Companies frequently engage in the process of selling parts of the organization. The selling of stocks is the primary method of selling a company because it allows investors to be incredibly liquid. However, the selling of stocks is marginal compared to the vast dollar amounts of selling a complete company. Thus, a merger and acquisition (M&A) are considered “mega-business” deals. In 2021, M&A transactions totaled more than $2.6 trillion.
Lawyers are one of three groups who advise a client for a large M&A transaction. The other two groups include accountants and investment bankers. Both accountants and investment bankers could provide the necessary information to conduct the transaction without a lawyer. Yet, lawyers continue to play an important role in M&A transactions. A lawyer has two primary roles. First, a lawyer expand the value of the transaction by removing the barriers that increase transaction expenses. These primarily mean choosing one form of managing the transaction that removes potentially regulatory costs. Second, a lawyer can protect their clients by removing information differences. For instance, the seller likely knows more information about the organization than the buyer. As such, a lawyer could bond the seller by requiring warranties and representations, or the lawyer could conduct a due diligence investigation. This process removes uncertainty, gameplay, and expenses for other costly precautions.
The M&A Process
A M&A begins when a buyer or seller expresses interest in aquiring (or selling) the target organization. Buyers may look for a strategic acquisition to build equity, or sellers may decide it is the right time to sell the organization. Both buyers and sellers have a wide range of how aggressive they could decide to be. For example, buyers could discuss informally with the management, or they could send a written offer or tender offer with the threat of making the letter public if the seller fails to respond.
If the parties decide to enter a transaction that is not hostile, they are likely to enter into confidentiality and non-disclosure agreements. A buyer may also ask—often refuted by the seller—for a “no shop agreement” where the seller won’t look for other offers during negotiations.
After the NDA is signed, the parties will begin the diligence phase. During this phase, the parties disclose relevant information related to the target’s financial well-being and other records.
If all goes well, the next step is to sit down and complete a “term sheet,” a semi-formal list of terms for the transaction. This often turns into the letter of intent to sell and buy the target.
Next, the buyer will obtain financing if necessary and then begin discussing the retention of key employees from the target.
After a draft of the terms have been made, both parties return to their respective board of directors for approval with the potential of obtaining a “fairness opinion” by investment bankers.
Once the boards—and potential stockholders—have approved, the parties need to ensure any regulations by the SEC, NASDAQ, or other organization is satisfied before closing can occur. At closing, the parties exchange the agreed upon terms. That is, the buyer receives the target, and the seller receives consideration for delivery of the target.
Even after the transaction is closed, the businesses have the responsibility of integrating the new target into a new organization. Lawyers may be required to restructure the target to assimilate it with the buyer’s organization. There is also the potential for disputes, as buyers dispute the quality of the the assets received and sellers dispute the fairness of the deal.
The First Step
The very first step to a M&A transaction is to get organized. The target and buyers should be expected to:
- Prepare a contact list of key players in the transaction, and identify who is to be the primary contact points from that list.
- Buyers will need to organize due diligence reports that are to be used.
- Obtain advisors—such as lawyers or bankers—to help facilitate the process and avoid any costly errors.
- Identify and remove from negotiations any potential conflict of interests.
- Advisors should inform buyers and the target about expectiations, including timeline, of the deal.
- Determine who will be in charge of communications with the public.
- Determine how confidential deal communications should be.
- Discuss the danagers of insider trading, and address other potential issues.
- Consider the impact other actors may have—such as hedge funds or stockholder activists.
