M&A Pipeline Stages: How the M&A Pipeline Works from Strategy to Integration

There’s nothing random about mergers and acquisitions (M&A). Businesses that are good at closing deals on mergers and acquisitions have a process that takes them through all the major stages of an M&A deal.

Dividing the process into different phases helps you remain organized and achieve success without getting overwhelmed and bogged down in the process. There are usually 7 stages in the M&A pipeline process. These stages include:

• Strategy and objective setting
• Target identification and market analysis
• Outreach and preliminary assessment
• Evaluation and due diligence
• Deal negotiation and structuring
• Closing the deal
• Post-deal integration

Each of the phases in the process usually has its own set of objectives and criteria that you should fulfill before moving to the next phase in the process.

Although you may have more than 100 prospects in your pipeline at a given time, it helps to have a process that helps you achieve your objectives with intention and a unified vision in mind.

1. Define what success looks like to you in terms of metrics. 
2. Evaluate cultural fit in due diligence. 
3. Plan integration before closing the deal.

The above decisions can have a direct impact on whether you achieve the expected value.

Strategy Development and Target Identification

Having a mergers and acquisitions pipeline involves developing a good acquisition strategy as well as an efficient process to identify acquisition targets. It’s the responsibility of the corporate development team to make sure that the acquisition strategy aligns with the corporate strategy and to do research to develop a robust acquisition target list.

Developing Your Acquisition Strategy and Strategic Objectives

It all begins with your acquisition strategy. This will set the tone for all other aspects of your M&A process. Your team will have to determine what industry to target, what gaps exist in your current portfolio, what your competitive landscape looks like, and so on.

Set strategic goals that will help you solve real business needs, whether that be entering new markets, acquiring technology, vertical integration, or other goals. Make sure to set criteria as well. This can be based on the size of the acquiring company, the acquiring company’s geographical area, revenue minimums, or other criteria.

Consider risks, ROI, and how effectively your acquisition strategy aligns with your corporate strategy as a whole. Remember, you want to make deals that will benefit your company in the long run.

Conducting Research and Creating a Target List

The research will ultimately determine the discovery and evaluation of deals. Research will include analyzing industry trends, competition, consolidation, and other factors.

When creating your target list, you can use a top-down and bottom-up approach. A top-down approach will begin at the industry level and work its way down to the industry that aligns with your strategic goals.

A bottom-up approach will begin with exceptional companies that may not fall in line with the top-down approach.

Don’t limit yourself to using just a few research resources. Use industry resources, industry databases, industry publications, and industry news and releases. 

Once you’ve created your target list, prioritize them based on revenue, revenue growth, profitability, and market share. Try to create a tiered approach to prioritize your target list while keeping the number of potential deals high.

Determining Strategic Fit and Synergy

The process of determining strategic fit will involve determining how this target will fit with your current business model, culture, and operations, including determining whether there is any overlap and complement between the two businesses.

What is Synergy?

Value is created in the process of synergy. Cost synergies can be created through scale, efficiency, and eliminating redundancy. Revenue synergies can be created through cross-selling, market expansion, and product expansion.

Where possible, quantify the synergy and include a timeline. Ensure that there’s cultural and management team compatibility, as this can be a deal breaker in the future.

Lastly, quickly review their financials to determine if they’re worth pursuing.

Deal Initiation and Target Assessment 

The deal initiation process lays the groundwork for the entire deal process. This is where the identifying, researching, financial analysis, and determining strategic fit occur.

Deal Initiation

The first contact with the potential target company can set the tone for the relationship moving forward. Take the time to learn about their business and don’t jump too quickly into the deal.

Build rapport and make connections with the key stakeholders. This can give you insight into their current and future direction.

The best way to initiate a deal is to approach them directly, use your network of industry contacts, or use investment bankers to assist in the process.

In the beginning, you can ask questions to gather information about the company, revenue, market share, growth, competitive advantage, and organizational structure.

Once mutual interest is established, it is likely that a Non-Disclosure Agreement (NDA) will be executed between the two parties, permitting the free exchange of information. Information regarding the company's operations and financials can be discussed.

The quality of information shared during this phase is very important. You should prepare questions you can ask them regarding their customer base, technology stack, employee turnover, growth plans, and other information. Information shared during this phase will enable you to determine whether you want to continue with the acquisition process.

Preliminary Analysis and Financial Review

When conducting a preliminary analysis, you should review the financial information of the target company and determine if it’s worth pursuing.

You should review financial statements, quality of revenues, profitability, and any liabilities. You should ensure you obtain accurate financial information and determine if it’s repeatable. You should create a financial model and determine the synergy and return on investment.

You should consider the company's history and growth prospects, as well as your company's assumptions regarding how you can improve the company after acquisition. Project management skills are essential during this phase.

You can use market data to compare it with the target company and determine its performance relative to market benchmarks. You can determine market share, customer concentration, and market competitiveness and determine if its financial history is repeatable.

Valuation and Selecting Targets

Valuation is a process of utilizing financial information to determine a price range for acquiring a target company. Several methods of valuation can be employed. These methods should be employed concurrently. These methods include comparables, precedent transactions, and discounted cash flow (DCF).

Comparables give us an idea of what the market thinks is valuable, precedent transactions give us real priced transactions, and DCF looks at future cash flows. Choose valuation methods that make sense based on the particular target and the availability of information.

If there’s sufficient historical information, DCF can be used on publicly traded companies with predictable cash flows. Comparables are best used on private, early-stage, high-growth companies.

In addition to financial considerations, compare the target’s standing on your selection criteria. Some of the factors to consider are strategic, cultural, integration, and management. Investment bankers and other M&A advisors can assist with benchmarking your key assumptions.

Due Diligence and Deal Structuring

Due diligence is the process of analyzing the financial and operational status of the target company. Deal structuring is the process of determining the way value is transferred from the selling company to the new company.

Each process requires your team, in conjunction with outside counsel and advisors, to work through the process.

Due Diligence Process & Virtual Data Rooms

Due diligence is done through a checklist of financial, legal, operational, and strategic information. You should assemble a team of legal, accounting, and industry experts to review the hundreds, often thousands, of documents in a reasonable amount of time.

A Virtual Data Room (VDR) is a data room where you can store all your diligence information. You can set up your VDR so that only certain documents are accessible to certain people. You can also use your VDR to keep an audit trail of which documents have been opened.

Some of the information on your checklist might include:

• Financial documents - Tax returns, audited financial statements, projections, debt obligations
• Legal documents - Company structure, pending legal cases, intellectual property
• Operational due diligence - Contracts, contracts with suppliers, employee information
• Compliance documents - Legal filings, permits, environmental reports

When these red flags are identified, risk mitigation becomes a key issue. You’ll need to assess these liabilities and determine if they are deal-breakers and if they can be negotiated as concessions.

Legal Review, Contracts, and Compliance

Your company’s legal counsel will review all contracts, warranties, and undertakings that bind the company and require it to take specific actions. They’ll determine what, if any, liabilities you’ll take on if these contracts are left in force after closing. You should negotiate any contracts with unknown liabilities and attempt to negotiate indemnification clauses.

The purchase agreement includes all of the representations and warranties made by the seller regarding the business. You should attempt to negotiate warranties for financial performance, legal compliance, ownership of intellectual property, employees, and known liabilities.

Review these key items:

• Regulatory permits and licenses
• Employment law and labor agreements
• Environmental permits and cleanup obligations
• Data privacy and security

What licenses are the business required to have to operate? Are there any environmental licenses? Are there any employment licenses?

Are there any customer and employee information obligations related to regulatory compliance? What about data privacy and security?

Review contracts for change of control clauses, where the contract would terminate if there is a change of ownership of the company. These are often present in contracts with customers and suppliers. You may need permission from a customer/supplier to buy the company, and these contracts could dictate how you purchase it. 

Negotiations and Letter of Intent

The Letter of Intent (LOI) outlines basic terms of the deal before conducting exhaustive due diligence. The basic terms will include deal structure and valuation. You should also negotiate your exclusivity period and confidentiality provisions.

The negotiation will involve balancing risk and your desire for a smooth integration against the purchase price. The higher purchase price upfront equates to higher risk for your company and faster access to profits. Using part of the purchase price as an earnout or escrow arrangement will mitigate risk but also cause integration issues.

The table below outlines key negotiation considerations:

The key issues you negotiate will depend on your approach to the deal. Leave your ego at the door because value is created when both sides feel like they won.

The Role of AI in Due Diligence

The role of artificial intelligence in M&A is growing and is of critical importance in M&A deals, especially when it comes to analyzing complex legal and financial documents. In fact, as per a survey carried out by Deloitte, 99% of respondents have implemented AI at some stage of the M&A lifecycle for better decision-making.

For example, with the DealRoom AI platform, you can instantly create a deal playbook, including a custom tracker and folder structure, all unique to the deal. This saves many valuable hours by using DealRoom AI to extract key terms and financial information from documents, uncovering hidden obligations and red flags as soon as the documents are uploaded to the virtual data room.