MERGER AND ACQUISITION PROCESS
1-GENERALLY
1.1 Merger and Acquisition
Merger refers to the process in which two companies, usually through the exchange of shares, become a single entity, and the legal personality of one partnership is absorbed into another. Acquisition, on the other hand, is defined as the complete or partial purchase of a company’s shares or assets by another company or individual.
2-SITUATIONS REQUIRING LEGAL ASSISTANCE IN THE MERGER AND ACQUISITION PROCESS
2.1 Tax Issues
The tax aspect of corporate merger transactions is regulated by various tax laws. In corporate mergers, the legal personality of the merged businesses ceases to exist. However, it is important to note that activities undertaken until the merger and the value increases that occur during the merger may fall within the scope of income or corporate tax regulations. In addition, double taxation avoidance agreements should not be overlooked in international mergers.
2.2 Due Diligence
The merger process is a complex process that is not easy. Mismatched goals of the companies involved in the merger pose a major problem. In order to achieve success in corporate mergers, comprehensive analysis and evaluation are necessary. This is where the concept of “Due Diligence” comes into play.
Due Diligence enables the acquisition of information about the target company and its careful analysis, examination, and evaluation. Due Diligence consists of four purposes: 1- Meeting the information needs regarding the target company, 2- Analysis, 3- Decision-making and price determination, 4- Determining the legal situation.
The first stage of the Due Diligence process, which is the initial purpose, can be said to involve three stages. These stages include the planning of the merger, the investigation of the companies to be merged, and reaching a final agreement by negotiating with the designated company.
2.3 Selection of Accounting Method
In corporate mergers, there are two methods: pooling of interests and acquisition method. However, the pooling of interests method has been prohibited by US GAAP and IFRS/TFRS. Thus, the acquisition method is the only accounting method deemed appropriate under both US GAAP and IFRS/TFRS for corporate mergers.
2.4 Selection of Payment Method
In mergers and acquisitions, the financing of the merger should be determined taking into account the acquiring company’s ownership structure, financial leverage position, collateral and borrowing capacity, future profitability, and financial targets for the subsequent period. In addition, the financing of the merger is also influenced by factors such as the economic environment, the size of the agreement, its boundaries (whether it is cross-border), whether the companies are publicly traded, and legal regulations.
When determining the payment method to be used in corporate mergers, the most important factors are tax practices and transaction costs. It is necessary to establish how the financing will be realized before entering into consultations between companies. Because the financing method will directly affect the value created after the merger.
The factors such as the size of the transaction to be financed, the cash position of the acquiring company, demand for the shares of the target company, the conditions of the merger, and market conditions during the merger period are important in determining the payment methods in corporate mergers.
Theoretically, using any of the payment methods in mergers would not change the financial structure of the company since the valuation principles are the same for each method. However, in practice, this may vary. The acquiring company can apply a single method or use multiple methods in the merger. The selection of payment methods in mergers can follow a complex process. In addition, each payment method can lead to different outcomes for the parties involved. A merger can be proposed to the target company by the acquiring company through cash, stock, securities, or a combination of these. The payment method should be acceptable for both the merging and the merged company and should have the flexibility to address any differences that may arise during the negotiation process. Since the selection of the payment method in a merger brings up the issue of how the risk will be distributed among the parties involved, there should be harmony between the parties in this regard.
The commonly used payment methods in corporate mergers include:
- Cash Payment
- Payment through Stock Exchange
- Payment through Preferred Stock and Bonds
- Payment from the Future Earnings of the Company
- Payment through Borrowing
- Payment through the Issuance of High-Risk Bonds
