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M&A Deal Structure

A binding agreement that outlines the rights and obligations of both parties in an M&A deal

What is an M&A Deal Structure?

An M&A deal structure is a binding agreement between parties in a merger or acquisition (M&A) outlining the rights and obligations of both parties. It states what each party of the merger or acquisition is entitled to and what each is obliged to do under the agreement. Simply put, a deal structure can be referred to as the terms and conditions of an M&A.

 

M&A Deal Structure

 

Basics of an M&A Deal Structure

Mergers and acquisitions involve the coming together (synergizing) of two business entities to become one for economic, social, or political or other reasons. A merger or acquisition is possible only when there is a mutual agreement between both parties, the agreed terms on which these entities are willing to come together is known as an M&A deal structure.

The process of creating or developing a deal structure is known as deal structuring. Deal structuring is a part of the M&A process; it is one of the steps that must be taken in a merger or acquisition. It is the process of prioritizing the objectives of a merger or acquisition and ensuring that the top-priority objectives of all parties involved are satisfied considering the weight of risk each party can bear. Initiating the deal structuring process requires all parties involved to state:

  • Their stance on the negotiation;
  • Observable latent risks and how they could be managed;
  • How much risk they can tolerate; and
  • Conditions under which negotiations may be canceled.

Developing a proper M&A deal structure can be quite complicated and challenging because of the number of factors to be considered. These factors include preferred financing means, corporate control, business plan, market conditions, antitrust laws, accounting policies, etc. Despite the complicated nature of the deal structuring process, employing the right kind of financial, investment and legal advice can make the process less complicated.

 

Ways of Structuring an M&A Deal

There are three well-known traditional ways of structuring a merger acquisition deal although, in recent times, business entities have engaged in other deal structuring methods on a note of creativity and flexibility. The three ways of structuring an M&A are asset acquisition, stock purchase, and mergers; they can also be combined to achieve an even more flexible deal structure.

 

1. Asset Acquisition

In an asset acquisition, the buyer purchases the assets of the selling company. An asset acquisition is usually the best deal structuring means for the selling company if it prefers a cash transaction; this is because an asset acquisition normally involves a cash transaction unless an agreement is reached on some other means of payment. The buyer chooses which assets to purchase and for which to assume responsibility.

Although the primary advantage of asset acquisition is that it normally involves a “cash deal,” it also comes with advantages and disadvantages for the acquiring and selling entities.

 

Advantages of an asset acquisition for either party include:

  • The choice of the buyer to decide which assets to buy from the seller and which not to
  • The selling company is still legally recognized as a corporate entity after the sales until it winds up completely.

Disadvantages of an asset acquisition for either party include:

  • The buyer may not be able to acquire non-transferable assets, e.g., patents
  • An asset acquisition may lead to high-impact tax costs for both the seller and buyer
  • It may also take more time than necessary to close the deal.

 

2. Stock Purchase

Unlike an asset acquisition where there is a direct transaction of assets, assets are not directly transacted in a stock purchase. In a stock purchase acquisition, a major amount or the entire seller’s voting shares are acquired by the buyer. In essence, this means the ownership of the seller’s assets and liabilities are transferred to the buyer.

 

Advantages of a stock purchase acquisition:

  • Taxes on a stock purchase deal are minimized, especially for the seller.
  • Closing a stock purchase deal is less time-consuming since negotiations are relatively smooth.
  • The seller can keep the operations running even after the deal is closed.
  • It is less expensive.

Disadvantages of a stock purchase acquisition:

  • Legal or financial liabilities may accompany a stock purchase acquisition.
  • Uncooperative shareholders may also be a problem.

 

3. Merger

Though the term “merger” is commonly used interchangeably with “acquisition,” in a strict sense, a merger is the result of an agreement between two separate business entities to come together as one new entity. When a merger involves a “buyer” and a “seller,” it becomes an acquisition, and an acquisition does not necessarily lead to a new entity since the buyer still retains the right to keep the firm’s name and its other attributes. A merger is not very complicated since all liabilities, assets, etc. become that of the new entity.

In structuring a deal, the advantages and disadvantages must be considered along with other influencing factors to reach a conclusion on which method to adopt.

 

Modeling Deal Structures

Below is a screenshot from CFI’s M&A Model Course, which has an assumptions section that includes various deal structures.

M&A Model Course with deal structures

 

Creating a Proper M&A Deal Structure

An important factor to consider is to create a great deal structure; a win-win approach should be used, where the interests of both parties are well represented in the deal and risks are reduced to the barest minimum. Most often, win-win deal structures are more likely to lead to a sealed merger or acquisition deal and may even reduce the time required to complete the M&A process.

There are two important documents that are used to offset the M&A deal structuring process. They are the Term Sheet and Letter of Intent (LOI).

  • Term Sheet: A Term Sheet is a document stating the terms and conditions of an intended financial investment, in this case, a merger or acquisition. On a general note, a term sheet is not intended to be legally binding unless otherwise stated by the parties involved.
  • Letter of Intent (LOI): As the name implies, a Letter of Intent (LOI) is a document written to convey the intentions of the writer to the receiver, in this case, in respect of an M&A. Like the term sheet, an LOI is usually not intended to be legally binding except for the binding provisions included in the document.

 

Key Takeaways

An M&A deal structure is one of the steps in a merger or acquisition; hence it is important to create a proper deal structure through deal structuring, taking top-priority objectives of the parties involved into account. Deal structuring is the process of creating a deal structure that is suitable to the objectives of all parties involved, i.e., the buyer and the seller.

There are three well-known methods of M&A deal structuring: asset acquisition, stock purchase, and merger, each with its own merits and demerits for both parties in the proposed deal. A proper deal structure will lead to a successful merger or acquisition deal.

 

Related Readings

CFI is the official provider of the Financial Modeling and Valuation Analyst (FMVA)™ certification program, designed to transform anyone into a world-class financial analyst.

To keep learning and developing your knowledge of financial analysis, we highly recommend the additional resources below:

M&A Modeling Course

Learn how to model mergers and acquisitions in CFI's M&A Modeling Course! Build an M&A model from scratch the easy way with step-by-step instruction.

This course will teach you how to model synergies, accretion/dilution, pro forma metrics and a complete M&A model. View the course now!