The process involved in Mergers and acquisition is typically lengthy and comes with decisions that are far-reaching in deciding the future after the transaction of the remaining organization(s).
There are three stages in this process which are:
At this point, the mission and strategy of the company are evaluated by its management and directors. Often, decisions about a horizontal or vertical development, market penetration, expansion, formation or diversification are made.
Afterwards, the company decides on the business combination strategy to adopt in line with its overall objectives.
That is to say, whether to pursue opportunities through strategic acquisition, merger or partnership (a joint venture), etc.
Time and costs for the proposed investment would also be estimated at this stage with the assistance of financial advisers.
2. Identify your Business Partners
The M&A process involves a constant, and increasingly detailed review of prospective entities before determining the target / partner.
A decision when to include skilled consultants will be affected by directors / managers ‘ time, resources and expertise, as well as cost considerations.
It takes a considerable amount of time to choose compatible target / partner. And the mechanism stays the same regardless of who takes it on.
The process begins with compiling a’ long list’ of possible targets / partners. At the planning stage, each company is reviewed against key criteria to arrive at a short list.
Some of these parameters include: strategic alignment with the existing business, relative organizational size, composition of management, unusual transaction costs, tax efficiency and quality of human resources, etc.
Once all the required information on potential targets has been collected, they are then reduced using an objective scoring system.
Contact the selected M&A partners to begin preliminary discussions related to the deal. A board meeting will be convened after the preliminary discussions to further discuss and approve the merger / acquisition.
The meeting is also responsible for signing the Memorandum of Understanding (MOU) and a Non-Disclosure Agreement (NDA), which will direct the future activities of the designated qualified consultants.
Some of the professional consultants usually involved in M&A transactions are Financial and Legal Due Diligence Advisors, Scheme and Company Solicitors, Reporting Accountants, Registrars, and Auditors.
In the case of an acquisition, usually a non-binding offer will be made to the target company based on the perceived value at this stage.
3. Due Diligence
Due diligence includes an investigation into target / partner’s affairs. This results in a study that contains relevant information about the above.
The due diligence step is typically the most tedious and costly stage of the Mergers and acquisition process because it requires deciding the right price for the transaction expected.
This point, however, exposes the seller to a tremendous amount of risk regarding the release of confidential information to the purchaser, who may be a competitor. For better understand the internal structure and activities of its sector, the buyer will need to access the records of the target company.
Here, in checking the seller’s value proposition, the initially signed NDA would serve to protect the interest of the target company in the face of highly classified information which the buyer requires to test.
Because the target company becomes instantly disadvantaged in the event of a breakdown of a deal considering the extent of trade secrets shared with the intending buyer during the process.
Some of the assignments normally covered during due diligence process include:
- Review items from the seller’s financial statement for the previous three to five years including minutes from board meetings.
- A study of the selling company’s tax obligations, legal structure, disputes with staff and other ongoing litigations.
- Analysis of a general customer base breakdown and a sales assessment to check the validity of turnover figures.
- A study of intellectual property rights that covers trademarks, patents and other fields of special and intrinsic value. For technology companies this is particularly significant.
Constant communication between Mergers and acquisition consultants of the merging entities and members of their project teams help consolidate the vast amount of information gathered during the Mergers and acquisition process. Some of the business valuation approaches used during the Mergers and acquisition process include:
- Discounted Cash-flow Method (DCF)
- Relative Assessment (e.g. P / E, Price / Book)
- Historical Earnings Assessment Method.
4. Closing and moving into new ownership
Upon completion of the due diligence point, the parties to the agreement must receive the report and decide on the share exchange ratio, the composition of the board of directors and then execute final documents, generally through their petitioners.
If it is an acquisition deal, the purchasing company will make a final offer and will move the appropriate funds as may be needed.
There are regulatory requirements which are unique to each jurisdiction and which are deemed necessary to conclude the transaction effectively. In Nigeria, the Securities and Exchange Commission (SEC) must file a Pre-merger / Pre-takeover Notice with and authorize it.
That will precede the formal request to approve the proposed merger or acquisition.
Research have shown that many cases of Mergers and Acquisition failure can be traced not to the strategic argument for merger, but to poorly planned and executed integration of the merging organizations.
It follows that companies investing enough time and effort in conducting their processes of merger and acquisition are much more likely to follow through at all levels, invest well and ultimately increase the shareholders ‘ post-merger value.