M&A Deal Structure

What Is M&A Deal Structure?

The rights and obligations of the buyer and seller in a transaction are outlined in an M&A deal structure.

The type of consideration in the transaction, the role of management on both sides after the deal closes, the requirements that must be met for the deal to close (such as regulatory clearance), and other contingencies are typically considered.

Any successful merger will depend heavily on the agreement's structure and outlined protocols/processes, which include how the arrangement will create value for all parties.

Much of the time in M&A deal structuring is dedicated to thoroughly analyzing unforeseen future risks, sometimes spanning several years. Stakeholders need to clarify several issues, including:

• How are these entities funded, and how is that process broken down?
• Ensure all contractual agreements stated are met by all parties for the transaction to occur smoothly
• Ensure all conditions are clear if the deal goes through with only some parties. (e.g., failure to achieve regulatory clearance)
• A timeline for activities and ensuring all milestones are addressed and agreed on
• Plans to handle potential deal risks

While the basic structure of merger deals has remained consistent over time, there's been a trend toward greater creativity to ensure all parties are satisfied. Over time, the foundational aspects of mergers have evolved to become more innovative, aiming to satisfy all parties involved.

Ways Of Structuring An M&A Deal

Asset acquisitions, equity purchases, and mergers are the three conventional M&A deal structures. These techniques can also facilitate the creation of a more adaptable contract structure.

1. Asset Acquisitions

Buyers often have greater control in this process as they selectively purchase the selling company's assets.

The advantages include:

• The buyer may choose which assets they want to purchase for themselves
• The selling company continues as the same corporate entity after the sale, holding the remaining unsold assets and liabilities as its own

On the other hand, the disadvantages are:

• The buyer cannot purchase non-transferable assets such as goodwill
• Taxes can be a significant consideration for both the seller and buyer, potentially adding substantial costs to transactions involving major assets, corporations, or stocks

2. Stock Purchase

Conceptually, buying stocks is easier than buying assets. Consequently, it's generally a simpler, less complicated transaction.

The acquirer purchases the target's stock and assumes its assets and liabilities without alteration. The majority of contracts that the target is bound by, such as leases and permits, pass automatically to the new owner.

For these reasons, choosing a stock buy over an asset purchase is frequently more straightforward.

3. Merger

Although "merger" and "acquisition" are frequently used interchangeably, a merger happens when two or more parties reach a legally binding agreement. The goal of the merger is to combine two businesses into one huge organization.

While liabilities and assets are typically transferred to the new business, a merger may not always be less complicated than an acquisition, depending on the deal's specifics.

Creating a Proper M&A Deal Structure

Aim for situations where both parties are always happy, both sides' interests are fairly represented in the agreement, and where risks are kept to a bare minimum while designing a great deal structure.

Transaction designs aiming for win-win outcomes often result in successful mergers with high closure rates. Two important documents are used in the M&A deal structuring process. These documents are known as the Term Sheet and Letter of Intent (LOI).

1. Term Sheet: In this example, a merger or acquisition, the terms and conditions of an anticipated financial investment are stated in a term sheet. Term sheets are usually legally binding documents, subject to specific conditions or provisions, which may vary by jurisdiction
2. Letter of Intent (LOI): A letter of intent (LOI) outlines the agreement between parties to formalize it later into a legally binding contract

Examples of M&A

Some of the most known M&A examples are:

1. Verizon and Vodafone: Verizon Communications and Vodafone implemented a merger back in 2014. Verizon acquired 45% of Vodafone's shares. As mentioned in the article, larger companies typically acquire smaller companies; as we all know, Verizon is a much larger organization than Vodafone.
2. Heinz and Kraft: Heinz, like the ketchup we use on our fries, and Kraft, like the mac and cheese we all love, merged together back in 2016 and named themselves "The Kraft Heinz Company." The merger was valued at $100B. Although this sounds like a merger to implement, we are still looking for the combined companies at our favorite consumer stores.  
3. Pfizer and Warner-Lambert: In 2000, Pfizer acquired Warner-Lambert for $90 billion. This example is sophisticated because both companies operate in the pharmaceutical industry, providing increased synergies and issues of too much market share.
4. Google and Android: Google and Android back in 2005 for a whopping $50M. This is another example of how the larger company executes the acquisition process. Although Google is a large company, Android provided features and tech that Google could not compete with, hence the reason for this acquisition. 
5. Exxon and Mobil: Exxon and Mobil merged back in 1998. The deal was closed at $80B. Exxon and Mobil are considered among the most successful mergers in history. Although Exxon and Mobil are considered the largest oil producers nationwide, executing this merger raised investor stakes by 293%, thus allowing investors to reinvest. 
6. AT&T and Time Warner: AT&T and Time Warner merged back in 2018. The two companies joined at a price point of $85.4B after receiving approval from the regulatory sector in the legal system.  

Benefits and Limitations Of M&A Deals

Here are some of the benefits of M&A Deals:

• M&A is a tried-and-true strategy for business expansion, enabling the newly created company to increase market share, expand geographically, overtake or buy out rivals, and acquire new talent, technologies, and assets. 
• The adage "two heads are better than one" holds true in mergers and acquisitions, as two businesses can realize beneficial synergies and generate considerably more value together than they could separately.
• By combining, two businesses may potentially streamline operations and eliminate redundant roles, systems, and licenses.

Some of the limitations of M&A Deals are:

• M&A transactions might take a long time to complete. The lengthy and labor-intensive M&A process might take months or even years to complete. Due diligence, a laborious manual process, detracts from key personnel's regular duties, hampering productivity and impacting involved businesses.
• An M&A transaction involves a lot of risk. Due diligence must be performed properly to ensure that the acquiring company has a complete understanding of the target company, which is why it is customary for businesses to hire outside consultants to assess the deal's risk. 
• Uniting two organizations with differing missions and cultures can be challenging, often resulting in integration difficulties for many merger and acquisition deals.

Free Resources

To continue learning and advancing your career, check out these additional helpful WSO resources:

• Acquisition Structure
• Asset Acquisition
• Asset Purchase vs Stock Purchase
• Capital Raising Process
• M&A Project Names