Mergers & Acquisitions

Mergers and acquisitions enable businesses to accelerate their development by creating value in various ways, allowing a faster and often less costly path to expansion compared with an ‘organic’ growth route.

Developing new products and services, increasing sales, and expanding into new markets in an organic way is certainly a measure of success, but this strategy typically takes time, and when companies need a speedier approach M&A transactions can be very beneficial.

Given their complex nature, however, it is vital to obtain professional assistance at an early stage in order to manage risk, avoid the many pitfalls associated with this type of growth strategy, and comply with the regulations.

Our partner led team at BTG Advisory has extensive experience of carrying out mergers and acquisitions across all sectors. We provide expert advice and practical support to ensure your strategy is sound, and that the value you anticipate is achievable in a given scenario.   

What are mergers and acquisitions?

Mergers

A merger occurs when two companies, commonly of a similar size, combine to form a new business with control typically being shared equally. The process is instigated by the companies’ directors, and must be approved by shareholders. A key consideration when carrying out a merger is the equitable treatment of staff and other stakeholders.

Acquisitions

Acquisitions again involve two companies, but in this case the acquiring business is usually a larger entity and becomes the new owner of the smaller acquired company. Sometimes the target is a failing company that offers value to the acquirer; in other instances a larger organisation may acquire a smaller business, perhaps more specialised in a particular sector of interest or value.

Different types of merger and acquisition

Mergers

Various types of merger exist, including:

• Horizontal merger: where two companies operating in the same industry combine, possibly to gain a greater share of a crowded market
• Vertical merger: this involves two companies in the same supply chain merging for operational and cost benefits, a good example being a car company and a supplier of vehicle parts
• Market extension merger: two companies that deal in the same type of product but operate in different markets merge to access a larger overall market and expand their customer base
• Product extension merger: the merging of two businesses that operate in the same market and sell different types of product, but ones that are related to each other

Acquisitions

Common types of acquisition transaction include:

• Share purchase: purchase of the entire company, its assets and liabilities, rights and obligations  
• Asset purchase: the buyer chooses which assets to purchase and the liabilities to take on

M&A legal issues

Many legal issues require consideration in an M&A deal, including:

Due diligence

Areas for consideration and clarification during the due diligence process include obtaining proof of asset ownership with regard to the target company, finding out about historic, current, or pending legal cases against the company, and examining staff/supplier contracts.

Warranties and indemnities

Intended to provide reassurance for both parties in a business merger or acquisition, warranties and indemnities can help smooth the path to an agreement during the final stages of negotiation.

Cross-Border Regulations

The Companies (Cross-Border Mergers) Regulations, 2007, cover mergers between companies in the UK and the European Economic Area (EEA), providing common rules to facilitate these types of transactions. 

Employees

The Information and Consultation of Employees Regulations (ICE Regs) apply to companies employing 50 or more staff. Increased operational efficiency is often at the heart of an M&A deal, but this can result in staff cuts or employment contract amendments. Legislation such as the ICE Regs must be considered to ensure compliance, avoid hefty fines, and enable a smooth transition.

What are the common reasons for mergers and acquisitions?

Reasons for choosing a merger or acquisition often include:

• Business growth
• A pre-emptive strike to prevent a rival business merging with or acquiring the target company
• Securing a larger share of the market
• Diversification – moving into a new geographical or business area, for example
• To purchase a specific type of asset, such as a company that is developing new industry technology

Outline of the mergers and acquisitions process

Identification and assessment of potential target businesses

Once the search parameters for target businesses have been defined, potential targets can be identified and assessed for suitability. It is crucial to take the time to fully understand a target business and how it operates, to prevent an M&A failure at a later stage.

Valuation

Valuation is a key element in any M&A process. The method of valuation can depend on factors such as the industry in question, the number of assets owned by a target business, or the type of assets it owns.

Negotiations

An M&A deal typically commences with an opening offer made by the acquiring company, after which negotiations on price and other specific terms begin. A company being merged will want to ensure the best deal possible in terms of price, but also in relation to the future employment terms of management and key staff.

Due diligence

Due diligence procedures confirm the information provided by a target company, and typically includes a review of the books, the target company’s assets and liabilities, the potential for claims to be made against the company, and supplier/staff contracts. Indemnities and warranties may also be negotiated at this stage, and are designed to protect both parties following completion of the transaction.

M&A advantages and disadvantages

Advantages of mergers and acquisitions can include:

• Accelerated expansion and development
• Cost savings through increased purchasing power
• Greater market share
• Competitive advantage through economies of scale
• Tax benefits
• Securing additional talented staff

Disadvantages include:

• A potential surplus of staff and the subsequent need for job cuts
• Possible friction between the employees of the two businesses
• Loss of experience if senior management and key staff leave

How we can help

BTG Advisory are mergers and acquisitions experts and have an extensive history of successful M&A deals across all industries. We provide professional assistance and guidance at every stage of the M&A process, ensuring compliance with the strict rules and regulations that govern UK and cross-border transactions.

Our contact with debt and equity providers around the UK also means we can assist with external funding should it be required. Depending on your objectives we can recommend and advise on the funding alternatives most appropriate for your situation. For more information on mergers and acquisitions, please contact one of our Partner-led team.