Knowing what an M&A deal structure is and it’s role factors into the process is key to performing a successful transaction. Yes, it’s a complex issue, but the more work that is put into this will result in a smoother, more streamlined proceeding, one that will save both time and money for all the parties involved.
What Are Mergers and Acquisitions?
Mergers and acquisitions (commonly abbreviated as M&A) is an umbrella term for several different types of consolidations between companies. There are many different types of M&A, with the most common ones being asset acquisitions, stock purchases and mergers. Although the terms are quite similar and are often lumped together, they have quite different meanings in the business world.
What Is an M&A Deal Structure?
An M&A deal structure is pretty much exactly as it sounds; it’s a binding agreement between the target company and the acquiring company (the two parties involved in the M&A transaction) that spells out all the particulars of the deal, namely the rights and obligations of all parties involved. It takes into consideration all aspects of the deal, the role of the company’s management (on both sides of the table) that need to be accomplished in order for the deal to be finalized. In short, the deal structure is a document of the terms and conditions of the M&A transaction.
Deal Structuring 101
As described above, there are different types of M&As as well as different reasons for companies to come together or synergize. Of course, an M&A can only be possible when all the parties involved come to an agreement on all the terms of the transaction. The process of putting this together is commonly referred to as “deal structuring.”
Deal structuring is a vital part of any M&A process; without it, there simply won’t be an outline of the transaction or finalization of the deal. Deal structuring is the prioritizing of all the steps and objectives in an M&A and confirming that all parties involved in the transaction are satisfied and in agreement. Of course, this is often the most difficult part of the entire process, as factors such as financing, corporate control, business plan, legal and tax issues as well as adhering to antitrust laws are involved here.
3 Different Ways To Structure an M&A Deal
Generally, there are three ways that M&A deals are structured, though sometimes these transactions can be a hybrid version of a couple of different methods. They include:
1. Asset Acquisition
Exactly as the name sounds, this is where one company acquires all types of assets of a target company. The asset acquisition deal is quite common in bankruptcy situations.
2. Stock Purchase
Unlike an asset acquisition deal, there are no assets (tangible or intangible) involved here. A stock purchase is strictly a financial transaction; the advantage of a stock purchase is that the seller reaps tax benefits and that it is usually a less complex (and less costly) type of transaction.
A merger is when two companies combine to form a new third company. Though “merger” and “acquisition” are often used interchangeably, a true merger is an agreement between two companies to combine as a new company.
In addition, there are a few more types of M&As, including tender offers, consolidations and management acquisitions.
Best Practices for a Proper M&A
The goal is to satisfy all parties involved in the deal. The better (and more thorough) the transaction structure is, the faster (and less costly) the entire deal will eventually be. However, in the M&A deal structure, there are two vital documents that are to be considered a top-tier priority. These are:
- Term Sheet: A term sheet is a nonbinding agreement that outlines the terms and conditions of a business deal or investment. Once both parties have agreed on these terms, a more formal, binding contract is drafted.
- Letter of Intent: Commonly referred to as LOI, a letter of intent is the commitment stating that one company has the intent to do business with a second company. It may have similar content to the term sheet but is less fact and figure based and serves more as a way to outline the main points of the business deal.
Where a Virtual Data Room Comes Into Play
A Virtual Data Room (VDR) is a necessary tool in virtually every M&A transaction. A VDR is a secure, online location where companies involved in the M&A process can store and share the documentation that is required for the transaction. The features of a sophisticated VDR consist of secure access (which includes enterprise-level encryption), multiple layers of security and user-friendly admin controls. In addition, there are customizable rights management that will grant only certain parties access to certain documents, all of which allow all parties to be able to shorten the entire M&A timeline.
The CapLinked Solution
CapLinked, an industry leader in the VDR space, provides secure virtual data rooms for all types of business transactions. CapLinked VDRs features a user-friendly interface that is compatible with virtually every OS, and, because of that, it gives users the ability to upload and download documents from virtually any type of computer, tablet or smartphone from anywhere around the globe. Learn more about how CapLinked can help smooth out your M&A process with a free trial.
Chris Capelle is a technology expert, writer and instructor. For over 25 years, he has worked in the publishing, advertising and consumer products industries.
McKinsey & Co. – Building the right organization for mergers and acquisitions
JWB Real Estate Capital – Deal Structuring Guide for Beginners
Investopedia – Virtual Data Room (VDR)