Concept of acquisition:
In simple terms, acquisition means buying a company – buying ownership or buying control over management or buying financial benefit as a owner – or all of this! What happens in an acquisition? All the assets, liabilities, rights and obligations of the target company are transferred to the acquiring company and the target company may even lose its legal existence. Acquisitions are also called takeovers.
The process of acquisition, depending upon whether the company is private limited or public limited, depending upon whether the company is listed or unlisted, depending upon what is the market size of the company, depending upon the financial size of the company, depending upon existence of international transactions, depending upon whether the company is into financial services or not (like NBFCs), depending upon whether it is government owned or private, the applicable laws and regulations for acquisition differ.
When are are acquisitions undertaken? Acquisitions are carried out for rapid, inorganic growth of the company when it becomes too cumbersome to grow brick by brick.
Types of acquisition by mode
The word acquisition could be acquisition of control by purchase of the “existing” shares of the company from the existing shareholder or it could be issue of additional equity resulting in the dilution of the control of the existing shareholder and gain of control for the new shareholders.
Acquisition by dissolution of target company (acquisition by merger)
Acquisition is the perspective of the buyer of a business. The seller would look at it as absorption by means of merger. This can be represented in the following way:
A + B = A
Acquisition by acquisition of controlling shareholding in the target company:
In acquisition by controlling shareholding, the target company continues its legal existence, but its management is now replaced or controlled by a new set of people, all the directors nominated by the new shareholders. The degree or extent of acquisition is very important in the acquisition transactions. The percentage of shareholding decides the power of the shareholders in the General Meeting and by implication in the board of directors. An acquisition of share holding can be represented in the following manner:
A + B = A + B
Critical stages of ownership in an Indian company:
25% Plus : When you have more than 25% equity, you can nominate at least one director on the board.
25% plus to 50% minus: When you have equity more than 25% time less than 50%, all the decisions that require special majority cannot be taken without your consent.
50% : When you have 50% equity, you have half the control of the company aur nominal size more control on the company than you.
50% plus 75% minus: When you have holding more than 50% and less than 75%, you have simple majority and you can carry out all the activities that need only simple majority.
75% plus to 90%: When you have 75% or more shareholding, you can pass on all the decisions that require special majority in the board and among the shareholders.
90%: When you have 90% stake in a company, it is called absolute majority, and the number of of government approvals or corporate formalities, board approvals and procedural steps are less and easy.
Amity & hostility between managements:
Among the acquisition by acquisition of controlling shareholding in the target company, there are various types of based on what was the the nature of relationship (friendliness or resistance) between the companies that were undergoing acquisition.
Friendly acquisitions are those in which the required company give easy concurrence and co-operates with the acquiring company.
In hostile acquisition, the target company openly refuses its acquisition by the acquirer. Hence, the acquiring company approaches dissenting or fence-sitting shareholders (or public if the company is listed) directly. Of course, the acquiring company needs to break people, shareholders, etc. till it reaches the desired shareholding in the company. In a hostile acquisition, the acquiring company may purchase a good quantum of shares in a clandestine way.
These are the companies that are always looking for easy and vulnerable target and have expert skills in acquisitions.
When a company faces liquidation, insolvency, or very unattractive hostile acquisition, or operational debt, and if such company is purchased by an investor to save it, it is called bailout acquisition.
Apohan’s services in acquisition consulting
Following are the Apohan’s services for M&A of Indian SME businesses:
Understanding business client objectives
Preparation of client profile
Industry scanning for strategic investor company for best fit
Industry scanning for financial investor company
Secondary market research of the sector and industry
Study of applicable local legal and regulatory framework for mergers
Inception report with M&A strategy for M&A transaction to the business management
Analysis of broad M&A options (contractual, equity, local, foreign, etc)
Analysis of mode of subscription to equity (private placement, etc)
Analysis of form of equity (common, preference, convertible, etc)
Orientation of client management for the M&A process
Preparation of the desired target investor profile (ticket size, fund types, etc)
Anonymous advertising in print media, online media, social media
Circulation of opportunity among investor forums, business forums, online deal platforms
Preparation of the a list target investors
Ice-breaking discussions with target companies
Selection of the target investor
Preparation of mutual NDA between principles
Structuring of the merger
Negotiation for sharing of control
Role of the previous directors
Financial performance targets in case of turnaround
Formulation of a strategy for a new project (size, location, capacity, etc)
Preparation of project information memorandum
Preparation of project profile
Preparation of a Business plan
Preparation of time Schedule of investment requirement
Negotiation on mode of issue of equity
Finalization of type of equity
Preparation of nature of amendments in MOA & AOA
Preparation of of drafts of board resolutions for internal approvals
Preparation of the financial model
Preparation of valuation for various levels of Equity stakes in the company
Preparation of key strategic terms of merger agreement
Selection of accounting, taxation and secretarial experts
Valuation for the purpose of taxation through certified valuers
Identification of due diligence agencies
Due diligence (corporate, financial, key contracts, marketing, procurement, key assets, real estate, manufacturing facility, permits & certifications, technology, operations, brand, intellectual property, compliance, associate companies, forensic, human resources, information technology, administration, etc.)
Preparation of due diligence report
Preparation of risk profile of the envisaged merged entity
Compilation of data for specific query
Preparation of term sheet
Preparation of draft business transfer agreement
Assistance in board meeting and General Meeting as special expert invitees
Preparation of disclosure schedule
Assistance in negotiation of business transfer agreement
Assistance in execution of the investment document
Assistance in understanding the investment payment process
Assistance in disbursement of payment
Resolution of deadlocks
Key inputs on integration process
Hand holding support for management of joint venture after the deal