Mergers and acquisitions (M&As) are two of the best ways to achieve rapid growth. In some cases, they’re the only option. They help companies expand their market share, extend their product catalog, and unlock new revenue opportunities through access to new skills, assets, and customer bases.
However, the vast majority (between 70% and 90%) of M&As fail. Integrating two parties usually seems better in theory than in practice, and preparing for a successful M&A is far more complicated than it looks. Before you dive in, consider the seven factors outlined in this blog.
1. Outstanding Liabilities
One of the main reasons M&As fail is that parties tend to overlook financial liabilities. According to Torey Wood, CEO of M&A Financing Services, there are a few critical points of consideration when it comes to potential liabilities:
- Outstanding balances on loans
- Quarterly IRS tax obligations
- Deferred maintenance on property or equipment
- Accounts receivable owed to the target company
In every M&A transaction, these liabilities become part of the package. That means if they’re not accounted for in the initial M&A agreement, they’ll cause significant cash flow problems for the acquiring company post-transaction.
2. Corporate Culture
Culture fit is one of the most important success factors in any M&A transaction. Deloitte research finds that nearly one in every three integrations fail due to a lack of cultural fit. The best way to ensure success is to build an integration plan that focuses on both the culture of the target and the buyer’s vision for the future. This includes defining clear goals, creating open communication channels between employees, and providing resources for team members who may need help adjusting to a new environment.
3. Human Collateral
When assessing teams and organizational leadership and creating plans to bring them under one roof, you can expect a few immediate financial contingencies:
- Salaries: What is the combined payroll going to look like for the new organization?
- Benefits: How will you provide healthcare coverage and other benefits to employees from both companies?
- Retention Plans: Are there any retention bonuses or other incentives that need to be considered in order to keep critical staff members onboard during and after the merger?
Usually, salaries are easy to manage; all you need to do is integrate old data into the new employee tracking software. Benefits and retention plans, however, are a bit more complex because they probably don’t align with how the new company operates.
Usually, businesses work with a benefits company that has strategies for managing benefits and retirement plans in the event their clients merge or are acquired by another company. If they don’t, they’ll need to do some research into the best plans and pricing for their specific situation.
4. Intellectual Property
When two parties merge or one company acquires another, all intellectual property (IP) transfers as part of the deal. Patents, trademarks, copyrights, and trade secrets all need to be transferred to the new holding company.
It’s important to understand who owns what IP, and how it will be managed post-merger or acquisition. This can involve a complex process of registration, licensing, and indemnification, which is something that most business owners don’t want to tackle on their own. IP lawyers are essential for ensuring that all IP is transferred properly and legally. They can also help to ensure that any IP-related liabilities are included in the M&A agreement.
5. Regulatory Requirements
Mergers and acquisitions often require approval from government agencies or other regulatory entities, such as the IRS or FINRA. To obtain proper licensure, applicants need to prove that their company is in compliance with all existing rules and regulations.
That means researching the requirements for engaging in an M&A transaction, filing the necessary paperwork, and preparing for potential meetings with regulatory agencies or other stakeholders. Companies should also consider how they will handle any recurring reporting obligations that may result from the merger.
Since regulatory issues are tough to keep up with, most companies going through the M&A process enlist an advisory firm like AE Merger & Acquisition Advisors for both sell-side and buy-side considerations.
6. Assets Owned By The Target Company
The “asset” category has more to it than equipment, accounts receivable, and company office buildings. It includes stocks held in the company’s name, intellectual property, and contracts (such as leasing agreements). There are a few things each party needs to consider before an M&A transaction:
- Redundancies: Owned equipment needs to be looked at closely to identify any double-ups they won’t need to keep after the transaction. For instance, two manufacturers probably don’t need to keep the same type of machine. The asset owner must also determine whether it is better to sell off the equipment or finance it to another entity.
- Leasing agreements: A company can easily end up paying installments on equipment they won’t use if they don’t review the existing leasing agreements. Usually, it is best to terminate these contracts and pay off what is owed to the lessor.
- Stocks owned by the company: Some companies buy their own stock for employee incentives or to take advantage of tax breaks.
7. Tax Implications Of An M&A
The parties involved in a merger or acquisition must keep in mind that taxes can have a significant impact on the deal’s overall structure and cost. The tax implications vary significantly depending on the size and nature of the transaction, as well as the jurisdiction in which it is conducted. Briefly, here are a few essential tax considerations that could impact your decision to go through with a merger or acquisition:
- Corporate tax rates: The tax rates in the countries where the companies involved in the M&A are based can have a significant impact on the overall cost of the transaction.
- Tax treatment of assets and liabilities: In an M&A transaction, the tax treatment of assets and liabilities can affect the deal’s structure. Buyers may prefer asset purchases, as they can potentially write off the acquired assets’ cost, while sellers typically prefer stock sales because they benefit from favorable capital gains tax rates.
- Tax deductibility of interest: The tax deductibility of interest on acquisition-related debt can have a significant impact on the deal’s cost. In many jurisdictions, interest expenses related to M&A transactions are tax-deductible, reducing the overall tax burden for the acquiring company.
- Tax loss carryforwards: If one of the companies involved in the M&A has tax loss carryforwards, these can be used to offset future taxable income, resulting in tax savings for the combined entity. However, certain limitations and restrictions may apply, depending on the jurisdiction.
- Transfer pricing: Cross-border M&A transactions may require consideration of transfer pricing regulations, which govern the pricing of goods and services exchanged between related entities. Non-compliance with transfer pricing rules can result in significant penalties and adjustments to taxable income.
- Indirect taxes: Indirect taxes, such as value-added tax (VAT) or goods and services tax (GST), can impact the deal structure and any potential post-transaction integration issues.
Endnote
When considering a business merger or acquisition, tax implications, human capital, asset ownership, and company culture play a critical role in its future success. Before carrying through with an M&A transaction, both parties need to consider whether or not the decision will truly benefit their organizations and bottom-line growth. By following the tips above, parties involved in M&A transactions can make more informed decisions and maximize their chances of success.
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