Introduction

In my first day in the M&A class, my teacher, Professor Rodrigo Olivares Caminal, asked the class a simple question – what is the difference between an acquisition and a takeover? More than 20 students attempted to answer this question without success. This is a simple but yet very fundamental question that goes to the root of the transaction. Yes, I know you may be thinking that the answer to this question is really straightforward. I agree that it is, however, many M&A writers, teachers and/or practitioners appear to have a view which may not be entirely correct.

M&A practitioners (also known as deal practitioners) use a lot of fancy words which add to the flare and grace of deal making. However, the meanings ascribed to these words may become imprecise and, in some cases (at least amongst non-deal practitioners) lost from their usage. Knowledge of the precise meaning of these deal terms is important especially for business owners who have need to embark on business purchase, sale or combination. It is also important for deal practitioners at all levels to understand the precise meaning of these deal terms so that they can better add value to the deal ecosystem.

The purpose of this paper is to analyse few terms and concepts frequently used in the M&A space, in order to provide you with a firm grasp of their meanings and ensure that you better appreciate deal nuances. In the following sections, we will identify a list of terms and concepts, and will try to define them with examples from concluded deals and existing laws.

The Terms and Concepts

  1. Acquisition
    An acquisition, as the name implies simply means the purchase of a business either wholly or in part. An acquisition may be of shares or assets depending on numerous factors. Where it is of shares, it invariably includes the assets owned by the company selling its shares. However, an acquisition of assets means that the company which owns the assets is not necessarily sold as part of the deal. The major advantage of asset acquisition is that generally, liabilities attached to the company do not move to the purchaser but remain with the company (save for certain liabilities such as employee claims on the transferred business as prescribed by certain regulations e.g., the Transfer of Undertakings Protection of Employment [TUPE] Regulation in the United Kingdom). Acquisitions may be effected with cash or non-cash considerations. The point to note is that an acquisition is a commercial transaction and as with such transactions, parties seek trade-offs which may involve cash or other non-cash considerations.

    For instance, Capitec Bank's acquisition of Mercantile Business Bank in 2018 for 7 billion South African Rands is a cash-based acquisition deal. Mercantile Business Bank was sold to Capitec by its Portuguese parent bank Caixa.1 Also, as far back as 1998 shares accounted for 67% of acquisition considerations in the United States.2 Shares are valuable consideration where the acquiring company's shares are valued well above that of the target. Imagine that Elon Musk's Tesla is desirous of acquiring Nigeria's Innoson Vehicles Manufacturing Limited (IVM), do you think IVM will prefer cash or shares in Tesla? IVM could also ask for a hybrid of cash and shares given the value of Tesla's shares.

  2. Merger
    A merger simply speaking is a combination of two companies or businesses. This combination may produce one entity, retain the two entities or result in three entities at the close of the transaction. So, 1+1 may become 1, or 1+1 may be 2 (preferably written in roman numerals as II to show they are still two different companies); or 1+1 will become 3 (or III). The point should be made that in commercial transactions, no term or concept is ever so rigid. They continue to evolve according to the creativity of the contracting parties. So, while ordinarily a merger should mean two companies combining to become one, there are instances where both parties combine by exchanging shares in each other at a pre-agreed valuation, while retaining their different operations and/or brand identities. The Daimler/Chrysler merger in 1998 is a good example. Following this merger, Mercedes and Chrysler retained their production lines and the brands were not combined to form one brand. Hence, it was easy for Daimler to move on with its Mercedes brand when the merger failed.

    A merger may not involve exchange of shares strictly speaking. A mere agreement by two companies to combine the operations of their business units in order to consolidate market share or to purchase supplies as one unit, may amount to a merger, subject to regulatory approval, depending on the governing antitrust laws. In Europe, Article 101(1) of the Treaty on the Functioning of the European Union (TFEU)3 generally prohibits such agreements unless parties can establish an exception under Article 101(3) TFEU. In ACF Chemiefarma NV v. Commission of the European Communities,4 it was held that a gentleman's agreement between different companies in which they agreed to preserve local markets and fixed production and export quotas for the production and sale of quinine and quinidine, was capable of restricting trade in the internal markets of the EU. In light of this, it is important to have a fluid understanding of the term 'merger' in order to anticipate when regulatory issues may arise.

  3. Takeover
    The definition of takeover is one of the inspirations behind this paper. The reason is that many writers and law teachers have the notion that the word takeover ipso facto connotes hostility in the M&A process. The correct view however is that takeover simply means the process of purchasing publicly traded shares. In simple terms, publicly traded shares are not acquired, rather they are said to be taken over. A look at Section 3 of the Introduction to UK's Takeover Code5 is instructive. Section 3(a)(i) and (ii) is to the effect that the Code applies to only companies which are trading on a UK regulated market or the stock exchange. The code also applies to private companies where their securities have been admitted to trading on a regulated market or stock exchange, or where the private company has filed a prospectus for the offer of securities to the stock market. This supports the view that takeover is only in respect of shares in the public domain as opposed to acquisition which is for private shares. Also, section 133(4) of the Investment and Securities Act (2007) of Nigeria, specifically provides that a takeover bid shall not be made in any case where the shares to be acquired are shares in a private company. This shows that privately held shares cannot be the subject of a takeover strictly speaking. Takeovers are usually regulated by some codes or rules given that they affect the 'public' whose shares are the subject of purchase and who cannot directly partake in discussions with the purchaser(s).

    A takeover may also be referred to as a "take private" or a "public to private". The reasoning behind this definition is simple. Acquisition in the M&A context means purchasing privately held shares (in a private company). This usually happens through negotiation between the shareholders of the private company and the purchaser(s) following which a share purchase agreement is signed and the purchaser assumes control of the company. In a takeover, the purchaser does not have the convenience of negotiating with the shareholders who are likely numerous and scattered across the globe. Hence, negotiations are typically done with the management of the public company following which the purchaser makes an offer for the shares of the public company and the management presents the offer to the shareholders. Where the shareholders vote in favour of the offer, the purchasers will pay and take over the shares of the shareholders, thereby taking the company into private ownership (hence why it is called a takeprivate). In 2013, following poor performance in previous years,6 Michael Dell, the founder and CEO of Dell, in partnership with Silver Lake Partners, a private equity firm, offered to purchase the shares of the company from its public shareholders for a consideration of $13.88 per share, valuing the company at $24.9 billion.7 This purchase took the company from public ownership back into the private ownership of Michael Dell, this time with Silverlake Partners. After a successful private management, Michael Dell took the company back into public ownership in 2018.

    A takeover is said to be 'hostile' where the management of the public company is not in support of a sale of the company to a particular bidder or to any bidders usually because they believe the company will get into wrong management following the sale, or they (the management) may be out of job following the takeover. Where this is the case, the bidders will take their offer directly to the shareholders and will typically bid for their shares at a premium. The management will on the other hand seek to apply several takeover defence mechanisms such as issuing additional shares at a discount (the famous poison pill) or issuing bonds redeemable before maturity in the event of a hostile takeover (poison put). The purpose of these mechanisms is to scuttle the takeover.

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Footnotes

1. https://businesstech.co.za/news/banking/345460/capitec-acquires-mercantile-bank/ accessed 18/06/21

2. Fortune, 'The Year of the Mega Merger', 11th January 1999 available at https://money.cnn.com/magazines/fortune/fortune_archive/1999/01/11/253799/index.htm accessed on 6/07/2021

3. https://eurlex.europa.eu/LexUriServ/LexUriServ.do?uri=CELEX:12008E101:EN:HTML accessed 18/06/21

4. https://eur-lex.europa.eu/legal-content/EN/TXT/?uri=CELEX%3A61969CJ0041 last accessed 17/06/21

5. The City Code on Takeovers and Mergers – Introduction – Page A2

6. https://www.theverge.com/2018/8/13/17644234/michael-dell-enterprise-technology-consumer-laptop-private-public-emc accessed 15/06/21

7. https://www.dell.com/learn/us/en/uscorp1/secure/acq-dell-silverlake accessed 17/06/21

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.