Mergers and acquisitions process is one of the most strenuous legal and financial process in a business’ life cycle. Although many startups look forward to being acquired by a large MNC, thus bringing in the pay-day, most don’t realize the numerous phases involved in a merger and acquisition process.
Although the words “mergers” and “acquisitions “are used separately, the process is quite similar. Both a merger and an acquisition involve two businesses fusing together to become one.
In the case of merger, we generally indicate that the two business fusing together are of a similar size whereas in the case of acquisition, we generally mean one larger business absorbing another smaller business into its fold.
Although the M&A process is quite long-drawn, I have divided the process into a few key steps that are essential in order to close a successful merger deal.
The steps are-
- Creating a merger and acquisition strategy.
- Identifying targets for M&A.
- Exchanging business information with businesses interested in an M&A deal.
- Conduct a Valuation and Synergy Planning
- Conduct negotiations with the other business involved in the deal.
- Do a due diligence of the other company.
- Get the agreement drafted for the merger and acquisition agreement.
- Ensure you have the right regulatory approvals.
- Integrating the businesses and ensuring you create synergy.
#1. Develop a merger and acquisition strategy
The buyer or the seller defines the purpose behind the mergers and acquisitions process. Among other aspects that the purchaser or seller analyses while designing the strategy, key are the sort of deal that they want to undertake, and the amount of money that they are prepared to invest or aim to get for this deal.
Developing a solid acquisition strategy is based on the acquirer having a clear understanding of what they hope to achieve from the purchase – what their business goal is for purchasing the target firm.
Similarly, if you are planning to sell your business, it usually happens via a share swap agreement. So, apart from the money that you hope you’ll get, you need to ensure that the business you are selling to, can afford to create a synergy between your business and the buyer’s.
Otherwise, the share price of the buyer will drop quite fast, impacting you.
In general, larger corporations in the market seek out smaller enterprises for purchase. However the opposite is true too. When Tesla was in its roughest patch ever, Musk was looking for potential buyers for his company and Apple was one of his targets.
Companies have several policies in place for mergers and acquisitions, such as the growth of current business, research and development, and so on.
These policies set out by the target companies should be taken into consideration by both organizations before embarking on a Merger and acquisitions strategy. Failure to apply sufficient planning, research, and strategy also hampers the Merger & Acquisition Strategy, and the consequent merged firm will just destroy value, for example – the merger between Microsoft and Nokia!
A research of the target companies (both buyer and seller), the demand and branding of the businesses, potential growth opportunities, as well as the industry should also be conducted. It will also provide an indication of the risks and benefits associated with the merger.
You may also have some pre-set criterias for the merger, for example – the customer base of the target company, the geographical location wherein it serves or its supply chain etc. Make sure you keep the criterias in the merger and acquisition strategy so that you can easily check if the targets match up or not.
#2. Identify the Target Companies and Contact the Key Executives of the Target
Once you have made up your plan, it is time to research the industry for potential target companies. The buyer or seller compiles a list of all potential targets and begins contacting them to indicate interest in an M&A transaction. The major goal of this step is to learn more about the targets and gauge their amenability to such a transaction.
The best way to make the contact is to do it all the way up, straight to the CEO. Since this is a very high-value transaction, usually other executives do not have a say in the matter.
However, if you can’t directly reach the CEO (happens to small startups who are looking to sell), try to make contact with some other senior level executive and ask for an introduction to the CEO.
#3. Exchange Business Information with Interested Companies
Hopefully, once you have set up a meet with the CEO, you need to prepare for the conversation. Sales tricks don’t work in this type of conversations, as it is a highly long-drawn process and you can only buy or sell if the other party is genuinely interested. (Exception – hostile takeover!)
You first have a conversation providing publicly-available information with the counterparty.
After the initial meeting, if both parties express interest interest in moving forward with the transaction, then you and the other party need to start with the initial paperwork.
This usually includes submitting a Letter of Intent to formally express interest in the sale and signing a non disclosure agreement to ensure that the deal’s deliberations and information exchange remain confidential.
#4. Conduct a Valuation and Synergy Planning
The main aim of a merger and acquisition deal is to create synergy, that is to realize benefits that a single company of the two can’t realize on their own but can enjoy when they combine.
Synergy can simply be denoted as – 2+2 = 5.
After both parties have a better understanding of the counterparty, they can begin evaluating the goal and the trade as a whole.
The acquirer requests that the target company supply detailed information such as their recent financial statements that will allow the acquirer to further examine the target, both as a standalone business and as a prospective acquisition candidate.
The seller on the other hand will try to assess what a reasonable price would be that would result in a profit for the shareholders, which in the case of a startup or a small business would be the founder and his / her team.
The seller will also try to determine what a reasonable offer for the target would be. The buyer will also on the other hand attempt to calculate how much of a synergy the deal can create as well as the risks that the deal can bring to the purchaser’s business. There can, in fact be several risks and challenges in an M&A deal such as regulatory approval issues, antitrust allegations, as well as a host of litigation.
There can also be a clash of team cultures between the buyer and seller’s team.
As such, all this needs to be considered in this valuation and synergy planning stage. In simpler terms, you do a risk vs reward analysis.
#5. Time for Negotiations
Either of the sides can propose an offer to the target company after both have finished their valuation and assessment. This offer could be in the form of cash or stock exchange.
If the other side believes the offer is not acceptable, they will bargain for a better price. This step may take a long time to complete because neither side wants to give the other the upper hand by exhibiting a rush to finish the agreement.
A common stumbling block for the purchasing side at this stage is that if the target is a particularly appealing business, there may be many possible bidders. This may thus cause for rivalry among purchasers to offer abetter terms & conditions to the target. This rivalry can even cause the buyers to sue each other so as to be give themselves the better hand.
A classic example of this is playing out in India in the Amazon, Reliance and Future company deal. Usually if the selling company has a hot proof of concept or MVP that can be operationalized in the market, then larger players try to get that business into its fold.
Similarly, if the selling company is short on cash and the buyer has other options, then the buyer holds the balance of power in his favour.
As such when you become a party in the negotiation, it is very useful to consider on whose side the balance of power lies in, and act accordingly.
#6. Do Your Merger and Acquisition Due Diligence
This step is usually conducted by the acquiring side. They need to make sure everything is in order and there is no other hidden surprises in the deal.
Due diligence is a complete evaluation of a firm that a potential buyer or investor usually conducts before purchasing a company in the M&A transaction.
During the due diligence process, as a buyer or investor, your attorney will examine the target company’s assets and liabilities, structure, operations, and critical business relationships. This information enables you to adequately analyze the deal’s strategic commercial viability and ensure that the transaction is appropriately priced.
If you are the seller or on the selling side, your lawyer will not only assist in providing the proper paperwork to the buyer or investor, but will also assist in managing the process so that you can continue to run your business without being inundated with document requests.
There’s a lot that goes into the due diligence procedure. It checks for the seller’s pending and completed litigations, its intellectual property rights, its HR policies and quality and management of the employee base as well as many other corporate, technical and legal factors.
#7. Draft the Merger / Acquisition Agreement
Once the due diligence has been completed, we move on to preparation of the agreement.
The parties make a final decision on the type of purchase agreement that it will be, such as whether the transaction shall be carried out via asset purchase or via share exchange or just share purchase.
Usually the agreement is made conditional to taking necessary regulatory approvals.
This depends on the law in the jurisdiction where the transaction is taking place. If the transaction is of a cross-country nature, then you need to ensure that the laws of both these two countries are being abided with.
In some jurisdictions, you need to take the regulatory approvals first before signing on the contract. So, clarify it with your lawyer.
We, at WinSavvy also provide legal advisories to businesses engaged in M&A transactions in the US and European Union.
#8. Take Necessary Regulatory Approvals
A merger involves a lot of regulatory and legal issues. You need to approach the appropriate agencies and take approvals. Make sure that there is no issues arising out of antitrust laws as that can be a real pain in delaying the M&A process.
If you are operating out of the US, check if you need to take approvals from the Securities Exchange Commission or any other government agencies.
In India, for example, if your business has more than a certain net worth or turnover, you need to take the approval of the Competition Commission of India. As such this is purely a jurisdictional matter. If you have any doubts, feel free to talk it through with us.
#9. Closing the Deal and Integrating the two Businesses
After the merger agreement is finalised, both the sides sign the documents, agreements and paperworks to complete the transaction, and the buyer gets possession of the target company. Following the transaction’s completion, the management teams of both entities collaborate to integrate the two businesses into one.
This is one of the most critical junctures in the entire merger and acquisition process for the buyer company.
If you are on the buying side, you need to ensure that the work force from both the sides can assimilate their different work cultures and function as one company.
This will ensure that the business actually realizes synergy.