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The Art of Buying and Selling Companies – Mergers and Acquisitions

The Art of Buying and Selling Companies – Mergers and Acquisitions

1. Why do businesses merge and acquire?

2. What are the types of mergers and acquisition?

3. Valuation, Valuation and Valuation.

4. What is the process of an M&A?


A tale of 2 deals


In between the late 2019 and the 3rd quarter of 2020, I was involved in a successful merger and acquisition (“M&A”) of a family-owned business for a value of more than S$10 million. On the other hand, I just concluded the hearing of a failed deal worth about S$30 million.


It is well known that many Asians love to invest and speculate in property or property related public listed shares. However, and except for the Japanese, the buying and selling of companies is less well known and less well understood. This is attributed to the fact that the shares in private companies do not have a ready secondary market to sell. Also, the value of private shares are opaque and there is little to no public information which you can obtain.


As such, whether a deal succeeds or fails will depend on how much knowledge a buyer, seller, their brokers, financial advisors and lawyers know about the mechanics of M&As. Importantly, how they are willing to work together towards the goal of achieving the deal, rather than breaking the deal.


Why do businesses merge and acquire?


While there are many reasons for M&As, we can roughly split the reasons into 3 time spans. Initially, and before the advent of the digital age, the main motive for M&As were mainly economies of scale and to improve efficiency. By around 2000, motives started to shift towards acquisitions of technology companies. Hence “Silicon Valley” became the buzz word and centre for these activities. Covid-19 has now caused many companies to review their supply chain risks. Therefore, it is predicted that in the months and years to come, much of the M&A activities will be driven by motives to mitigate supply chain risks


What are the types of mergers and acquisition?


There are traditional 2 types of M&As. A vertical M&A is characterised by the coming together of companies within the same supply or process chain. Whereas a horizontal M&A is characterised by the coming together of 2 similar or competing businesses in the same space. Example: If you are a retailer of shavers, the M&A of your supplier is known as a vertical M&A. Whereas, if you are merging with a shaving cream retailer, that is usually known as a horizontal deal.


Valuation, Valuation and Valuation.


In the property investment world; when someone asks how to choose the right property to invest? The oft quoted answer is: “Location, Location, Location!”. In the world of M&A, when someone asks how to choose the right deal? The oft quoted answer is “Valuation, Valuation, Valuation!”. The first is the share value. The second is the human capital value and the last is the market share value. The value of the shares are represented by the underlying assets and liabilities of the company. While the value of the human capital is represented by the people in the company; ie their motivation, culture and energy. The value of the market is represented by the brand of the company ie how attractive is the brand to its customers?



What is the process of an M&A?


Considering that the value of the shares, human capital and market shares are at the heart of every deal, the people at the deal table must be able to negotiate sensibly in terms of all 3 aspects. Example, and if you are a buyer, it would be pointless to ask your corporate lawyer to draft clauses that is totally in your favour and against the sellers, without considering that, post-merger, such clauses may affect the morale of the human capital and how a hostile take over maybe perceived negatively by existing customers of the target company.

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