Guide to Corporate Transactions

Corporate transactions cover a wide range of activities that can apply during the lifecycle of a business. Here we provide a summary of some of the typical transactions that occur in the corporate sphere.

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Mergers & acquisitions

A merger occurs when two companies amalgamate into one. There are five types of mergers:

• Horizontal merger: two companies in the same stage and industry merge, for example, to reduce competition
• Vertical merger: two companies in the same industry, but at different stages of development merge into one, for example, to give the acquiring firm more control over its manufacturers
• Conglomerate merger: two companies in unrelated industries merge, for example, two companies with different seasonal demand may merge to ensure year-round revenue
• Congeneric mergers: two companies that serve the same market in different ways merge, for example, a phone manufacturer and a mobile network
• Market-extension merger: two companies that sell the same products in different markets merge, for example, an alcoholic beverage company purchasing a chain of bars

In an acquisition, one company absorbs another. Acquisitions can be distinguished into two groups:

• Friendly acquisitions: the board and shareholders of the acquired firm agree to being subsumed by the acquirer
• Unfriendly acquisitions (hostile takeovers): the larger firm purchases large stakes of the smaller firm, without their agreement, to obtain a controlling interest

Share and Asset Purchase

When a business is to be sold, there is a choice as to whether to structure the transaction as a share purchase or an asset purchase.

A share purchase means that the buyer will acquire the shares in the company (which will typically be the entirety of the issued share capital). Share purchase is also possible in relation to some of the shares by either existing shareholders or the company itself.

An asset purchase involves the buyer negotiating which assets and rights they will take on. They may, for example, choose to acquire responsibility for certain liabilities but not others.

Management buy-outs & buy-ins

A management buy-out occurs when a company’s existing managers buy out a significant proportion (or the entirety of) the company. The purpose of this is for the managers to have a greater degree of control and influence on the direction of the company. These can be a useful business solution to allow it to remain controlled by those who already understand how to run it effectively and allows for a smooth transition to the new owners.

A management buy-in works in the same way as a buy-out, except the purchasers are an external management team, from outside of the company. The existing managers will be replaced by those who have purchased the interest in the company.

A leveraged buy-out is the purchase of a company with a significant proportion of debt financing. The target company in this instance will usually not have agreed to the takeover, and their assets can be used as collateral by the acquiring company.

Corporate finance

Companies need to ‘raise capital’ in order to fund their operations and investments. There are several ways a company can do this:

• Initial public offerings (IPOs), which is where a business first lists its securities on a securities exchange or offers them to the public under a disclosure document. There are stringent listing and due diligence requirements here that must be adhered to
• Equity financing, which involves selling a section of the business to an investor. This can be lucrative, but means handing over some control of the company
• Equity restructuring
• Venture capital and private equity
• Joint ventures, which is a commercial agreement between two or more participants to cooperate in relation to a joint business objective
• Securitisation, which is a financing method that involves selling large pools of cash-generating assets (such as mortgages) to a special purpose vehicle (SPV) who pays for the assets by issuing interest-bearing securities into the capital markets
• Debt financing, which involves the company borrowing money from a lender and agreeing to pay it back (with interest) at later date. Typical forms of debt finance are a loan, a credit card, or a corporate bond. Corporate bonds are issued by a company to an investor. Interest payments are paid to the investor until the bond "reaches maturity”, when the payments stop, and the original investment is repaid