In this article, we will delve into the various types of M&A and deal structuring options that are available and commonly used in Malaysia. 

Types of M&A

Types Illustration and Explanation
Horizontal M&A In this situation, two companies that operate in the same industry and offer similar products or services come together. The two companies may be direct competitors or have overlapping customer bases. Horizontal M&A can generate synergies, as the merged company can pool its resources, expertise, and knowledge to improve its product offerings, reduce costs, and improve its competitive position. However, this type of M&A may also raise anti-competition concerns, as the merged company may result in increased market share in a particular market or industry, and have the effect of significantly preventing, restricting or distorting competition in Malaysia. 

An example of Horizontal M&A is the merger of Celcom and Digi in 2022 created the largest telecommunications company in Malaysia, bringing together two major players in the industry. 

Vertical M&A Vertical M&A involves two companies operating in different stages of the supply chain of a particular industry. This type of M&A can take place when a company acquires a supplier or a distributor.The primary objective of this vertical M&A is to enhance a company’s supply chain efficiency, reduce costs, and increase its control over the production and distribution of its products or services. By vertically integrating its operations, a company can reduce its reliance on third party suppliers or distributors, which can be a source of uncertainty and risk.

For example, MISC Berhad acquired AET Tankers Holdings in 2020, which enabled MISC Berhad to expand its fleet of tankers and strengthen its position in the global shipping industry.

Concentric M&A Concentric M&A refers to the acquisition of a company that operates in a related industry or market. Both the companies will have similar products, services, or customer bases, but they may not be direct competitors. The concentric M&A is to expand a company’s product and service offerings, improve its market position, and create economies of scale. By acquiring a company in a related industry or market, a company can leverage its existing resources such as distribution channels, marketing expertise, and customer relationship, to generate additional revenue and profits. 

For example, Maybank’s acquisition of Kim Eng Holdings in 2011 allowed Maybank to expand its financial services and increase its market share in the investment banking industry, by leveraging Kim Eng Holding’s expertise in brokerage and investment banking. This acquisition provided Maybank with a strategic advantage in the highly competitive financial services industry.

Conglomerate M&A Conglomerate M&A refers to the acquisition of a company that operates in a completely different industry or business line. The two companies may have no direct competition or related products or services. This can diversify a company’s portfolio, expand its reach, and reduce its risk by entering into new industries or markets. By acquiring a company in a different industry, a company can reduce its dependence on a particular product or service, and gain exposure to new customers and revenue streams. 

For instance, YTL Power’s acquisition of Wessex Water in 2002 allowed YTL to expand its business into the UK, and diversity its business operations. 

 

Deal Structure

Deal structuring is a critical aspect of M&A that involves designing the various elements including timing, sequencing of actions, and negotiating the legal, financial and commercial terms of the transaction. A well-structured deal can ensure that the transaction progresses as smoothly as possible, mitigate costs, and minimise the risks of any unexpected complications or issues. 

Creating an M&A deal structure can be complicated and challenging. It is not a one-time event, but rather an ongoing process throughout the M&A transaction. As the deal progresses, adjustments may need to be made to the terms and conditions of the transaction based on the new information or changing circumstances. Depending on the specific industry licence and type of business involved, some mergers and acquisitions will also be subject to regulatory approvals from its respective regulators for a transaction to proceed.

There is no statutory concept of a merger in Malaysia, and a merger typically involves acquisition of shares or assets of a company, briefly described below:

1. Share Acquisition

A share acquisition involves one company purchasing the equity/ownership interest of another company, giving the acquirer control over the target company’s strategic decisions, operations and employees. The acquired target entity will remain in existence as a separate legal entity.

On one hand, share acquisition ensures business continuity as the target company continues to operate as a going concern, ie. its regulatory approvals and business licences, existing contracts and employees remain as status quo. On the other hand, the acquirer also takes over the target company’s known and unknown liabilities and legal claims, which can be costly and time consuming to address post-acquisition. 

As the acquirer takes over the target “lock stock and barrel”, a seller must be prepared that the acquirer will conduct a more comprehensive due diligence, and the seller can also expect tougher negotiations on the representations, warranties and indemnities by the acquirer in the sale and purchase agreement. 

2. Business / Asset Purchase

In an asset purchase, the acquirer will “cherry pick” specific assets such as inventory, equipment, contracts, real estate, intellectual property, employees, and sometimes even selected receivables or liabilities, rather than acquiring the entire company. This approach allows the acquirer to buy what it wants and leave behind the assets, liabilities or debts of the target company that it does not want. The acquirer will not need to be concerned about closing down or liquidating the target entity post-acquisition.

However, planning and executing the transfer of assets may be time consuming and more document intensive than a share acquisition. Asset purchases may also require the consent of more third parties compared to a share acquisition. For example, if the acquirer chooses to take over various contracts such as tenancies, leases, loans, customer and supplier contracts of the target company, the consents of these contracting parties need to be obtained. 

Another potentially tricky aspect of an asset purchase is in the transfer of employees, which involve considerations such as whether termination benefits are payable, and ensuring that correct procedures and requirements under Malaysian labour laws are complied with. The lack of planning and allocation of sufficient time on this front can lead to hefty payouts or a disgruntled workforce.

Under an asset purchase, regulatory or operational licences will also need to be obtained afresh given the change of legal entity, which can take time and introduce risks and uncertainties to the acquirer. 

Generally, an asset purchase may result in a disruption of business continuity and even goodwill as the acquirer will have to reset or rebuild the business to a large degree. Nonetheless, this can be a preferred approach for acquirers who have clear businesses and direction and merely require complementing assets. 

When structuring a deal, the payment structure is a crucial factor to consider, i.e. how the acquirer will pay the purchase price to the target company’s shareholders, and it can have a significant impact on the outcome of the deal. 

The common payment structures in M&A transactions include:

  • Lump sum payment – the acquirer pays full purchase price upfront (either in cash, stock, or a combination of both). This can be attractive to sellers who prefer certainty and speed of payment, and can also help to simplify the deal structuring process. 
  • Earn-out – this allows the acquirer to pay a portion of the purchase price based on the target company’s future performance. It is typically structured as percentage of the target company’s revenue, profit, or other financial metrics, and is paid over a defined period of time. 
  • Contingent payment – the payments are made if certain conditions or milestones are met, such as achieving a certain strategic business goals or key performance indicators. They can be attractive to both acquirers and sellers, as they help to align incentives and mitigate risks. 
  • Claw backs – the acquirer gets to claw back a portion of the purchase price if certain conditions or milestones are NOT met, such as failing to achieve a certain revenue or profit level. This feature may come into play if the acquirer is paying the seller a premium above the market value.
  • Structured payment – this involves dividing the purchase price into multiple payments over time, which are tied to specific milestones or events set by both the acquirer and sellers. This type of payment can help to manage cash flow and reduce risk for both parties. 

The Malaysian tax implications to both the acquirer and the seller will also differ between a share and an asset deal. For example, a transfer of shares will attract a much lower stamp duty rate of 0.3% compared to an asset purchase, for which the stamp duty could vary between 1-4% depending the type of asset or liability being transferred. 

Conclusion

Deal structuring is a complex process that requires careful planning and consideration, which both the acquirer and seller should carefully consider their goals, financial situation, and potential legal risks and regulatory requirements to determine the best deal structure for their specific situation. A well-structured deal can help to create value for both the acquirer and seller which leads to long term success and growth.

***

This article was written by Shawn Ho (Partner) and Toh Jia Yi (Associate). Shawn leads the corporate practice group of Donovan & Ho, and has been recognised as a Notable Practitioner, whilst the firm has been recognised as a Notable Firm for Corporate and M&A by Asialaw Profiles 2020 and 2021. We are also ranked as a Recommended Firm by IFLR1000 2020 and 2021.

Our corporate practice group advises on corporate acquisitions, restructuring exercises, joint venture arrangements, shareholder agreements, employee share options and franchise businesses, Malaysia start-up founders and can assist with venture capital funds in Seed, Series A & B funding rounds.  Feel free to contact us if you have any queries.

 

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