Mergers and Acquisitions (M&A): Strategies to Avoid Common Pitfalls

This report examines the complexities of mergers and acquisitions (M&A), highlighting the strategic importance of these transactions while also addressing the potential pitfalls that can lead to significant financial losses. It emphasizes the necessity of thorough due diligence, particularly in evaluating core technologies, communicating effectively with all shareholders, and understanding the potential liabilities associated with prior work. The report uses case studies such as the eBay-Skype and Yahoo-Dialpad deals to illustrate these points. It offers practical advice, including the importance of asset purchases over business acquisitions, understanding employee retention, securing indemnities, and carefully assessing lease agreements. By providing these insights, the report aims to equip readers with the knowledge needed to navigate the M&A process successfully and avoid common, often costly, mistakes.

Companies may be formed or demolished by mergers and acquisition (M&A) to acquire new
technologies. The worst is that a devastating agreement would cost millions or even trillions of
dollars in effort and resources. A strategic acquisition, on the other hand, will start a business at
the forefront, maximize its market profits over rivals, and likely allow a large corporation to
grow into a new market. The purchasing from Google YouTube may be a perfect example.
YouTube also serves a multi-billion-dollar income stream that allows cable TV to decrease.
Instagram can also be seen as a case in point for Facebook purchase, which lets Facebook boost
its social media superiority.
The art of making a successful M&A transaction involves sincere observer, insightful sentiment
and attention to detail; it requires more than just a review of the balance sheet and a review of the
contract boxes. Three tips are available to escape some of the pitfalls that are not always obvious
but can destroy technology operations.
Make Sure You Are Buying Core Technology Techniques
EBay spent $2.6 billion on Skype in 2005 in order to increase revenues through the provision of
a swift means of exchange to buyers and sellers. If Skype could not work with eBay users, the
majority believed that it was why eBay sold Skype four years later. But it's not that easy when
we know a little that the original acquisition of EBay does not require the possession of Skype's
fundamental technologies. Google even wanted to buy Skype from eBay at the time. But as they
realize, they had to compromise both with eBay and Niklas Zennstrom, founding father of Skype
that continues to have peer-to-peer network technology, they decided not to go through the deal.
Eventually, eBay sold a large stake in Skype to a group of private investors and Microsoft
acquired the intellectual property company several years later. If people work on the law on
M&As (Mergers and acquisitions), they should spend most of their thorough research on each

transaction in order to ensure that the target company doesn't have any rights to the technology
they purchase. In the meantime, it should be the responsibility of junior partners to read any
document signed by the target group. In multiple test rooms also lined in banker crates. This may
be a painful process, but it would serve to ensure that fundamental intellectual property is not
limited by statute.
Communicate With All Shareholders, Even the Ones with the Least Amount of Shares
When Yahoo was about to purchase Dialpad Communications, they faced undesirable opposition
from an uncertain source, who was a businessman, who withdrew much of his interest in Dialpad
several years ago, indicating that the firm meant almost nothing to him, suddenly had his own
idea. He offered his stock a better price as the sale was about to end. This made the deal
complicated.
First of all, all fusions and acquisitions are filled with surprises and risks, which prevent and
prepare them for the worst. Secondly, the majority acts for their own advantage at the last
minute. You can minimize the impact that anyone can take advantage of by talking to
shareholders earlier. In this way, you can buy more time to bargain and allow shareholders to
appreciate what they get.
Enumeration of traps
 TRAP: RESTATEMENT OF PREVIOUSLY ISSUED FINANCIAL
STATEMENTS
The discovery of possible misstatements in financial statements reported on by a predecessor
auditor has historically created challenges for the successor auditor. Firm mergers and
acquisitions complicate those challenges.

Situation: Scenario: Predecessor firm P audited the financial statements of XYZ Corp. and issued
an audit report for the year ended Dec. 31, 2009. Successor firm S audits XYZ for the year 2010
and expects to issue an audit report on comparative financial statements for the years ending
Dec. 31, 2009, and Dec. 31, 2010. During the audit of XYZ, S becomes aware of information
that leads the firm to believe that the financial statements of XYZ issued by P in 2009 require
revision. The P partners disagree with the need to revise the financial statements and object to
any restatement. The merger agreement is silent as to which firm’s professional judgment
governs this dilemma. In addition, the merger agreement includes a one-year de-merger period,
which has not elapsed and is creating additional pressure during the discussions on how best to
resolve this problem.
SOLUTION
S company can resign from the engagement if it is not satisfied with the technical resolution to
the potential financial statement revisions. This could be a significant problem, as XYZ is a
major client of P and its loss as a client may lead to a de-merger of the firms. A more
comprehensive and detailed due diligence evaluations and inquiries made before a merger or
acquisition may have detected this problem early on and resulted in a simple resolution. Greater
due diligence is recommended when merging firms have as clients startup companies, shell
companies, larger companies, companies with liquidity and cash flow problems, and companies
in nontraditional industries and other businesses that could be considered high risk. For example,
the due diligence might be extended to review more closely the potential merged firm’s work
papers dealing with going concern or other emphasis of a matter disclosures and the engagement
team’s adherence to AICPA audit guides relating to nontraditional and higher-risk industries, as

well as the firm’s competency capabilities and realistic basis for completing higher-audit-risk
engagements.
 TRAP: BREACHES OF CLIENT CONFIDENTIALITY
Situation: Your firm is considering merging with or being acquired by another firm, which will
conduct a due-diligence process of your firm’s financials, agreements and other records. State
accountancy boards, regulatory agencies and professional membership organizations have
detailed rules regarding protecting clients’ confidential information. You can avoid violating
those rules if the merger transaction is not finalized.
SOLUTION
Require potential buyers or merger candidates to sign a separate confidentiality agreement that
protects each party from client infringement and use of client information outside the due
diligence process.
 TRAP: POST-ACQUISITION LIABILITY EXPOSURE FOR PRIOR WORK
Situation: Your firm merges or acquires another firm. You inform your carrier about the
acquisition and cancel the acquired firm’s professional liability insurance because the combined
successor firm doesn’t need two policies. Consequently, P has no coverage for past work.
Statutes of limitation against CPA firms for general negligence and breach of contract vary
among states—New York’s is three years and New Jersey’s is six years, for example. Failing to
consider P’s potential liabilities for past work creates a major exposure for S.
SOLUTION:

Have P obtain the longest tail policy available. Tail insurance, formally known as extended
reporting period, continues your ability to defend claims after the claims-made policy is out of
force. This covers the risk of a claim made against the acquired firm for work before the
acquisition and is the preferred solution. Tail policies typically cover three to five years. The
coverage is expensive because the policy’ If the same insurance company covers both parties to
the merger, ask the insurer to use the earlier of the two firms’ retroactive (“retro”) dates. For
example, if the acquiring firm has a retro date of 2005 and the acquired firm’s retro date is 2000,
ask the insurer to approve a retro date for the acquiring firm of 2000. This eliminates the need for
a tail policy, but it has a drawback: The acquiring firm’s liability limit now applies to claims
against both firms. It creates a potentially unlimited exposure for claims above the acquiring
firm’s policy limit, particularly if the combined firms encounter multiple claims full cost is due
upfront, but considers getting three-year coverage for maximum protection.
TRAP: DISGRUNTLED PARTNER LEAVES WITH CLIENTS
Situation: A partner in the acquired firm decides she doesn’t like the acquisition deal terms and
leaves the firm, taking clients with her. There’s always a chance that one or more partners equity
or contract will be dissatisfied with the M&A terms. If that partner or partners leave during the
negotiations and take a significant amount of business, it could change the value of the deal and
potentially kill it.
SOLUTION:
Include an enforceable no compete provision in an amendment to your partnership agreement
prior to the M&A negotiations. State laws on no compete agreements vary, so check to make
sure the terms are enforceable. Meet with disgruntled partners early in the M&A discussions to

negotiate fair withdrawal terms that will avoid the necessity of killing the deal months after
negotiations commence.
Traps to avoid while Acquisition
If you are in the early stages of the process of buying a business, there are a few typical issues
that always come up in negotiations. The Letter of Intent (or LOI) is a short document that spells
out the important terms and conditions of the sale such as the price, how and when the price will
be paid, the assets that will be sold to the buyer (and those the seller will keep), and other terms
such as the seller’s noncompete agreement. The LOI allows that parties to put in place a signed
document for the basics of the deal so the process can move forward.
1. YOU SHOULD BUY THE ASSETS, NOT THE BUSINESS.
There are two reasons. First, you will get better tax treatment, since your tax basis in the assets
will be the amount you paid for them, rather than the amount the seller paid for them long, long
ago. Second, if the seller owes money to people, or is being sued by someone, you will not
assume any of those liabilities ifs you buys the business assets.
2. GET TO KNOW THE EMPLOYEES.
Likewise, you should take the time prior to closing to make sure the key employees are willing to
stick around, since they’re often the ones who see the customers day to day, operate all the tricky
machinery, and know “where the bodies are buried.” Many sellers will be reluctant to let their
employees know the business is up for sale, for fear they will quit en masse the date of the
closing and leave you with a business you don’t know how to run. Frankly, you will probably be
just as concerned that that doesn’t happen.

3. GET AN INDEMNITY FROM THE SELLER.
Even if your client’s accountant has torn apart the seller’s books and records, sometimes things
get overlooked, and you will find her getting sued because of something the seller did or failed to
do before she took over the business. Insist on an indemnity from the seller, promising to defend
the lawsuit and pay all judgments and fees if that should happen. Likewise, you should be
prepared to give the seller an indemnity if she gets sued because of something you do or fail to
do after the closing takes place.
4. CAN YOUR CLIENT ASSUME THE SELLER’S LEASE?
Is the seller leasing the premises where she conducts her business? If so, you should find out
(1) How much time remains on the lease term?
(2) Whether the landlord is willing to let you assume the seller’s lease “as is,” without an
increase in rent.
If the lease has only two years or less to run, you might want to spend the money now to
negotiate a brand new lease with a five to 10 year term. Also, find out if the landlord is holding a
security deposit usually two month’s rent, but sometimes more the seller probably will want you
to purchase her Security Deposit on top of the agreed-upon purchase price for the business
assets. If the seller is including the Security Deposit in the purchase price, make sure that is
spelled out in the Letter of Intent.

5. MAKE SURE THE SELLER STICKS AROUND FOR A WHILE.
In many retail and service businesses, the customers have a personal as well as business
relationship with the owner. Make sure the seller sticks around for a couple of weeks after the
closing to introduce you to customers, help you figure out the books, and ensure a smooth and
orderly transition of the business. Consider paying the seller for her time so she has an incentive
to stay off the golf course, at least until you are comfortable you knows what you are doing.