398 11 Takeovers: Introduction
enjoy private benefits which they want to keep after the merger. For example, the
controlling shareholders of each company may agree to share control after the
merger.
For legal reasons, it can be easier for the board to accept a merger of equals in-
stead of a takeover offer made by an acquirer. The board has a legal duty to act in
the interests of the company meaning that the board should try to ensure the long-
term survival of the business organisation of the firm (Volume I). Whereas a take-
over of the firm means that the board of the company and the firm’s old manage-
ment will not be able to influence its future business, a merger of equals can en-
able them to maintain some control and to protect the firm’s survival chances in
the future. It can therefore be easier for the target’s board to explain the benefits of
a merger of equals.
The absence of a control premium means that the structure of the combined
companies will be important when the boards try to obtain shareholder approval.
Shareholders of the company perceived as the weaker party are likely to be critical
about the proposed transaction. (a) The post-merger corporate governance struc-
ture of the participating companies is a common way to signal to shareholders
whether the transaction is a true merger of equals – or a normal acquisition for
which the shareholders of the weaker company should receive a control premium.
The negotiations can be difficult because the transaction is negotiated by people
who have a vested interest in the outcome (the board members and managers of
the participating companies). (b) Fairness opinions are important for both parties.
11.3 Consideration and Funding..................................................................
The acquisition structure, the financing structure, and the choice of consideration
are interrelated.
From the perspective of the acquirer, the consideration is an investment that
must be funded. The terms of the acquisition agreement must therefore depend on
the financing structure, and vice versa. Both depend on the preferences of inves-
tors providing the funding. For example, the acquisition structure and the positions
taken by creditors in the financing structure determine the risk exposure of credi-
tors.
Consideration. There can be different forms of consideration: cash, shares,
other assets, or a combination. The price can be fixed or variable, and the price
can be payable at different points in time. For example, the contract can contain
terms on earn-outs, retentions, and completion accounts.
Funding. The acquisition can also be funded in various ways: by debt (LBO),
target’s assets (private equity), shares issued to the target’s shareholders (share ex-
change offers, formal mergers), or other share issuings.
The target can be an important source of funding. In a share deal, mandatory
provisions of company law typically restrict the giving of financial assistance to
the buyer or subscriber of shares. However, company laws permit some forms of