10 corporate M&A secrets that your company may be hiding from you
September 26, 2022
Have you ever found yourself wondering what corporate M&A means? And why, exactly, you’re being kept in the dark about it? If so, then the news in this article will come as welcome relief.
Here are ten secrets your company might be hiding from you about their corporate M&A practice
#1 — There are always secret terms of M&
Corporate mergers and acquisitions can seem magical to those who are not intimately involved in them. It’s easy to have a sense of awe at the whirlwind of activity and wonder what magic led the two companies together. The truth is,
while magic has been used in some high-profile cases, it’s rarely employed as we only see a slice of what is happening.
Rather, most deals work on very specific terms that are made publicly available after the deal closes (a so-called term sheet).
This term sheet will outline for shareholders what is about to happen with their shares or equity — both how much they will retain and how much they will give up if the transaction goes through.
#2 — The deal won’t go through if the seller doesn’t sell
The most crucial mistake when undertaking a Merger and Acquisition (M&A) is not being able to get the other side to commit. A deal only goes through if the seller sells,
so it is paramount to their success that they do everything in their power to please the potential buyer.
For an M&A process to move forward, both parties need to agree on terms. The seller needs to know what they want and then need to come up with a plan as part of an entire package deal where they give up ownership of something they are selling while retaining some level of control. They have to commit to the rest of the process can go forward.
#3 — It Will Take Longer Than You Think
- It will take longer than you think. Fact: Acquisitions can take up to a year to go through. Waiting this long after investing so much time and effort could wear on the dealmaker. Don’t expect it to happen right away!
#4 — All third parties will require their lawyers (e.g., landlord, accountants)
To ensure a smooth integration, it is important to think about all the legal issues that will need to be addressed before actually executing the deal.
This includes third parties like landlords and accountants, who will require their lawyers. Each of these third parties will have different needs to execute their responsibilities under the deal or any other ongoing transactions they are engaged in with both the buyer and seller.
For example, if a landlord is required by its lease with the seller to transfer its interest back to the seller when it sells its property as part of a sale transaction for cash consideration equal to fair market value, then it could use this requirement as leverage during negotiations.
#5 — First drafts are crap
First drafts are always crap. Spend the time to revise, proofread, and tweak your writing. Use some spellcheckers if you want to. If it’s anything important, have someone else look at it for typos too!
#6 — Get ready to take some risks
If the decision is to merge, both companies need to prepare for change. Staying in one silo and only making changes internally could prevent a struggling business from ever coming back to life.
Forcing a stronger company to take over the weaker one or combining two similar businesses may keep both stagnant, so leaders need to be open-minded about which direction is best. There will always be risks involved when merging with another firm,
but identifying these risks upfront can help overcome them and make the transition smoother for everyone involved.
#7 — If it sounds too good to be true, it probably is
If it sounds too good to be true, it probably is. This adage seems especially fitting when negotiating the purchase of a company. Beware of any seller who is unrealistic about pricing or playing hardball with valuable assets like intellectual property. With negotiation, there is always room for back and forth.
Sellers often want to make more money for themselves and leave little left over for the buyer to soften the blow when they will no longer have an ownership stake in the business.
It is up to buyers to ensure that the worth of what they are paying matches up with the potential financial return on their investment; otherwise there’s no point in signing a contract!
#8 — Confidentiality clauses are real
The seventh thing to know about corporate M&A is to keep in mind the potential confidentiality agreements and clauses. To use a simple example, think of when an employee takes a job at Google.
As part of the hiring process, they sign an NDA. This prevents them from revealing proprietary information about the organization during or after their employment there, even if they left with bad feelings towards the firm.
There are also likely to be some things restricted by non-disclosure agreements and more information that’s not for public knowledge – like financial statements.
#9 — Payment terms could kill you (literally)
Sometimes companies are so desperate to do a deal with a potential buyer, they’ll agree to any terms just to make the deal work. Payment terms and related provisions can have a significant impact on which shareholders will earn money or lose money at the closing of the transaction.
If a buyer purchases an ongoing business, for example, then there’s usually an adjustment mechanism in place for dividends paid by the target entity during the time between acquisition and final sale.
One company agreed to deferred payment of its debt instruments to satisfy one term desired by another party in a transaction.
The consequences were dire—the target’s credit rating plummeted after this announcement and it was forced into involuntary bankruptcy by its creditors due to liquidity issues exacerbated by failing to meet its financial covenants.
#10— Contractual language will follow you into new ventures
So we’ve all heard the saying, don’t let the bed bugs bite, but with an acquisition sometimes it feels like that old mantra comes true. A contract negotiation gone sour will follow the buyer into any new project.
The developer of Linux left his job at Silicon Graphics after a dispute over patent rights. So take these words to heart and ask yourself: is this something I can live with?
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