A successful merger and acquisition rarely occurs in a short span of time. Instead, it involves a systematic order that considers strategy, evaluation, negotiation, and implementation. Though each M&A procedure is distinct, a standard course of steps can be followed that will help increase efficiency and lower risks.
Strategic Alignment and Deal Rationale
It all begins well before any target firms come into play. The acquiring firms regard determining why and how the purchase will help in meeting their own goals. These goals may include expanding, entering new markets, acquiring new talent, diversifying resources, or maximizing efficiency.
Strategic alignment provides clarity for every subsequent step that is taken. It would be detrimental if this were not the case because then agreements could end up appealing on paper but not practical in terms of operations. The management teams would often evaluate if this was something that could be done internally.
Target Identification and Initial Outreach
Having a strategy in place, candidates are screened out based on financial, operating, and cultural issues. This may require in-house or outside analysis. Confidential approaches may be made on a non-disclosure basis to protect confidential data.
Early dialogue is more about general fit than specifics on numbers. Each party considers interest levels, fit, and deal appetite. If fit is deemed good, dialogue progresses towards indicative valuation and structuring of the deal.
Preliminary Valuation and Letter of Intent
After the initial approach, a preliminary valuation by the acquiring firm takes place based on available information. This work facilitates the generation of a Letter of Intent based on proposed price, structure, and exclusivity arrangements and key conditions.
Although it is non-binding in nature, a letter of intent assists in creating expectations, thus paving the way for a detailed evaluation. It also allows both sides to commit to the next process.
Due Diligence and Risk Assessment
The process of due diligence requires the most intensive use of resources. The process includes financial, legal, operational, tax, and commercial diligence. The teams involved assess contracts, customer concentration, compliance records, and financials.
It is crucial that there be accuracy in reporting during this phase. Many organizations use tools such as finance reporting software to compile data and monitor findings. Many issues that arise during diligence give rise to terms such as price adjustments or deal protection.
Negotiation and Final Agreements
The results of due diligence work guide the final negotiations. The purchase agreement contains the terms of pricing, representations, warranties, indemnities, and closure conditions as agreed. A significant amount of legal work is involved in this process.
There needs to be a balance in the negotiation process. Aggressive negotiation could lead to strained relationships and could impede closing, while if negotiating too lightly, one could face post-close risk.
A successful M&A process demonstrates discipline over speed. Each stage of the process builds on preceding stages to offer a journey from strategy to completion of the transaction. Applying structure and clarity to the process will facilitate value-creation beyond completion of the transaction. For more information, check out the infographic below.
