Taking your company to the next level through a merger or acquisition is one of those ideas that sounds great in theory, but can prove troublesome in practice.
When M&A works, it works very well. For example, in the AFL, the Brisbane Bears merged with the Fitzroy Lions in 1996; five years later, the new entity, the Brisbane Lions, won the first of three consecutive grand finals.
But when M&A fails, it tends to fail spectacularly. Take the famous case of Alan Bond and the Nine Network – Bond bought the business off Kerry Packer for $1.05 billion in 1987 … and then sold it back to him in 1990 for $250 million.
The failure rate for M&A deals is between 70% and 90%, according to Harvard Business Review. Why so high? Because companies fail to do their due diligence.
To avoid that unfortunate outcome, here are five of the most important legal issues you need to resolve before signing off on a merger or acquisition.
- Establish what assets are included in the deal
First, you need to clearly understand which assets are and aren’t included in the deal. This sounds like an easy matter, but a company is made up of hundreds of different parts, so it can be easy to overlook something. If an asset isn’t specifically listed in the sale contract – whether it’s equipment, patents, staff, clients, software, social media accounts – you might discover too late that what you assumed you were buying and what you actually acquired were two different things.
- Establish the condition of the assets
You also need to understand the condition of the assets you’re acquiring. Don’t be like Tom Hanks and Shelley Long in The Money Pit, who thought they were buying a wonderful home, only to have it collapse around them once they’d moved in.
- Check the other company’s books
On a related note, whether you’re merging with another company or acquiring it, you need to conduct a thorough due diligence of its books. The case of Hewlett-Packard and Autonomy illustrates the point. In 2011, HP bought Autonomy for US$11.7 billion; the following year, HP was forced to write off US$8.8 billion from Autonomy’s value, in part due to accounting irregularities it discovered too late.
- Read the other company’s contracts
When you merge with or acquire another company, you’re also taking on their contracts – legal promises they’ve made to clients, suppliers, staff and other parties. As part of your due diligence, you need to uncover, read and understand all these contracts, because they’ll soon become your responsibility.
- Find out the other company’s legal history
You’re also taking on your M&A partner’s lawsuits. So you need to uncover whether your partner is currently involved in litigation; whether they have ongoing responsibilities from previous lawsuits; and how vulnerable they are to future lawsuits from clients, suppliers, competitors, regulators or staff.
These are just some of the legal issues you need to resolve during an M&A process. To protect yourself, get advice from an experienced M&A lawyer. Contact Sutton Laurence King Lawyers 03 9070 9810 or for help