Understanding Multi-Step Transactions in Mergers and Acquisitions

Mergers and acquisitions (M&A) represent some of the most significant events in the corporate world, transforming industries, creating new market leaders, and reshaping the competitive landscape. While the concept of one company buying another seems straightforward on the surface, the reality is far more intricate. Many M&A deals, especially those involving public companies or complex ownership structures, require a series of coordinated legal and financial steps to achieve the desired outcome. These are known as multi-step transactions. Understanding the rationale, mechanics, and implications of multi-step transactions is crucial for anyone involved in M&A, from executives and board members to legal and financial advisors.

Defining Multi-Step Transactions in M&A

A multi-step transaction in the context of mergers and acquisitions refers to a deal structure that unfolds through a sequence of distinct but interrelated legal and financial steps, rather than a single, all-encompassing action. This approach is often necessary when the acquirer cannot immediately obtain 100% ownership of the target company or when regulatory, tax, or structural considerations require a phased approach. The most common example is the two-step merger, but multi-step structures can be even more elaborate, especially in cross-border deals or transactions involving multiple entities.

The essence of a multi-step transaction is that each phase is designed to achieve a specific objective, such as securing a majority stake, satisfying regulatory requirements, or facilitating the integration of assets, culminating in the full consolidation of the target company into the acquirer’s structure.

Why Use a Multi-Step Transaction Structure?

Multi-step transactions are not chosen arbitrarily. There are several compelling reasons why deal makers opt for this approach:

• Shareholder Dynamics: In public companies, it is rare for all shareholders to agree to sell their shares at once. A tender offer may secure a majority, but not total, ownership. A subsequent merger “squeezes out” the remaining shareholders.

• Regulatory Requirements: Antitrust or foreign investment approvals may require certain steps to be completed before the transaction can proceed to full integration.

• Tax Optimization: Structuring the deal in phases can sometimes yield more favorable tax outcomes for the buyer or sellers.

• Operational Integration: Gradual acquisition allows for smoother integration of business units, systems, and cultures.

• Risk Management: Staging the transaction can help manage financial exposure and allow for adjustments based on due diligence findings or market changes.

The Classic Example: The Two-Step Merger

The two-step merger is the archetype of a multi-step transaction in M&A, particularly in U.S. public company acquisitions. Here’s how it works:

Step 1: The Tender Offer

The acquirer makes a public offer to purchase shares directly from the target company’s shareholders, usually at a premium to the current market price. The goal is to quickly amass a controlling stake-often set at more than 50% of outstanding shares, but sometimes higher depending on the jurisdiction or company bylaws.

Step 2: The Squeeze-Out Merger

Once the acquirer obtains the requisite majority, it initiates a statutory merger-often referred to as a “squeeze-out.” This compels the remaining minority shareholders to sell their shares, typically at the same price as the tender offer. The target company is then merged into a subsidiary of the acquirer, resulting in 100% ownership.

This structure offers speed and certainty: the tender offer can close rapidly, and the merger ensures complete control. It also sidesteps the need for a protracted shareholder meeting or vote, which can be time-consuming and uncertain.

Other Multi-Step Transaction Structures

While the two-step merger is the most visible example, multi-step transactions can take many forms depending on the deal’s complexity and objectives:

Triangular Mergers

A reverse triangular merger involves the acquirer forming a new subsidiary, which then merges with the target company. The target survives as a subsidiary of the acquirer, and the shareholders of the target receive cash or shares in the acquirer. This structure can be combined with a tender offer as the first step, followed by the merger.

Carve-Outs and Spin-Offs

In some cases, a company may first spin off a division into a separate entity (the first step) and then sell that entity to a buyer (the second step). This allows for cleaner separation of assets and liabilities and can facilitate regulatory approval or tax planning.

Cross-Border Transactions

International deals often require multiple steps to comply with local laws, obtain regulatory clearances, or address currency and tax issues. For example, an acquirer may first purchase a minority stake, then seek regulatory approval, and finally complete the full acquisition.

Leveraged Buyouts (LBOs)

In a leveraged buyout, the acquisition may be structured in stages: arranging financing, creating acquisition vehicles, purchasing the target, and then merging entities or restructuring debt and equity.

The M&A Process: Where Multi-Step Transactions Fit

To appreciate the role of multi-step transactions, it’s helpful to understand the broader M&A process, which typically unfolds in several phases:

1. Strategy and Planning

The acquirer defines its objectives, identifies potential targets, and develops a preliminary deal structure. This is where the decision to pursue a multi-step transaction is often made, based on shareholder composition, regulatory landscape, and other factors.

2. Target Identification and Initial Contact

Potential targets are evaluated, and initial discussions are held. Non-disclosure agreements are signed, and preliminary terms are discussed.

3. Due Diligence

A thorough investigation of the target’s financials, operations, legal standing, and risks is conducted. Findings from due diligence may influence the choice or design of a multi-step structure.

4. Negotiation and Signing

The parties negotiate the definitive agreement(s), which spell out the steps of the transaction, including any tender offers, mergers, or asset transfers.

5. Execution of Multi-Step Transaction

The steps are carried out in sequence, often with closing conditions for each phase. For example, a tender offer may be conditional on securing a minimum percentage of shares, and the subsequent merger may be subject to regulatory approval.

6. Post-Closing Integration

Once full ownership is secured, the acquirer integrates the target’s operations, systems, and personnel. In some cases, further steps-such as asset sales or reorganizations-may follow.

Legal and Regulatory Considerations

Multi-step transactions are governed by a complex web of laws and regulations, which vary by jurisdiction and deal structure. Key considerations include:

• Securities Laws: Tender offers are subject to strict disclosure and timing rules, especially in the United States under the Williams Act.

• Fiduciary Duties: Directors of the target company must act in the best interests of shareholders, which can influence the negotiation and approval of each step.

• Minority Shareholder Protections: Squeeze-out mergers and similar steps must comply with laws protecting minority shareholders, including appraisal rights and fair price requirements.

• Antitrust and Foreign Investment Approvals: Regulatory clearance may be required at one or more stages, particularly in cross-border or industry-consolidating deals.

Advantages and Disadvantages of Multi-Step Transactions

Advantages

• Speed: The tender offer phase can be completed quickly, especially if the acquirer offers a compelling premium.

• Certainty: Once a majority is secured, the acquirer can force the completion of the transaction.

• Flexibility: The structure can be tailored to address shareholder, regulatory, or tax issues.

• Market Signaling: A public tender offer can generate momentum and encourage other shareholders to tender their shares.

Disadvantages

• Complexity: Multi-step transactions require careful planning and coordination among legal, financial, and operational teams.

• Cost: Multiple steps may involve additional legal, advisory, and financing costs.

• Uncertainty: If the tender offer does not achieve the desired threshold, the deal may stall or fail.

• Regulatory Risk: Each step may be subject to separate regulatory reviews, increasing the risk of delay or denial.

Real-World Example: The Two-Step Merger in Practice

Consider a hypothetical scenario: Company A seeks to acquire Company B, a publicly traded firm with thousands of shareholders. Company A launches a tender offer to buy shares at a 30% premium. After the offer period, Company A has acquired 75% of Company B’s shares. Under state law, Company A can now initiate a short-form merger, compelling the remaining shareholders to sell their shares at the same price. The entire process, from tender offer launch to full ownership, may take just a few months-far faster than a traditional merger requiring shareholder approval at a meeting.

This approach is especially common in industries where speed is critical, such as technology or pharmaceuticals, where news of a deal can trigger competitive bids or market volatility.

The Role of Advisors in Multi-Step Transactions

Given the intricacy of multi-step deals, experienced advisors are indispensable. Investment bankers help structure the transaction, manage communications with shareholders, and coordinate financing. Legal counsel drafts the complex agreements and ensures compliance with all applicable laws. Tax advisors optimize the structure for both buyer and seller, while consultants may assist with integration planning.

Integration and Post-Transaction Steps

The completion of the legal steps does not mark the end of the process. Successful M&A requires careful integration of people, systems, and cultures. In some cases, additional steps may follow, such as divestitures of non-core assets, restructuring of operations, or further acquisitions to consolidate market position. The phased nature of multi-step transactions can actually facilitate smoother integration, as each stage provides an opportunity to assess progress and make adjustments.

The Strategic Value of Multi-Step Transactions

Multi-step transactions are a hallmark of sophisticated M&A practice. They allow acquirers to navigate complex shareholder structures, regulatory hurdles, and operational challenges with greater flexibility and precision. While they demand careful planning and execution, the benefits-speed, certainty, and strategic control-often outweigh the added complexity and cost.

For companies contemplating an M&A deal, understanding when and how to employ a multi-step transaction structure is essential. It can mean the difference between a failed bid and a transformative acquisition. As the M&A landscape continues to evolve, driven by globalization, technological change, and shifting regulatory regimes, the ability to design and execute multi-step transactions will remain a critical skill for corporate leaders and their advisors.

A multi-step transaction in M&A refers to a deal structure that unfolds through a series of coordinated legal and financial steps-most commonly starting with a tender offer and followed by a merger-to achieve full ownership and integration of a target company. This approach is chosen for its strategic, legal, and operational advantages, and is a key feature of modern M&A practice.

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Howard Law is a business, regulatory and M&A law firm in the greater Charlotte, North Carolina area, with additional services in M&A advisory and business brokerage. Howard Law is a law firm based in the greater Charlotte, North Carolina area focused on business law, corporate law, regulatory law, mergers & acquisitions, M&A advisor and business brokerage. Handling all business matters from incorporation to acquisition as well as a comprehensive understanding in assisting through mergers and acquisition. The choice of a lawyer is an important decision and should not be based solely on advertisements. The information on this website is for general and informational purposes only and should not be interpreted to indicate a certain result will occur in your specific legal situation. Information on this website is not legal advice and does not create an attorney-client relationship. You should consult an attorney for advice regarding your individual situation. Contacting us does not create an attorney-client relationship. Please do not send any confidential information to us until such time as an attorney-client relationship has been established.