Mergers and acquisitions have the ability to reshape companies and their industries like no other corporate action.
Every industry leading company has conducted mergers and acquisitions at some stage, whether it was to acquire a rival, enter a new geography, or access intellectual property or technology.
Whatever their motive, all of these companies will have followed a fairly well-defined set of chronological steps to close the deal.
DealRoom has gained significant insight into this process having worked with hundreds of dealmakers over the years.
This guide aims to shed some light on the M&A process - whether you are on the buy-side, or the sell-side of the deal.
M&A process is the how transactions come together, from start to finish.
Seemingly good deals are often destroyed by virtue of bad processes. As the largest project management process that exists for any company, the process of how it is conducted can either unlock or destroy millions of dollars of value.
if M&A is used to transform an organization, the M&A process itself must also be transformed.
DealRoom is an advocate of Agile M&A, so the M&A process timeline that we put forward is somewhat different to that suggested elsewhere.
The following graph summarizes our thinking on how this timeline should play out:
In any M&A process, getting the timelines right is crucial. Like a meal that brings together different ingredients, what happens when is crucial to the relative success of the end result.
Larger deals may not necessarily mean more time - just more resources (i.e. bigger deal teams).
In general terms, this entire process should take up to six months, but take every opportunity to learn from previous workflows and make the next workflows more efficient.
Most buy-side deals involve steps in a similar fashion as to what we can see from the graphic above.
To learn about sell-side M&A process steps, scroll further down.
For now however, let's have a closer look at each step on the buy-side of M&A process.
The company decides on its overarching goals for the M&A process. It’s important that there’s a good motive for undertaking M&A as it underpins the whole process.
It also allows you to ask ‘why are we doing this?’ any time doubts creep in (and they almost certainly will).
Additionally, if you have ambitious growth plan for your company endeavours, check out our guide to developing an acquisition strategy.
When looking at which transactions to undertake, companies typically consider from a number of M&A criteria. These include:
Revenue - Near the top of the criteria will be the size of the company in economic terms.
Geography - Would an acquisition give more market share in an existing geography or access to a new geography?
Industry - Is the acquisition target operating in the buyer’s industry or a complementary industry? How much crossover exists between the two industries?
Market - Assuming both companies are in the same industry, does the target company operate in a faster growing segment than that of the acquirer?
Intellectual Property - Is there some intangible asset, such as IP, that an acquisition would give the acquirer ownership of?
Based on the previous step, you will now be able to develop a long list of companies that fit the search criteria.
Some companies should immediately look more attractive than others, and these will form the basis of your shortlist for an acquisition.
There are typically two approaches to contacting target companies - personally or through an intermediary.
This step allows you to assess the target company owner’s interest in selling or entering a merger, and gaining a general understanding of their valuation expectations.
Having gained some insight into a target company and its owner’s valuation expectations, you begin the process of a more in-depth valuation of the company, both from an operational and financial standpoint.
The negotiations step is crucial for the buyer and seller. Not only does it lay the groundwork for an eventual deal, but also allows each side to gain an understanding of the other and their willingness to compromise and to make a deal happen.
Most deals that don’t make it fall through at the negotiations step.
The next step is writing a letter of intent (LOI), effectively a written offer for the company, outlining the terms and conditions of the deal, including conditions of payment.
There is typically some back and forth on the first draft, as buyer and seller seek to include or exclude particular clauses in the draft.
The success of your deal now hinges on how well you conduct due diligence - an audit or investigation of the target company, its operations, human capital, tax and legal structure, and its financials.
A high-quality virtual data room such as DealRoom will make the process significantly more productive.
The buyer uses all of the information gained during due diligence to put an informed purchase contract to the target company.
This phase may involve an intermediary - agreed upon by both parties to the deal - to look after escrow accounts and deeds to the target company.
Although sometimes regarded as a step after an acquisition has taken place, the sooner that integration begins the better.
Significant value can be generated from the deal by putting a good change management strategy in place as soon as the ink has dried on the purchase contract.
Just as how establishing a motive for acquiring a business is crucial for generating value on the buy-side, the same is true of the sell-side.
“Why do you want to sell” is often the first question that sellers face and is better answered with a reasonable motive than “sales are falling” or “I’ve taken the business as far as I can.”
These options may be honest, but they’ll ultimately take from the value the seller generates in a sale and are issues that should be dealt with separate to a divestment.
As the first paragraph alludes to, deciding that you’re ready to sell your company is not the same as the company being ‘sale ready’.
Being ‘sale ready’ means ensuring that the balance sheet is in good condition (i.e. not overloaded with debt), a stable and competent management team is in place, contracts are in place with the company’s largest clients, and more.
The more organized you are, the better the sale process is likely to run.
This means utilizing a project management tool like DealRoom (and feel free to use others), rather than the endless back and forth of email and competent but far-from-best-in-class file storage software like Google Drive.
There’s a reason that M&A professionals use DealRoom, and if you’re organizing a sale of your business, it would be no harm to investigate why.
Even if you have a buyer in mind for your business, they’re going to want to see things written down in paper.
This typically means a 2-page teaser that summarizes the company and its financial results and - if the teaser raises an interest - sending a confidential sales memorandum to the interested party, which outlines the company in more detail, including providing a fuller picture of its financials.
You’re likely to know just a sample of buyers, but nothing like the number of companies and investors that would be interested in your business at the right terms.
Use whatever resources you can- company contacts, LinkedIn, industry association members, private equity firms active in your space, and more - to develop a list of those companies you believe would represent good buyers.
And by all means, hire an investment bank to lead the process (see next step).
Investment bankers aren’t strictly necessary in a company sale, but despite what many people say, they can add significant value - after all, M&A transactions are their bread and butter.
A good investment bank will also advise on the current level of interest in companies like yours, and work with industry intermediaries to give the deal extensive marketing reach.
A deal struck with the first potential buyer is more a good sign that you’ve undervalued the company rather than a rich vein of luck.
The sales memorandums of some companies pass through dozens and hundreds of firms before eventually finding an interested party.
Every time that somebody expresses an interest, use the feedback they provide as a datapoint to improve the offering.
Even an extremely interested party is likely to come in with a bid that’s at least a little under where they’re willing to end up.
This is where negotiation comes in. It’s also another point of this value chain where investment bankers earn their pay, having typically worked on the negotiations of dozens of deals, they should know how to extract higher sale values from buyers who understate their interest in the business.
Assuming negotiations go well, they will be followed by the interested party submitting a non-binding letter of intent (if the seller is feeling particularly bullish, they can ask for an upfront, non-refundable deposit at this stage), to be followed, post-due diligence, by a legally binding share purchase agreement, outlining the terms of the deal in fine detail.
When the company’s share certificate shave been exchanged, the company is sold.
There are usually some post-transaction terms to be complied with, including gardening leave for the management of the selling company (ensuring that you don’t poach any of the company’s employees or clients) or management staying on for a period of up to 3 years, in what’s known as a ‘handover period’.
The success of any transaction depends to a great extent on the effective participation of the deal stakeholders, both internal and external.
If you watch high-performing teams, you’ll notice that these are groups of people who are together because they want to be.
While external stakeholders cannot always be relied onto contribute effectively (for example, an employee of the target company who refuses to fully engage with the process), the internal stakeholders are within your control.
This begins with putting together a competent deal team:
The exact composition of the deal team depends on a number of factors and will vary by project.
Here is how to enable and maintain high performance deal teams. (by a Harvard teacher & consultant)
Nevertheless, every deal team will have, at a minimum, legal counsel, tax attorneys, and accountants.
Crucially, each deal team should have a Deal Lead and Deal PM.
Deal Lead: Owns the overall M&A process and is responsible for the end-to-end success of the deal. This is generally someone from the company’s Corporate Development or Strategy department.
Deal PM: Operates under the Deal Lead and is responsible for end-to-end program management. They should possess experience, a love of detail, broad expertise, and good people skills.
The deal team can also include external consultants, depending on the specifics of the deal. These are usually only drafted in when they can add specific value to the process. Examples here include:
Investment bankers/intermediaries: Particularly useful in providing industry-specific transactions experience and contacts.
Subject area specialists: These bring knowledge to bear in the valuation of companies involved in highly technical activities such as the life sciences, artificial intelligence, or other areas where the value of IP could be difficult for an investment banker to ascertain.
Foreign consultants: When making cross-border acquisitions, there are sure to be small details that your local legal counsel cannot be aware of, and this is where bringing in consultants from that jurisdiction should add value.
Whichever side of the M&A transaction you are on, these were the steps and people that will, in most cases, be involved at some point, as the process goes on.
To give you even better overview of the M&A process, however, here is what you need to know.
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.
Buy-side 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.
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 sell-side 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.
Challenges of various sizes are inevitable at every one of the steps outlined above. Common examples include:
Communication challenges dodge the M&A process throughout. They arise in negotiations between the buyer and target, at the due diligence stage, and with the stakeholders of both companies in communicating the benefits of the deal to them.
M&A teams use tailored communication integration checklists that help building a roadmap for consistent and clear messages throughout the entire process.
As outlined in a previous article, employee retention is the major HR challenge of the M&A process. Employees at all levels know there are likely to be cuts, and this tends to create unease. Reassuring staff is a vital step to ensuring that they are retained to generate value from the eventual deal.
Two firms with growing revenues coming together doesn’t automatically create a larger firm with even bigger growth. Quite often, exactly the opposite is the case. A fall off in operations as a result of the deal, poorly implemented integration, and even HR issues can all contribute to missing financial targets.
DealRoom has worked on hundreds of deals at the due diligence level, and a common thread running through deals that fail is rushed or inadequate due diligence. Although everyone wants the process over as soon as possible, it has to be thorough to ensure long-term value generation.
AgaIn, a challenge that can occur at any phase of the M&A process, including after the deal has been concluded. The DealRoom guide on change management offers strong advice on how to avoid typical issues of cultural change to ensure that the two companies successfully merge into one.
The structure of the deal needs to strike a balance between several factors. These include the interests of stakeholders
and even operational
The best deal structures invariably involve detailed workflows: Mapping out the process in advance is the best way to ensure that the transaction achieves the goals inherent in the company’s M&A strategy.
This also ensures that the deal participants largely know in advance how the deal is going to play out.
To this end, there are several issues which must be considered before the deal takes place:
Divide the M&A process into short-duration projects that sharpen the focus of the deal participants. Shorter-duration projects increase the chances of success and maintaining momentum (hence, they’re often referred to as ‘sprints’).
Develop a business strategy that defines your company’s overall objectives, capability gaps, priorities, and the potential areas in which M&A can add value. This should inform the companies that make the shortlist of target companies.
Corporate development executives are deal enthusiasts by definition; an effective deal team needs competent skeptics to complement the enthusiasts. Ensure that the deal team is not just a group of cheerleaders.
Integration is often thought of as a post-deal process, but realistically, it should form part of due diligence (and even the pre-deal phase). At the heart of any M&A process is the question: ‘how will we integrate this asset?’
Hundreds of academic papers have used the event-based model to decide whether a deal is successful or not.
This is a spurious way to garner whether a deal was successful post-closing or not:Successful deals often show negative share price movements in the months after the transaction closed.
Likewise, the opposite can be true of deals that destroy value over the longer term.
Pay particular attention to the following:
Ensure that the people at both companies are on board with the process, communicating with them (listening as well as informing). No deal has ever survived an alienated workforce.
Don’t lose focus on the operations of the company, just because integration has to be dealt with in the short-term. Taking your eyes off the company’s day-to-day operations is a fatal mistake for CXOs to make.
Remain agile. There’s a temptation to draw things out over months when weeks will do.Remember that M&A is a means to an end, with the end being corporate growth. That should be what drives everything in the process.
DealRoom has worked with hundreds of M&A practitioners, both intermediaries and companies involved in transactions, to develop an industry-leading understanding of how effective M&A transactions function.
This has enabled us to put together materials in a knowledge bank which we can share with members.
This includes tens of M&A tutorials from these practitioners as well as an Agile M&A guide that significantly enhances the M&A process for organizations of all sizes.
Watch our Agile M&A tutorial to explore more on how improve your m&a process and close deals faster.
Get Agile and receive a free demo about how can we improve your M&A transaction process today!
Few projects present the conundrum that M&A presents organizations: By its nature, the more details it addresses, the more value it adds.
But on the other side of this equation, the process needs to be agile, and all things being equal, the more efficient the process, the more value it adds. How can companies add more detail to their M&A whilst reducing the team to close transactions? In a word, technology.
DealRoom’s due diligence software is a project management tool designed to address the M&A detail-time conundrum. It should be considered as a critical element of the process by any company undertaking agile M&A.