Strategy for Successful Merger and Acquisition

Author : Kale1129
Publish Date : 2021-05-31


 Strategy for Successful Merger and Acquisition

In order to make a merger work, it is pertinent to have a sound strategic planning so that maximum benefit is taken out from the merger. Before signing on the dotted lines, the company doing the acquisition must evaluate the performance, market position, cash flows, future opportunities, technology, regulatory issues of the target company to fix the right price for the deal. The management of the company doing the acquisition must have a clear and well-defined strategy for their specific business.

It is always advisable to take lessons from the past deals if the company has done in the past, learn from the experience of peers and look into industry benchmarks. This can help in formulating a sound strategy which will pay off in the long run. One must look into the working environment, employees and other cultural issues of the target company so that all misconceptions are sorted out at the initial stage and employees of both the companies know what is in store for them. As the deal has to make sense for both the target and the acquirer, it is important to identify synergy between the two companies.

Most prominently, the strategy must lay out the business drivers of the merger and factor in all the risks associated with the merger. If any major restructuring is required after the buyout, it must be chalked out and shared with the target company. This will surely ensure that all those involved in the merger process like management of the merger companies, stakeholders, board members, investors, employees agree on the defined strategies set by the acquiring company. If the plan gets consent of all these stakeholders, then it will be easy to go ahead with the merger and complete the integration process without much hassle.

At the time of chalking out the merger and acquisition strategies, one must consider the markets of the intended business, market share that the acquiring company is eyeing for in each market, the products and technologies would be required to achieve the target, the geographic locations where the business will operate and the skills and resources that you would require to make the deal a success.

Once the basic strategy is in place, then the acquiring company must look at the finances. Financing the deal can be done from myriad sources like cash, own accruals, debt, public and private equities, minority investments, etc. One must evaluate the cost of the fund depending on the needs and the amount of returns that the deal can fetch in the medium to long-run. Always build a preliminary valuation model by calculating the estimated cost of acquisition and estimated returns from the merger. It will help you in understanding the relative impacts of the acquisitions. Knowing the value drivers of the

Moreover, when one is dealing with billions of dollars, every aspect of the deal and the risks must be noted down in the document.

In a merger or acquisition transaction, there are three basic steps: (I) the negotiation period or pre-definitive agreement period; (ii) the definitive agreement or agreements; and (iii) closing.

The first and foremost step in an M&A deal is executing a confidentiality agreement and letter of intent. To keep the deal confidential, a confidentiality agreement must be signed on parameters on the use of information. The confidentiality agreement may contain other provisions unrelated to confidentiality such as a prohibition against solicitation of customers or employees (non-competition) and other restrictive

A letter of intent or Term Sheet, is a preliminary document potential buyers might send over when buying a company. A letter of intent must contain some sort of exclusivity provision known as no shop or window shop provisions. To spell it out, a no shop provision prevents the parties from entering into any discussions or negotiations with a third party that could negatively affect the transaction. A window shop provision allows for some level of third-party negotiation or inquiry like a party cannot solicit other similar transactions but is not prohibited from hearing out an unsolicited proposal. All these provisions must be clearly spelt out in the deal agreement.

The definitive agreement, which is also known as Share purchase agreement, spells out the finalised deal terms that the buyer and seller are agreeing to During the period between signing and completion, it is important for the buyer to have some influence on the conduct of the business. The buyer must take undertakings from the seller that the target will not do anything out of the ordinary during this period without the buyer's consent.

In any sale and purchase agreement of M&A, the parties agree to transfer title to the shares (share acquisition) or the assets of the business (business acquisition). It will also state the amount of the purchase price and the timing of the payment. The most common forms of consideration are cash, shares in the buyer (often called a share for share exchange) or loan notes/debentures. For public companies, the price is always given on a per share basis, with the exact share count and the treatment of dilutive securities spelled out later on.

In order to protect a deal, the common deal protection is a standstill agreement. A standstill agreement prevents a party from making business changes like selling off major assets, incurring debts or liabilities or hiring or firing management teams. An important aspect of the deal agreement is the representations and warranties which provide the buyer and seller with a snapshot of facts as of the closing date. From the seller the facts are generally related to the business like title to the assets, no undisclosed liabilities, no pending litigation or adversarial situation likely to result in litigation, taxes are paid and there are no issues with employees. From the buyer the facts are generally related to legal capacity, authority and ability to enter into a binding contract.

deal is the most critical element for success of any M&A. The acquiring company must do all due-d

Proper due diligence at every stage will make the M&A a grand success

By planning the merger activity carefully and analyzing every issue that may arise, the target company will be better prepared to successfully consummate a sale of the company. The buyer is concerned not only with the likely future performance of the target company as a stand-alone business but must understand the extent to which the company will fit strategically. Evaluating the commercial attractiveness of an M&A deal involves validating the target company's financial projections and identify the synergies.

The primary goal of due diligence in the M&A process is for the buyer to confirm the seller's financials, contracts and customers. Due diligence starts the moment the letter of intent (LOI) is signed. All due diligence information must be made available to the buyer from the seller. Due diligence is a vital activity in M&A transactions, and may consume several months of intense analysis if the target firm is a large business with a global presence.

First and foremost, the buyer must evaluate all of the target company's historical financial statements and related financial metrics. It must look at the reasonableness of the target's projections of its future performance. The buyer must look at the extent and quality of the target company's technology and intellectual property. It must focus on the domestic and foreign patents and whether the company has taken appropriate steps to protect its intellectual property including confidentiality and invention assignment agreements with current and former employees and consultants.

The buying company must look at customers and sales. The buyer must fully understand the target company's customer base across all geographies including the level of concentration of the largest customers as well as the sales pipeline. The company must look whether there will there be any issues in keeping customers after the acquisition and what are the sales terms or policies, and have there been any unusual levels of returns or exchanges offered by the target company to acquire new customers.

The company must look at the target company's employee and management issues. The buyer must understand the quality of the target company's management and employee base and look at information concerning any previous, pending, or threatened labor stoppage. The buyer must look at employment and consulting agreements, loan agreements, and documents relating to other transactions with officers, directors, key employees, and related parties. Since integrating the employees is the most difficult part in any deal, the buying company must evaluate every aspect of the deal.

Lastly one must look at the tax issues depending on the operations of the target company. Central, state and foreign incomes sales and other tax returns filed must be look into. To make a deal successful, experienced due diligence and integration managers must be involved in these mergers, and there must be high-profile, executive-level participation from both sides. A strong analytical team must drive the market and competitive assessment, and the human resources team needs to focus on organizational and cultural issues. If there are areas of consolidation, functional representation is critical to ensure buy-in from management.

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iligence earnestly and identify the sources of value like intellectual property, people, markets and brand from the deal.



Category :business

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