Mergers and Acquisitions (M&A) are significant and multi-staged processes that have profound effects on businesses. Any M&A requires careful planning and preparation as the goal is to create a transaction that benefits all parties, which eventually contributes to the long-term success of the business. In Finland, the M&A processes must be seen as a strategic opportunity where careful preparation is the key to achieving the optimal outcome.
Mergers and acquisitions are different ways that companies are combined and where entire companies or only their major business assets are consolidated through financial transactions. Usually the goal of an M&A is to achieve strategic objectives such as growth, diversification or cost reduction.
The lifecycle of an M&A deal usually is lengthy as well. A deal will move through a number of stages before completion.
Mergers and Acquisitions are often used interchangeably; however, they do have different meanings. A merger describes two companies that join forces to create a one new legal entity, rather than remaining separately owned and operated. An acquisition, on the other hand, refers to a situation where a company takes over another and establishes itself as the new owner.
· Friendly acquisition: A company purchases another company with the approval of the target company’s shareholders and the board of directors
· Hostile acquisition: The acquiring company (purchasing company) makes an offer directly to the shareholders without involving the target company’s board of directors
· Horizontal merger: A merger between two companies that are in direct competition with each other
· Vertical merger: A merger between a customer or a supplier and a company
· Congeneric merger: A merger between two companies that are in the same market
· Conglomeration: A merger between two companies that have no common market base
The first and major step in any M&A process is the preparation phase as it sets the foundation for the whole transaction and its success, making it a key part of the whole process. The preparation starts with getting the company ready for its purchase. The first step in this process is to carefully assess the financial condition of the company and take the necessary steps to improve it.
It is also important to ensure that the company’s intellectual property rights (IPR), such as trademarks, trade secrets and patents are properly registered and protected. This includes checking that all registrations are up to date and the associated fees and renewals have been assessed. The company should also identify all their licenses and other agreements that are related to IPR in order to avoid disputes.
Furthermore, the preparation stage includes ensuring that all other legal documents, such as shareholders’ agreements, employment contracts, lease agreements, other contracts and permits are up to date. Ensuring proper legal documentation not only reduces risks of disputes but also increases buyer confidence in the quality of the M&A.
Additionally, assessing the value of the company that is being sold, is crucial. It is an integral part of any M&A process as it ensures that the deal makes strategic, financial and operational sense.
Developing a good M&A strategy revolves around having a clear idea of what it is expected to gain from an M&A. What is the purpose of a merger or acquiring another company (product expansion, gaining access to new markets)?
Defining M&A goals and creating a profile of an ideal target company includes considering factors such as size, financials, offerings, market etc. Effective targeting narrows the focus on companies that are compatible entities to merge with or to acquire.
The valuation of a company aims to establish a reasonable economic value for the business in the event of an M&A. The value of a company is determined by its past, present and future financial situation of the company.
Valuing a company is not a straightforward analysis and it always involves a degree of uncertainty. Changes in the general market situation, the economic environment and the internal environment of the company can have a significant impact on the forecasts already made.
The negotiation process is critical as it addresses multifaceted legal challenges that may arise. Parties must negotiate terms and conditions that align with jurisdictions concerned, if it is an international transaction, and also safeguard commercial interests. Before the negotiations, however, it is important to set realistic objectives for the negotiation process as without clear and achievable objectives, the negotiations can easily fail or lead to unfair terms.
The negotiations usually start with a letter of intent (LOI) in which the key commercial interests are outlined. The key subject matters are purchase price and the terms of the transaction. However, before closing any sensitive information, it is essential to enter into a non-disclosure agreement (NDA), which binds the parties to keep confidential information arising from the M&A process.
Due diligence is an exhaustive process that aims to confirm or correct any assessments made during negotiations. The seller is required to ensure that the business is ready for a sale or a merger. This includes careful assessment of documentation of the financial state of business and review of legal aspects.
The buyer on the other hand is required to carry out thorough assessment of the financial situation, the risks and the opportunities to fit into its business strategy. The buyer is also required to ensure that all the terms and conditions of the transaction are clear and appropriate before the final commitment is made.
In Finland, a seller and a buyer may agree on the terms of a sale contract within the limits of the freedom of contract. In order to achieve the best possible outcome of the sale of a business, it is important that the intention and the will of both parties are recorded in the contract.
A well-drafted contract will help the parties to ensure that the terms of the contract are enforceable while minimizing potential disputes, saving time and money. At least the following elements should be present at a well-drafted contract:
- the contracting parties and the purpose of the contract
- the subject matter
- the purchase price and its payment
- transfer of ownership
- the conditions for the completion of the transaction
- assurances, rights and obligations of both seller and the buyer
- liabilities
- confidentiality, non-competition and IPR rights
- law applicable to the contract and to possible disputes
During the M&A transaction, the employees transfer as well from the target company to the acquiring company. The acquiring company, or the buyer cannot unilaterally change or terminate the employment contracts solely based on a merger or acquisition. This is enshrined in the Finnish Employment Contracts Act.
There are also tax implications for M&A transactions, which depend on how the transaction is carried out. M&A process may be conducted as a business transaction or as a sell of shares.
It is also quite common to add clauses for limitation of liability. Limitation of liability clauses are contractual terms by which the parties limit their liability to the other party in relation to the subject matter of the transaction. Parties therefore define the circumstances and the manner in which the seller or the buyer may be held liable for breach of contract or other possible damages reducing ambiguities.
It is also notable that while there is the freedom to contract, there are sectors, such as the financial sector or insurance sector, to which there are specific rules for the M&A process.
When finalizing the transaction, the parties should ensure that all contractual conditions have been met. The necessary approvals and permits have been obtained as well as the due diligence has been conducted.
The signing of the contract finalizes the transaction. The signing can be held physically or digitally and is attended by both parties, the parties' representatives and their legal advisers.
As a result of the signatures, the contract and the terms and measures identified become binding on the parties. Signatures usually transfer, for example, ownership from the seller to the buyer as agreed. It is also common for the parties to agree that the purchase price of the object of the transaction will be paid at the time of the signing. However, the steps to be taken at the signing of the contract depend on the terms of the contract drawn up by the parties.
Integrating organizations is a complex and time-consuming process. Each business relies on their distinct systems, processes and workflows, which can lead to operational inefficiencies and disruptions. Additionally, companies have their own distinct corporate cultures and values that can result in employee conflict and maybe even loss of talent in the workforce.
Another challenge lies in the valuation of a company as it has a degree of uncertainty. Valuation of a company is not an exact science; however, it is crucial to not overvalue company assets either when acquiring a company. M&A transactions may burden financial resources leading to cash flow issues, increased debt and other unexpected costs.
Mitigating such risks and challenges from early on is vital as restructuring the business is quite common during the M&A process, only highlighting the significance of proper planning and conducting due diligence process.
The M&A process is a complex and strategic undertaking that requires careful planning and expert guidance. From identifying a suitable target company to conducting thorough due diligence, each step plays a crucial role in ensuring a successful transaction. The culmination of these efforts is the negotiation and execution of a detailed purchase agreement, solidifying the terms of the deal. A well-executed M&A process can create significant value and drive long-term growth.
M&A is a process that culminates in signing the contract. Before this, however, many aspects of the transaction and its execution should be assessed and considered in order to ensure a successful M&A process. The M&A process should not be done carelessly. The importance of planning, conducting due diligence process as well as ensuring clarity and consistency of the terms and conditions cannot be highlighted enough in ensuring a successful M&A.
Are you looking to merge, sell or buy a business? We at Hedman Partners specialise in business law and can help with identifying your business goals, executing plans, and achieving your objectives while eliminating risks and seeing your projects through to their desired conclusion. Contact us for expert advice and help. We have experienced attorneys who understand entrepreneurship, are client focused and approachable. Contact our legal professionals here or contact us via our webpage.
