These days, success or even survival in the biodiesel industry often means finding an M&A partner or partners. The economics of the industry reward control of or the ability to leverage a position with respect to feedstocks, markets, financing, transportation and other revenue and cost drivers. An M&A transaction that aggregates production capacity, a horizontal transaction, is one way that leverage might be created. A vertical transaction that integrates production capacity with feedstock supplies (an upstream deal from the point of view of the producer) or with a biodiesel market player or end user (downstream) creates a different kind of market power. These types of horizontal and vertical transactions are often called strategic transactions because they focus on competitive strategies. When the acquirer is not in the biodiesel industry and is interested in the target principally as an investment opportunity, which may include making additional financing available to the target, the acquirer is often referred to as a financial buyer.
Selecting the Team
The process of planning, negotiating and completing an M&A transaction can be difficult, complicated and time-consuming. Each party must select a team composed of management and outside professional advisors for the purpose. For a small company, management may be represented by a few key officers and board members. In a large company, the management team may include inside counsel and members of the finance, accounting, development and human resources staffs. Each party will be supported by outside counsel, independent accountants and tax advisors. For transactions of any significance, investment bankers will assist in analyzing values, structuring the deal and negotiating terms, and they will be in a position to provide fairness opinions with respect to the financial terms of the transaction. If requested, they may also conduct the search or auction process to identify the most attractive M&A partner and best financial terms. In some cases, intellectual property counsel, professional engineers, environmental consultants and other experts will be required to deal with issues that are critical to the transaction or could be a roadblock to success.
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Planning for the M&A Transaction
The first step in considering a possible M&A deal is self-analysis. What are the strengths and weaknesses of the company, what does it bring to the table that may be attractive to potential acquisition partners and what does it look for in those partners? This analysis will reveal the types of transaction—horizontal, vertical, strategic, financial or a combination thereof—that should be considered. Consideration of the relative strengths of the company and potential acquisition partners will give an indication of whether the company is an acquirer or is likely to be an acquisition target. Being a target, incidentally, is not necessarily bad; receiving cash in an exit transaction or retaining equity in a stronger enterprise may be far better than struggling alone.
M&A Transaction Structures
The planning process will include consideration of alternative structures for the transaction that will maximize the benefit to the company’s equity holders while retaining the attractiveness of the deal for possible M&A partners. The three principal structural alternatives for an M&A transaction are the following:
Statutory merger A statutory merger is completed in accordance with the laws governing the organization of the respective parties to the transaction. Whether the parties are corporations, limited liability companies, partnerships, cooperatives or other entity forms, most state laws are now flexible enough to allow two companies to combine into one by merger of one into the other or to allow a subsidiary of one to merge with a target. A merger of a target with a subsidiary, where the consideration is cash or securities of the parent, is often called a triangular merger. When the target merges into the acquirer or into a subsidiary of the acquirer, the merger is a direct or forward merger. Often, however, it is advantageous (at least from an economic standpoint) to structure the transaction as a reverse merger, where the acquiring company or subsidiary merge into the target.
Acquisition of assets In an acquisition of assets, the acquiring company purchases some or all of the business and assets of the target and may assume specified liabilities of the target. The acquirer generally acquires only those liabilities of the target that it specifically agrees to assume, subject to some successor liability doctrines imposed by law and court decisions such as liability for pre-existing environmental issues. Following an acquisition of assets, the target may sell its remaining assets, satisfy its remaining liabilities and distribute the cash or securities received in the acquisition to its equity holders, or, it may continue business with the lines of business and assets not sold in the acquisition.
Acquisition of stock or other equity interests If the transaction is structured as an acquisition of equity interests, the transaction focuses on the owners of the target rather than the target itself. In the case of a closely held target, the acquirer might successfully negotiate the simultaneous purchase of all of the outstanding equity. Where the equity of the target is more broadly held, the transaction might be conducted as a friendly or hostile tender-offer, in which the acquirer offers to purchase the equity of willing sellers, usually subject to a controlling percentage of the equity being tendered for sale. If a minority interest remains after an initial equity purchase, the acquirer will often conduct a second-stage squeeze-out or freeze-out merger, subject to state law, by which it would eliminate the minority interest for cash.
Typical reasons for choosing one or another structure focus on the tax consequences of the transaction, the preservation of tax or accounting advantages, the ability to selectively acquire a portion of the business, assets and liabilities of the target and the avoidance of the necessity to secure consents from third parties that have existing contractual or business relationships with one of the parties to the transaction.
Transaction Consideration
The nature and amount of consideration to be paid or issued to the parties to an M&A transaction or to their equity holders will normally be the most important term in the transaction. The consideration will normally be cash, debt obligations or equity securities, or a combination of those forms. The amount or value of the consideration given will depend on negotiations between or among the parties which often will reflect differing perceptions of value. Particularly when equity securities are offered, the value equation will focus not just on the value of the target but also on the present value or expectations of the future value of the acquirer issuing the securities. When the transaction involves the equity securities of comparably sized parties, the perceived relative values of the parties and the ratios of equity to be shared in the combined enterprise may be more important than any specific dollar values attributed to the parties or their equity.
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