M&A is abbreviated by two English words, Mergers and Acquisitions. The merger and acquisition ( “M&A”) process is one of the most important processes in doing business through partial or full ownership of that business, helping companies scale, strengthen their competitive strength, and achieve higher profitability. This process involves acquiring or merging other companies to create a new company or expand the size of an existing company. However, the M&A process can also face many challenges and risks. Therefore, the implementation of the M&A process requires thoughtful and careful preparation. In this article, we will learn about the decisive steps in the M&A process and what factors to keep in mind to make it effective.
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General overview of M&A and M&A process
1.1. Overview of M&A and M&A process:
Mergers: is the merger of one or several companies (hereinafter referred to as the merged company) into another company (hereinafter referred to as the merged company) by transferring all legal assets, rights, obligations and interests to the merged company, and terminate the existence of the merged company[1].
Acquisitions: is the purchase by an enterprise directly or indirectly of all or part of the contributed capital, assets of another enterprise sufficient to control and dominate the enterprise or an industry or line of the acquired enterprise[2]. The acquisition will not form a new legal entity.
The M&A process is all the steps involved in a merger or acquisition, including planning, research, due diligence, and execution activities. Understanding the decisive steps in the M&A process will bring many benefits to businesses, such as:
- Improve economic efficiency: When combined, businesses can leverage each other’s resources, technology, markets and customers, helping to reduce costs and increase revenue.
- Enhance competitiveness: M&A helps businesses enhance their competitiveness by expanding their scale and taking advantage of each other’s competitive advantages.
- Achieve higher profits: M&A helps businesses achieve higher profits by optimising production and business processes.
1.2. Forms of M&A:
Not merely owning a part of contributed capital or becoming a shareholder of the business, the goal of M&A is to gain control of the business, enough to make decisions on important issues of the business. Therefore, the forms of M&A are implemented very diversely as follows:
(i) Horizontal M&A
It is a form of merger or acquisition between businesses that offer the same or similar product lines to the end consumer, meaning that these two businesses can be in the same industry or at the same stage of production and are often direct competitors to each other.
(ii) Longitudinal M&A
It is a form of merging two or more enterprises owning the same production value chain, the same products and services but different in production and business stages. For example, in the same electronics manufacturing industry, an enterprise specialising in the production of components was merged with an enterprise specialising in the production of mobile phones.
(iii) Combined M&A
A form of merger and acquisition between businesses with different product lines, services and stages of development in order to create a new business or expand the scale of an existing business.
The above forms can be implemented through direct capital contribution to the enterprise or purchase of issued shares to increase the charter capital of a joint-stock company.
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Decisive steps in the M&A process
Here are the decisive steps in the M&A process that businesses should keep in mind:
Step 1: Define M&A goals and strategies.
This is one of the most important steps in a merger and acquisition. Before entering the M&A process, the Board of Directors of the enterprise needs to build for their businesses a clear strategy about what they want, what will be gained from this M&A deal. This is very important, because a clear strategy is needed to identify potential targets for mergers and acquisitions. These potential goals could be geographic location, profitability, customer base, and competitive advantage.
Step 2: Search and evaluate potential businesses.
2.1 Search for a business: The business manager will base on the potential goals from the strategy development step, evaluate each given criterion, from there, select potential businesses from the prepared list.
2.2 Reach the business: After identifying potential businesses, the next step is to approach the selected businesses. The business manager will develop strategies and plans to interact and establish contact with these businesses. This may include holding meetings, discussions, or other interactive activities aimed at building relationships and better understanding the capabilities and potential of each business.
Step 3: Perform a business value assessment.
3.1 Legal Due Diligence: Legal due diligence is an important part of ensuring that a business is properly assessed and does not face legal risks. This includes examining issues related to ownership, contracts, legal obligations, and other factors that may affect the value of the business as a whole.
3.2 Business valuation: After completing the due diligence step, the business valuation process will continue. The business manager will use methods to determine the true value of the business, including assessing assets, expected income, and market factors. This helps enterprises have a detailed and objective view of the economic value of the enterprise, thereby serving as a basis for investment and cooperation decisions.
Step 4: Negotiate and sign the contract.
4.1 Carry out negotiations: During this process, the leader and manager will conduct negotiations with the management team or representatives of the potential business. The goal of negotiations is to reach an agreement that benefits both parties, including terms of transaction value, payment conditions, and other conditions related to the transfer process.
4.2 Conclusion of a contract: After the negotiated terms are agreed, the next step is to conclude a formal contract. This contract shall contain all terms and conditions discussed and agreed during negotiations. Signing a contract is an important step and marks a formal commitment between the parties involved in the transaction and is the legal basis for starting the process of transfer and cooperation between the two enterprises.
Step 5: Carry out legal procedures.
At this stage, the implementation of legal procedures is an important step to finalise the transfer process. The decisive steps in the M&A process at this step include:
5.1 Carry out procedures for registration with competent State agencies: The buyer needs to register and adjust the contents of business registration with the competent State agency when there is any change related to enterprise information; charter capital, contributed capital, percentage of contributed capital; business lines; the authorised representative of the owner or member of a limited liability company being a foreign organisation; founding shareholder information; and tax registration information.
5.2 Carry out legal procedures related to the transfer: The buyer shall carry out all legal procedures related to the transfer, including confirmation of ownership, the seller’s liabilities and statutory procedures.
5.3 Report to the Tax authorities: The buyer should report on any changes to the tax authorities and fulfil the tax obligations related to the transfer process in accordance with the law.
Step 6: Finish the M&A process.
After completing the M&A process, the buyer may encounter challenges in personnel management, personnel transfer, conflicts in management policies of businesses, conflicts in corporate culture,… Therefore, the close cooperation of the two enterprises, the management and handling experience of the buyer at this stage is essential to solve problems and take advantage and exploit the strengths of the acquired enterprise. This marks the end of the M&A process and opens a new phase of consolidation and joint development.
Above is an overview related to decisive steps in the M&A process that Phuoc and Partners share with readers. If you encounter any difficulties related to the legal field, please contact us. Phuoc and Partners is a law firm established in Vietnam and currently has nearly 100 members working in three offices in Ho Chi Minh City, Hanoi and Da Nang. Phuoc and Partners is also considered as one of the leading law firms with specialised legal staff in Vietnam practice areas are rated top in the legal market such as Labour and Employment, Taxation, Mergers and Acquisitions, Litigation. We are confident to be one of the Law Firms providing the best legal services to our clients.
[1] Article 201.1 of Law on Enterprise 2020 and Article 29.2 of Law on Competition 2018
[2] Article 29.4 of Law on Enterprise 2018
