Structuring an agreement

One of the most complicated steps in the business combination process

Many factors must be considered, such as antitrust laws, securities regulations, corporate law, rival bidders, tax implications, accounting issues, market conditions, forms of financing and specific negotiation points in the business combination agreement.

Important documents when structuring transactions are the term sheet (used to raise funds) and a letter of intent (LOI) that defines the basic terms of the proposed transaction.

The negotiation of the agreement is often a very delicate step in the process because it often reveals the true intentions of the stakeholders.

In order to reduce friction at this stage, the company carrying the project must carry out a preliminary analysis of the target in order to verify that the spirit and objectives of the merger are respected.

Analysis of business combinations

Preliminary target analysis usually involves two steps:

• the valuation of the objective on a stand-alone basis and
• the valuation of the potential synergies of the operation.

When it comes to evaluating synergies, there are two types of synergies to consider: hard and soft.

Hard synergies are direct cost savings to be realized after completion of the M&A process. Hard synergies, also known as operational synergies, are benefits that will definitely result from the merger or acquisition, such as salary savings that will come from the elimination of redundant personnel between the acquirer and the target companies.

Soft synergies, also known as financial synergies, are increases in revenue that the acquirer expects to realize after the transaction closes. They are “soft” because the realization of these benefits is not as assured as the cost savings associated with the “hard” synergy.