Business Beat
Business Beat
MERGERS AND ACQUISITIONS – THE PROS AND CONS Mergers and acquisitions can often mean more than the power of two – but only if due process is followed
M
ergers and acquisitions (M&A) refers to transactions between two companies that combine in some form. Although used interchangeably, they come with different legal meanings. In a merger, two companies of similar size combine to form a new single entity. On the other hand, an acquisition is when a larger company acquires a smaller company, thereby absorbing the business of the smaller firm. M&A deals can be friendly or hostile,
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depending on the approval of the target company’s board. Paul Taylor, a partner in the corporate department of business law firm Fox Williams, is of the view that success depends on understanding what an M&A seeks to achieve. For many, he says that “the goal is to achieve a clean exit from a business. But some may wish to stay on and become a part-owner of a bigger business that makes the acquisition.”
CONSIDERATIONS Many sales take the form of a share sale rather than an asset sale. In essence, the former transfers ownership interests in the company, whereas the latter means the sale of assets and business to another company. Taylor says that there are benefits and drawbacks to each, but a key driver is tax: “A share sale may give rise to capital gains tax
on the profits made. An asset sale will result in corporation tax on the proceeds of the sale made by the company. Once the company has paid the corporation tax, the proceeds of the sale can then be distributed, but if the owners are individuals, they will be charged income tax on the proceeds.” In effect, there can be double taxation on an asset sale, which is why share sales are preferred. An issue for private limited companies is that they have no open market for their shares, making it difficult to determine a valuation – at least not without external advisers. Here, Taylor recommends that “a valuation is obtained from a reputable corporate finance adviser early on in the process.” He continues by explaining that there are options for sellers: “With a ‘locked box’, the price is locked on a particular date, and any ‘leakage’ out of the company to the
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