Company Acquisition in the Context of Mergers and Acquisitions (MA)
Company acquisition is a transaction based on a special purchase agreement, in which a company or a company stake is transferred completely or partially. Simply put, it is the (partial) acquisition of a company, often referred to as acquisition or takeover. It is important to distinguish between friendly and hostile takeovers. The latter does not occur with consent based on contract negotiations, but without the approval of the affected company through unsolicited purchase of the capital majority in the form of company shares.
A company acquisition falls into a category of processes known in business as Mergers Acquisitions, or MA for short. Merger refers to the amalgamation or fusion of two companies, while Acquisition represents the purchase of parts of a company or an entire company in the sense of a takeover. Thus, MA encompasses all processes involving the transfer and change of ownership rights in companies.
In a merger, two companies are united in a legal and economic sense. They then continue to exist as a new organizational unit. A takeover is somewhat different. Here, ownership rights are transferred from one party to another with the corresponding rights and obligations. The acquired company can either continue to exist as a separate organizational unit under different management or be integrated into the acquiring company.
MA transactions take place within the framework of strategic corporate development, with reorganization, growth, or economic strengthening as possible motives.
Various legal regulations are relevant for MA transactions. Depending on the situation, particular attention must be paid to capital market law, foreign trade law, tax law, antitrust law, labor law, and the Securities Acquisition and Takeover Act.
The complex legal basis, as well as the economic and organizational complexity of MA processes, require expertise and sensitivity for the implementation of corresponding plans. Companies often turn to external MA consultancies for this reason.
Company Acquisition: Process and Organization
Company acquisition is an individual process for which there is no universally valid procedure. However, most company acquisitions follow a certain pattern, consisting of a preparation and analysis stage, contract negotiations, and the final execution.
In the preparation and initiation phase, both buyers and sellers explore their goals and devise a strategy. If the seller is willing to sell, a very important process begins, especially for the buyer: the company audit, also known as due diligence.
The potential buyer, or their advisors, closely examine the target company to determine values and potential risks. This process is very extensive and requires expert knowledge. Therefore, specialized consultants from the Mergers Acquisitions field often play a key role here. The due diligence examination is naturally very complex, especially in large companies. However, an extensive examination phase with expert support is also recommended for medium-sized businesses. Contract negotiations can already take place during the examination phase, with the parties agreeing on the type of execution and the exact contract conditions (specific contract object, purchase price, transfer date, legal relationships, possible guarantees and warranties…).
Once the company audit is completed and there is agreement on the contract terms, the final signing takes place, known as the ‘Signing’. In some cases, company purchase agreements must also be approved by other parties (for example, antitrust authorities or the supervisory board).
This is followed by the phase known as ‘Closing’, in which the purchase contract is executed. Once this has happened, the buyer can make adjustments to the company to implement their pre-set acquisition goals.
Legal Protection in Company Acquisitions
Not only the negotiations, but also the contract documents can be quite extensive in a company acquisition. In addition to the main contract for the final transaction, various preliminary and ancillary agreements can play an important role:
- During the course of negotiations, the final contract is often preceded by a Letter of Intent, in which the buyer declares their intention to purchase. This is usually formulated in such a way that it is not legally binding; nevertheless, it is considered an important instrument to affirm the seriousness of the negotiations.
- A Letter of Intent should be legally distinguished from a preliminary contract. The latter goes a step further and obligates the parties to conclude a later main contract. Agreements made here are enforceable. A preliminary contract can be useful, for example, when there is already agreement on the contract contents, but a main contract cannot yet be concluded due to certain obstacles (e.g., missing approvals).
- A Non-Disclosure Agreement can be beneficial for both parties, in which confidentiality and non-exploitation of confidential information obtained during the negotiation process are agreed upon. Such an agreement is particularly relevant if no contract is ultimately concluded.
- Sometimes, agreeing on a non-compete clause can be in the buyer’s interest. This can stipulate that the seller may not establish a direct competing company or use their existing customer base or trade secrets for this purpose. A temporal and geographical limit is usually set for this. Whether a special agreement is necessary for this is not clearly defined legally, but the additional security can’t hurt in individual cases.
Important Before Company Acquisition: Due Diligence
Due diligence generally refers to a thorough examination to safeguard against risks. In business life, it usually involves a business partner review as a prerequisite for cooperation or a transaction.
As mentioned earlier, it is normally also part of an acquisition process. Here, due diligence refers to a detailed analysis of the economic, financial, legal, and tax situation of the target company. This serves both to determine the purchase price and to safeguard against risks.
The due diligence can vary in scope depending on the situation and may focus only on certain areas. In this context, a distinction is made between Simplified Due Diligence and Enhanced Due Diligence. The former is conducted for low-risk assessments and is rather superficial. The latter, on the other hand, is applied for high-risk situations and involves a correspondingly more intensive examination.
Conducting due diligence can be a complex task and belongs in the hands of experts with appropriate industry-specific, legal, and economic knowledge. These can be in-house experts from the buying company and/or external advisors, such as digatus.
The examination primarily uses documents and data from the target company, but also includes conversations with its management. Different areas can be weighted differently during the examination. The financial situation (Financial Due Diligence) and market position (Commercial Due Diligence) of the target company are usually of particular importance in the purchase process. Furthermore, the examination of legal (Legal Due Diligence) and tax (Tax Due Diligence) factors is very relevant for the design of the purchase contract. Increasingly, softer factors such as corporate culture or sustainability efforts are also being included in the examination. Such factors can also pose risks for buyers, for example by damaging reputation. Sometimes, factors of this kind are only subjected to more comprehensive due diligence after the contract is signed, in the course of corporate restructuring and adaptation.
Executing a Company Acquisition: The Possibilities
Essentially, two different forms are distinguished in company acquisitions, namely the Asset Deal and the Share Deal:
- In an asset deal, the economic assets of a company (real estate, equipment, goods, …) are individually sold to the buyer. There is the possibility to purchase all assets of a company or only certain parts of it. Assets that are privately owned by shareholders of the company but used for business purposes cannot be transferred. With the transfer of assets, a transfer of business can also occur. The buyer simultaneously takes over existing employment relationships. At the end of a complete asset deal, the buyer holds all economic assets of the company, while on the other side only the company as an ’empty shell’ remains.
- In a share deal, the economic assets are not sold; instead, the buyer acquires ownership shares in the company and thus completes the whole or partial takeover. This could involve shares, GmbH shares, or partnership shares of a partnership. The buyer thus becomes a shareholder and has corresponding rights and obligations, which in this case also includes employment relationships. However, ownership rights to the entirety of the company are transferred here, not its specific components.
Asset Deal or Share Deal – Which is More Advantageous?
Of course, for buyers and sellers, the question arises as to which form of transaction is more advantageous when buying a company. This cannot be answered in general terms, of course, as both variants can have advantages and disadvantages, which is why many factors must be considered.
For sellers, the share deal is often the preferred option. In terms of profit from the company sale, the share deal is usually more advantageous from a tax perspective. Moreover, the processing and contract design are generally less complex. In an asset deal, each affected asset must be clearly identifiable and listed in the purchase contract. Additionally, a sale value must be determined for each asset. This can be very difficult, especially for intangible assets such as patents or brand names. This issue particularly affects the relatively fast-paced IT sector.
The complexity of an asset deal can also be an argument for buyers to choose a share deal. However, under certain circumstances, the asset deal may still be the better choice. Especially for economically unstable companies, a share deal can be risky for buyers. Unlike in an asset deal, the buyer becomes a shareholder in a share deal and thus also assumes liability for the company’s debts (for example, tax liabilities).
Moreover, in an asset deal, there is the possibility to individually select and evaluate purchase items. In principle, this also gives the buyer the option to exclude items that have no value for them from the deal.
Which purchase transaction is ultimately more advantageous always requires a precise case-by-case examination and can best be assessed within a professional consulting situation as part of the due diligence process, such as at digatus.
Minimizing Risks Through MA Consulting
A company acquisition is a complex process that can also contain many pitfalls and may become a failure. Especially when professional guidance is lacking, the error rate is high based on experience. Often, it’s very fine differences that ultimately decide between success and failure and require a trained assessment and approach.
Economic, legal, financial, and even emotional pitfalls complicate the path to company acquisition. Professional MA consulting can help avoid them. This is partly due to the special know-how. Even for experienced entrepreneurs, a company acquisition is usually not part of daily business. For start-ups, it can even be completely new territory. The risk of making unconsidered mistakes and perhaps being taken advantage of is correspondingly high. In addition, there is an emotional component that should not be underestimated. Buyers and sellers do not always pursue the same interests and goals. External consulting then provides a neutral, unbiased perspective on the purchase process in the interest of the client. The objective assessment strengthens their negotiating position. A good consulting company also has the expert knowledge and experience to simplify and optimize the transaction.
MA consulting can be involved in all process components of a company acquisition. This begins with the exploration of one’s own company goals and extends to company adjustment after the purchase completion. Especially in the legal design of the purchase, in price calculation, and in the assessment of potential risks, professionally qualified MA consulting, such as that provided by digatus, usually pays off very well.
Company Acquisition: Special Case IT Sector
The comparatively fast-paced IT sector occupies a special position to some extent when it comes to company acquisitions. This is mainly due to the fact that determining a realistic purchase price is often difficult, and the price expectations of buyers and sellers can differ significantly.
Values in the IT sector are often intangible and correspondingly difficult to determine.
Especially in small and medium-sized software companies, the company’s success – and thus to a certain extent also the company’s value – often depends heavily on the owner. However, for the buyer, the value that remains when this factor changes due to the purchase is of interest. Company organization, business model, skilled workforce, and customer base can be more important here than previous balance sheets. This must be taken into account when determining the value.
The choice of the right consulting firm can be crucial here. Consultants from outside the industry often tend to view IT companies like any other company and apply the same valuation methods. However, this is a very specific market for which business knowledge alone is not sufficient. Industry-specific market knowledge is usually required here.
Christoph Pscherer
He has been working in the IT environment for almost 30 years, gaining experience in various roles and areas. Through his years of experience as a Service Manager, he knows the challenges and needs on the customer side. He has been applying this deep understanding and knowledge at digatus for more than eight years. As Head of BU IT M&A and Transformation, he and his team support all IT topics along the value chain of M&A projects. This includes due diligence, carve-out, and integration projects.
