MERGERS AND ACQUISITIONS

Turning ideas into business is mostly associated with starting a new company. This, however, is only one of the many mechanisms to do that, and often not the most efficient. The first part of this article will introduce the concept of mergers and acquisitions (M&A) in trying to explain how those could become the tool of choice for business. M&A can also be very useful in risk mitigation, which will be discussed in the second part of this article.

The term mergers and acquisitions is often anticipated to cover different corporate mechanisms aimed to consolidate or divide business. The types of reorganization are merger, amalgamation, division, separation and restructuring, while types of acquisition (alienation) are purchase (sale) of stock and purchase (sale) of property. Merger and amalgamation are tools for consolidating business, while division and separation are used in partitioning it. Finally, restructuring is moving from one type of legal entity to another.

Each of the aforementioned reorganization tools stands to be used for a specific purpose and can often serve as an alternative to acquisition or alienation. For instance, selling a part of real estate owned by the company is costly in terms of taxation, while separating a new company carrying the same property and alienating stock of the new company is in most cases tax free. Financial benefits of this tool are not limited to tax avoidance, but also include avoiding numerous registration fees. Overall it is safe to state that this tool is in most cases financially advantageous for the seller.

When it comes to risk mitigation M&A can serve very efficiently to transfer or allocate risks between different entities. Best legal practice suggests separating assets from business in most cases in order to limit liability for business to an entity not holding the main assets. The most cost-efficient way to achieve this for established companies is through M&A. This tool can be especially useful in setting up holding companies. M&A gives the business flexibility to control assets and liabilities in order to minimize risks.

The aforementioned solutions, however, have their shortcomings too. When comparing alienation of stock to alienation of property it is important to keep in mind that the new company founded in the result of separation or division may also carry hidden or unforeseen liability of the “mother” company. In result, the buyer will most probably have to consider the added cost of legal due diligence within the deal. Moreover, in most cases this will be more time consuming as well. These shortcomings, however, are manageable and only in a few cases shall they objectively outweigh the benefits.

M&A is a corporate tool, which, if correctly implemented, will result in significant reduction of financial burden of a deal and efficient allocation of business risks. What may, at a first glance, seem like an unnecessary complexity added to a deal, can well become the financial difference making that deal possible to go through.