Is a Corporate Acquisition the Right Move for your Company?

There are many factors that corporations and investors should consider when determining whether acquiring a company is the right move. A substantial percentage of corporate acquisitions don’t succeed in the way hoped for. Acquisitions are extremely involved in terms of time and cost. In a large acquisition, the data room alone can contain hundreds of thousands of pages worth of documentation requiring review to determine whether the assets are exaggerated, or the liabilities understated. A transactional lawyer can advise on the mechanics of the transaction, the ideal mix of debt and equity used to finance the acquisition if a lender is keen to share some of the risk with the equity investors, the share purchase agreement, as well as the due diligence, warranties and other aspects of the deal. However, the corporation and its board must consider the bigger picture. This will include an analysis of whether acquiring a corporation is a good move.

One benefit to a takeover is that it facilitates quick business expansion. A corporation can double its size quickly by way of acquisition rather than expanding over a number of years. This makes acquisitions attractive from a growth perspective. Moreover, an acquisition can allow a business to diversify. A business seeking to move into new areas, including niche areas, can do so via an acquisition with an aim to increasing its profit margins. Ideally, the target will compliment the predator’s business. Further, another key advantage to takeovers is that they keep management on their toes, which tends to benefit the shareholders in the form of good profits and dividends. Generally, the existing management tends to get replaced, as the predator corporation will likely put its own people on the board of directors.

There are some potential drawbacks to acquiring a business. First, what looks good on paper might be a problem in practice. For example, the predator and the target might have different business cultures or IT systems and preferences. They might use different accounting methods and might have an entirely different ethos. A smooth integration between the two business cultures might be unrealistic. In this respect, a takeover can result in losses. Second, acquisitions involve precious use of management’s time. The directors will have to consult accountants, lawyers, and investment advisors. The directors will have to defend the position of the corporation, and review the acquisition documents and comment on them.

There is also the cost to defend takeovers. Management will constantly be thinking about the takeover rather than thinking strategically about how the business should be run. This might impede the board’s ability to act in the best interest of the company on a day-to-day basis. Further, there is also the human cost of unemployment. It is almost inevitable that where there is an acquisition, there will be unemployment. For example, the corporation might determine that 40 sales managers are not needed when it can get by with 30. There might be assets that the corporation no longer needs as well. Since takeovers are designed to be “cost-savings”, unwanted assets will be disposed of. Finally, there is also the risk of indebtedness of the predator. The predator might not have all of the money up front, so it will have to use some debt to take over the target. These large borrowings may be passed on to the target company.

This blog has summarized some of the pros and cons of corporate acquisitions, but does not constitute legal advice and is not intended to be a summary of the law relating to mergers and acquisitions. If you require a transactional lawyer, whether you are considering a share purchase or asset transaction, Colin Cuttress, Barrister & Solicitor, can help you navigate the legal landscape. Colin is located at 1015 Bloor Street West, Toronto ON, MH6 1M1, or you can send a confidential email at colin@cuttresslaw.com.