The Mergers and Acquisitions (M&A) process has many steps and can often take anywhere from 6 months to several years to complete.
In this guide, we’ll outline the acquisition process from start to finish, describe the various types of acquisitions (strategic vs. financial buys), discuss the importance of synergies (hard and soft synergies), and identify transaction costs.
M&A deal process includes:
- Develop an acquisition strategy : Developing a good acquisition strategy revolves around the acquirer having a clear idea of what they expect to gain from making the acquisition – what their business purpose is for acquiring the target company (e.g., expand product lines or gain access to new markets, etc.)
- Set the M&A search criteria : Determining the key criteria for identifying potential target companies (e.g., profit margins, geographic location, or customer base)
- Search for potential acquisition targets : The acquirer uses their identified search criteria to look for and then evaluate potential target companies
- Begin acquisition planning : The acquirer makes contact with one or more companies that meet its search criteria and appear to offer good value; the purpose of initial conversations is to get more information and to see how amenable to a merger or acquisition the target company is
- Perform valuation analysis : Assuming initial contact and conversations go well, the acquirer asks the target company to provide substantial information (current financials, business information, etc.) that will enable the acquirer to further evaluate the target, both as a business on its own and as a suitable acquisition target
- M&A due diligence : Due diligence is an exhaustive process that begins when the offer has been accepted; due diligence aims to confirm or correct the acquirer’s assessment of the value of the target company by conducting a detailed examination and analysis of every aspect of the target company’s operations – its financial metrics, assets and liabilities, customers, human resources, etc. Due diligence includes, financial, tax, legal, commercial, technical and HR due diligence. Due diligence report could include points as deal-breaker for example significant legal issues or business license issue, etc. It also includes valuation points that can be used for negotiating the value based on the outcomes of the financial due diligence performed.
- Negotiations : After producing several valuation models of the target company and performing the due deference, the acquirer should have sufficient information to enable it to construct a reasonable offer; Once the initial offer has been presented, the two companies can negotiate terms in more detail. Then it will be considered as Binding Offer.
- Sale and Purchase Agreement : Assuming due diligence is completed with no major problems or concerns arising, and negotiation has been completed, the next step forward is executing a final contract for sale; the parties make a final decision on the type of purchase agreement, whether it is to be an asset purchase or share purchase, etc. There are two methods of paying the agreed value: The locked box mechanism which entails that the purchase price payable on the transaction's closing date, is agreed and fixed at the date of signature of the transaction agreements (Signature Date). There is no price adjustment or true-up between the Signature Date and Closing Date. The other method is Completion Accounts Mechanism, the essential difference between the two approaches is one of timing, with a locked box mechanism requiring the parties to commit to a certain price at signing and a completion accounts mechanism committing the parties to a mechanism for determining the certain price at some time following completion. Each mechanism has its own considerations and cases to be used in.
- Financing strategy for the acquisition : The acquirer will, of course, have explored financing options for the deal earlier, but the details of financing typically come together after the purchase and sale agreement has been reached.
- Closing and integration of the acquisition : The acquisition deal closes, and management teams of the target and acquirer work together on the process of merging the two firms. Post deal integration is essential and should be managed carefully and appropriately. Another important consideration is the Leakage Period which refers to the seller extracting value from the target in the period from the locked box date to the closing date. The parties will need to identify possible sources of leakage, with the seller's obligations to prevent any leakage usually being backed by a pound-for-pound indemnity.
To learn more about the M&A process, or in case you need help please contact us.
