Mergers and Acquisitions is the combining of the assets of two companies to form one single entity which could be either an entirely new entity or function as either of the two combining entities. M&A transaction occurs primarily to fuel growth plans of the companies. In acquisitions the acquiring company takes over the assets of the target company where the acquired company either ceases to exist or continues its operation under the name of the acquirer.
In mergers two companies come together for their mutual benefit. Reasons for mergers and acquisition are basically to accomplish growth plans through product diversification, entering new markets, access to new technologies, and achieving operational synergies.
According to mergers and acquisitions advisory firms in the USA the M&A process can take several months and even years to complete, depending on the size of the transaction and the complexities involved. The mergers and acquisitions transaction involves few essential steps that have been discussed below.
Developing an Acquisition Strategy
The process starts with developing an acquisition strategy that basically revolves around the acquirer’s idea of what they expect to gain from the transaction, such as expanding the portfolio of products or services, gaining entry into new markets, access to new technologies, etc. The buyer also needs to determine what type of transaction they want to enter into and the amount of capital they are willing to commit for the acquisition.
Setting a Search Criteria and Contacting the Targets
After developing the acquisition strategy, the next step is to determine the key criteria to identify the potential target companies. The search criteria could be the financial performance of the target including profit margins, geographical location, customer base, dealer network, etc. Based on the set criteria a list of the potential target is prepared, and the buyer starts to contact them to gather more information about the companies and to gauge their interest in such a transaction. If both the parties agree to go ahead with the transaction, the buyer submits the letter of intent and expression of interest.
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A confidentiality agreement is then signed assuring to keep the discussions of the deal confidential. Subsequently, sensitive information, such as financial and other operational details are shared so that both the companies can assess the feasibility of the transaction.
Valuation Analysis and Synergies
If the initial contact and discussions go according to plan, the buyer requests the target company to provide additional information, such as current and projected revenues, to further evaluate the target, both in terms of the business on its own and its suitability as an acquisition target. As the assessment of the deal on the whole is on, the seller tries to determine what would be a fair price that would benefit the shareholders the most. The buyer on the other hand, tries to figure out what would be a reasonable offer based on its assessment of the synergies it would achieve with respect to cost reduction, increased market share, enhanced product portfolio, operational efficiency, etc.
After using the various valuation models, generally the discounted cash flow analysis, comparable transaction analysis, and comparable publicly traded company analysis, the acquirer would be in a position to make a calculated offer. The seller may or may not accept the offer, and demand a better price. The deal price is further negotiated and both the parties try to get the best bargain from the deal. Finance and legal experts represent both the parties, and hard bargaining takes place. Negotiations may take a long time to conclude.
Mergers and Acquisitions Advisory, Law Firms in the USA consider due diligence to be the most important part of a merger and acquisition transaction. It is a comprehensive process where in every minute details of the target company is thoroughly examined, such as the financial metrics, assets and liabilities, employees strength, customer base, vendors, supply chain and logistics, legal obligations, etc. This exercise is basically undertaken to reassess the value of the company. If the acquirer comes across some additional information which is not consistent with the earlier information, then it may have to revise its offer or even withdraw from the deal if the seller had hidden some important fact about the company.
Sale and Purchase Agreement
If no major issue crops up during the due diligence, the parties proceed towards executing the final contract for sale and purchase. The parties have to decide whether the deal would be for asset purchase or share purchase, and what would be the mode of payment and in how much time the total payment would be made. Though it is up to the acquirer how it plans to finance the transaction, it has to make the payment within the stipulated time.
Closure and Integration
Finally the deal is closed by signing of the M&A contract by both the parties. Now the final step in the mergers & acquisitions process is the post- merger integration. The management teams (usually the business unit) of both the companies work in tandem to integrate the operations of the merging companies to accomplish the planned objectives.