Buyers Choice of Strategy in Mergers and Acquisitions

William Frederik Enkebølle & Frederik Jensen

Student thesis: Master thesis

Abstract

Mergers and acquisitions are a frequently used transaction between buyer and seller. The buyer is always trying to strengthen its position on the market in which it operates. The acquisition of the target company is a high-risk transaction associated with many unknown conditions. 2 out of 3 mergers and acquisitions fails to perform. 1 The buyers’ expectations to the initial purpose of the acquisition isn’t met due to many different circumstances. Acquisitions are an effective way for a company to strengthen, develop and optimize its organisation.2 In the initial phase there is an asymmetric information between the seller and the buyer. An important task for the buyer is to minimize the asymmetric information so that it’s possible to assess limitations and opportunities that lies within the target company. By uniting incentive structures, the buyer can ensure the optimal behaviour of the seller. The overall purpose of this thesis is to reduce and as far as possible prevent the high number of acquisitions that doesn’t fulfil initial expectations by analysing different aspects of the acquisition process. Through an analyse of the Danish legislation regulating mergers and acquisitions the thesis finds that the legislation is insufficient and isn’t capable of handling complex acquisitions. The parties should therefore use their freedom of contract to construct an optimal contract that fits the acquisition. The thesis finds that contracts are drafted in a traditional and reactive way where the primary focus is risk allocation and limitation of liability. The thesis concludes that by implementing principles from the interdisciplinary research field strategic contracting the parties can optimise the contract by qualifying the content. Through a shift in focus so that central areas of the contract are responsibilities of the parties, and scope and goals, this will be possible. The thesis finds that sellers knowledge sharing, and cooperation is highly important in a successful postmerger integration and makes extraordinary value creation possible. Sellers future involvement is also considered important in this value creation process. When seller is implemented in the buyer’s organisation it’s important that the party’s incentive structures stay aligned. This is partially done by signing a Warranties & Indemnities insurance, that act as a safe-guard between the parties. When a guarantee breach occurs, the buyer won’t have to file a claim towards their new business partner, but to the insurance company, which ensures the future cooperation.

EducationsMSc in Commercial Law, (Graduate Programme) Final Thesis
LanguageDanish
Publication date2019
Number of pages153
SupervisorsKim Østergaard