The EY-Parthenon Deal Barometer predicts that Mergers & Acquisitions deals in 2024 will increase 20%, which is very promising indeed. How attorneys structure and close a successful M&A deal is critical, considering that half of acquisitions fall apart somewhere along the transaction.

Get your merger and acquisition lawyer involved from the target evaluation stage right at the start of due diligence. The decision of which company to acquire is complex and very strategic. Valuing a target company is not just about looking at solid financials –  it’s about the story behind the brand and discovering the potential harmony behind a merger or acquisition.

We’ve all heard about Disney acquiring Hulu and Marvel, or Facebook’s acquisition of Instagram and WhatsApp. There was extensive legal due diligence that took place and certainly bumps in the road.

Mergers & Acquisitions Strategy: Disney Acquires Marvel to Increase Its Male Audience

Disney’s acquisition of Marvel is an excellent example of strategy leading to an acquisition. Prior to the acquisition, Disney had a problem – their male audience was low. Disney movies had a much higher female audience. So a year after Iron Man was released by Marvel, Disney acquired Marvel Entertainment to solve that problem.

“We believe that adding Marvel to Disney’s unique portfolio of brands provides significant opportunities for long-term growth and value creation,” said Disney’s CEO at the time, Bob Iger. The acquisition was not only beneficial to Disney. Marvel may have gained even more than Disney by the purchase.” Marvel’s brand and characters we greatly expanded by Disney’s resources and global infrastructure. Marvels’ CEO says exactly that – “Disney is the perfect home for Marvel’s fantastic library of characters given its proven ability to expand content creation and licensing businesses.”

The Right Timing for a Small to Medium Business to do an Acquisition 

The words “mergers” and “acquisition” are sometimes used interchangeably, but they have different meanings. A merger is joining two organizations together, while in an acquisition one company absorbs the other.

A lot of business leaders find themselves asking the question “ When is the right time to sell or buy a business? “ Maybe a merger or acquisition was always planned or an opportunity arose that you can’t ignore. Perhaps you’re ready to buy a competitor and expand your business offerings, or as a smaller business you are looking to merge with a larger company for revenue expansion and long-term stability. Either way, before jumping into signing a Letter of Intent talk to your merger and acquisition lawyer on whether this is the right strategic move.

Mergers & Acquisitions of Small Businesses – Learning from Nvidia’s Purchase of AI Startup.

In April of 2024, Nvidia announced its acquiring Israeli AI startup Run:ai for $700 million. Being acquired by a large corporation leads to many new opportunities for smaller companies. In this case Nvidia helped Run:ai increase the brand recognition along with controlling competitors. And now Nvidia has an AI tech that keeps it cutting edge.

Structuring the Deal as an Asset Purchase or Stock Purchase

Every transaction is unique so there are various strategies that merger and acquisition lawyers analyze for a successful M&A deal based on business objectives. A deal can be done as either a purchase of a company’s stock (some or all) or a purchase of just it’s assets. When deciding between an asset purchase or a stock purchase, buyers and sellers need to weigh the advantages and disadvantages of each deal structure. This is usually a heated point of negotiation in the Letter of Intent.

Asset Purchases Benefit Buyers

Buyers usually want to structure an acquisition as an asset purchase to benefit from the asset purchase tax treatment and lower legal risk. Asset purchases allow buyers to pick the specific assets and liabilities to align with business goals. This how buyers can hedge legal risk. If there are certain pieces of the business they do not want, these can be omitted from the purchase agreement.

Tax Treatment in Asset Purchases

In the asset purchase, the buyer gets a “step-up in basis” on the acquired assets, which usually reduces future tax payments. It’s customary for the acquired assets to be stepped-up to their fair market values in an acquisition.

The increase in depreciation and amortization may lower taxes for the acquiring company, contingent on how this is all structured from a legal and accounting perspective. In an asset sale, the seller (target company) pays capital gains tax on assets sold.  In the case the target company is a C corporation, its shareholders may also have a personal tax liability when the company liquidates.

How to Manage and Optimize Assets in an Asset Purchase

Asset purchases can be more complex than stock purchases, as specific assets often needs to be reassigned such as intellectual property and contracts. This is where your merger and acquisition lawyer needs to be very careful in advising on the deal structure and memorializing it in the M&A Letter of Intent. One risk example is a key customer of the target not agreeing to the contract assignment.

Once the LOI is signed, the asset purchase agreement needs to address individually each of the assets and liabilities subject to acquisition. Unlike in a stock purchase where the company’s various agreements can remain as is, in an asset purchase the buyer needs to do an assignment of each contract which requires obtaining the other party’s written consent. This applies to client agreements, vendor agreements, employee agreements, license agreements, and more. Licenses, titles and permits also don’t transfer over.

Understanding the Advantages for Sellers in a Stock Purchase Acquisition

Structuring an M&A deal as a stock purchase is buying a target company’s equity from its shareholders. In other words, a stock purchase involves the buyer acquiring the entire target entity, all assets and liabilities. Sellers tend to prefer to sell stock, not just assets, due to the more favorable tax treatment for the seller. But that’s not always true- sometimes sellers want to offload certain parts of the business in which case an asset purchase is more appropriate.

Dealing with the target’s contracts in a stock purchase might be easier but this is where the buyer’s merger and acquisition lawyers need to do a careful contract review to understand what the buyer is really inheriting. The M&A legal review should also check on restrictions to a change or ownership or reorganization in each agreement.

The Disadvantages of a Stock Purchase

Stock purchases carry more risk to the acquirer because there is a chance the buyer inadvertently obtains liabilities not uncovered during legal due diligence. That said, stock purchases are very common forms of an acquisition structure, but a specialized merger & acquisition lawyer is essential to help make good decisions.

In a stock purchase type acquisition, buyers will not reap the tax benefits that they could obtain in an asset purchase. There may also be some risk of the target company’s shareholders voting against the sale.  Lastly, the buyer assumes the target company’s present depreciation schedules and tax basis in the company’s assets.

Merger and Acquisitions Lawyers’ Critical Role

There are essential legal and business approaches for seamlessly steering the complexities of M&A deals. Your merger and acquisition lawyer should understand and break them down for business leaders.

Look for counsel that’s committed to ensuring a tailored approach is not just legally sound, but also perfectly in tune with your business goals.

How to Avoid Having Acquisition Failure

Combining two companies with separate cultures and a different way of running operations is a challenge. Many M&A deals fall apart during the integration phase of the transaction. A survey by KPMG reveals that roughly 50% of M&A deals fail due to concerns uncovered through due diligence due to problems uncovered in the target’s operations, finances and management issues.

Mergers & Acquisitions Success with Gouchev Law

Each deal is unique. A good merger and acquisition lawyer will not only help the parties agree on a purchase price, they will also provide a creative deal structure for your strategic business objectives and favorable tax treatment. The first and most important part of legal’s role in the M&A deal is structuring an airtight LOI – and that includes terms related to earnouts, non-competes and installment sales.

The mergers and acquisitions lawyers at Gouchev Law will identify the best approach for acquiring or selling a business, whether through a horizontal merger, an acquisition, a restructuring or a strategic alliance.

Gouchev Law’s expertise in commercial law, particularly in M&A, has made us the go-to boutique law firm for mergers & acquisitions deals of all sizes. If you’re looking for a sharp mergers and acquisitions lawyer who is also fun to work with (yes, we exist) then look no further than Gouchev Law to guide you in a successful transaction. We are not just legal advisors; we are strategic partners invested in your success.

See the Gouchev Law difference and schedule a call to take the first step towards a successful M&A deal!

 

About Gouchev Law
Our Mergers & Acquisition attorneys deliver actionable and customized advice to manage risks. From Fortune 500 companies to high-growth start-ups, we assist clients across various industries .We don’t simply offer legal counsel, we provide solutions firmly rooted in a thorough understanding of the client’s operations, business goals, technology, current and prospective data requirements, and risk tolerance. You can count on our team to understand the people behind the deals, leading to faster deal closings.

Disclaimer: The information in this article is for general information purposes only. Nothing in this article should be taken as legal advice for any individual case or situation. This information is not intended to create and viewing it does not constitute an attorney-client relationship.

About the Author

Jana Gouchev

Jana Gouchev is a prominent corporate lawyer on the leading edge of technology deals and complex commercial transactions. She delivers legal and commercial insight that propels companies forward. Jana's practice is focused on Corporate Law, Data Privacy and Information Security, Tech Law (consulting, SaaS, and AI), Complex Commercial Contracts, Intellectual Property, M&A, and Advertising law. 

Hailing from Paul Weiss, an AmLaw 50 firm, Jana has the experience and the business mindset that propelled her to now be the right hand outside counsel to CLOS, GCs and other key business leaders of the world’s most innovative brands, including the New York Times, Citi, Estee Lauder, Hearst, Nissan, and Squarespace. She is also outside general counsel counsel to numerous high-growth private companies. Jana is routinely featured in Forbes, Bloomberg, The New York Law Journal, Law360, Modern Counsel, Inc., and Business Insider for her keen business law insights.

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