M&A – mergers and acquisitions or corporate transactions – is about how two or more companies are consolidated into each other.
Careful preparation is required if you are selling or buying a business or company. Successful Mergers and Acquisitions have a chance to deliver real synergies through economies of scale and risk reduction.
Mergers and acquisitions can be done in many different ways and it is rarely obvious which solution is best in terms of tax, profit and efficiency, among others.
With the help of a good M&A advisor, you are well placed to find the best possible deal and gain maximum peace of mind – whether you are a buyer or a seller.
What is M&A?
M&A stands for “Mergers & Acquisitions”. In English, it is usually called business transactions or business acquisitions. M&A means that a company is bought or merged with another company. Often the whole company is involved in the transaction, but it can also be a spin-off of part of the business.
Similarly, an acquisition may involve a change of ownership of all the shares or only a controlling interest. It does not even have to involve the purchase of shares. It is common for only the business to be purchased through a so-called ‘squeeze-out’.
Who is the buyer in a business combination?
Most commonly, the buyer is a company or other legal entity. This is advantageous from a tax point of view. However, it can also be a natural person who is the buyer in an acquisition.
Will you succeed with M&A?
Nielsen Företagsvärdering AB has extensive experience in business valuations and transaction advice in connection with mergers and acquisitions, whether for start-ups, smaller companies, or larger companies.
Our philosophy is that there is no one size fits all. Therefore, we always start from your specific situation when assisting you with your corporate transaction.
Types of mergers and acquisitions – various corporate transactions
Actually, Mergers and Acquisitions is an umbrella term for several different types of corporate transactions. Here are the most common types of M&A:
When one or more companies merge, it is called a merger of limited liability companies, “Mergers” in English. First letter of “M&A”. It starts with the board of directors of each company agreeing to the merger. They then seek shareholder approval.
In practical terms, mergers of companies can take place either by absorption or combination:
Absorption: A limited company takes over the assets and liabilities of one or more other limited companies. The transferring company is then dissolved without liquidation.
Combination: Two or more companies are merged by forming a new acquiring company.
In other words, when companies merge, either one of the company names can be used or a new common name can be created. It is also possible to change the name.
Mergers also occur from time to time among listed companies. In such cases, the companies can either choose to continue under one company’s share ticker or they can create a new common ticker.
An acquisition is the purchase of another public company. Acquisition – the second letter of the abbreviation M&A. Usually the buyer is a company, but it can also be another legal entity or a private person. For tax purposes, however, it is advantageous if the purchaser is a company.
There are two main ways to buy another company:
Buying the whole company – share transfer
Only buying the business – inward transfer
Buy all shares – share transfer
Buying the whole company (share transfer) means that the buyer takes over both the rights and obligations of the target company’s business.
A share purchase is usually the simplest option in M&A, but at the same time involves a higher risk for the buyer. This is because the target company may have hidden liabilities.
In the case of a full business transfer, there are rarely any dilemmas about what is included in the purchase, as the entire business is being sold. However, it is wise to define everything carefully in the purchase agreement. For example, it may be of interest to the buyer if knowledge transfer is included in the agreement.
Buying only the business – the “hard sell”
The alternative is to buy only the business itself without the company. This type of acquisition is known as a ‘squeeze-out’.
In this type of business transaction, only the cash is included – in whole or in part, for example:
These can then be absorbed into another company or brought into a start-up limited company. An inkind transfer is more complicated than a share purchase because everything has to be specified. On the other hand, the buyer thus knows exactly what is included and what possible obligations it entails. This means lower risk.
M&A with a contribution in kind
The purchase of shares and the transfer of assets are the most common forms of company acquisition, but there are also other forms of company transactions.
A new share issue is a common way of carrying out an M&A. In a so-called ‘rights issue’, the acquiring company issues new shares which the seller receives as payment. In exchange, it receives the shares of the target company.
The advantage of a contribution in kind is that the company does not have to use any cash to acquire another business. The disadvantages include dilution of the shares, a shift in power and the risk that the company’s own shares are wrongly valued.
Consolidation through M&A
Consolidation is a type of M&A where one or more subsidiaries are incorporated into the parent company. Alternatively, one or more companies within the same group may be merged into a new and larger entity.
Through consolidation, the parent company often acquires the subsidiary, whose accounts are then included in those of the parent company.
The concept of consolidation is also used in group accounting and in technical analysis in the stock market. These should not be confused with the consolidation referred to in the context of mergers and acquisitions.
MBO – Management Buyout Acquisitions
A Management Buyout – MBO is a type of M&A in which a management team buys a majority stake in the company they manage. The money often comes from private funds, possibly together with external financiers and possibly also with vendor-backed financing.
The motive behind an MBO is often to take the limited company private so as to make it easier to change the business. This enables management and potential co-investors to move the company forward more quickly and make it more profitable. When the company is privately owned, it does not have to take into account the constraints otherwise associated with a publicly owned company. The aim is that this will ultimately lead to a higher valuation.
An MBO can also be a way for a company to spin off a part of the company that is not in line with its core business.
MBI – Management Buy In
Management Buy In, MBI, is similar to an MBO but the difference is that instead, management from another business buys a majority stake in the company. They then replace the current management team.
In both cases, a management team takes control of the company. However, in an MBI, management is at a disadvantage compared to an MBO due to a knowledge deficit compared to the outgoing management.
Why do you do M&A?
Mergers and acquisitions are one of the most important tools companies have to grow. It is a beneficial process of change.
At the same time, it is important to know that M&A is something that can be very risky if not done correctly. Many people do not know that a majority of all M&A deals are either value neutral or downright value destroying.
Yet – Mergers & Acquisitions remain as one of the most effective ways to expand a business.
There can be many benefits and several motives behind mergers and acquisitions, including:
Synergies – economies of scale and reduced risk
Faster growth than organic growth alone
Securing up distribution channels
More predictable supply chains
Increased market share
Better negotiating position with suppliers
Access to patents
Increased knowledge and know-how
Downsizing by spinning off part of a business
Synergies of corporate transactions
One of the main advantages of corporate transactions is that they create synergies. Researcher Igor Ansoff has described this as the 2+2=5 effect.
Synergies are seen in the increased future cash flows of the company and are an effect of risk reduction and economies of scale. In other words, an M&A can lead to lower corporate risk and lower cost per unit or service produced – if all goes according to plan.
Mergers and Acquisitions in three ways
To understand the benefits of M&A, it may be useful to look at the goal of corporate transactions. They are usually divided into three categories of integration processes:
Horizontal: Acquisition of competitor that is on the same level. The goal is more market share and knowledge transfer.
Vertical: Acquisition of companies at a different level of the value chain, such as a distributor or subcontractor. Can lead to reduced transaction costs and more secure flows of, for example, products, raw materials or services.
Lateral: Acquisition of companies in another industry. The aim is to increase risk diversification.
Sixty years ago, the consensus was that lateral corporate transactions usually created the most value. Today, it is much more common to advocate horizontal acquisitions and mergers. The idea is that companies are most successful when they deepen and create a stronger market position in their field.
The M&A transaction process – how it works
The transaction process in an M&A is often described in three steps:
In fact, these phases or constituent sub-moments often occur at least partially in parallel. Some M&A firms such as PWC, Deloitte and others often have their own ways of describing the process.
But this “three-stage rocket” is the most common model.
The strategy phase of business transactions includes analyses and sub-processes that underlie the rationale behind the acquisition. It is in this phase that the target company is valued and an initial contact is made.
This phase often begins with a strategic analysis that provides answers as to why an acquisition should be made in the first place. It also forms the basis for the acquisition strategy to be used.
Through the strategic analysis, it becomes clear what is driving the profits of the target company in an M&A. This often includes analysis of the industry and the competitive situation.
Identifying target companies
The strategy phase involves identifying and evaluating different target companies. There may not be only one acquisition candidate. Business brokers and private networks are helpful in identifying suitable acquisition targets. Sometimes a search is not needed, for example in the case of M&A within a group or when the target company is a competitor that has long been on the company’s radar.
Finally, a business valuation is needed as part of the strategy phase of M&A. This is often one of the more difficult stages as it is never possible to determine an exact objective value of a company. Business valuations are always based on assumptions and best judgement. Nevertheless, it is a necessary step for a merger or acquisition deal to go through.
Transaction phase in M&A
The transaction phase of an M&A is often based primarily on the transfer of information.
By means of a well-conducted inspection, the buyer is able to detect irregularities in the target company in good time. Accounts, contracts, agreements and other documentation are reviewed to check that everything is in order. At this stage, it is always possible to cancel the deal if information comes to light that indicates that the business purchase will be unfavourable.
Structuring the acquisition
In order to decide how to structure the acquisition, the first step is to consider how it will be financed, what makes sense from a tax point of view, civil law issues and accounting aspects.
It is at this stage that the question of whether it is the shares or the cash that is to be purchased arises. To work out what is most advantageous, it is common to use the expertise of lawyers and accountants.
Structuring is also about deciding how the M&A deal will be financed. One question is how much of the purchase price will be paid. Sometimes a performance-based earn-out is used if the seller has guaranteed a result.
The form of payment can vary. The most common form of payment is cash, but there are also alternatives such as a non-cash issue where payment is made in the form of shares.
In the structuring phase, it is also important to resolve all labour law issues. For example, in corporate transactions, the seller is obliged to negotiate with the trade union before the acquisition takes place.
Drafting the agreement
In the transaction phase, the contract is drafted. It is rarely a piece of paper presented by one party and then immediately accepted by the other. Contract drafting is more like a process that evolves through repeated contacts between the parties.
It is not uncommon for different pre-agreements to be drawn up first. However, the letter of intent and the purchase agreement can be considered the most important.
In addition to the purchase agreement itself, it is common that other agreements and side agreements are also concluded. These may include licensing agreements, confidentiality agreements, employment agreements and the like.
For the seller, the purchase price is by far the most important, while the buyer may often be more interested in guarantees, obligations and the like.
Once the deal is done, it is time for the integration phase in business transactions. This is about realising the value of the acquisition.
Usually an M&A advisor is not involved in the integration phase, but it depends on a case-by-case basis. If you engage us for mergers and acquisitions, we are always willing to discuss how we can assist you in this final stage of the transaction process as well.
Business transactions and tax
In the context of M&A and corporate transactions, there are a lot of tax considerations to make. What is most favourable for the seller is not necessarily best for the buyer and vice versa.
The example concerns the way in which the acquisition of a business should take place in an M&A. As mentioned above, there are two main ways – transfer of shares or transfer of assets.
Share transfer often favourable to the seller
For the seller, it is often advantageous to do a share transfer and avoid just selling the deposit. This is because the seller is taxed on the difference between the sale price and the residual value of each asset if there is an in-cash transfer. The purchase price lands on the selling company, which must be taxed one way or another. Therefore, the sale of an asset at a loss is often an expensive business transaction for the seller.
Crowd selling can be advantageous for the buyer
For the buyer, on the other hand, the option of a “no-strings-attached” transfer can be advantageous. The buyer takes over the assets at the purchase price. A regular depreciation of the value is then made. The purchase price is the initial value of the shares. This means that the tax depreciation base is higher in a cash deal than if the shares are purchased in the company.
Would you like advice on M&A?
Nielsen Företagsvärdering AB will help you assess how your M&A can be carried out in a tax-efficient manner. Our team includes both accounting consultants and lawyers who together can determine the best approach for your merger or acquisition.
The term M&A – Mergers and Acquisitions – is sometimes used rather casually but there is an important difference between the two “components” of the term.
A “merger” is a merger between two or more companies. The different businesses are merged into one. Often they form a whole new company together.
An “acquisition” usually refers to a business transaction in which one company acquires another by taking it over.
In practice, there is a lot of overlap between mergers and acquisitions, which is why they are often referred to as one and the same – M&A.
We are your M&A advisors
Nielsen Valuation Group is an innovative M&A advisor. We have extensive experience in assisting in all types of corporate transactions – acquisitions as well as sales of companies.
We believe that there are so many different cases in mergers and acquisitions that it is not possible to apply a standardised template to all of them. The needs for, for example, valuation, legal support, business integration, etc., vary greatly depending on the type of business and the size of the company.
When you engage Nielsen Valuation for a business transaction, you will receive an individual approach and a tailor-made proposal. It will be both better and more cost-effective than buying a pre-packaged solution from one of the M&A giants.
Want to go with a cheaper option or even do the valuation yourself? Nothing is stopping you, but...
You may lose the lawsuit, due to the valuation failing to be waterproof.
You may never settle the conflict, hurting the relationship with your counterpart.
You may get deceived while entering or exiting your partnership.
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