Mergers and acquisitions are a fundamental part of business growth for many companies. From smaller firms to global names like Disney and Pixar, Microsoft and LinkedIn, and Heinz and Kraft, M&A has seen many companies elevate themselves to the next level.
Around 760 M&A deals occur within the UK each year, with further outward acquisitions (UK companies buying overseas companies) totalling £4 billion and inward acquisitions amounting to £7.8 billion in the third quarter of 2024, the last period for which ONS figures are available.
Naturally, it’s crucial to be aware of the regulatory and legal frameworks surrounding M&A before embarking on this type of business growth, alongside understanding the different ways transactions can be structured, to decide which works best for your business.
What is a share purchase?
One of the most common ways for a business to acquire another is through a share purchase, where the acquirer buys all shares of the target company – which gives them control over all assets, liabilities and operations.
Typically, these types of acquisitions require fewer regulatory approvals than other types of structure, which is seen as an advantage for buyers. However, they must ensure they’ve undertaken thorough due diligence so they can understand the liabilities associated with the shares.
Examples of share purchases include Microsoft’s buyout of all outstanding stock from ByteDance, the parent company of TikTok; and Amazon’s $13.7 billion acquisition of Whole Foods ($42 per share), giving Amazon physical retail spaces for the first time (Acquire.com).
But not all share purchases have been quite as successful: when eBay Inc acquired Skype Technologies for $2.6 billion, it was considered to be a massive overpayment as revenue for the latter only stood at $7 million. eBay leaders felt they could improve their auction site by giving users better access to communications technology, but customers did not adopt the new technology, meaning shareholders were informed two years later that the value of Skype had been written down by $900 million.
However, some time later eBay was able to sell all of Skype’s equity to Microsoft for $8.5 billion – so it wasn’t a complete disaster as they did eventually make a $1.4 billion on their original investment (M&A Science).
Are there other types of acquisition?
Another common type of acquisition is an asset purchase, where the buyer acquires specific assets and liabilities of the target company – while this can be an advantage as they can pick the most valuable assets and avoid undesirable liabilities, additional regulatory clearances and more complex negotiations may be needed to complete the deal.
One of the risks associated with an asset purchase is that the target company could dissolve, with shareholders receiving the proceeds of the sale distributed among them.
How does a merger work?
Mergers see two companies coming together to form a single new entity, or one company absorbing the other. Either a brand-new corporate structure is established or the merging businesses are completely integrated. The complexities of merging everything about the businesses including operations, cultures and systems mean careful planning and execution, and they are subject to rigorous scrutiny around regulatory requirements – especially when the companies are larger, or the merger has the potential to significantly alter market dynamics.
One of the biggest mergers of recent times was the $135 billion deal struck between United Technologies and Raytheon, which sparked the creation of the most advanced aerospace and defence systems production company in the world. ExxonMobil have also been part of various deals including a $60 billion merger with Pioneer, a company which was undertaking hydrocarbon exploration (M&A Community).
What regulations and laws govern mergers and acquisitions?
There are several key bodies and legislative frameworks involved in M&A transactions in the UK – and of course, deals are even more complex if one of the companies involved is based overseas.
A critical piece of this legal jigsaw is The Companies Act 2006, which outlines legal requirements for companies including essential provisions for M&A transactions. These include shareholders’ approval, a fair offer from the acquiring entity, and compliance with competition law.
The UK Takeover Code, administered by the Panel on Takeovers and Mergers (PTM), sets out the rules surrounding takeover bids and related transactions, aiming to protect shareholder interests and ensure all parties are treated fairly throughout the process. Included within the code are provisions for disclosures, offer timings and obligations for both companies.
In addition to the PTM, the Competition and Markets Authority (CMA) plays a vital role in the M&A process by assessing the competitive implications, considering market share, potential consumer impact and the overall economic landscape. If a merger substantially reduces competition within any market, the CMA can either block or impose conditions on the deal to avoid creating a monopoly.
How can businesses decide whether to use M&A as a growth tactic?
Careful consideration is needed to decide whether acquisition should form part of a business’ growth strategy – and, if so, which type of M&A structure would be preferable. This can, of course, vary with each deal or new company considered.
A nuanced understanding of the regulatory requirements is essential, especially with legal developments and best practices evolving over time. Legal and financial advisors who specialise in UK M&A can be invaluable in helping businesses ensure compliance, alongside achieving a successful transaction for all parties. Once businesses understand structures, market conditions and regulations, they are much better placed to capitalise on M&A opportunities, enhancing their competitive advantages in an increasingly dynamic market.
Yulia Barnes, Managing Director of boutique commercial law firm, Barnes Law Associates
