Choose an appropriate M&A transaction structure

Choosing a transaction structure in a Merger and Acquisition (M&A) deal is one of the key factors determining a transaction’s success or failure. In addition to mentioning how the transaction is organized, the M&A transaction structure will help clarify the key moments of the transaction, the payment process and terms, the legal framework, etc.

Selecting a suitable transaction structure is a complex process that requires an in-depth understanding of many fields such as finance, corporate governance, legal, and tax. The following article will analyze common types of M&A transaction structures and evaluating their respective advantages and disadvantages.

Three common types of transaction structures are used in M&A transactions in the Vietnamese market: asset purchase, share purchase (stock purchase), and merger. Each transaction structure will have different advantages and disadvantages, specifically:

1. Asset Structure

According to this structure, the buyer will buy specific assets of the target company. 

a. Advantages:

• Allows the buyer to selectively acquire specific assets and liabilities, giving greater control over the requirements outlined in the transaction; 

• Enables the buyer to leverage the target company’s weaknesses, such as excessive debts or legal issues that the buyer can resolve and negotiate better terms. 

• Provides a fresh start for the buyer as the buyer can proactively establish a new tax basis for the asset being purchased, potentially providing tax benefits. 

• Inherit intellectual property rights tied to the purchased assets; 

• The buyer can retain the workforce operating the purchased assets through appropriate agreements. 

b. Disadvantages:

• The buyer will need to carry out more thorough due diligence as each asset needs to be identified and transferred individually; 

• Additional procedures for ownership registration may be required, especially for assets subject to legal ownership registration. Some real estate assets may be restricted if the buyer is a foreign investor. 

• Difficult to expand scale based on existing assets. Structural and technological changes may have to be made to develop the company with the purchased assets. 

2. Buying shares, contribution capital (stock purchase)

Whereby the buyer will buy back shares, contribution capital of the target company and will own part (or all) of the target company (including its debt and assets and liabilities) based on the ratio of shares, contribution capital owned in the target company after the acquisition. This is the most popular method in M&A deals. 

a. Advantages:

• The transaction process will be simplified in terms of cost and time because as purchasing shares or capital contribution in the target company includes its corresponding assets and liabilities. 

• Updating the buyer’s new information on licenses and certificates will be more convenient; 

b. Disadvantages:

• If the buyer is a foreign investor, they must meet the market access conditions according to investment law; 

• Buying shares (capital contribution) of the target company means that the buyer will also purchase its financial responsibilities and potential risks; 

• Control over the assets of the target company will be more limited as the buyer needs to comply with existing internal governance rules unless the parties agree to change them according to the buyer’s setting; 

• Risks related to inheritance, such as unresolved disputes and lawsuits or other responsibilities that the target company must address.

3. Merger

This method allows one or several companies to merge into another by transferring all assets, rights, obligations, and legal interests to the receiving merged company business, terminating the existence of the merged company. Company consolidation, whereby two or more companies can merge into a completely new company while also terminating the existence of the merged companies. 

a. Advantages:

• The parties can take advantage of the inherent market position of the merged companies. 

For example: Company A has a strong distribution network but lacks innovative products. The merger of Company A and B, a company with strengths in product research and development, can create a new company that is more competitive and operates more efficiently. 

• Efficiency in operations after the merger may be improved further. 

• The merger expands market reach. Entering a new geographic area through consolidation or merger can unlock untapped markets, allowing companies to grow their customer base and diversify revenue streams. 

b. Disadvantages:

• Cultural integration: Merging or consolidating companies with different organizational cultures can be a significant challenge. Misalignments in values, working styles and communication can partly hinder integration efforts, leading to employee dissatisfaction and reduced work productivity. 

• Internal conflicts: management and operational integration can be complex and disruptive, potentially causing internal conflicts. 

• Brand impact: Changing company information can reduce the influence of previously built brands. 

• Shareholder exit: Some members and potential shareholders may leave if they doubt that the merger would have positive results. 

It should be noted that, although the parties, especially the buyer, may initially design the preliminary transaction structure in the M&A deal the chosen transaction structure can be changed to suit the actual situation of the target company after receiving the appraisal results. 

4. Conclusion

It is clear that by carefully evaluating the advantages and disadvantages of transaction structures, the parties in the transaction, particularly the buyer, can make decisions on choosing the appropriate transaction method for their goals, strategies and ability to accept risks. Besides, it is also important to note that each transaction structure has its own meaning, it may not be suitable for this transaction but will be suitable for another transaction. Furthermore, the pros and cons of each type of transaction structure depend on the needs and goals of the buyer and seller. 

At PLF Law Firm