Mergers and acquisitions (M&A) are an eminent facet of corporate strategy, finance, and management. They are executed to bolster the position of once separate entities in their sector or prosper in a new market. The M&A process involves a synthesis of activities that include evaluation, negotiation, and strategy to consolidate assets in a fashion that preserves and increases overall business value and may take upwards of several years to complete. This guide details:
While the M&A process tends to seem rather complex (and undoubtedly intimidating!), it typically follows a general pattern.
A conventional M&A process consists of:
An M&A deal structure is essentially the “terms and conditions” of a deal that outlines the rights and obligations of each party. Although M&A deals widely vary from one to the next, there are generally three different options for structuring an M&A deal:
While recent technologies have worked to help simplify the M&A process, integration cannot happen without the human brain power of key players strategizing and planning on the backend. Careers in M&A tend to be highly compensated, highly competitive and produce a mixture of an exceedingly challenging, yet rewarding experience.
Careers in M&A include those work in either investment banks or may be in-house at the company on the corporate development team. M&A brokers at investment banks operate as a third-party and generally advise clients on either the buy-side or sell-side of M&A. Depending on where employed, these bankers may have the opportunity to carry out monumental transactions that visibly alter an entire industry. Those in M&A at their firm’s corporate development team often function as internal investment banks.
Although M&A transactions are a viable avenue to quickly scale an organization, expand to new markets, and create synergies, the integration of these two separate entities attempts to assimilate a multitude of dynamic variables such as company culture, longstanding practices, and perhaps the most complex of all, people. These variables run a high risk for a marriage of the two entities to be anything but harmonious.
Common issues in the M&A process include:
From a sell-side perspective, the investment banker’s ultimate goal is to sell the client’s company for the highest possible valuation. This is achieved by first preparing a teaser document depicting all of the clients' highlights to send to a wide variety of potential investors. The objective here is to reach attract as many investors as possible to create competition, intensifying demand, and increase price.
Once a buyer confirms interest, the sell-side banker sends a Non-Disclosure Agreement (NDA) clause for the buyer to sign stating that the buyer will not misuse the information disclosed to them. After a signature is obtained, the sell side will compile a Confidentiality Information Memorandum (CIM) with more detailed information on the business and industry; it is their job to make the CIM as attractive and compelling to the buyer as possible.
If the buyer elects to move forward, then they send a non-binding Expression of Interest (EOI) and begin conducting due diligence. Assuming that all proves well during the due diligence phase, a series of negotiations are held where the sell side strives to achieve the highest possible valuation.
Finally, granted that an agreement is settled, both parties are to sign a definitive agreement prepared by lawyers, detailing rights, obligations, and the final price. Here, it is the sell-side banker’s main concern to keep a sharp eye out for the final purchase price and working capital requirements. At this stage, it is beneficial to obtain legal assistance from accredited lawyers and professionals to dodge potential statutory or regulatory issues down the line. Once this process is completed, integration commences.
Because M&A transactions are a result of a harmony between buy and sell sides, the buy-side process generally follows a similar flow to the sell side, just on the opposite end of the spectrum. The objective here is to obtain the best value for the deal, rather than simply just the highest valuation.
The buy-side process is initiated by researching and identifying potential candidates that meet their client’s criteria on the sell side. Once the target candidates are determined, the buy side will sign the Non-Disclosure Agreement (NDA) and then receive a Confidentiality Information Memorandum (CIM) to further aid in their decision on whether to move forward.
If yes, they will send the seller a non-binding Expression of Interest (EOI) and initiate due diligence. Due diligence involves scrutinizing the sell side’s history, operations, and, most importantly, financials to a tremendous level of detail to gain an authentic look at the firm, its value, and insight as to whether the deal would be advantageous for the buyer.
Utilizing the information gathered during due diligence, the buy-side runs a variety of financial models to value the firm. It is crucial during this step not to pinpoint one estimate, but include a sensitivity analysis to produce a range of values.
If the forecasts and estimates conclude for the transaction to be beneficial, both parties will convene for a series of negotiations to settle on the finalities of the deal. As with the sell-side, once an agreement is reached, the parties will both sign a definitive agreement. Again, here it is crucial to seek legal counsel.
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An M&A pipeline refers to the flow of events that occur during a transaction and how stakeholders work them. The pipeline steps begin with acquisition strategy and deal sourcing, proceed to acquisition planning, negotiating, and due diligence, moving all the way to transaction and integration.