As the oil and gas industry ramps up production, energy companies in Texas are discovering opportunities to merge with and acquire other organizations. One strong motivator driving these transactions is a lack of liquidity. Because of pricing, market risk and other concerns, financial institutions may hold back on providing capital to some independent companies. Forming new partnerships or restructuring through acquisition or combination sometimes provides a means by which a company can access additional capital and reach its production and distribution objectives.
An important factor to consider before entering into a transaction centers on whether a business can meet its short term liabilities. According to CNBC, nearly $40 billion worth of debt held by energy companies is at high risk. Many energy companies are facing the probability of some form of restructuring as an alternative to liquidation or bankruptcy.
Due diligence process
Determining how a potential merger or acquisition candidate could generate profits requires each party to share company information. While management may prefer to keep the organization’s business affairs private, opening up the records for an interested party to review is necessary when discussing a potential acquisition. The information parties share will include detailed financials, contracts and business plans, engineering reports, legally protected intellectual properties such as patents or copyrights and more.
At an early stage during transaction discussions, the parties will want to enter into a confidentiality or non-disclosure agreement to protect the information that will be disclosed. As noted by Forbes magazine, the purpose of the agreement is to limit use and release of information by the other side so disclosed information is exclusively used to evaluate the proposed transaction.
The terms of an NDA may include limits on specific persons who can access the information, standards for the protection of the information, and provisions for returning or destroying the confidential information if the deal doesn’t close or the disclosing party requests it to be returned.
A merger or an acquisition of an energy company is a significant and detailed undertaking. A breach of confidentiality may result in legal action when a potential partner misappropriates the information disclosed during the due diligence process.