An M&A agreement is a binding agreement between the parties to a merger or acquisition (M&A) that sets out the rights and obligations of both parties. It establishes what each party to the merger or acquisition is entitled to and what each is required to do under the agreement.
There are three traditional ways to structure a deal:
Asset acquisition (asset deal):
In an asset acquisition, the buyer acquires the assets of the selling company, and it's usually the buyer who chooses which assets to buy.
The advantages of an asset acquisition can vary depending on the buyer's profile, since:
- The buyer can decide which of the seller's assets to buy and which not to.
- The selling company continues as a corporate entity after the sale and retains ownership and control of the remaining assets and liabilities not sold.
These deals are typically seen in situations of financial distress, where the goal is to sell the company's productive unit (machinery, facilities, customer portfolio, brands, etc.) to preserve value before liquidating and dissolving the company.
The disadvantages of an asset acquisition include:
- The buyer may not be able to acquire non-transferable assets, for example, those included in so-called goodwill, which refers to the value of a company derived from its brand, customer base, and the reputation associated with its intellectual property.
- An asset acquisition can generate significant tax costs for both the seller and the buyer.
- It can also take longer to close the deal compared with other deal structures, which cover all assets and liabilities through the purchase of the company.
Share purchase (share deal):
Unlike an asset acquisition, where there is a direct transfer of assets, assets are not traded directly in a share purchase. In a share purchase acquisition, the buyer acquires an amount of the seller's voting shares, which can be a minority stake, a majority stake, or all of them. In essence, this means that control of the seller's assets and liabilities is transferred to the buyer.
Advantages of a share purchase acquisition:
- Taxes on a share purchase agreement are minimized, especially for the seller, compared with selling each of the company's properties individually.
- Closing a share purchase agreement takes less time, since the negotiations cover the company as a whole rather than fragmenting it into the many properties it may have.
Disadvantages of a share purchase acquisition:
- Legal or financial liabilities come with a share purchase acquisition, in the sense that the buyer takes ownership of the entire company, also assuming the financial obligations that have allowed it to be acquired and maintained throughout its life.
- Uncooperative minority shareholders can also be a problem and hinder the sale if they disagree, making it harder to obtain a majority or full stake in the share capital.
Mergers:
Although the term “merger” is commonly used interchangeably with “acquisition,” strictly speaking, a merger is the result of an agreement between two separate business entities to combine as a new entity. A merger is usually less problematic than an acquisition because all the liabilities and assets of the two become those of the new entity resulting from the deal, which also generates synergies that benefit the operations of the combined company.
In this case, it's key to reach an agreement on ownership of the new entity, that is, how the share capital will be divided among the former owners of the two merging companies, based on the contributions they make to the creation of the new company.
When structuring a deal, you should weigh the advantages and disadvantages along with other influencing factors to decide which method to adopt, based on the particular circumstances of the parties and the fundamental goals driving the deal.
