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Mergers and Acquisitions

Whether it’s joining forces with a tech-savvy start up or combining portfolios with an international distributor, mergers and acquisitions allow firms to grow. Carys Evans analyses the possibilities

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Mergers and acquisitions are popular ways to enhance and grow business

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When one company takes over another and establishes itself as the new owner, this is an acquisition. From a legal point of view, the company which has been acquired ceases to exist, the buyer absorbs the business and the buyer’s stock continues to be traded while the acquired company’s stock does not.

A merger usually involves combining two companies into a single larger company. The combination of the two companies involves a transfer of ownership, either through a stock swap or a cast payment between the two companies. In practice, both companies surrender their stock and issue new stock as a new company.

By merging, companies benefit from factors such as staff reductions – although not necessarily good news for the staff themselves – in terms of costs, a reduction in staff means a reduction in payroll which is a financial benefit for owners. Mergers can also enable companies to acquire technology, and in turn, stay competitive and at the forefront of evolving and advancing markets.

A merger can see lots of different cultures come together

According to the Office for National Statistics, between October and December 2018, the total value of inward mergers and acquisitions was £33.3bn – the highest value since quarter four of 2016. The value of mergers and acquisitions for the entire year has rocketed since 2017, growing from £35.2bn to £71.1bn. Domestic mergers and acquisitions (UK companies acquiring other UK companies) was valued at £5bn for the fourth quarter of 2018 and was the highest recorded value for the entire year since 2008 at £26.5bn.

Recognising an acquisition opportunity is just the first step in a long and sometimes complicated process so where do you start, and how do you go about completing the successful acquisition of a company?

Fail to prepare, prepare to fail

Before a company can acquire another, it must ensure that it is first entirely financially stable with business at a healthy point. Before a company decides which firm it would benefit most from acquiring, it makes sense to first sit down and work out exactly what you can afford to buy.

Another question to ask before moving forward with an acquisition is do you have the strength and capacity in your team to complete the process? Integrating teams, processes and customers can all prove to be a tricky job if you don’t yet have the means to efficiently complete this.

When deciding which company is the right one for you, it is important to make sure that you fully understand the business and how it could complement yours or drive your business forward. Think about what your strengths and weaknesses are. Acquiring a company with the same strengths as yours has the potential to propel your services even further, allowing you to offer even more to existing customers. Acquiring a company which would bring strength to your areas of weakness provides the opportunity to widen your offerings to broader markets and access even more clients.

O Factoid: According to the Office for National Statistics, the total value of inward mergers and acquisitions for 2018 was £71.1bn.  O

It is also important to remember that no two companies are the same. Therefore, every single merger or acquisition will have its own pros and cons. It is just about sitting down and working out what it is you want to get out of the partnership and then decide whether it is a realistic, achievable next step.

What do you want out of it?

DTM Legal is a firm of solicitors with offices in Chester and Liverpool. The company works closely with clients to provide commercial legal advice.

Edward Barnes is head of corporate and commercial at the firm. He explains how this sort of business venture can allow a buyer to enter a new geographic market, a new product, or service sector, with much less effort and more certainty than attempting to expand organically.

Barnes says: “A target business with a tried and trusted team of people, product or service can be a very attractive way of increasing profit and market share. For sellers, the driver is often the fact that they wish to exit or retire or realise their initial investment. Or even simply that they feel they have taken their business as far as they can with their own resources, people, and expertise and a buyer can offer greater access to new markets or funding.”

In terms of the actual process involved in completing a merger or acquisition, Barnes gives a six-step break down. First, a non-disclosure agreement or confidentiality agreement between parties is created to enable frank discussions and disclosure of sensitive financial or legal information.

Next, a letter of intent or heads of terms setting out the key elements of the merger or acquisition including price, payment mechanism and timescales is curated. Then a questionnaire or follow-up enquiry is often used to discuss legal, commercial and financial questions.

The sale and purchase agreement is then made, which is the main transaction document covering the deal as well as details of the price and payment mechanism.

“The Disclosure Letter is a document in which the buyer formally discloses information which are inconsistent with the warranties,” Barnes explains. He adds: “This flushes out information for the buyer and, if done properly, ensures the seller will not be liable to the buyer for any claims that the warranties have been breached.”

The Disclosure Letter is a document in which the buyer formally discloses information which are inconsistent with the warranties

Finally, various ancillary documents are shared, depending on the circumstances. For example, board minutes, shareholder approvals, new service agreement or consultancy agreements.

In terms of what to be wary of, Barnes says: “Sellers are often surprised by the level of due diligence and how time consuming it can be. Often, for confidentiality reasons, it is the seller or a small management team who are the ones involved in what can be quite an intense period which can feel like it is taking them away from the day job of running the business."

“Sellers and businesses should and can prepare in advance for this scrutiny by checking procedures. Contracts and policies to ensure everything is compliant and in place as a buyer will pick up on failings in this area and may require everything to be put in order very quickly and in its preferred terms or else be put off acquiring or merging altogether.”

Move into new waters

Ocean Outdoor is no stranger to an acquisition. Just two months ago, the firm extended its digital out-of-home (DOOH) media presence in Europe. The company acquired Stockholm-based Visual Art Media and will now provide digital signage in Sweden, Denmark and Finland.

Ocean expanded its Nordic presence with the acquisition of Visual Arts Media this year

Earlier in the year, Ocean Outdoor acquired two additional companies in the Netherlands: Ngage Media and Interbest. Both operate large-format full motion city centre and roadside advertising portfolios across the region. The acquisitions marked Ocean’s first move into continental Europe.

Ocean Outdoor acquired Ngage Media and Interbest in the Netherlands this year

Discussing the benefits of a merger or acquisition, Ocean Group chief operating officer and chief financial officer, Stephen Joseph says: “Whilst the obvious ones are cost savings, there are more subtle benefits around a broader skill set of the people that join together, as well as their experiences. Sharing ideas and solving problems of a new partner who has overcome a similar issue is another key upside.”

On what challenges to prepare for and how to be successful, Joseph adds: “With different cultures communicating the story to all people, both internal and external partners, as to what the merger means for them, a coherent public relations plan and communications process is the key here.

An Ocean Outdoor screen in Scotland’s capital, Edinburgh

“Maintain momentum throughout the process and be prepared to make important decisions very quickly and very late at night. Having good advisors around you helps. Ultimately, if you reach a stumbling block then get everyone in a room and don’t leave until the deal is done.”

Merging a business which you have curated for many years, or even letting it go, can be a mammoth emotional milestone. To deal with this, Barnes recommends speaking to other friends or contacts who have been through a similar process.

He says: “Completing a deal is only part of the equation. Afterwards there is a business to integrate, new people to manage and often big differences in working cultures. Is one party much bigger than the other? Will the buyer take a ‘hands off’ approach and leave the target business to operate before or will they get heavily involved in managing and operating the business? If the latter, how will they do this?”

These are all important things to consider before embarking on a merger or acquisition, so don’t forget there is lots of advice and expertise available at the ready for the taking.

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