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What is an M&A Process? Everything You Need to Know

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:


M&A Process

Steps in M&A Process

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:

  1. Developing an M&A Strategy - Leaders and strategists determine the high-level goals for the firm and what they seek to gain from this transaction, such as increasing share in their current market or expanding to new ones.
  2. Identifying Target Candidates - An appointed search team identifies, classifies, and assesses potential candidates that could satisfy the firm's strategic growth and financial goals.
  3. Contacting Targets - Reaching out to and creating a two-way conversation with potential targets will help in gleaning more information about the candidate, gauging their interest, and assessing the overall amenability among the two entities.
  4. Performing Valuation Analysis - The acquirer obtains more in-depth information on the target companies, typically in the form of a confidential information memorandum (CIM) or a deal book that encompasses comprehensive data on the company’s history, products, financials, etc. to further appraise whether it would be an appropriate acquisition target.
  5. Negotiating - The two entities meet to further discuss the possibility of a transaction and negotiate specific terms as well as a price.
  6. Conducting Due Diligence - Once an offer with the final candidate is on the table, the acquirer must conduct due diligence. Due diligence is a comprehensive process that examines, evaluates, and analyzes all aspects of the target company’s operations and financial position prior to establishing a definitive agreement.  
  7. Executing the Transaction - After due diligence confirms that the company is a suitable fit, the two parties negotiate the logistics of the transaction, i.e. regulatory, operational, and cultural issues, constitute, and sign the final sale contract.
  8. Integrating - The two firms work together to successfully integrate into one entity, aiming to maximize value while minimizing operational distractions and interruptions.

What is M&A Deal Structure?

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:

  1. Stock Purchase -  The buyer purchases a substantial or the entire amount of the target company’s stock from its stockholders, leaving the company and its assets intact, but now under the new ownership of the acquirer.
  2. Asset Acquisition - The buyer acquires a majority of the sellers’ assets and assumes liability for the assets chosen. These transactions are often paid for with cash or stock.
  3. Merger - Two separate companies integrate to form a single, new entity. Unlike stock purchases or asset acquisitions, there is not necessarily a “buyer” or “seller.”

Careers Involved

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.  

M&A Process Problems / Challenges

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:

  • Communication issues - During the M&A process, managers and employees that are not directly involved in the process are often left in the dark rather than being empowered and educated, leaving them wondering why the merger or acquisition is happening, how their position or department will be affected, and even debating whether they should start updating their resume, making open communication and frequent check-ins with employees are critical.
  • Employee retention challenges - M&A generally introduce an exuberant amount of change and stress on the employees of both organizations. Whether workers dislike their new manager, abhor new processes, or lack the feeling of job security, an absence of proper communication, transparency, and consistently checking in on incumbents on management’s end could chase employees to the door.
  • Missing financial targets - One of the major reasons for M&A is to form synergies and bolster revenues. Hypothetically, if a $4MM business and a $3MM integrate, it could be forecasted that this new combination will be able to attain revenues of $7MM or more. However, key players may become disgruntled and leave or sales estimates could be inaccurate, which is why it is crucial to allow for some wiggle room when forecasting from the get-go to ensure that the transaction will still make sense.
  • Inadequate due diligence - While the team executing due diligence may have been sure to cross their t’s and dot their i’s, sellers still often seek to make their company as appetizing as possible to further entice the transaction. Therefore, accurate, proper, and precise seller representations and warranties documented in the M&A agreement are essential for adequate protection.  
  • Cultural clashes - M&A deals are enacted because the books add up and forecasts reveal alluring growth opportunities and tantalizing revenue projects, however, what due diligence can’t glean is whether or not the cultures will successfully mesh together. Processes such as decision making or even workplace banter may be polar opposite among organizations, creating a clash of forces. Along with commercial due diligence, it is also critical to administer culture surveys to employees and train them on the practices of each end.

Sell-Side Process

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.

Buy-Side Process

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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