Mergers and acquisitions: our lawyer explains

Political uncertainty, drastic economic change, increasing competition and technological advances are just some of the reasons for mergers and acquisitions. Shareholders can become embroiled in a chain of procedures that are as tedious as they are time-consuming. Bringing such an important operation to a successful conclusion requires an effective strategy. To put together an infallible action plan, first understand the arcana of corporate mergers and acquisitions.

What is corporate mergers and acquisitions in Canada?

The creation of a new, more powerful and more efficient company – that’s the aim of mergers and acquisitions. But what does it actually involve?

M&A: definition

M&A is also known as Mergers and Acquisition. It is a legal operation involving 2 distinct companies. It involves the transfer of assets and liabilities from one company to another. The absorbing company receives all the assets and liabilities of the absorbed company. The operation involves dissolution without liquidation, as well as an exchange of corporate rights. The merger results in the creation of a new company.

Mergers and acquisitions are similar to company takeovers. It enables the new company to accelerate its growth, expand its activities, broaden its scope of business, increase its market presence and enhance its profitability. It is also a tool for growth.

The different forms of merger and acquisition

This legal operation takes a number of different forms:

• • horizontal mergers and acquisitions ;

• • vertical mergers and acquisitions;

• • conglomerate mergers and acquisitions;

• • concentric mergers and acquisitions.

Horizontal mergers involve the amalgamation of several complementary companies with the aim of increasing market share. It makes it possible to diversify products or services in a sector while reducing competition.

Vertical mergers take place between 2 entities offering different products and services, but sharing the same supply chain. It expresses theintegration of the supplier or customer into another company. The aim is to increase profits and enhance the company’s offerings and efficiency.

Conglomerate M&A refers to the association of 2 companies operating in different markets. The legal operation reduces costs, increases efficiency and limits competition. It also diversifies the activities of the acquiring company.

Concentric mergers and acquisitions or conglomerate mergers bring together 2 companies in the same business sector. The aim is to broaden the range of products and services on offer. It essentially takes place between organizations that share the same distribution and communication channels.

Mergers and acquisitions, not to be confused with mergers and acquisitions

Mergers and acquisitions are often confused with mergers and acquisitions. M&A defines the transfer of assets from one company to another, with the aim of creating a single entity. The two entities merge, creating a single legal and commercial enterprise. Neither retains its name or trademarks.

The acquisition refers to legal control and powers at general meetings. The absorbing company manages the economic and commercial sector of the absorbed company. The shareholders of the absorbed company become shareholders of the absorbing company. The absorbed company keeps its name and trademarks.

As a result, the merger and acquisition gives the absorbed company greater legal and commercial freedom and individuality. Nevertheless, the acquiring company assumes operational control of the acquired company. Rules are laid down to guarantee equal treatment for all shareholders.

What are the advantages and disadvantages of mergers and acquisitions?

Corporate mergers and acquisitions are part of a productivity and efficiency drive. The operation has its strengths and weaknesses.

The advantages of M&A

Financial logic, strategic development, cost synergies and reduced competition are the main factors in merging 2 companies. The operation reduces budget expenditure. This feat is the result of volume discounts, duplication of production tools and human resources.

The approach transforms the competitor into a powerful ally. It regenerates skills through the integration of new resources or the creative combination of resources.

It also guarantees synergy for growth, i.e., the sale of new products and expansion of the distribution network.

It ensures the consolidation of services and enables you to enter a new market or expand your area of activity internationally.

Disadvantages of M&A

All it takes is a small error in strategic assessment, a cultural difference or a flaw in the integration plan to tarnish the atmosphere within a company. Yet M&A can become a source of internal conflict.

What’s more, bringing together 2 different entities can be a blow to social relations. The arrival of new resources can worsen the climate. The manager is then faced with problems of social cohesion and human resources management.

On the other hand, a large company becomes difficult to manage. A lack of agility and poor internal organization will undermine your productivity and harm your business.

What are the key stages in a corporate merger and acquisition in Canada?

The steps involved in an M&A vary depending on the parties involved: the seller and the buyer. Our lawyer explains:

M&A steps on the seller’s side

As part of a sale transaction, the selling company mandates an investment bank to assist in the process.

• • Putting together a teaser

The merchant bank prepares a teaser (a summary of the company’s information) on the business to be sold, and draws up a list of potential buyers. Once the teaser has been validated, the merchant bank starts canvassing and sends the teaser to the selected buyers.

• • The negotiation

Interested potential buyers enter the negotiation process. They sign a Non-Disclosure Agreement (NDA), which commits them to keeping all information about the selling company confidential.

Once the NDA has been signed, the bank sends aninvestment memorandum (a file containing a detailed description of the company, its activity, its sector analysis, its competitive analysis, the financial statements and the valuation of the company to be sold) to the potential buyer. The dossier will form the basis for negotiations and serve as the basis for the M&A transaction.

• • The meeting between the buyer and the company to be sold

The interested buyer declares his interest and sends a Letter Of Intent (LOI) to confirm his intention to buy and his firm price. The bank then organizes a meeting between the company and the buyer.

• • Due Diligence

The selling company’s endorsement of the pricing proposal triggers the due diligence phase. This stage confirms the company’s information. Information verification is the role of the lawyers and the investment banker.

Due diligence culminates in the drafting of a Share Purchase Agreement (summarizing the terms of the merger). Each party signs the SPA. After the merger, any necessary adjustments are made (financial, legal, accounting, etc.).

M&A steps on the buyer’s side

The acquiring company also mandates an investment bank to accompany it in the purchase of a company.

• • Searching for targets

The bank searches for potential companies based on the customer’s criteria. Once it has identified the ideal targets, it drafts a teaser notifying its client of its intention to buy. The customer signs an NDA to access the memorandum of target companies that have responded in favor of the teaser.

• • Company selection

The investment bank draws up a presentation of the selected companies and provides its client with an estimate of their value. If the client wishes to acquire a particular company, the bank organizes a meeting. Once the 2 parties have agreed, the bank draws up the LOI with a firm price.

• • Due diligence

Next comes the due diligence phase, designed to verify the authenticity of the information provided on the target company. The SPA is drawn up and signed by the 2 entities, triggering the merger. Finally, the necessary adjustments are made.

What are the challenges of a corporate merger and acquisition in Canada?

Merging and acquiring a company presents you with 2 major challenges, both of which are security-related.

Security compliance

The new company is exposed to increased technological risk if the 2 merging organizations have different levels of IT security. The IT department will have to solve the problem of data management, as it is a question of cybersecurity.

A company with a low level of security could compromise the confidentiality of the other company’s data. The new company could then become a target for hackers.

To remedy the problem, it will be necessary to standardize documentation codes and procedures, as well as policy standards.

IT transparency

IT transparency promotes the integration of the 2 organizations. The IT teams of the 2 entities will work in harmony to share recent and relevant information. Collaboration should result in clear visibility of the new company’s IT map.

Conclusion

Diversification of offerings, expansion of the catchment area, efficiency, productivity and cost savings: these are the opportunities offered by mergers and acquisitions in Canada.

However, the operation involves a number of social and security risks. A difference in corporate culture becomes a source of internal conflict. Differences in security levels can also jeopardize the confidentiality and sharing of data within the new company.

A feasibility study is therefore essential to guarantee the effectiveness of the merger and acquisition.