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To merge or not to merge?

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To merge or not to merge?

In recent weeks there has been a string of high profile mergers culminating in the recent ‘Betty Power’ merger - between Betfair and Paddy Power - creating one of the world’s largest online gambling businesses worth £5 billion.

This merger follows the British American Tobacco proposal to buy the remaining 58% of shares in Reynolds American for £38bn to create a 'global tobacco and next generation products company'.

The general principle of a merger is to combine two separate legal entities into one. The motivations or advantages of a merger can be significant, however they are not without risk.

The new merger company can experience boosted economics of scale, great sales revenue and market share. All were factors behind the BAT and ‘Betty Power’ mergers.

As is clear a proposed merger involves the mutual decision of two companies. It is usually one made by two companies on an equal footing to combine the businesses to gain a structural and operational advantage within the market. The merger is also likely to be with a view of cutting operational costs and increasing profits. This in turn will hopefully boost shareholder values for both groups.

Before you embark on the process a company must ensure that it is one they are committed to, it is in the best interest of the company and that the company’s “house is in order”.

If you are in the early stages of the process you should take specialist advice drafting a mutual non-disclosure agreement or confidentiality agreement between the companies. You are effectively “airing your dirty laundry” with a competitor so if the proposed merger falls through you must ensure that what is known stays confidential.

You must also take specialist advice on the “structure” of the merge. Is a ‘NEWco’ being set-up, is there a transfer of assets or is there a buy-out. There are a number of options available all of which have benefits and negatives to the merger companies. You must also consider the operations of the business following completion, plan ahead and attempt to agree this in advance. The drafting of ‘Heads of terms’ will be an important process and can deal with the formalities including further staffing requirements etc. You must take advice from specialists so the proposed structure is effective, tax efficient and you comply with the legal requirements imposed upon you.

Due diligence is then one of the most important processes throughout the merger. You must fully understand what you are taking on the positives and the negatives before you embark. Specialist advice must be taken from both lawyers and accountant to undertake a full and detailed review of all the company’s affairs. It is at this stage most merger are likely to fall down.

You must however be realistic. Understand that your business is unlikely to be perfect and the merger is an attempt to make both companies work more productively. You must also consider what financial requirement the merge company will require. Will this be the raising of liquidated money to fund the merger or will there need to be funds available for working capital?

Stephensons commercial team has aligned itself closely with corporate financiers to provide bespoke funding options for a variety of business transactions.

For more on company acquisitions, disposals and mergers or if you are thinking on embarking on this process please contact Thomas Baker in the commercial law department.

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