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What is an M&A Deal & Deal Structure - The Ultimate Guide

Companies have been merging with and acquiring each other for hundreds of years.

However, in our modern economic state, these transactions have become more important and more complex than ever.

Mergers and acquisitions are financial transactions with variable structures, processes, timelines, and outcomes.

These transactions are critical to healthy corporate finance and understanding the necessary components of mergers and acquisitions is as well.

On DealRoom platform, specifically designed for M&A, we have dozens of deals every year. And in this article we want to explain the important and necessary aspects of mergers and acquisitions, enabling practitioners to plan accordingly and select the right process for their company.

What is an M&A Deal?

M&A Deals are financial transactions in which assets are sold, transferred or consolidated between two companies.

Understanding the Process of Mergers and Acquisitions

Mergers and acquisitions (M&A) are complex financial transactions that consolidate companies or assets through various means.

M&A deals play a large role in the corporate finance industry, creating strategic growth, increased competition and economic stability.

Both mergers and acquisitions are unique transactions with contrasting outcomes.

Understanding the Merger

Mergers consolidate the assets of two companies, creating a newly formed organization. In a merger, it is typical for the acquired company to become part of the acquirer and take their name.

Understanding the Acquisition

Meanwhile, during an acquisition the acquiring company secures a majority stake in the target organization. However, both companies typically keep their individual names.

M&A deals can conclude with a number of different transactions however and are not limited to the definitions above.

Some of these other transactions include, consolidations, take overs, purchase of assets, tender offers, or management acquisitions.

For an M&A deal to be successful, both companies need to be on the same page.

Since these deals have high values, the merger or acquisition deal process is often a complex affair. The potential value of the deal must be clear to all involved parties such as executives, employees, and investors.

How Long Does the M&A Deal Process Take?

M&A transactions can take anywhere from 1 month to well over 1 year to close. The time required to complete an M&A deal usually varies based on the size of the transaction and the involvement of each company. When the buyer is serious and wants to finish the process as soon as possible, the firm can determine the principal terms and deal structure in just a few weeks.

However, even with clear terms conducting the deal itself can be complex, information-dense and time-consuming.

After establishing terms, stakeholders must conduct thorough due diligence, plan integration and executive post-close operations. For executing these processes stakeholders use data rooms, project management tools or specific M&A software like DealRoom which combines both capabilities.

Throughout these processes there are many unknown contingencies that can interfere with the timeline.

For a deal to close efficiently and successfully, all M&A procedures must be completed carefully and with painstaking accuracy.

What are M&A Deal Stakeholders and Their Responsibilities?

M&A deals are comprised of various and differing stakeholders that negotiate, conduct and ideally benefit from the transaction.

These stakeholders represent the parties involved in an M&A deal including the prospective buyers, sellers and target company.

Each of these parties hold specific responsibilities and decision-making powers that are essential to the success and execution of the proposed deal.

While every deal is unique with varying actors and interested parties, the following is a key list of M&A stakeholders along with their individual roles:

1. Buyer or Purchaser

Each M&A transaction requires at least one buyer. The buyer, or purchaser, is the stakeholder that pays the purchase price and acquires partial or all assets of the target company.

The key responsibilities of the buyer during an M&A transaction is to negotiate and establish financial, strategic and transactional terms with the seller. They must also conduct extensive due diligence on the target company before purchase in order to uncover liabilities and analyze fit.

The buyer can turn to third-party advisors to assist in these processes such as lawyers, investment bankers or strategic consultants.

Depending on the structure of the deal, the acquirer is also likely responsible for the success of integration post-close.

This requires blending the target company’s operations, assets and culture into their own. This process can be incredibly complex, time-consuming and is extremely important to the long-term success of the deal.

2. Seller

The seller is the party selling off certain assets or equity to the purchaser in an M&A deal. Seller’s are typically a small group of individuals, such as executives, who control or own the target company.

The seller’s responsibility is to conduct and negotiate an equitable deal, provide the prospective buyer with accurate and substantive information regarding their company and to effectively transfer all purchased assets and securities once an agreement is made.

The seller’s post-close obligations would include reimbursing the buyer should there be a loss of value due to any violations of the purchase agreement or letter or intent.

Not all M&A deals include a seller however.

For example, when the target company is publicly-traded the Board of Directors, not the public shareholders, manage the acquisition.

3. Target Company

The target company is the organization being acquired during an M&A deal. The target company is separate from the assets or liabilities being required and refers only to the corporate entity itself.

Depending on the structure of the deal and what is being purchased, the target company’s involvement greatly fluctuates.

If the target company is the subject of the deal and not a party in it, they will typically not be actively involved with the negotiations but simply aid with the due diligence process.

If the target company is public however, their Board of Directors will likely take part in key negotiations and agreements.

What is an M&A Deal Structure?

An M&A deal structure refers to the binding agreement that ties two parties together when a potential transaction is being discussed. Deal structures state the rights and obligations of the two parties so that there is no scope for confusion later. It elaborates on what the parties are entitled to and what they are obligated to do under the agreement.

M&A Deal Structure

An M&A deal structure is a symbol of mutual agreement between the two parties.

Firms draw up the deal structure during a process called deal structuring. Stakeholders prioritize the goals and objectives of a deal, keeping in mind the risk-bearing capacity of both companies.

The goal of a deal structure is to provide an M&A transaction that fits the needs of both the buyer and seller and provides all involved with an agreed upon end state.

Stakeholders need to be clear about the following before the deal structure can be created:

  • Stance and expectations for the negotiation
  • Plans to handle potential deal risks
  • Conditions which can cause the deal to be unsuccessful or fail to close

Devising an M&A deal structure can be an ordeal due to a large number of critical factors such as the financing means, market conditions, antitrust laws, corporate control, and accounting policies of both parties.

Types of M&A Deal Structure

Traditionally, there are three main ways to structure an M&A deal.

These structures include either

  • asset acquisition
  • stock purchase or
  • merger

These key structures present specific advantages and disadvantages for stakeholders and must be considered carefully.

While these three are the most typical deal structures, it is important to note that modern practitioners are becoming more flexible and creative while structuring M&A transactions.

The following structures are sometimes being combined and altered to achieve the best outcome for stakeholders and a modern economy.

Types of M&A Deal Structure

1. Asset Acquisition

Asset acquisitions are a well-known and more traditional way of structuring an M&A deal.

In this structure, a buyer purchases certain assets of a target company. Asset acquisitions typically involve a cash transaction after the buyer determines which assets to purchase.

Stakeholders may choose to conduct an asset acquisition if the prospective buyer wants to purchase particular assets while not taking on any of the associated liabilities because the target company will keeps its name and corporate entity.

Asset acquisitions do tend to produce high tax costs for both the buyer and seller and is an extremely time-intensive process.

This process is also not ideal for buyers who are looking to acquire non-transferable assets like licenses and patents.

2. Stock Purchase

In a stock purchase acquisition, the buyer acquires all or a majority of a seller’s stock from its stockholders.

Unlike an asset acquisition, all of the target company’s assets and liabilities are transferred to the buyer. The buyer will now own all contracts, intellectual property and licenses.

A stock purchase structure may be good for practitioners seeking a less time-intensive and costly process.

These agreements are typically negotiated quickly because the seller retains much of their normal operations post-close. Taxes are also significantly lower for stock purchases.  

One main disadvantage of stock purchase agreements to consider is that all financial or legal liabilities of the target company will be transferred to the acquirer. Dissenting shareholders may also be an issue during this process.

3. Merger

In a merger, two unique organizations combine to form one corporate entity.

The seller is typically given cash, stock or both in exchange for all assets and intellectual property. In structuring the deal, the seller’s or buyer’s company is reconstituted or an entirely new entity is created.

Comparatively, mergers are generally a simple deal process.

Typically, mergers only require the approval of a simple majority of shareholders. Minimal negotiations also take place because all assets and liabilities are instantly passed to the acquirer.

This can also be a disadvantage however is due diligence is not conducting thoroughly and unknown liabilities surface post-close.

The M&A deal structuring process also requires two important documents, including the Term Sheet and the Letter of Intent (LOI).

The Biggest Mergers & Acquisitions in the United States

The United States has always been a hotbed for M&A. The late 1990s popularized the idea of large M&A transactions, and since then they have also become more common.

Here are some of the biggest M&A deals in the U.S history:

1. Verizon/Vodafone

Verizon Communications and Vodafone jointly came up with Verizon Wireless. However, Verizon later acquired Vodafone's 45 percent stake in a transaction that amounted to $130 billion. Now, Verizon Wireless is completely owned by Verizon Communications.

2. Pfizer/Warner-Lambert

These two companies from the pharmaceutical field came together in 2000 when Pfizer Inc acquired Warner-Lambert. The deal was worth $90 billion and took three months.

3. Exxon/Mobil

ExxonMobil Corporation (XOM) came into being in 1998 when Exxon Corporation and Mobil Corporation merged after an $80 billion deal. Exxon and Mobil, at the time of the deal, were the biggest oil producers in the U.S. and today they are in a class of their own.

4. Altria/Philip Morris

In 2008, the Altria Group Inc. gave their approval to the spin-off of Philip Morris International. All Altria shareholders received a share of Philip Morris International.

5. AT&T/Bell South

One of the biggest telecommunication giants in the world, AT&T acquired BellSouth (BLS) in a deal that grossed $67 billion. AT&T, as a result, got a local customer base of 70 million people which helped them strengthen their hold over the industry.

6. Travelers Group/Citicorp

The banking giant, Citicorp, created a historic merger when they decided to come together with Travelers Group in 1998.

The $70 billion deal had a tremendous influence on the financial services industry in the country, and the merger gave birth to Citigroup Inc.

7. America Online and Time Warner

The year 2000 saw one of the biggest mergers in history when America Online (AOL) joined hands with Time Warner Inc. AOL, an internet provider, merged with Time Warner, the entertainment conglomerate, to create AOL Time Warner.

The deal was worth $165 billion and is considered to be a landmark in the M&A world. However, the merger fell through soon after.

Close Deals Faster with DealRoom

M&A deals are complicated, long and costly processes with many unknown contingencies.

DealRoom, a project management solution for complex financial transactions, is designed to create a more streamlined and efficient deal process.

With intuitive functionality designed explicitly for M&A, DealRoom Deal Management Software increases collaboration, adaptability and deal success.

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