M&A transactions: concept, types, stages. How is the M&A transaction supported?

M&A transactions in Russia are a frequent phenomenon that attracts increased media attention. They are held in order to gain more market volume, consolidate enterprises of a particular industry, increase their influence, get the effect of synergy, and maximize profits. Considering M&A transactions, it is necessary to assess their impact on the business from both the buyer and the seller.

The M&A deal on mergers and acquisitions of companies is a combination of a share purchase and sale agreement and corporate restructuring, it requires significant time and financial resources. M&A transactions must be accompanied by qualified consultants.

What are M&A transactions? What is the difference between a merger and a takeover? Types of M&A transactions

Что такое сделки M&A? Чем отличается слияние от поглощения? Виды сделок M&A

M&A transactions or mergers and acquisitions (mergers and acquisitions) are the purchase/sale of a business in order to form a new company or establish control over the sold company in order to consolidate the business, strengthen its position in the market and increase profits.

In practice, in addition to the motives aimed at increasing profits, there are additional motives for M&A transactions:

  • obtaining benefits and reducing the tax base — a company with good tax benefits is bought;
  • transfer of losses to profit of future periods — such a right arises during reorganization after bankruptcy.

However, if the transfer of losses is the only motive, then such a transaction may be considered questionable.

  • obtaining more favorable credit conditions — the larger the company, the more reliable the borrower it is;
  • an increase in the volume of purchases from suppliers — as a result, more favorable conditions for the purchase of resources.

What is the difference between a merger and a takeover?

To understand the difference between a merger and a takeover, it is necessary to give concepts:

Merger — companies voluntarily merge, they cease to exist and a new legal entity arises. All assets and liabilities are transferred to the company formed as a result of the merger.

Takeover — more than 30% of the assets of the legal entity being absorbed are acquired and full control is established by joining the operating company. At the same time, the buyer company continues to function, and the seller company is liquidated.

There are 2 absorption groups:

  • friendly — made on the basis of an agreement of intent, when shareholders of both companies are interested in a transaction or in the consolidation of assets;
  • unfriendly — in this case, the buyer gradually acquires stakes in the target company on the market or from minority shareholders and, having reached a controlling stake, changes management and begins to carry out operational management of the target organization.

The first type is more common, but in world and Russian practice, examples of unfriendly takeover are not uncommon, often ending with a complete consolidation of the shares of the target company owned by the buyer.

Types of M&A transactions are divided into:

  • Horizontal — firms with the same orientation are united
  • Such deals are aimed at increasing resources, working together on projects and reducing competition.
  • Vertical – an association of firms with various activities. For example, a supplier joins with a manufacturer. In this case, there is an increase in profit, which is caused by a decrease in the cost of resources.
  • Parallel – the goal is to combine firms with interconnected products to reduce costs and improve product quality. Example: a manufacturer of computer components is teaming up with a semiconductor manufacturer.
  • Reorganization – companies with different areas of activity are connected. In this case, a new legal entity appears.

Mergers of companies and their types are also divided by national indicators:

  • internal – committed in the same country;
  • export – provide for the transfer of rights to foreign organizations;
  • import – provide for obtaining the rights of companies of foreign states;
  • mixed – the parties to the transaction may be companies whose assets are located in different states.

M&A transactions are classified by geography:

 

  • transnational (cross-border);
  • international;
  • national;
  • regional;
  • local.

Also, M&A transactions can be divided into types depending on the organizational and legal form of the target company:

  • public M&A transactions occur when shares of a public joint stock company (PAO) listed on the stock market or not listed, but not having restrictions on the acquisition, are purchased on the stock exchange or from shareholders;
  • private, when shares of a non-public JSC or LLC are purchased by agreement with the owners.

M&A transactions market in Russia

Рынок сделок M&A в России

2020 was a bad year for the M&A transaction market, and the volume of available funds in the economy also decreased due to the coronavirus pandemic.

However, the trends that have been manifested over the past 5-7 years have persisted. The total number of transactions decreased by about 30%, while in 2019, 126 transactions took place in the first three quarters, information about which got into the press. In 2020, only 88 were closed during this period.

The volume of transactions fell in financial terms, in 2019 it amounted to more than $ 25 billion, in 2020 it slightly exceeded $ 14 billion. By industry, the greatest activity is traditionally observed in the IT sector, telecommunications, mining, retail and office real estate.

Nonetheless, due to the fact that many companies have found themselves in a difficult situation, for 2021 this may become an incentive for investment activity of companies ready to strengthen their economic influence at the expense of their assets.

Experts assess the impact of M&A transactions on the country’s economy as positive. They make it possible to structure individual industries, create new vertically integrated holdings, create new jobs, but this can definitely be said only based on the results of the analysis of transactions in recent years.

At the beginning of the era of mergers and acquisitions, many manufacturing enterprises were acquired for the sole purpose of selling real estate and land plots, as an example, JSC “Karacharovsky Mechanical Plant”, which produced economy class elevators.

The territory of the plant was located within the third ring of Moscow and the investor, having consolidated a controlling stake, sold the plant’s property for offices and shops, a small volume of production was saved.

M&A transaction support. Structuring of mergers and acquisitions

Сопровождение сделки M&A. Структурирование сделок по слиянию и поглощению

In most situations, the structuring of transactions is entrusted to investment consultants, large banks, investment companies. For example, our investment company APEXCOM can provide comprehensive support for M&A transactions:

  • attracting financing;
  • structuring the transaction;
  • legal support;
  • accounting support;
  • conducting negotiations;
  • etc.

The complexity of transactions requires the mandatory participation of qualified lawyers familiar with the intricacies of their support, including English law, which usually regulates such transactions.

The stages of transactions are mostly common in the sale and purchase of assets. However, you should pay attention to individual elements in the structuring, depending on the following factors:

  • the number of shareholders and the need for mandatory repurchase of shares from them when acquiring more than 30% of voting shares;
  • the need to coordinate transactions with the FAS of the Russian Federation or at other levels;
  • presence of a foreign element;
  • the difficulty of securing financing;
  • the required system of guarantees.

Usually, by the final stage of the transaction, in addition to the seller and the buyer, a financing bank, an investment consultant, a law firm, a registrar, Russian and foreign, an organization guaranteeing the security of transactions participate in it.

Stages of the M&A transaction

Этапы сделки M&A

The stages of an M&A transaction may differ depending on whether an asset is being bought or sold. The main stages when buying an asset practically do not change, but additional ones are often added, depending on the structure of the transaction.

A lot depends on whether a deal is planned with a specific buyer who has come out with a purchase offer or whether a buyer is being sought among an unlimited number of people, for example, during the privatization of state property or during a kind of auction among many companies interested in buying in one way or another.

An example of such a search could be a deal for the sale of a Rolf car dealer, but the pandemic forced the owner to postpone the event. The buyer search stage is more typical for a private business, with 1-2 shareholders.

After finding a buyer, the transaction stage begins. As a rule, M&A transactions are structured as follows:

  • conclusion of an agreement of intent in which the parties express their desire to make a purchase and sale;
  • conducting an asset audit;
  • search for financing;
  • negotiations on the structure of the transaction;
  • development of a guarantee system;
  • payment and transfer of shares, depending on the guarantee system, something happens earlier;
  • change of management (if necessary);
  • adoption of new editions of constituent documents;
  • mandatory repurchase of shares from minority shareholders if more than 30% of shares are acquired. The repurchase is carried out at market value, to determine which an independent appraiser is invited;
  • reorganization in the form of merger or merger (if provided).

To carry out most of the stages, it is necessary to attract qualified consultants, whose role is especially great in transactions with international participation. They think over not only the structure of the transaction, but also the structure of the future business.

An example is the merger of Daimler (Mercedes Benz) and Chrysler. During the merger, it was possible to combine production and technology, but to leave the same sales and profit-making process in each company, and the transaction showed a significant synergistic effect

Drafting an Agreement of Intent and structuring an M&A transaction

The parties, having expressed their desire to conclude a deal, fix their intentions in the agreement. The agreement of intent expresses the interest of the parties in concluding the transaction, as standard, it contains the following conditions:

  • the parties express their intention to buy and sell the asset, the seller refuses to negotiate with other buyers;
  • a preliminary price is fixed, which can be revised;
  • the deadline for each stage of the transaction is determined;
  • the parties guarantee each other confidentiality;
  • The conditions for refusal of the transaction are prescribed, if necessary, financial compensation.

The agreement can be worked out to a greater or lesser extent. More often it is signed between the final beneficiaries of both legal entities. If it does not contain financial obligations, for example, a deposit condition, it is not regulated by national legislation and is not actually binding.

Most often, its action is also subject to English law and it is the basis for drawing up a contract of sale.

Conducting due diligence of the acquired asset

An audit or due diligence of the acquired company allows you to identify the main legal, financial or tax risks that the acquisition entails. It is usually carried out by involved legal and audit companies.

Our team has specialists for project management of any complexity. There are also partners – legal, accounting and auditing companies, production and technology consultants, services for dealing with distressed assets of banks.

Proactive verification of the target company reveals most of the risks. The audit should answer the following questions:

  • the status of the constituent documents, their compliance with the current legislation, the absence of legal risks associated with the status of the company.

Usually such risks arise for legal entities with a history of privatization or bankruptcy, but they may also be associated with the invalidity of the legal address, non-payment of the authorized capital, non-registration of the issue of shares and other reasons

  • the composition and structure of shareholders participating in the transaction and not participating in it. The risks of mandatory repurchase when acquiring 30% of shares or more, the risks of an aggressive minority shareholder who may interfere with the transaction are identified;
  • the condition of real estate objects, the presence of registration of rights to land plots, buildings and premises, the presence of liens and other encumbrances, the absence of alterations, the presence of property sale transactions of a controversial nature;
  • the state of the company’s business processes, patents, technologies, information support;
  • level of accounts payable, total debt burden;
  • the quality of accounting, no need to restore it;
  • tax burden, no problems with underpayment of taxes;
  • absence of off-balance sheet obligations, for example, promissory notes, which may be unexpectedly presented for repayment after payment and closing of the transaction.

It is important to identify assets that are vital to the company, without which the company cannot exist and ensure the safety of these assets during the transaction.

Usually such an audit takes 2-3 weeks. Before it, it is necessary to agree on an obligation that if the party refuses the transaction based on the results of the audit. It will return all the documents studied and assume the obligation to preserve trade secrets.

Usually this obligation is specified in the agreement of intent. Sometimes, simultaneously with the audit, an asset is evaluated by independent appraisers.

Analysis of the received information and risks

The audit report becomes the basis for the analysis of information and risks, and often the transaction price decreases based on its results. The identified risks become the basis for bidding and creating a system of guarantees.

Usually, the seller offers to deposit certain funds that will be paid to the buyer if significant risks arise within 1-3 years after the closing of the transaction. This is a British practice, increasingly being implemented on Russian soil.

A takeover transaction is often accompanied by additional guarantees that reduce the seller’s risk level. When a merger occurs and the shareholders of both the seller and the buyer continue to participate in the management of the company, the parties do not provide guarantees.

Attracting financing from the bank

Not all companies can make an acquisition at their own expense, there is a need to obtain a loan, ordinary or syndicated.

A syndicated loan is jointly provided by several banks. Quite often, the loan is given not by Russian, but by foreign banks. Sometimes a bond loan is issued in order to finance a transaction.

Stages of attracting financing:

  • negotiations with banks or funds;
  • consideration of transaction documents, business plan, which specifies the sources of repayment;
  • determining the loan value;
  • determining the type of guarantees, usually a pledge of shares or real estate of the target company;
  • sending funds to the buyer’s accounts, sometimes directly to the seller.

Support financing usually also requires the involvement of consultants at the stage of negotiations with the bank.

Preparation and approval of transaction documents

Depending on the structure of the transaction and the presence of a cross-border element, for example, when companies with foreign incorporation act as a seller or buyer, a package of documents for the transaction is prepared.

The share purchase and sale agreement will be mandatory, shares can be sold directly or the project company to which they are reissued.

The mandatory terms of the contract will be:

  • asset description;
  • the price or the procedure for determining it;
  • obligations to pay and transfer shares;
  • responsibility;
  • confidentiality obligations;
  • the procedure for termination of the contract if one of the parties refuses to purchase;
  • force majeure conditions.

Additional conditions may be a deposit, guarantees of fulfillment of obligations, guarantees of absence of risks. If a merger takes place and the seller continues to be a shareholder of the new legal entity, a shareholders’ agreement is concluded, which may be governed by Russian law or the law of Britain and Wales.

This document builds a system of relations between the seller and the buyer, if they are both shareholders of the new company, and describes the mechanism for conflict resolution.

Final negotiations and closing of the transaction

After the documents are ready and the financing is attracted, the transaction is closed. Final negotiations may be held before closing the transaction.

Final negotiations are not a mandatory stage, usually by the time the documents are prepared and agreed, all issues have already been resolved.

But if the order of the transaction has changed, at this stage additional agreements to the documents can be signed, the conditions for further interaction will be determined. At this stage, the interests of shareholders are usually represented by intermediaries.

Stages of an M&A transaction when selling assets

Этапы сделки M&A при продаже активов

When owners wish to sell an asset, they also act according to a certain scheme, modified depending on whether a purchase offer has already been made or the party to the transaction is only looking for a buyer.

The first stage is pre-sale preparation, in which the asset is cleared of risks and debt obligations.

Pre-sale preparation of an asset

When preparing a company for sale, it is necessary to carry out a number of actions that increase the value of the asset, they also depend on the presence of a foreign element in the transaction. Usually the preparation consists of the following stages:

  • the company’s activities are optimized as much as possible;
  • it is checked that all the necessary assets are registered to the company being sold and there was a possibility of their alienation;
  • intra-group obligations are terminated;
  • a financial business model is being prepared for future periods;
  • an internal evaluation of the company is being carried out;
  • presentation materials for sale are being prepared.

Preparation, depending on the complexity of the transaction, can take from several months to two years.

Buyer search

Sometimes an investment consultant is usually hired to solve this problem. He determines the range of possible buyers, sends them offers and then conducts negotiations, striving to provide the seller with the highest possible price.

Conversation

This stage takes from a week to several months, the time depends on the complexity of the issues discussed.

Negotiating solves several types of tasks:

  • price determination;
  • determining the structure of the transaction;
  • determining the form of payment;
  • development of a guarantee system;
  • identification of risks that could not be found out during the audit process;
  • determining the future management system, often the seller wants to remain a minority shareholder in the business or retain management for a certain time. These issues are resolved in the shareholders’ agreement. Also at this stage, the relationship of the parties as a result of the conflict is regulated. The Texas revolver model is most often used, when one of the parties to the conflict is obliged to either sell its share or buy the share of the second shareholder.

The negotiations are almost always attended by consultants who are not personally interested in the transaction, but receive commissions. Their experience allows us to protect the interests of both sides to the maximum extent.

Development of a guarantee system

The parties are developing a system of guarantees, usually the transaction is structured in such a way that the payment is made in favor of the bank or financial intermediary and only after the registrar or the depository transfers the shares to the buyer’s account, the intermediary checks the documents and makes payment for the transaction.

Among the most common forms of guarantees:

  • letter of credit;
  • bank guarantee;
  • deposit box;
  • using an escrow account or an escrow agent.

The cheapest way of guarantees is a bank safe deposit box, but this type is becoming rarer, due to the practical withdrawal of large amounts of cash from business circulation.

An escrow account can be used to deposit not only money, but also securities, depending on the structure. This is the most expensive form of providing guarantees, since the bank or escrow agent assumes responsibility for the compliance of the documents on the basis of which funds are paid or shares are transferred with the terms of the transaction.

Preparation of documents

Two standard documents for structuring M&A transactions are a contract for the purchase and sale of shares or shares and a shareholders’ agreement.

Depending on the presence of a foreign element in the transaction, they may be regulated by Russian or English law. English law is more flexible, so it is usually used in large transactions, the parties are free to choose the applicable law, but disputes in connection with documents subject to English law are practically not considered in Russian courts. This, in case of a conflict, can make its resolution quite expensive.

Closing an M&A transaction

Support of M&A transactions is not always completed simultaneously with their closure, payment and transfer of shares. Consultants often accompany the process of corporate restructuring, management change, mandatory buyout and follow-up activities.

Closing a transaction is the fulfillment of obligations by both parties, one takes steps to transfer shares, the second pays the money.

The transfer of shares of a Russian joint-stock company is made by sending a transfer order to the registrar or the depository, if shares of a foreign legal entity are purchased, to the registrar conducting the company’s legal affairs.

Usually, immediately after the transfer of shares, a general meeting is appointed, at which management changes. However, sometimes the transaction is structured so that the meeting is scheduled for the day of the transaction. Then the payment condition becomes, among other things, the change of the general director.

Mergers and acquisitions of companies are carried out, if provided for, after obtaining full control, when corporate decisions can be made by voting with reissued shares.

For the Russian market, it is the corporate stage of completion of the transaction that is unusual, usually the transaction is completed at the stage of re-registration of shares.

M&A deals — examples

Сделки M&A — примеры

To answer the question of what M&A transactions in Russia are, it is necessary to give several examples of different types, both accompanied by reorganization and without it.

Among the significant deals of last year, experts singled out the acquisition by Rostelecom of a 55 percent stake in Tele-2 Russia for $2.1 billion, but it was the only high-profile deal.

According to the results of last year, the market for M&A transactions decreased financially by about 30%, this was due to the pandemic, and experts predict its revival closer to autumn.

Deals were especially actively concluded in the IT sector and in the field of e-commerce, activity was manifested in the telecommunications market, office real estate markets practically stagnated.

It is worth mentioning the following examples of M&A transactions:

  • joint venture “Sbera” and Mail.ru Group acquired a controlling stake in the ready-to-eat express delivery service “Kitchen in the district”, as well as in the food delivery service “Scooter”;
  • The largest transaction was the sale of X Holding to Alisher Usmanov’s USM holding, whose price exceeded $2.1 billion. In exchange for the shares of his company, Anton Cherepennkiov received 10% in the Usmanov holding, which includes the mobile operator Megafon. The transaction lasted more than a year, first a project company was created, to which the group’s telecommunications assets were transferred, then there was an exchange of shares, in fact, the transaction took place in the form of a merger. Synergy allowed the new holding to become the largest in Europe;
  • the market was interested in the deal on the purchase by Vnesheconombank of a network of clinics “Doctor Nearby” providing online consulting and telemedicine services;
  • An interesting deal for the market was the acquisition of Promsvyaznedvizimosti JSC, the owner of a number of construction projects (Novospassky business quarter, Arbat 1 business center by its former director Dmitry Ermolov. It started in 2018, but the market only found out about it in 2020.

The deal is interesting because one of the owners controls the package not directly, but under a trust agreement, which partially helps to protect the asset.

Many companies have decided to exit the market, which should lead to an increase in the number of mergers and acquisitions.

M&A transaction support is a difficult task and experienced consultants should be involved to solve it.

Разрабатываем Стратегии для собственников бизнеса в целях оптимизации группы компаний, решения нестандартных задач и продажи активов. Оказываем услуги по сопровождению сделок M&A, управлению непрофильными активами и проектами в целом.

Leave a comment:

Top
APEXCOM
Legal Information
Apexcom Ltd.
Primary State Registration Number (OGRN) 1217700163746
Taxpayer Identification Number (INN) 7726475790
Tax Registration Reason Code (KPP) 772601001
Contacts

+7 (495) 225-81-62
info@apexcom.net

Address: 117105, Moscow, Novodanilovskaya Embankment 6, building 1, 10th floor

© 2021. All rights reserved. APEXCOM® Powered by Digital Agency GOadvance