This article will outline the format of M&A transactions and evaluate the advantages and disadvantages of various structures.

Merger and acquisition:

M&A, also known as Merger and Acquisition, is a broad term that refers to various types of consolidations involving two or more companies. M&A is a strategy utilized by companies to broaden their scope or size. A merger involves the combination of two businesses to create a new entity, while an acquisition occurs when one company buys out another company entirely. Essentially, the distinction lies in how the agreement is conveyed to the board of directors, employees, and shareholders of the company being targeted. Mergers and Acquisition (M&A) allow companies to choose from different methods of business transfers such as slump sale, share acquisition, asset purchase, and merger based on their needs and requirements. Nevertheless, asset acquisitions, stock purchases, and mergers are the most frequently seen options. In this article, we will talk about asset acquisition and stock purchase, but first let’s understand the structure of an M&A deal.

M&A Deal Structure: 

During an M&A transaction, there are two parties participating: the acquiring company and the target company. The M&A deal structure is a formal contract between the parties outlining the terms and conditions of the transaction, such as payment terms, legal requirements, and the distribution of risks and rewards between the buyer and seller. It also dictates the type of payment that will be used in the trade between parties, such as assets or securities. The arrangement can be complicated, involving different legal, financial, and accounting factors. Parties start negotiations to assess risk and determine how to manage it.

Types of M&A deal structure: 

Choosing the optimal framework for a merger or acquisition is crucial for the deal’s success. Different deal structures, such as assets purchase, stock purchase, merger, slump sale, come with their own set of benefits and drawbacks. In this article, we will examine the two most frequently used types: asset purchase and stock purchase.

Acquisition of assets:

In this arrangement, the purchaser only obtains the essential assets – including intellectual property, equipment, and real estate – needed to run the business. Additionally, the purchaser could agree to assume specific responsibilities of the company that is being transferred. The seller retains ownership of the remaining assets, as well as any liabilities and obligations. This particular structure is typically utilized when the purchaser is interested in acquiring a specific division or business unit within a company.

Benefits:

• The purchaser has the option to buy specific assets and avoid taking on unknown liabilities and risks, which assists in broadening their business.
• Seller has the ability to maintain ownership of assets that are not wanted.

Drawbacks:

• Buyer might have to comply with certain legal and regulatory requirements in order to transfer the assets.
• The seller could be responsible for tax obligations.

In September 2019, Orient Refractories Limited has entered an asset purchase agreement with Manishri Refractories & Ceramics Private Limited for acquisition of certain assets /plant & machinery situated at Baichuana, Tangi, Distt. Cuttack, Orissa. The same will help the company to diversify its existing product line by adding new products like Magnesia Carbon Bricks etc.

Stock Purchase:

In contrast to an asset acquisition transaction, a stock purchase does not involve any assets (physical or non-physical). This type of agreement enables the purchaser to acquire full ownership of the entire business, including its assets, debts, and obligations. One benefit of buying stocks is that the seller can enjoy tax advantages, and it’s usually a simpler (and cheaper) way of acquiring ownership.

Legally speaking, there are minimal changes for the company aside from the alteration in ownership. Having all assets and contracts registered under the company’s name can be beneficial because it means there will likely be less need for approval from third parties when conducting transactions. Therefore, the buyer finds it simpler to carry on with the business operations once the sale has been completed.

Benefits:

• Clear rules and regulations in the legal field.
• Simple to execute
• The purchaser takes on the target company’s entire assets and liabilities.

Drawbacks:

• The buyer will take on unforeseen obligations and dangers.
• The seller will be responsible for tax responsibilities.

The situation deteriorates further with an increased number of shareholders. The greater the number of shareholders, the more likely it is to encounter disagreements during the sale process.

In summary:

The arrangement of mergers and acquisitions (M&A) is essential in deciding the outcome of a transaction. This article has covered the main two deal structures: asset purchases and stock purchases, each coming with their own pros and cons. In the end, the decision on whether to pursue an asset purchase or a stock purchase should be based on the objectives and situation of the parties participating in the M&A deal.