Apple’s $400 million purchase of Shazam was among the many high-profile acquisitions that made the headlines in 2017. Leading corporate commercial solicitor, Richard Riley, takes a closer look at business acquisitions.
There are all kinds of compelling reasons for making an acquisition.
Perhaps to take advantage of economies of scale; to gain expertise or market share; to reach new demographics; to extend a product or service offering. There may even be a case for eliminating a competitive threat.
In Apple’s case, the $400 million purchase of London-based start-up Shazam is expected to add considerable value to the tech giant by providing data and music expertise that will complement and enhance Apple Music’s streaming service in the face of tough competition from Spotify.
Whatever the commercial rationale – and whatever the size of the deal – the procedures and processes tend to remain relatively constant. Initial tentative approaches gradually mature into serious negotiations, which clearly herald a need to look at the wider implications. Are the managements and systems compatible? Will there be an overlapping or duplication of responsibilities and resources in some areas of the larger business? How will customers respond?
At this point it should have become clear whether the sale will involve the acquisition of the assets or its shares. This is a fundamental part of any acquisition and at the most simple level, buying shares involves taking-on the entirety of the business including both its assets and liabilities but buying the assets alone will mean leaving some or all of the liabilities in the hands of the seller. From the buyer’s perspective ‘cherry picking’ the assets is usually more attractive as they will have the profit-generating components in their hands, leaving the seller with a ‘shell’ company from which to extract any available returns after all the liabilities have been discharged.
A share sale is often a better proposition for the seller. With completion of the transaction, all responsibility for the enterprise will pass to the buyer, including assets, liabilities, risks, on-going disputes and any unresolved issues. The purchase price will also go straight to the seller without them having to work out a tax efficient way to get to the funds.
In either case a negotiation will need to take place to agree a satisfactory price and the key terms of the deal. It‘s a common mistake to assume that this initial agreement (and, perhaps, a handshake) will be written in stone. In reality, more often than not, the financial ground will shift as more hard information comes to light. The conduct of due diligence may cause reappraisal of the price or the terms of payment as events unfold. Ultimately, the price agreed will rest on the seller and the buyer reaching common ground and a shared perception about the business’ current and future potential and the value to be placed on this.
It’s critical that professional advisors become involved in structuring the transactional arrangements at this stage. The terms can vary considerably with factors like earn-outs, conditional or deferred consideration, possible share exchanges and so forth to be ironed-out before formal contacts are exchanged. Working closely with an experienced legal team will ensure all transactional arrangements are agreed and set in place as quickly as possible.
The initial discussions with an experienced team of legal advisors might include a whole range of highly relevant issues, such as timescales for the operational take-over, retirement terms for directors of the acquired company, currency exchange rate fluctuations and the robustness of key customer contracts.
The buyer will, of course, need to have the capital to complete the transaction and this could be raised through existing reserves or bank finance which can be additional complexity to contend with.
The sale process can be management time intensive so it is important for both parties to “keep their eyes on the ball” in respect of both existing businesses whilst the acquisition is ongoing. In the event of the deal collapsing, for whatever reason, they will both need to continue with their existing businesses. Experienced legal teams supporting the parties will be aware of the potential pitfalls and will ensure that all legal matters and documentation are processed as smoothly as possible.
Similarly, integrating the target business can be a challenge and it is important that everyone agrees about how the handover will occur (which may involve the seller staying involved in the business for a short period of time post completion).
Guiding the parties through the process and advising them on the pitfalls and hurdles is a job for an experienced corporate deal specialist.
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