Many M&A Transactions Fail
According to the Harvard Business Review, 70% to 90% of mergers and acquisitions fail. The larger the deal, the more likely it is to fail.
When companies merge or buy each other, it's a significant business decision that requires thorough planning. It also involves numerous areas of expertise, especially during due diligence. Mergers and acquisitions (M&A) are complex transactions with many moving parts.
Our merger lawyers are familiar with potential concerns and can help sort through them to make your vision a reality. Our attorneys work with companies of all sizes in Philadelphia and support businesses in Bucks, Delaware, and Montgomery County, PA.
Types of Mergers & Acquisitions
Mergers and acquisitions refer to the consolidation of companies or assets. They include public companies and private companies. M&A activities can take multiple forms.
Mergers
A merger occurs when two companies combine to form a single new entity. This process typically involves the mutual agreement of both companies' boards of directors and shareholders. Mergers seek to gain synergies, expand market reach, and increase competitive advantage. For instance, two rival companies could join forces to become more competitive and save money on operations.
Acquisitions
An acquisition is a process by which one company purchases another. The acquired company may become a subsidiary of the acquiring company or be absorbed entirely. Acquisitions can be friendly or hostile, depending on whether the target company’s management supports the transaction. Companies acquire others to gain new technologies, enter new markets, or achieve economies of scale.
Consolidations
Consolidation involves combining companies into a new entity. Unlike a merger, where one company usually retains its identity, the original companies cease to exist—a new entity forms. Consolidations look to streamline operations, reduce redundancy, and increase efficiency in industries with many small players.
Tender Offer
A tender offer happens when one company offers to buy shares from another company's shareholders at a set price. This offer is usually higher than the market price to entice shareholders to sell. Tender offers can be part of a friendly acquisition strategy. They can also be a hostile takeover if the target company's management teams don't support the acquisition.
Asset Acquisition
In an asset acquisition, a company purchases specific assets of another company rather than buying the company itself. This can include machinery, patents, intellectual property, or customer lists. Asset acquisitions allow the purchasing company to selectively acquire valuable assets while avoiding liabilities associated with the target company.
Management Acquisitions
Management acquisitions occur when a company's executives buy a controlling stake in the company from its owners. Financing can come from private equity firms or through personal funds and loans. Management buyout acquisitions typically hope to gain greater control over the company's operations and strategic direction.
Critical Steps in the M&A Process
As mentioned, mergers and acquisitions are not easy. Numerous pieces must come together for their success, especially when dealing with high-asset businesses.
Typically, the buyer and seller must go through these steps. Again, an M&A lawyer can help orchestrate a successful outcome.
M&A Due Diligence Process
Due diligence is a critical step in the M&A process. It requires thoroughly reviewing the target company’s financials, operations, legal matters, and overall health. This step helps the acquiring company understand what they buy and identify potential risks.
Valuation
Determining the value of the target company is essential. This involves examining its assets, liabilities, earnings, and market conditions. Accurate valuation ensures that the acquiring company doesn't overpay.
Negotiation
Negotiation helps determine the deal's terms. Terms include the purchase price, payment method, and other conditions to finalize the deal. Effective negotiation ensures that both parties are satisfied with the agreement. An merger lawyer can play an essential role in this process.
Contract Drafting and Review
Once both parties agree on the terms, they must draft and review the legal documents. These contracts outline the deal's specifics, including representations, warranties, and indemnities. A solid contract protects both parties and ensures clarity. A business lawyer versed in contract law is critical during this process.
Regulatory Approval
M&A deals often require approval from regulatory bodies to ensure compliance with antitrust laws and other regulations. Navigating this process is crucial to avoid legal issues that could derail the deal. The Entity Transaction Law (Title 15) governs M&A activities in Pennsylvania.
Post-Merger Integration
Numerous mergers and acquisitions fail because of poor post-merger integration planning. This involves combining the operations, cultures, and systems of the two companies. Successful integration is key to realizing the benefits of the merger or acquisition.
Essential Considerations for a Successful M&A
When planning a business merger or acquisition, you must carefully consider many factors that can determine its success. A business lawyer or acquisition attorney can prove invaluable during this due diligence stage.
Deciding factors include:
Strategic Fit
A merger or acquisition must align with the company’s strategic goals and long-term objectives. Those objectives can include expanding market reach or enhancing capabilities, for example.
Financial Health
Evaluating the financial stability of the target company is crucial. The evaluation includes the target's revenue, profit margins, debt levels, and financial projections. Understanding the financial health ensures that the acquiring company makes a sound investment.
Cultural Fit
Merging two companies means merging two cultures. Assessing the fit of corporate cultures is vital to avoid conflicts and ensure a smooth integration. Cultural misalignment can lead to employee dissatisfaction and decreased productivity. More importantly, it can cause the M&A to fail.
Market Conditions
Understanding current market conditions, including industry trends, competition, and economic factors, is essential. These conditions can impact the success of the merger or acquisition.
Legal Risks
Identifying and mitigating legal risks is a crucial part of the M&A process. The transaction must comply with all relevant laws and regulations and address potential legal issues arising from it.
Common Pitfalls in M&A
We mentioned the failure rate of mergers and acquisitions. Here's a closer look at the common pitfalls. Working with a business lawyer or business acquisition attorney can reduce these risks.
Overpaying
One of the most common pitfalls in M&A is overpaying for the target company. Typically, this stems from over or underestimating the benefits of the acquisition. During the M&A due diligence process, you must arrive at an accurate valuation to avoid this mistake.
Inadequate M&A Due Diligence
We can't stress this pitfall enough. Skipping or rushing through the due diligence process can lead to unforeseen problems. You must identify potential risks and ensure that you know exactly what you're getting into as an acquiring company.
Post-Acquisition Integration Challenges
Combining two companies is never easy, and post-acquisition integration challenges can arise. These can include difficulties merging operations, systems, and cultures. You need to develop an integration strategy and plan to address these challenges.
Regulatory Hurdles
Regulatory issues can delay or even block a deal. Understanding and complying with all regulatory requirements is essential to avoid legal obstacles.
Misaligned Expectations
Differing goals and expectations between the merging companies can lead to conflicts. To ensure that both parties align, open and honest communication throughout the process is important.
Our M&A Lawyers Get Results
With any merger and acquisition, you need a team of professionals. Our business and M&A lawyers can guide you through the process and list essential steps that could derail the merger.
Our acquisition attorneys support businesses in the Philadelphia metropolitan area and Bucks, Delaware, and Montgomery counties. Get the insight you need to make your M&A a success.
