Potential risks at different stages of the mergers and acquisitions process that businesses should be aware of
Mergers and acquisitions activities (M&A) are increasingly becoming a tool for businesses to expand their scale, diversify their operations, and enhance their competitive advantage in the market. At the same time, M&A also creates opportunities for business owners to transfer ownership of their enterprises. To effectively implement an M&A transaction, businesses need to clearly understand the stages of the M&A process and identify the potential risks involved.
1.Stages of the M&A process
A typical M&A transaction generally goes through four main stages:
Preparation and target identification stage: At this stage, the business identifies its strategic objectives for the M&A transaction, including but not limited to the industry, market, target company, and long-term development orientation. At the same time, the business conducts an internal assessment of its financial resources, human resources, and management capacity to execute and integrate after the transaction.
Due diligence stage: This stage is conducted to comprehensively review the target company’s financial, legal, operational, and corporate culture aspects. The review includes an examination of legal documents, contracts, assets, intellectual property rights, financial obligations, and other potential risks.
Contract signing and transaction completion stage: The parties transfer ownership of the company’s assets, fulfill payment obligations, adjust employee arrangements, and comply with applicable legal requirements.
Post-transaction integration stage: In the case of a merger, the two companies are consolidated into a single legal entity, including the adjustment of necessary legal documentation, alignment of management systems, operational processes, corporate culture, and personnel.
2.Potential risks in the M&A process
At each stage of the M&A process, businesses may face different risks, ranging from financial and legal to operational risks. Below are some typical risks that businesses should pay special attention to.
First, the risk of misvaluation of the target company. This is a common risk in M&A transactions when the buyer fails to accurately assess the true value of the target company. Misvaluation may stem from incomplete, inaccurate, or non-transparent financial data, or from the buyer’s failure to anticipate market fluctuations during the valuation process. This risk can significantly reduce the overall effectiveness of the transaction. Many businesses in Vietnam have been subject to tax reassessments after completing M&A transactions, causing the buyer’s expected profits to effectively “evaporate.”
Second, legal compliance risks. M&A activities are governed by various laws such as the Law on Enterprises 2020, the Law on Investment 2025, and the Law on Competition 2018, among others. Common compliance risks include failure to carry out procedures for foreign investors’ capital contribution/share acquisition registration, violations of economic concentration regulations, or failure to meet business conditions after the transfer. As a result, businesses may face administrative sanctions or become involved in disputes affecting their operations.
Third, risks arising from choosing an inappropriate transaction structure. In acquisition transactions, there are two common structures: (1) share deal and (2) asset deal. In a share deal, the buyer faces the risk of indirectly assuming all liabilities of the target company. In an asset deal, a common risk is that licenses and contracts are not automatically transferred. For mergers, transaction structure risks are often associated with the choice of merger form (horizontal, vertical, or conglomerate) and post-merger organization. Unlike acquisitions, in a merger, the merged entity ceases to exist, and all rights and obligations are transferred to the surviving entity under the principle of universal succession. This creates significant risks if the surviving entity does not fully assess potential obligations, including financial, tax, labor obligations, or unresolved disputes of the merged entity.
Fourth, risks from contingent financial obligations. In M&A transactions, the buyer not only acquires assets but may also bear or be affected by the target company’s financial obligations. Common risks include unrecorded liabilities, obligations to the State, especially tax obligations or other payable amounts that have not been fully or accurately declared, or obligations not properly identified due to management errors or undisclosed disputes. If not carefully reviewed, these factors may lead to high costs and directly impact the buyer’s investment efficiency.
Fifth, risks arising from Change of Control clauses in contracts between the target company and its partners. In practice, many important commercial contracts of the target company may contain clauses allowing partners to terminate the contract upon a change in ownership or control. As a result, after the transaction is completed, partners may refuse to continue cooperation or demand renegotiation of terms under unfavorable conditions. This may lead to the loss of strategic partners and disruption of business operations immediately after the transaction.
Sixth, risks related to changes in the workforce and key personnel. The integration process often leads to changes in organizational structure, HR policies, and working environment. These changes may result in labor disputes or cause key personnel to leave the company. In practice, many M&A transactions fail to meet expectations not due to financial factors but because businesses cannot retain their core operating teams, thereby directly affecting operational efficiency and post-transaction strategy execution.
Seventh, risks related to information confidentiality and competition. The departure of management or senior personnel after the transaction may pose risks of information leakage. If such individuals join competitors, trade secrets, development strategies, or core technologies may be disclosed. Without appropriate control and confidentiality mechanisms, businesses may suffer significant losses in competitive advantage.
3.Measures to mitigate risks in the M&A process
To control risks arising during the M&A process, businesses need comprehensive preparation from the outset and continuous control throughout the transaction.
First, conduct in-depth legal and financial due diligence to ensure compliance with the law. It can be affirmed that due diligence is the most critical step in an M&A transaction, serving as the foundation for risk assessment, legal compliance, and determining the true value of the deal. Businesses should thoroughly review legal documents, contracts, assets, financial obligations, existing disputes, and compliance with legal requirements, especially for transactions involving foreign elements or conditional business sectors. Engaging professional advisors such as lawyers and auditors not only helps identify risks but also assesses their impact on the transaction value.
Second, develop an appropriate transaction structure and financial plan. Businesses should clearly determine the transaction form, carefully evaluate the advantages and disadvantages of each option, and make suitable choices. Additionally, payment timelines should be considered. For example, staged payments or price adjustments based on business performance may help mitigate financial risks in case of adverse developments.
Third, draft comprehensive and well-structured contracts. Businesses need to carefully review provisions on the parties’ obligations, price adjustment mechanisms, conditions precedent, principles for determining damages and compensation, dispute resolution methods, and other relevant provisions. A well-drafted contract, with the support of professional advisors, helps minimize disputes and protect the company’s rights and interests when risks arise.
Fourth, develop a post-M&A integration and governance plan. Specifically, businesses should establish a clear integration plan, including alignment of management systems, review of contracts with partners, updating licenses, and adjustment of HR policies. Preparation for the post-merger stage should be conducted in parallel with due diligence to ensure uninterrupted business operations and achievement of strategic goals. At the same time, appropriate confidentiality measures should be implemented, especially for management personnel, through agreements such as NDAs, non-compete clauses, or internal control mechanisms, to minimize post-transaction information leakage risks.
In summary, while M&A transactions offer significant opportunities for growth and expansion, they are accompanied by complex legal risks. Proactively identifying and managing risks from the early stages not only helps protect the investment value and minimize disputes but also plays a decisive role in the long-term success and sustainability of the transaction. The use of legal services from reputable law firms is essential to support businesses in effectively managing these risks.
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