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 process.
Most deals will involve each of the following steps, usually in this order:
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).
Ask yourself questions such as:
Based on the previous step, you will now be able to develop a longlist 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.
This usually involves several phone calls between both parties to the deal.
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.
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.
The structure of the deal needs to strike a balance between several factors. These include the interests of stakeholders
and even operational
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:
Watch our Agile M&A tutorial to explore more on how improve your m&a process and close deals faster.