M&A

M&A, or merger and acquisition (기업인수합병/企業引受合倂) is a corporate strategy or corporate finance dealing with the buying, selling, dividing and combining of different companies or similar entities. M&A is believed to help an enterprise grow rapidly in its sector or location of origin, or a new field or new location, without creating a subsidiary, other child entity or using a joint venture.

In Korea, M&A used to be conducted involuntarily in the process of corporate rehabilitation or insolvency proceedings under the court’s supervision. See M&A in insolvency proceedings.

Definition
The distinction between a "merger" and an "acquisition" has become increasingly blurred in various respects (particularly in terms of the ultimate economic outcome), although it has not completely disappeared in all situations.

From a legal point of view, a merger is a legal consolidation of two companies into one entity, whereas an acquisition occurs when one company takes over another and completely establishes itself as the new owner (in which case the target company still exists as an independent legal entity controlled by the acquirer). Either structure can result in the economic and financial consolidation of the two entities.

When the target company does not want to be purchased, it is regarded as an "acquisition" or hostile takeover. Consolidation occurs when two companies combine together to form a new enterprise altogether, and neither of the previous companies remains independently.

Friendly M&A
In Korea, majority of M&As have been arranged with the consent of the management by the creditor banks or courts which supervise the financial affairs of marginal companies.

Hostile takeover
Sometimes a target company may be acquired against the will of the incumbent management through [friendly M&A tender offer] (공개매수/公開買受) at the market. So a variety of anti-M&A tactics would be employed by the target company.

For the purpose of transparency and investor protection in securities trading, the tender offer, over five percent possession of shares and proxy war are regulated by Articles 133 through 158 of the Financial Investment Services and Capital Markets Act (the “Capital Markets Act”, 자본시장과 금융투자업에 관한 법률).

Leveraged buyout (LBO)
See Leveraged buyout (차입매수/借入買受).

M&A process
In legal terms, whether M&A is successful or not depends on reasonable business valuation based upon due dilligence and appropriate documentation.

Business valuation
The five most common ways to value a business are: Professionals who value businesses generally do not use just one of these methods but a combination of some of them, as well as possibly others that are not mentioned above, in order to obtain a more accurate value. The information in the balance sheet or income statement is obtained by one of three accounting measures: a Notice to Reader, a Review Engagement or an Audit.
 * asset valuation,
 * historical earnings valuation,
 * future maintainable earnings valuation,
 * relative valuation (comparable company & comparable transactions),
 * discounted cash flow (DCF) valuation

Accurate business valuation is one of the most important aspects of M&A as valuations like these will have a major impact on the price that a business will be sold for. Most often this information is expressed in a Letter of Opinion of Value (LOV) when the business is being valuated for interest's sake. There are other, more detailed ways of expressing the value of a business. While these reports generally get more detailed and expensive as the size of a company increases, this is not always the case as there are many complicated industries which require more attention to detail, regardless of size.

Documentation
The documentation of an M&A transaction often begins with a letter of intent. The letter of intent generally does not bind the parties to commit to a transaction, but may bind the parties to confidentiality and exclusivity obligations so that the transaction can be considered through a due diligence process involving lawyers, accountants, tax advisors, and other professionals, as well as businesspeople from both sides.

After due diligence is completed, the parties may proceed to draw up a definitive agreement, known as a "merger agreement," "share purchase agreement" or "asset purchase agreement" depending on the structure of the transaction. Such contracts are typically 80 to 100 pages long and focus on four key types of terms:
 * Conditions, which must be satisfied before there is an obligation to complete the transaction. Conditions typically include matters such as regulatory approvals and the lack of any material adverse change in the business.
 * Representations and warranties by the seller with regard to the company, which are claimed to be true at both the time of signing and the time of closing. If the representations and warranties by the seller prove to be false, the buyer may claim a refund of part of the purchase price.
 * Covenants, which restrict operation of the business between signing and closing.
 * Termination rights, which may be triggered by a breach of contract, a failure to satisfy certain conditions or the passage of a certain period of time without consummating the transaction.

M&A strategies
To defend management of the company, the following tactics are employed, though some of them are not adopted by the Commercial Act, among others:
 * Poison pill
 * Golden share
 * Dual-class stock
 * Voting right caps
 * 3rd party-alloted paid-in capital increase
 * Staggered board member
 * Sunset arrangement