Overview
Mergers and Acquisitions (M&A) deals are structured in various forms, each tailored to meet the strategic and financial objectives of the participating entities, while also navigating regulatory, tax, and operational considerations.
The choice of structure significantly impacts the success of the transaction and the future trajectory of the combined entities in the dynamic landscapes of insurance and technology.
One common approach is the stock purchase, where the acquiring company buys the majority, if not all, of the target company’s shares from its shareholders.
This method directly transfers control and benefits, including existing contracts and liabilities, to the acquirer. It appeals to buyers who wish to seamlessly integrate the target into their operations without the hassle of asset selection.
However, it also means assuming all underlying risks and obligations of the target company (see Insurance M&A Deals Outlook).
Alternatively, an asset purchase can be structured where the buyer selectively acquires only certain assets and specific liabilities from the target company.
This method is particularly advantageous for buyers interested in specific parts of a business rather than taking on a complete entity with its potential hidden liabilities.
It allows the acquirer to avoid undesired assets and liabilities, offering a cleaner, albeit potentially more complex, integration process.
This type of transaction is common when a company wishes to expand certain capabilities or product lines without the burden of unrelated business units or contractual obligations.
A merger represents another structure, where two companies agree to proceed as a single new entity rather than one company absorbing the other.
This approach is often employed to combine resources, share risks, and enhance competitive advantages in the market.
It requires mutual agreement on all terms and a shared vision for the future company, making it suitable for deals where balance and equal footing between the merging entities are desired.
In more complex scenarios, especially relevant in the technology sector, considerations for intellectual property and technology transfers become central.
These deals may include arrangements for joint ventures or strategic alliances instead of outright acquisitions or mergers.
Such structures facilitate collaboration and shared benefits from specific technologies or market opportunities without full integration.
Each M&A deal structure comes with its own set of strategic implications and legal complexities. Companies must carefully evaluate their goals, the specific circumstances of their target, and the market environment.
This evaluation helps in choosing the most appropriate structure, ensuring that the deal not only enhances value but also aligns with broader strategic objectives and complies with regulatory requirements.
Different types of mergers and acquisitions
There are a number of different types of mergers and acquisitions, including vertical, horizontal, congeneric, market-extension, product-extension, and conglomerate.
Dealmakers were riding high from the best year on record for global M&A Market, with more than 60,000 publicly disclosed deals breaking US$5tn in value for the first time.
PwC predicted that this year wasn’t likely to top in the face of growing headwinds—but the market expected M&A to continue to prosper.
Fast-forward to mid-year. Not only have the headwinds grown stronger, but new ones have emerged, including rapidly accelerating inflation and interest rates, lower stock prices, and an energy crisis deepened by the Russia–Ukraine conflict.
In the face of stark economic pressures – inflation, rising energy costs, and looming recession – insurers remain focused on growth opportunities. The volume of mergers and acquisitions (M&A) in the global insurance industry reached its highest rate of growth for ten years, up 9.5%.
The benefits of each are varied, and depending on your strategy could include:
- building economies of scale
- increasing market share
- decreasing competition
- boosting efficiencies
- expanding product lines
- diversifying offerings
There are also, however, negative connotations associated with each type, which should also be carefully considered before merging companies.
Understanding which type of merger or acquisition will best support your long term strategy requires a careful look at the pros and cons of each type, and the support of an expert advisor for guidance.
In an M&A transaction, the valuation process is conducted by the acquirer, as well as the target. The acquirer will want to purchase the target at the lowest price, while the target will want the highest price.
Compared with strong equity market performance worldwide, however, companies completing M&A deals underperformed the wider market by –13.1 percentage points for acquisitions valued over $100 million between January and March 2024 (see Top Cyber Risks that Can Threaten M&A Deals).
This figure is based on share price performance and continues the negative performance of the previous quarter (–13.6 percentage points).
Despite these latest performance figures, the long-term 15-plus-year trend still shows M&A deals to have outperformed the market since the global financial crisis (+1.5 percentage points).
2024 proved to be a very challenging year for acquisitions globally. And despite receding inflation fears, several factors are combining to have a chilling effect on dealmaking, including weak global economic growth, geopolitical instability and ongoing uncertainty surrounding the U.S. presidential election.
Types of M&A by transactions
The following are some common transactions that fall under the M&A umbrella:
Mergers
In a merger, the boards of directors for two companies approve the combination and seek shareholders’ approval (see 4 stages of M&A deals).
Acquisitions
In a simple acquisition, the acquiring company obtains the majority stake in the acquired firm, which does not change its name or alter its organizational structure.
Consolidations
Consolidation creates a new company by combining core businesses and abandoning the old corporate structures. Stockholders of both companies must approve the consolidation, and subsequent to the approval, receive common equity shares in the new firm.
Acquisition of Assets
In an acquisition of assets, one company directly acquires the assets of another company. The company whose assets are being acquired must obtain approval from its shareholders. The purchase of assets is typical during bankruptcy proceedings, wherein other companies bid for various assets of the bankrupt company, which is liquidated upon the final transfer of assets to the acquiring firms.
Management Acquisitions
In a management acquisition, also known as a management-led buyout (MBO), a company’s executives purchase a controlling stake in another company, taking it private. These former executives often partner with a financier or former corporate officers in an effort to help fund a transaction. Such M&A transactions are typically financed disproportionately with debt, and the majority of shareholders must approve it.
Tender Offers
In a tender offer, one company offers to purchase the outstanding stock of the other firm at a specific price rather than the market price. The acquiring company communicates the offer directly to the other company’s shareholders, bypassing the management and board of directors.
To create a great deal structure, aim for a win-win scenario, where the interests of both parties are well represented in the deal and risks are reduced to the barest minimum.
Most often, win-win deal structures are more likely to lead to a sealed merger or acquisition deal and may even reduce the time required to complete the M&A process.
The most difference between a M&A – a merger and an acquisition relates to the size of the companies involved. In an ‘unfriendly’ deal (or hostile takeover), a target company does not wish to be purchased, but may do so out of necessity. In these instances, it is always considered an acquisition.
There are two important documents that are used to delineate the M&A deal structuring process. They are the Term Sheet and Letter of Intent (LOI).
- Term Sheet: A Term Sheet is a document stating the terms and conditions of an intended financial investment, in this case, a merger or acquisition. Term sheets generally are legally binding unless otherwise stated by the parties involved.
- Letter of Intent (LOI): As the name implies, a Letter of Intent (LOI) is a document outlining the understanding between two or more parties that they intend to formalize later in a legally binding agreement. Like the term sheet, an LOI is usually not intended to be legally binding except for the binding provisions included in the document.
Types of M&A by integration
Horizontal integration and vertical integration are competitive strategies that companies use to consolidate their position among competitors.
Horizontal integration
Horizontal integration is the acquisition of a related business. A company that opts for horizontal integration will take over another company that operates at the same level of the value chain in an industry.
A horizontal merger occurs when two companies operating in the same market (and selling similar products or services) come together to dominate market share.
This type is attractive for merging companies aiming to build economies of scale and decrease market competition. However, there are potential downsides. A horizontal merger comes with increased regulatory scrutiny and stringency, and can lead to a loss of value if the post-merger integration is not fully realized. Regulatory due diligence should be executed with extra special care. An example of a horizontal merger might be if McDonald’s and Burger King joined forces.
Vertical integration
Vertical integration refers to the process of acquiring business operations within the same production vertical. A company that opts for vertical integration takes complete control over one or more stages in the production or distribution of a product.
Vertical mergers involve two companies in the same industry who operate in different stages of production.
This could involve a retailer who merges with a wholesaler, or a wholesaler merging with a manufacturer, for example. This type of merger is ideal for streamlining operations, boosting efficiencies, and cutting costs across the supply chain, but it can also reduce flexibility and result in new complexities for the business to manage.
Congeneric mergers
Two businesses that serve the same consumer base in different ways, such as a TV manufacturer and a cable company.
In a congeneric merger, the acquirer and target company have different products or services, but operate within the same market and sell to the same customers.
They could be indirect competitors, although their products often complement each other. As these companies already share similar distribution channels, production or technology, this type of merger can allow the new business entity to expand its product lines and increase market share. As a downside, the fact that these two companies already operate within the same industry could limit further diversification.
Market-extension merger
A market extension merger describes two companies in the same industry who join forces with the aim of expanding market reach. Commonly, this type of transaction occurs across multiple geographic regions. A product extension merger occurs when a specific product is added to the product line of the acquirer from the acquired company.
Product-extension merger
Two companies selling different but related products in the same market. Conglomeration:Two companies that have no common business areas.
Mergers and acquisitions involve the coming together (synergizing) of two business entities to become one for economic, social, or other reasons. A merger or acquisition is possible only when there is a mutual agreement between both parties. The agreed upon terms on which these entities are willing to come together are known as an M&A deal structure.
Ways of Structuring an M&A Deal
There are three well-known traditional ways of structuring a merger acquisition deal although, in recent times, business entities have engaged in other, more creative and flexible deal structuring methods. The three traditional ways of structuring an M&A deal are asset acquisition, stock purchase, and mergers. The methods can also be combined to achieve a more flexible deal structure.
Asset Acquisition
In an asset acquisition, the buyer purchases the assets of the selling company. An asset acquisition is usually the best deal structure for the selling company if it prefers a cash transaction. The buyer chooses which assets it wants to purchase.
Advantages of an asset acquisition may include:
- The buyer can decide which assets to buy from the seller and which not to.
- The selling company continues as a corporate entity after the sale, containing the remaining unsold assets and liabilities.
Disadvantages of an asset acquisition include:
- The buyer may not be able to acquire non-transferable assets, e.g., goodwill.
- An asset acquisition may lead to high-impact tax costs for both the seller and the buyer.
- It may also take more time to close the deal, compared to other deal structures.
Stock Purchase
Unlike an asset acquisition, where there is a direct transaction of assets, assets are not directly transacted in a stock purchase. In a stock purchase acquisition, a majority amount of the seller’s voting stock shares are acquired by the buyer. In essence, it means control of the seller’s assets and liabilities are transferred to the buyer.
Advantages of a stock purchase acquisition:
- Taxes on a stock purchase deal are minimized, especially for the seller.
- Closing a stock purchase deal is less time-consuming since negotiations are less complicated.
- It may be less expensive.
Disadvantages of a stock purchase acquisition:
- Legal or financial liabilities may accompany a stock purchase acquisition.
- Uncooperative minority shareholders may also be a problem.
Merger
Though the term “merger” is commonly used interchangeably with “acquisition,” in a strict sense, a merger is the result of an agreement between two separate business entities to come together as one new entity. A merger is typically less complicated than an acquisition because all liabilities, assets, etc. become that of the new entity.
In structuring a deal, the advantages and disadvantages must be considered along with other influencing factors to reach a conclusion on which method to adopt.
FAQ
M&A deals can be structured as stock purchases, asset purchases, or mergers. In a stock purchase, the buyer acquires the target’s shares and assumes its assets and liabilities. An asset purchase allows the buyer to acquire specific assets while avoiding certain liabilities. A merger combines two companies into a single new entity, often to achieve balanced integration.
In a stock purchase, the acquirer buys the majority or all of the target company’s shares, taking on both its assets and liabilities. An asset purchase allows the buyer to selectively acquire specific assets and liabilities, which provides flexibility to avoid unwanted obligations or risks.
Asset purchases allow the acquirer to avoid specific liabilities and unwanted assets of the target company, leading to a more tailored integration. This approach is beneficial when the buyer is only interested in certain parts of the target’s business or wants a cleaner integration.
A horizontal merger occurs when two companies in the same industry at similar production stages combine, often to reduce competition, achieve economies of scale, and increase market share. However, it may face regulatory scrutiny to ensure market fairness.
Risks in M&A transactions can include regulatory challenges, cultural clashes, valuation discrepancies, and unexpected liabilities. For stock purchases, buyers assume all liabilities of the target, while in asset purchases, the focus is on desired assets and limited liabilities.
A Term Sheet outlines the general terms and conditions of the M&A transaction and is typically legally binding unless stated otherwise. A Letter of Intent (LOI) expresses the parties’ intention to proceed with the transaction but is usually non-binding except for specific provisions.
Vertical integration involves acquiring a company at a different stage within the same supply chain, such as a retailer merging with a manufacturer. This strategy can streamline operations and reduce costs but may reduce business flexibility and add complexity to operations.
………………………..
Edited by Tetiana Mykhailova — CFO Beinsure / Commercial Director Finance Media
