What is the merger and acquisition deal structure?

Deal structure is the binding agreement between companies, which outlines rights and obligations for both the companies. This agreement states about the entitlements and constraints of companies.

In other words, deal structure is nothing but terms and conditions of a merger and acquisition. It prioritizes the objectives and the major priorities of both the companies are satisfied. Preparing a merger and acquisition deal is challenging and complicated.

Process of deal structure is explained below −

  • Negotiation stance.

  • Latent risks and how they can be managed.

  • Maximum risk can be tolerated.

  • Conditions (negotiations may cancel).

Some of the factors considered while preparing deal structure are as follows −

  • Financing means.

  • Market conditions.

  • Accounting policies.

  • Business plan.

  • Laws etc.

Documents required in structuring a deal are mentioned below −

  • Term sheet − Tells about the terms and conditions of financial investment.

  • Letter of intent − It is a written document, which conveys intentions of the writer to the receiver.

Structuring a deal can be done in following manner −

Asset acquisition − Here, buyer purchases an asset of seller.

Advantages of asset acquisition are as follows −

  • Buyer has the choice of selecting an asset.

  • Until the complete process is done, the seller is still legally recognized as a corporate entity.

Disadvantages of asset acquisition are as follows −

  • Can’t acquire non-transferable assets.

  • High impact tax cost for seller and buyer.

  • Takes more time for closing and negotiations.

            Stock purchase − Here, buyer gets majority of voting stock share of seller.

Advantages of stock purchase are as follows −

  • Taxes are minimised.

  • Takes less time for closing and negotiations.

Disadvantages of stock purchase are as follows −

  • Problems with shareholders (uncooperative).

  • Accompany legal/financial liabilities.

Merger − It is an agreement between the two companies to become a single entity. Mergers are less complicated than an acquisition.

Updated on: 17-May-2022


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