When two companies combine to form a single entity it is referred to as merger or acquisition. To be more specific, the merger is the combination of two companies while acquisition refers to taking over a target company by the acquiring company. The reasons for mergers and acquisitions are quite common, such as diversification of product portfolio, entering into new markets, synergies of operation, and overall growth strategy. Instead of growing organically, companies find the M&A route easier and quicker to accomplish their growth plans as it gives them ready access to established markets, increases their product portfolio, and new and advanced technologies.
As top mergers and acquisitions firms in India point out, all M&A deals are different from each other and take different amounts of time. There is no fixed formula for success. However, all deals follow some basic steps if they have to be successful. Seven steps in a successful M&A transaction are discussed below.
Identifying Growth Opportunities
The first step in the process is to identify growth opportunities in the business and the markets served. To determine growth markets the buyer has to collect a lot of data including client origin, demographics, competitors’ information, employers and employees, and performance and profitability of the service line, consumer preference, etc. They need to determine what they expect to gain from the transaction- growth, improved market share, eliminating competition, lowering input cost by achieving operational synergies, etc.
Identifying Merger and Acquisition Target
The next step in the process is to identify probable acquisition candidates. The buyer must pick the industry it wishes to target and prepare a list of potential companies that could meet their strategic objectives for financial growth. This could be done by properly identifying the likely targets based on management experience, research and the help of consultants. Various social media sites, such as LinkedIn and Facebook are also good resources. The acquirer company has to be proactive in their approach in the identification process.
Refining the Target Criteria and Assessing the Financial Fit
Once a primary list is ready, the acquirer should refine the list by establishing criteria for the target companies. The team would want to consider both, the type and the size of the deal. They also need to consider the likely benefits of the transaction, the risks involved, and how do the different targeted opportunities compare with each other. The financial position of the target and the combined entity has to be comprehensively evaluated based on current and projected revenue and costs. The financial evaluation is necessary to prevent the acquirer from getting overly aggressive and overvalue the target company.
Contacting the Company
The corporate development team must now move forward with a compiled list and start contacting the target companies to see if a fruitful relationship could be developed. The most challenging aspect of this stage, according to top mergers and acquisitions and top corporate law firms in India, is to move beyond what is called the gatekeepers in corporate parlance. These gatekeepers could be managers, administrative personnel, or even CEOs and CFOs, who are the initial hurdle as they could be taken to task for allowing the call to get through. The team should carefully put the proposal for acquisition or merger in the most subtle manner without creating any anxiety among the senior employees of the targeted company.
Evaluating the Target
Once the acquirer moves past the gatekeepers and connects with the seller, the primary task is to listen to the potential seller in order to gather as much information as possible. After the meeting and gathering of information current financial statements, current and projected revenues and key performance indicators should be thoroughly reviewed. If the available data is not enough to fully evaluate the target, additional information should be requested. After analyzing the data, the corporate leadership must determine the likely benefits and disadvantages of the proposed acquisition, and whether moving forward with the deal would be a strong strategic and financial fit.
Conducting Valuation and Negotiating Purchase Price
The next step in the process is to assess the value of the target, how to structure the transaction so that it is best suited to achieve its objectives. There are basically three valuation methods that are utilized by companies: discounted cash flow analysis, comparable transaction analysis, and comparable publicly-traded company analysis. It is up to the corporate leadership which method they want to employ to arrive at a realistic value. As soon as a value is arrived at and the acquirer wants to move forward, it should make an offer to show its seriousness in the deal.
Performing Due Diligence, Finalizing the Contract and Closing the Deal
Once an offer is made by the acquirer and accepted by the target, a comprehensive due diligence exercise is undertaken. It involves a thorough review of the target’s financial, legal and operational position, including employee and customer details, intellectual property, etc. Every aspect of the target is taken into account. After successful completion of due diligence, a formal contract, that includes the terms of payment is finalized and the deal is closed.
Post the deal closing, one very important aspect remains for a successful merger or acquisition law company, that is, post-merger integration. It refers to the integration of operations of the two companies to maximize operational synergies in order to achieve the planned objective.