Numerous tasks contribute to the completion of an activity, and efficiency greatly improves when these tasks are organized into a sequential series based on their inherent nature and relevance.
Bearing this principle in mind, we present the procedural steps involved in navigating the complex terrain of Mergers and Acquisitions.
We aim to provide you with a streamlined and methodical approach, facilitating the effective execution of these processes.
10 Steps of Mergers and Acquisitions Process
1. Acquisition Strategy
2. Selection Criteria
3. Target Search
4. Acquisition planning
5. Valuation
6. Negotiations
7. Due Diligence
8. Contract
9. Financing
10. Closure Announcement
Mergers and Acquisitions Process involves 10 steps:
1. Acquisition Strategy
Being an investment banking firm, we’ll meet our client who may want to buy a company or a business unit or sell their company or a business unit.
Let’s take the example of a client who wants to purchase a company keeping some needs in mind. The strategy made at this step should cater to the company’s expectations which it wants to achieve with the deal.
Every company has certain reasons in mind when it wants to sell or purchase a company. The reason might be that it wants to grow inorganically or take control of raw material (backward integration) or distribution (forward integration). The reason might be unusual price hikes on the supplier’s end and it wants to acquire a company that is similar to its existing supplier. Or it may be facing issues with its existing distributor regarding delivery charges or delayed deliveries, so it would want to acquire a company that is similar to its existing distributor.
The client will specify the budget he has in his mind. Whether he wants the deal to close under $10 Million or it may give a range of maybe $10 Million to $25 Million or anything.
The time frame in which he wants to close the deal, do they want it to happen as soon as possible or they are not in a hurry and can afford a time frame of 1 to 1.5 years or whatever they want?
Confidentiality of the deal is also discussed here. Do they want to keep it very confidential or they are comfortable in making the deal public right on day 1? If not, the acquirer or acquirers if there is more than one, enter into a Non-Disclosure Agreement (NDA) which protects the confidentiality regarding the name and other information about the target company.
2. Selection Criteria
Some criteria should always be clear in mind while looking for a target company, otherwise finding the right fit would be very difficult and with this, the efforts would also get channeled in the right direction. The reason for acquisition can be anything, it may want to expand its operations in a particular geography, so acquiring a company in that geography would solve its problem.
A company might be looking for knowledge in a particular segment or a new technology on which it doesn’t have much hands on. So it would want to acquire one who has the exact expertise the company/acquirer is looking for.
Sometimes interest is to grab the customer base of the target company. In this scenario the acquiring company just acquires the target company and its total number of customers increases by the number of customers the target company holds.
Interest can also be in financial terms. A company might be looking for a company to acquire whose PAT margins are above a specific range or whose? ROCE is around a certain number.
3. Target Search
This is the stage where based on the criteria decided in stage 2, the target company is searched for.
There are many ways in which the target company can be identified:
- Free research using some search engine.
- Paid databases eg. Capitaliq, Pitchbook, Bloomberg, Dnb, Owler, etc.
- Investor meets- Some firms invite investors and startups looking for funding to professional events. It becomes a live platform for investors and startups to meet. The main purpose here is to make both parties comfortable with each other and develop some sort of understanding among themselves. These investor meets are helpful in scenarios where small startups are looking for quite a high amount which a common man would not be very comfortable in giving and if they approach the bank for a loan, they may not want to overburden themselves with the high amount of interest payment.
- Angel investors- A group of individuals having a high net worth comes together to invest somewhere.
4. Acquisition planning
At this stage, some important information about the target is gathered which includes their business model, their operating process, are they exceptionally good at any specific area of business. The company may be operating with less operating working capital than its competitors are or their operating margins are slightly more than that of their competitors in the industry.
Along with strengths, their weaknesses are also been focussed on. If they face any challenge in any business area or they are lacking behind somewhere. What are the products of the company, its financials, customer base, operations scale, etc?
The objective here is that if we as an investment banker recommend this target company to the client who is looking for a potential target to buy, so what value can the target company offer to the acquirer? Is the company compliant with all the jurisdiction requirements?
Most important here is that if “Purpose” which was the main reason for acquisition is being solved or not.
If all of this is approved by the buyer, they dig in a little more and gather some more important information which includes historical financial statements, projected numbers, audit reports, credit ratings, any criminal charges against the company, etc.
5. Valuation
All the information that was gathered in Stage 4 is put to use here in Stage 5. The objective here is to conclude the actual worth of the company in some number form.
6. Negotiations
Once all the information about the target company is gathered till this step has been approved by the client/acquirer, here comes the sixth stage of negotiations. Both parties meet for the first time at this stage, before this the names of opposite parties are kept confidential by the Investment banker. The value which the investment banker has calculated is taken as the basis of discussion here. Some premiums and discounts are also taken into consideration and asked from the acquirer or target company.
7. Due Diligence
When the target is decided, rough scanning or basic due diligence is already done at that stage. Once the offer is accepted and the target company is ready to sell its stake, Enhanced due diligence is done.
Here the final confirmation is taken that whatever valuation is being done till date is correct only based on all the information the company has provided. So, its main aim is to check the validity of the numbers in detail and to check if there is any alarming sign that exists.
The assumptions with which the financial statements are being made, the items on which amortization is being put. Do the impairment policies and other non-GAAP policies align with the accounting practices acceptable by accounting regulations within the operating zone? Is the company compliant with regulatory authorities of the land of operations? Any legal case going on with the company, how intense is it? There may be some legal case going in which the company will have to pay a fine of $10,000 million if it doesn’t come in its favor. If this happens the acquiring company may go bankrupt if it has to pay such a big amount for fine.
Along with this, federal/state tax liens, judgment liens, bankruptcy, and credit reports are also looked at.
This is one of the most crucial steps of the process as any mistakes made at this stage may put the acquirer in big trouble later on. But some big brands have made mistakes at this step. For eg. HP’s purchase of Autonomy, valued at $11.1 billion. It disclosed disappointing financial results, including an $8.8 billion write-down. This substantial loss stemmed primarily from suspected accounting irregularities at Autonomy. HP alleged that individuals within Autonomy intentionally misrepresented financial data to inflate their performance, leading HP to overvalue the acquisition. What’s particularly astonishing is HP’s failure to detect these discrepancies for nearly a year, suggesting oversights during the due diligence phase.
8. Contract
This step comes in after the target company gets passed in the last step i.e. Due Diligence and is accepted by the acquirer and both parties agree to enter in the transaction. The legal team of the Investment Banking firm comes in here at this stage. A contract is made which includes all the terms and conditions. It includes the clauses for every minute detail regarding terms of exchange, the nature of the deal whether it will be an all-stock deal or all-cash deal, or a cash + stock deal or some part would be equity some would be cash and some would be debt, Stock exchange ratio, etc.
Details regarding employees, their pay scale, their positions changing, layoffs if any, everything is mentioned in the contract.
9. Financing
The CFO’s role increases a lot at this stage. This step is skipped if it is an all-stock deal because there is no need to look at financing options, all the payment is being done using the acquirer’s stocks. If the deal structure is all cash or stock + cash, the acquirer needs to look for financing options to pay for the cash part.
10. Closure Announcement
After the deal closes, it is disclosed to the Exchange of Jurisdiction of Operations. It may be SEBI (Securities and Exchange Board of India) in the case of an Indian company, SEC (Securities and Exchange Commission) in the case of a US company, etc. Then NCLT (National Company Law Tribunal) is informed in the case of an Indian company. At this stage, the acquirer has to disclose that it is acquiring a company. Disclosure of the name of the target company is not mandatory. All the pre-clearance and other merger-related filings are made at this stage including amendments if any.
Closing statements
Completing a merger can be quite challenging. With numerous steps to navigate before, during, and after the merger, alongside intricate timing considerations at each stage, having appropriate support is crucial.
The process of Mergers and Acquisitions (M&A) involves ten sequential steps for effective execution:
- Acquisition Strategy: Understanding the client’s objectives, budget, timeframe, and confidentiality preferences. Defining the purpose of the acquisition, whether for growth, integration, or financial reasons.
- Selection Criteria: Establishing clear criteria for identifying target companies based on specific needs such as geographical expansion, technological expertise, customer base, or financial metrics.
- Target Search: Utilizing various methods including research engines, paid databases, investor meets, and angel investors to identify potential target companies that align with the established criteria.
- Acquisition Planning: Gathering crucial information about target companies including their business model, strengths, weaknesses, financials, compliance, and alignment with the acquisition’s purpose.
- Valuation: Using the gathered information to determine the actual worth of the target company in numerical terms.
- Negotiations: Meeting with the target company to discuss the proposed acquisition value, considering premiums, discounts, and other factors, while maintaining confidentiality until this stage.
- Due Diligence: Conducting detailed scrutiny to confirm the accuracy of information provided by the target company, checking for any red flags, legal issues, financial discrepancies, or regulatory non-compliance.
- Contract: Drafting a comprehensive contract detailing all terms and conditions of the acquisition, including the nature of the deal, exchange ratios, employee details, and other relevant clauses.
- Financing: If necessary, securing financing options to facilitate the acquisition, especially for cash components of the deal, involving the CFO in managing financial aspects.
- Closure Announcement: After finalizing the deal and obtaining necessary approvals, disclosing the acquisition to relevant regulatory bodies, making necessary filings, and announcing the closure of the deal to the public exchange or regulatory authorities.
