Mergers and Acquisitions

An Overview

Mergers and acquisitions only occur rarely in the lives of the most entrepreneurs, shareholders and managers. Thus they are not experienced in purchasing and selling a company by way of an asset or share deal. In consulting practice these kinds of proceedings are among the most complex. Before an investigation of the target company (due diligence) may take place purchaser and seller have to declare confidentiality in reference to every information the purchaser will receive regarding the target company and the seller. Sometimes the purchaser demands a period of exclusivity to check the target company and to negotiate with the seller. A letter of intent or a memorandum of understanding often contains these aspects.

If the purchaser is still interested in buying the target company or its shares after the due diligence has been finished the parties start to negotiate the contract. At this legal knowledge is required as well as knowledge of taxation. E. g. the consideration has to be fixed and its adjustment under specified conditions. Moreover representations and warranties of the seller have to be agreed as well as the scope of his liability for defects. If the target company is a German stock corporation (AG) or a partnership limited by shares (KGaA) capital market regulations are to be adhered to.

The Bidding Process

If a few parties are interested in purchasing a target company or its shares the seller sometimes tries to seek out the best offer by organizing and executing a bidding process. The purchaser may be a competitor who has a strategic interest in acquiring the target company or a financial investor. Prior to the transaction the potential buyer seeks for not freely accessible information about the target company as much as possible. On the basis of these information he calculates his offer in order to be invited by the seller to negotiate exclusively. If there are a lot of parties who are interested in buying the target company the bidding process may be divided in two rounds. The potential buyers who remain in the competition after the first round will become part of the so called short list. In the second round the competitive bidder receive further information after signing a confidentiality undertaking. After that the bidders are able to finalize their offers on the basis of the new information. At the end of the second round the seller decides to start negotiations with the bidder who has complied with all bidding requirements and offered the best bid.

Challenges after Closing the Transaction

After closing the transaction the management of the purchaser has to integrate the business of the target company. Beside that huge challenge it is sometimes involved in law suits or proceedings before tribunals of arbitration. There are various reasons for this. E. g. the purchaser asserts that the seller has violated fundamental contractual duties or warranties given. The seller e. g. demands the purchase price or the remaining part of it the purchaser do not want to pay because the seller has violated contractual duties.