Overview of Mergers and Acquisitions Services
Mergers and Acquisitions are complex transactions between two or more entities. Around the globe, many companies utilize mergers and acquisitions services provided by consultants and investment banks. This area is broad and requires the experience and expertise of consultants. Mergers and Acquisitions encompass agreements and transactions between two parties. It is essential to understand the issues faced in a relevant merger or acquisition scenario.
Objectives of Merger and Acquisitions
Mergers and Acquisitions services are carried out for the following reasons:
- In this day and age, competitors do not wish to take chances and instead merge to enjoy the benefits of the merger.
- Economies of Scale.
- Economies of Scope.
- Merger and Acquisition Services are conducted to reduce the burden on conducting due diligence. Due Diligence survey is usually done by an external consultant or a third-party organization. An organization cannot waste time and expense in recruiting an in-house team to carry out due diligence. Hence an external consultant such as an accounting firm, consulting firm, law firm, or an investment bank is recruited to carry out due diligence on the target company.
- Transactions that involve complex mergers require coordination between different parties. The parties involved in mergers and acquisitions include government agencies, law firms, investment banks, consultancy firms, technology firms, and audit firms. Due to this, mergers and acquisitions services are required by the companies.
- Expert advice is required before conducting a merger or acquisition transaction.
Importance of carrying out Mergers and Acquisitions Services
Mergers and Acquisitions services are carried out to provide Businesses with an added benefit of assurance in the service provided. Businesses that merge have to be sure that the transaction is beneficial. Moreover, they have to synchronize the transaction with the future goals and plans of the business. The process of M & A is complex, and different parties are involved. Hence it is crucial to recruit quality professionals in carrying out mergers and acquisitions services.
Applicable Law for Mergers and Acquisitions services
As M & A is a complex process, different regulatory laws would be applicable for a merger.
The following laws would apply to a typical M and A scenario:
- Company Law – The companies’ act, 2013 govern mergers and acquisitions transactions within India.
- Securities Law – Companies are listed in recognized stock exchanges. Any company willing to list its securities in the stock exchange has to register with the Securities Exchange Board of India (SEBI). The Securities law that governs mergers and acquisitions in the SEBI Takeover code (Substantial Acquisition of Shares and Takeovers) Regulations, 2011.
- Income Tax Law – Income Tax law would be applicable when it comes to asset sales- such as capital gains tax payable on the transfer of assets from one company to another. Even for the transfer of shares from one company to another, income tax provisions would be applicable. The Income Tax Act, 1961, would apply to all M and A transactions in India.
- Competition Law – The appropriate competition authority will ensure that the merger is not detrimental to companies present in India. The Competition Commission of India (CCI) is the regulatory body for competition matters in India. The law that regulates antitrust in India is the Competition Act, 2002.
- Foreign Exchange Law – If the transaction is cross border, then the provisions of foreign exchange law would also be applicable.
Procedure for Mergers and Acquisitions
The typical merger and acquisition process is as follows:
- Drafting Term Sheet – This is the first step in a typical merger and acquisition process. The term sheet is also known as the letter of intent. This term sheet or letter of intent is a non-binding document that the parties intend to carry out the merger and acquisition transaction. It can be compared to the terms and conditions of a particular process. Both the buyer and seller of the merger transaction have to exchange term sheets with one another. The parties would discuss their intention and primary objective.
- Recruiting Third-Party Consultants – The parties have to hire experts to assist them in mergers and acquisitions services.
- Purchase Price of the Transaction – This would involve the parties of a private acquisition transaction where the buyer and seller would have to negotiate a purchase price. The mode of payment (cash or shares) would also be discussed between the parties. The parties would also discuss the price mechanism. The parties can either use the following pricing mechanism for a merger and acquisition transaction:
a) Lock Box Method
b) Completion Accounts Methods
- Negotiation of Employee Contracts – Depending on the type of transaction in mergers and acquisitions services, employees of the merged entity or the target company have contracts. Service agreements of directors would also be present. The consultant providing Mergers and Acquisitions Services should ensure that employee agreements, non-compete clauses are updated and amended.
- Warranties and Guarantees – In a complex merger and acquisition transaction, the buyer should ensure that the seller or target company has given warranties. This must be cleared between the parties in the initial period of consultation that all warranties are true and as per the knowledge of the seller. If there is any form of misrepresentation or breaches, the buyer can sue the seller for breach of contract.
- Clauses on Exclusivity – Exclusivity clause is a clause present in the merger transaction which prohibits the seller from seeking further bids for acquisition or merger. It is a remedy that can be used by the buyer in case the seller goes on and seeks additional bids.
- Terms of Confidentiality – In a complex merger transaction, information is exchanged between parties. In the Initial Information Questionnaire, the seller has to disclose all the relevant information to the buyer. Apart from this, the buyer and seller must sign confidentiality agreements to avoid any distribution of information on clients and employees.
- Due Diligence – Due diligence is an investigation conducted by the third party consultant on the target or merging companies. A thorough due diligence report must be provided by the third party consultant to the buyer on the merger or acquisition transaction.
- Post Completion Work – The third-party consultant should ensure that the parties take post-completion steps.