What is a good strategy for a successful M&A transaction, from a business point of view?

In corporate finance the phenomenon of mergers and acquisitions is one that usually involves significant restructuring and complicated corporate transactions, that may either lead to the accelerated growth of a certain organisation or to its complete demise. Thanks to profitability and size expansion being the objective of most organisations, this phenomenon is decisive for industries across the globe. Such M&A transactions are related to the ability and desire of a legal entity to combine its assets and liabilities with another organisation either through merger or acquisition.

But what is an effective way of planning to achieve successful mergers and acquisitions?

Before coming to a final conclusion in relation to the big step, every entrepreneur must have in mind that mergers and acquisitions face various challenges and do not always end up being successful in enhancing growth and the value of a business.

For example, considering the case of purchasing a house, the buyer will definitely arrange viewings, prudently make an examination of the inside and outside of the property and check if the advantages of this house outweigh the costs/disadvantages that it may have. Even after all the investigations the buyer may go through before buying the house, whether the purchase of the house was a success will be clear only after the buyer has been utilizing it for quite some time.

Buying another business faces similar challenges. In fact, only after the acquirers get to run the business on their own will they be sure if the merger or acquisition was a success. Nevertheless, it is extremely important for entrepreneurs not only to undertake extensive research in order to ensure that a merger or acquisition will be beneficial for their company in the long-term, but they must also make sure that once the decision is taken, a correct plan/strategy is laid out in order to make the acquisition process as smooth and efficient as possible. In the Republic of Cyprus, the services of legal representatives can be vital in the execution aspect of any M&A.

In the initial stage where the entrepreneurs try to ensure whether merging with or acquiring another firm is the ideal way to move forward, it is vital that entrepreneurs and their financial advisors clearly identify the primary goals of the potential M&A and the likelihood of these goals actually being achieved. Such goals may include:

  1. Decreasing Competition: An entrepreneur may consider that in the dynamic global corporate environment their business faces intense competition from an organisation of the same industry in the market. In this instance, a merger, as a growth strategy, will play an imperative role to the decrease of the competition level in the market.
  2. Acquiring Patents and IP rights: When purchasing shares, the target organisation is purchased on its entirety, including every asset under that organisation's possession. This will also include patents and other intellectual property rights owned by the target company, including every liability. If, through merger and acquisition the goal is to obtain patented products or technologies, or access to royalties, the buying entrepreneur must deeply consider whether such products or technologies will fit for the purpose of his/her organisation.
  3. Cost and Revenue Synergies: Traditionally, corporations merge to increase revenue and reduce costs through means of economies of scale.
  4. Diversification acquisition: An entrepreneur may wish to acquire controlling interests in another corporation to expand its product offerings and service provisions. This will allow the diversification of the acquiring organisation and reduce the risk it is exposed to.

Further to that, before taking the decision to move forward with an M&A the potential investors must answer certain questions that will ensure both that the merger or acquisition of the target company is clearly feasible but also ensure that the positive synergies and value enhancement achieved will outweigh the negative synergies of the potential M&A. Such questions will include:

  1. Does the target company and its products/services fit with the long-term business plan of the acquiring company and its business objectives?
  2. What is the correctly estimated market value of the target company? Will the shareholders of the target company be willing to accept the premium offered by the potential acquirers?
  3. Does the company culture fit with the acquiring company's culture, ethics and principles? If not, how easy and cost effective will it be to change the culture?

Only after all these are answered and potential acquirers reach the decision to move forward with the merger or acquisition will the planning of such deal begin. Here is where the importance of having great legal representatives kicks in as they can make the implementation process much easier and efficient. More importantly, good legal representatives will also set a solid foundation for the merger implementation process, which will in turn increase the chances of the transaction actually succeeding.

In terms of the implementation process the potential acquirers and their legal representatives must pay close attention in the following areas as these may be detrimental to the success (or failure) of the potential merger or acquisition:

  1. Meeting all the regulatory requirements associated with the specific merger or acquisition and the industry it is situated in: Specifically, in Cyprus, there are sector-related regulations and requirements in certain sectors such as Financial Services whereas in other industries, no sector-specific M&A regulations exist. Additionally, there is a specific time-frame that the Takeover Bids Law of 2007 (Law N. 41(I)/2007) as subsequently amended by Law N. 47(I)2009 and Law N.7(I)2015, provides for Mergers and Acquisitions and more importantly certain necessary documentation is required in order to deem a merger or takeover bid valid. All such regulatory requirements must be met in accordance with the specific industry and company in question, as if these are not met the acquisition process will either be delayed or in certain cases even deemed void.
  2. Tax implications: The structure of the acquisition or merger deal and the method by which the transaction will be carried out can play a great role in the tax advantages and therefore the maximisation of wealth that potential acquirers can benefit from. It is not the scope of this article to analyse the tax advantages Cyprus offers for M&As, but for the sake of an example from a business point of view, in many cases there may be a great argument in favour of carrying out an acquisition through the method of Share Purchase rather than Asset Purchase simply because of the significantly lower tax the acquirer will be liable to pay. This benefit of-course will depend on the type of company in question and how strong of a factor this is compared to all other relevant factors influencing the acquirer's decision. For more insight information about Assets Acquisition Vs Share Acquisition you may read our relevant article.
  3. Carrying out legal due diligence: It is of utmost importance that the potential acquirers and their legal representatives carry out thorough due diligence procedures in order to discover any potential legal risks that the potential target may put the acquirer in and ensure that such risks are avoided or mitigated. Among other due diligence procedures, the potential buyers' side should identify all outstanding liabilities and owned assets of the target company, ensure that all licensing requirements are met by the target, identify any potential fraudulent actions such as money laundering that the potential target may have been involved in, and finally ensure that there are no in progress legal actions against the target firm. Further from ensuring the safety of the acquirers and their investment, this process may reveal information that can be used as leverage by acquirers at the table of negotiations with the target company's shareholders, and therefore achieve a lower final acquisition price.
  4. Agreeing upon confidentiality and non-disclosure agreements that will safeguard the interests of both sides: A very fine line exists when it comes to Mergers and Acquisitions and the nature of such agreements. On the one hand, the target will always be reluctant to release any information (such as customer lists) that may put in danger their firm's performance in the case where the acquisition does not go through, especially if the bidding company is a competitor in the same industry. Therefore, the acquiring side must ensure to require and gain all necessary information it needs to carry out its research and valuations of the target company but at the same time respect any confidentiality agreement between the two parties and abide by it, as if it does not then the legal consequences may be severe.

As it has been made clear, the process of undertaking a merger or acquisition is by no means a simple one and this is amplified by the fact that an overwhelming 70%-90% of M&As worldwide actually fail. Not only is it important to carry out an accurate cost-benefit analysis to ensure that an M&A is the most efficient allocation of the acquiring company's resources but it is as important to ensure that when the decision to move forward is made, appropriate professionals are employed to assist and guide potential acquirers through the whole Merger or Acquisition implementation process and provide solutions to any complications that may arise. At AGP our experience is vast having handled plenty of M&As and always by the client's side when it comes to the complicated process of getting over the line.

Originally Published by A.G. Paphitis, March 2021

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.