A merger occurs when two companies, which are often about the same size, agree to join together to form a new entity. Mergers are friendly, whereas acquisitions tend to be more hostile and occur when a target company realizes that they have no option but to ensure their survival by being bought by the other company.

The rationale behind a private company merger is that two companies together are stronger and more valuable than two separate ones. Stronger companies can buy others in order to create a more competitive and cost-efficient entity. This in turn has a positive impact on profits, and consequently benefits shareholders. Typically a private company is acquired by buying all of the share capital both issued and to be issued. The advantage of doing this is that all of the assets of the target company are acquired.

The process involved in a merger

In the first instance, once a target has been identified, the heads of terms need to be negotiated. These set out the main contractual terms of the proposed sale and will typically include the proposed purchase price, non-compete covenants, and types of warranties. There may also be a proposed timetable, as well as confidentiality clauses, and/or exclusivity clauses. Given that it is possible to be liable for pre-contact misrepresentation, negligent, fraudulent or misleading statements it is vital that you obtain expert advice at an early stage to avoid these pitfalls.

Due diligence

When considering whether to pursue the merger it is important to investigate the financial, legal and operational health of the other company. You will need their accounting records and balance sheets, a list of assets and liabilities, a list of actual and potential customers, details of employees and their benefits, any pending litigation or insurance claims, and the company’s formation documents, such as its articles of association. You will also need to ascertain whether there are any rights that shareholders may have to make offers prior to any share transfers, or whether there are any other restrictions.

Legal structure and personnel issues

Other issues may include how the board of directors, executive officers and other managers will combine, and whether there will have to be any redundancies at this or other staff levels. It is essential that prospective employees who may be affected are identified early, not just because of the prospective liabilities but also if you fail to comply with TUPE rules then you can attract substantial penalties. Will the cultures of the two companies fit each other? Will the merger achieve synergy, i.e. will the combined companies improve performance and value?

Finance

During the planning process the merger will be valued, and finance will need to be obtained. A realistic and evidence-based valuation may require substantial preparation and negotiation. This stage could take a while but once this is complete, and the offer has been accepted, the merger process is well underway.

Post-merger integration

The process of combining two organisations post-merger is called ‘integration’. This is one of the most challenging areas to address during the merger process. There can be cultural clashes so it is very important to consider these before the merger gets to the integration stage. When successfully executed, identified risks are avoided and the change to the business, the people and the culture are all managed so as to achieve, or even exceed, the value expected by the merger. In order to achieve the best results this last stage requires careful planning and risk analysis. Practical steps include:

  • starting the process of integration as soon as the merger has been announced;
  • nominate key members of staff from each company to manage the integration, and divide them into areas such as human resources, legal, sales, manufacturing, IT, and finance;
  • create a plan for internal communication; a blue print for employees from each company to follow that will show them how they will integrate into the new business.

It is important to ensure that there is a clear picture defining what successful integration will look like, so that everyone knows when it is complete.

Many prospective mergers fall away during the planning process. This is because what may have made theoretical sense at the outset was not eventually executable. Expert advice at the outset can often find a way through difficult strategic decisions which is why it is always advisable to seek the advice of an experienced merger lawyer at an early stage.

For further information, please contact Simon Walker or Heidi Sawtell in the merger team on 01264 721 705 or 01264 721 702 or email simonw@talbotwalker.co.uk or heidis@talbotwalker.co.uk.