by another was my first glimpse into the world of M&A. It was 2017, and Village Grocer had just taken over Ben’s Independent Grocer. At the time, I couldn’t make sense of it — why would anyone sell something they’d worked so hard to build? Years later, I’ve come to realise that M&A isn’t just about letting go; it’s about vision, strategy, and the inevitable need to evolve.
In this post, I’ll break down the world of M&A — how deals are structured, the role legal teams play, and the challenges that can turn even the best-planned mergers into corporate nightmares.
What Exactly is M&A?
In the simplest terms, M&As are the process where companies either merge into one new entity or one company acquires another.
- Mergers: This happens when two companies of similar size decide to combine forces to form a new entity. For example, Glaxo Wellcome merged with SmithKline Beecham in 2000 to form GlaxoSmithKline, creating a pharmaceutical giant.
- Acquisitions: Here, one company buys another. The acquired company can either be absorbed into the buyer or continue to operate independently. A prime example is Facebook’s (now Meta) acquisition of Instagram in 2012, where Instagram maintained its identity while being integrated into Facebook’s ecosystem.
Key Players in M&A
- Acquirer/Buyer: The company making the purchase or merger offer
- Target: The company being acquired or merged
- Seller: The party that owns the Target or its assets and is negotiating the sale
- Investment Banks: They provide advice, perform valuations, and often help finance the deal
- Lawyers: They handle contracts, ensure regulatory compliance, and mitigate legal risks
- Shareholders: In many cases, shareholders of both companies need to approve the deal
- Regulators: Government bodies like the UK’s Competition and Markets Authority (CMA) ensure that the deal doesn’t harm market competition
Benefits of M&A
M&A transactions can unlock significant advantages for companies, often transforming industries and supercharging growth. Here are some of the key benefits:
1. Synergies
This is the magic where 1 + 1 equals more than 2. Synergies happen when the combined value of two companies exceeds their standalone worth, thanks to cost-saving efficiencies, revenue growth, or both. A prime example is Disney’s $71 billion acquisition of 21st Century Fox in 2019, which supercharged Disney’s streaming platform, Disney+, by adding massive hits like The Simpsons and X-Men to its content arsenal.
2. Market Expansion
One of the fastest ways to break into a new market is through acquisition. Why build from scratch when you can buy your way in? Walmart’s acquisition of Flipkart in 2018 gave Walmart instant access to India’s booming e-commerce market — a key strategic move in tapping into a country with over a billion consumers and growing online demand.
3. Cost Efficiencies
M&A is a great way to streamline operations by eliminating redundancies. Take Sprint and T-Mobile’s merger in 2020 for instance. They aimed to create a stronger telecommunications player by combining their infrastructure. This consolidation allowed the companies to streamline operations, resulting in reduced operational costs through the integration of networks and IT systems.
4. Access to Talent and Technology
Acquiring a company can also mean acquiring cutting-edge technology or top-tier talent that would otherwise take years to develop or recruit. Google’s acquisition of DeepMind in 2014 is a classic example. By snapping up the AI research company, Google gained access to advanced AI capabilities, boosting its own innovation and keeping ahead in the AI race.
Structuring the Deal: Share vs. Assets Sale
In an M&A transaction, one of the first decisions is how to structure the deal: will the buyer acquire shares, assets, or both? Each structure has unique advantages as well as legal and financial implications. The decision often dictates the entire approach to the transaction, so let’s break it down:
1. Share Sale
In a share sale, the buyer purchases the shares of the company, acquiring the entire entity. This means the buyer takes over all assets, liabilities, and obligations, often referred to as buying the company “warts and all.” The sellers are typically the shareholders, who sell their shares to the buyer.
- For Sellers:
- This approach offers a “clean break” for sellers, as they divest all liabilities to the buyer. From a practical standpoint, share sales are less disruptive because contracts, licenses, and agreements remain with the company. The change is at the ownership level, so externally, business relationships often continue seamlessly.
- From a tax perspective, individuals often favour share sales to avoid double taxation — once on the company’s assets and again when they receive sale proceeds. (Double taxes: twice as painful as double texting)
- For Buyers:
- A share sale allows for business continuity — contracts, assets, and employees all remain in place. However, the buyer assumes all liabilities, including hidden ones, so due diligence is crucial here. For example, if the company being acquired has outstanding legal disputes, the buyer inherits them.
2. Asset Sale
In an asset sale, the buyer cherry-picks specific assets and liabilities they want, leaving the less desirable elements (like debt or ongoing lawsuits) with the seller.
- For Buyers:
- Asset sales allow for greater flexibility, as buyers can pick and choose which parts of the business they want to acquire. This is ideal when buyers want to avoid certain liabilities or risks. For example, Lenovo’s acquisition of IBM’s PC division was an asset sale, where Lenovo selectively acquired the technology and inventory without inheriting IBM’s legal or operational headaches.
- Asset sales allow for greater flexibility, as buyers can pick and choose which parts of the business they want to acquire. This is ideal when buyers want to avoid certain liabilities or risks. For example, Lenovo’s acquisition of IBM’s PC division was an asset sale, where Lenovo selectively acquired the technology and inventory without inheriting IBM’s legal or operational headaches.
- For Sellers:
- This structure can be trickier as sellers are left with residual liabilities and may face double taxation on the sale of assets and distribution of proceeds to shareholders. It’s not as clean a break as a share sale.
How Legal Teams Contribute to M&A Transactions
If M&A were a puzzle, legal teams are the people frantically trying to make sure all the pieces fit — without leaving any gaps for lawsuits to slip through later. Their job is critical in structuring, negotiating, and closing the deal, ensuring everything stays above board.
1. Structuring the Deal
One of the first jobs of the legal team is to determine whether the deal should be structured as a share sale or an asset sale. The decision hinges on liability exposure, tax implications, and the level of disruption the buyer is willing to manage.
2. Drafting and Negotiating Contracts
Legal teams draft and negotiate contracts like the Sale and Purchase Agreement (SPA), Non-Disclosure Agreements (NDAs), and Transition Services Agreements (TSAs). These documents spell out exactly what both parties are agreeing to — leaving little room for future misunderstandings.
3. Regulatory Compliance
Compliance is critical, particularly with competition law. Legal teams work to ensure that the deal doesn’t violate any antitrust regulations. In cases like the failed merger between AT&T and T-Mobile, antitrust issues can lead to significant legal challenges and, in some cases, termination of the deal.
Due Diligence: Because Surprises Are for Birthdays, Not M&A Deals
M&A due diligence is like a detailed background check — no stone is left unturned. Buyers need to know exactly what they’re getting into, and sellers need to ensure they’ve disclosed everything relevant.
1. Legal Due Diligence
Legal due diligence involves reviewing the target’s contracts, intellectual property, and pending litigation.
2. Financial Due Diligence
This involves an in-depth analysis of the Target’s financials, including revenue streams, debt levels, and profit margins. Financial due diligence ensures that the buyer is paying a fair price and that there are no hidden financial liabilities.
3. Commercial Due Diligence
This is where the buyer assesses the Target’s market position, day-to-day operations, customer base, and growth prospects.
How M&A Deals are Financed
M&A deals can be financed in various ways, depending on the buyer’s strategy and financial standing.
- Cash Transactions
The buyer pays the target entirely in cash, providing immediate liquidity to the seller, but potentially straining the buyer’s finances. - Share Transactions
The buyer offers shares in their own company as payment, allowing the seller to become a shareholder in the buyer’s company and benefit from its future growth. - Leveraged Buyouts (LBOs)
The buyer finances the deal using debt, often secured against the target company’s assets. - Hybrid Transactions
A combination of cash, shares, and debt, typically used in larger deals to manage liquidity and leverage.
Challenges in M&A: What Could Possibly Go Wrong?
M&As are like the corporate world’s version of matchmaking. Sometimes, two companies seamlessly come together like the perfect power couple. Other times, they can hit some serious bumps in the road. Here are a few challenges that can throw even the most promising matchups off track:
1. Integration Issues
The “honeymoon phase” in M&A often ends abruptly when the real work of combining two companies begins. If the newly merged partners have wildly different corporate cultures or operational systems, things can go south fast. Integrating teams, aligning objectives, and merging IT systems can feel like trying to fit a square peg in a round hole. A botched integration can lead to confusion, inefficiency, and even talent loss — making the once-glamorous deal start to look like a messy divorce in the making.
2. Regulatory Challenges
Just like in-laws, regulators can have a lot to say about your corporate marriage. Large M&A deals are often subject to regulatory scrutiny to ensure they won’t reduce competition or harm consumers. If the deal raises antitrust concerns, regulators might block it or impose strict conditions. These hurdles can stall negotiations or drag the deal into legal battles — turning a seemingly perfect union into a bureaucratic nightmare.
3. Valuation Discrepancies
In the world of M&A, valuing the target company is a bit like agreeing on the wedding budget — everyone has different expectations. Buyers want a bargain, sellers want top dollar, and if there’s a major disconnect, negotiations can grind to a halt. Disagreements over the company’s worth, future prospects, or undisclosed financial issues can sour the deal before it even gets to the altar.
Conclusion
M&A is like an orchestra, where different elements blend together to create something far greater than the individual parts. Each company brings its own unique instruments — its strengths, rhythms, and nuances. When conducted with vision and strategy, these pieces come together in perfect harmony, creating a symphony that resonates not just within the companies, but across entire industries.
Just as I once struggled to understand why my favourite grocer would be sold, I now see the beauty in how M&A, like a masterful performance, is about timing, precision, and knowing when to bring in new players. Done well, it creates something that goes beyond what either company could do on its own, shaping the future in new and exciting ways.
Leave a Reply