Only a third of M&A transactions actually create added value for new owners, despite the fact that the transactions are designed to increase the value of the business. Take a look at indemnification clauses during M&A processes in the article below.
Corporate Finance and Clauses During M&A Processes
Corporate finance is the field of finance that deals with the sources of funding, the capital structure of corporations, the actions a firm’s managers take to add value to shareholders, and the tools and analysis used to allocate financial resources. Fundamental corporate finance is the goal of maximizing or increasing shareholder value.
Mergers and acquisitions, being a well-known and widely used competitive market institution in developed countries, have a number of undeniable advantages: they serve as a tool for expansion, and external growth, and in already established integrated business groups, they contribute to the “clearing” and consolidation of assets, they can significantly improve companies in the commodity, credit and stock markets, increase its financial stability, make the business more competitive and profitable as a result.
In a merger, the boards of directors of the two companies approve the merger and seek shareholder approval. In a simple takeover, the acquiring company acquires a controlling interest in the acquired company without changing its name or organizational structure. Consolidation creates a new company by merging core businesses and abandoning old corporate structures. Shareholders of both companies must approve the consolidation and, upon approval, purchase common stock in the new firm.
Specific situations where a firm may need external financing during M&A processes are:
- ensuring the current needs of the business (financing of working capital, fulfillment of debt obligations);
- expansion (modernization) of existing production facilities (additional financing of working capital);
- bringing the company out of the crisis;
- buying other businesses.
From the point of view of the management of the initiating company, the takeover of the target company can be considered the implementation of an investment project. Modern economic science contains a sufficient number of approaches to assessing the economic efficiency of investment projects. There are network monitoring tools that offer complex and non-standard configurations that make administrators indispensable in your organization; if they leave it for some reason, then no one will be able to use this polished monitoring tool anymore.
The Examples of Indemnification Clauses During M&A Processes
What are the benefits of an assurance and guarantee insurance policy for strategic buyers during the M&A processes:
- Better coverage of indemnification conditions.
Working capital management is the management of a company’s cash that is associated with a short-term operating balance of current assets and short-term liabilities; the focus here is on managing cash, inventory, and short-term borrowing and lending.
- Protection of business relations.
This moment takes into account the specifics of mergers and acquisitions in the technological field because they often have the nature of recruiting engineering and management personnel through the takeover of a company.
- Simplify the claims recovery process.
Representation and Warranty Insurance Policy provides buyers with an alternative option to satisfy their claims for damages caused by the actions of counterparties.
Besides, some indemnification clauses during M&A processes offer multiple types of licenses, and when you want to increase the number of items controlled or the type of items controlled (applications, business processes, specific servers, etc.), some companies take advantage of this to disproportionately increase costs. Before choosing a tool, take an interest in the licensing system.