What is M&A? (Mergers and Acquisitions)

In order to grow larger and gain the adventages of size, companies sometimes buy other companies and M&A is the name of those transactions in general. However, type of the transactions vary according to the terms as “merger” or “acquisition”. (M&A stands for “mergers and acquisitions”.) Let’s watch this short video to get a deeper understanding of the context:

What does “Mergers & Acquisitions” mean?

Difference between mergers and acquisitions

Let’s start with the most wondered question: “What is the difference between mergers and acuquisitions?”

A merger occurs when two seperate entities decide to create a new joint organization and the process usually includes buying and selling of shares. However, if a company takes over the other company and declares itself as a new owner in a clear way, it is called acquisition.

MERGERACQUISITION
New company is formedNo new company
Considered to be friendly and plannedConsidered to be hostile and sometime involuntary
A new name is givenThe acquired company comes under the name of acquired company
There is almost no power difference between partiesAcquiring company gets to dictate terms
In merger, new stocks are issuedIn acquisitions, there are no new stocks issued
Merging of Glaxo Wellcome and Smithkline Beecham to GlaxoSmithKlineTata Motors acquisitions of jaguar Land Rover

Source

What are the basics of M&A?

Mergers and Acquisitions, in other words M&A is the transfer or consolidation of ownership in the context of companies. The process includes people with different backgrounds such as business, legal or technical. So, this article covers major processes that corporations go through in the context of an M&A transactions.(The basics of M&A Process)

Overview of parties and responsibilities in M&A

As the every step in M&A transactions is cruical, there may be various parties which has been specialised in different areas of M&A. Therefore, usually the volume of an M&A transaction is so high and includes years of working. Also, the share owners are aware the situation and they don’t cut down spendings on services that facilitates the transaction.

Auditors:

  • Sharing an opinion on the accounts

Lawyers:

  • Writing
  • Legal Structuring
  • Conducting legal DD (corporate and other)

M&A TS:

  • Financial DD
  • Tax DD

Also some firms provide services of:

  • Commercial DD
  • Operational DD
  • Social/Pensions DD
  • IT DD
  • IFRS/ US GAAP
  • Strategy
  • Insurance DD
  • Environmental DD

Phases of M&A (M&A Transaction Process)

Since there are a lot to do before an M&A transactions, it’s highly significant to know what to do in what phase of an M&A transaction.

M&A Buyer side Phases

Buy-side M&A Transactions Process

  • Phase I: Market Analysis & Identifying Potential Targets
  • Phase II: Contacts withTargets & Preliminary Due Diligence
  • Phase III: Due Diligence
  • Phase IV: Negotiations
  • Phase V: Transaction Closing

Details of Sell-Side M&A Transactions Phases

We’ve mentioned the titles of M&A process without giving details. So, let’s go further and examine what to do in each phase of M&A transactions.

Phase 1: Preparation for SaleI

  1. Initial Review:
    • Understand the business
    • More than just the business itself
    • Where is the business going
  2. Sale strategy:
    • Gain a thorough understanding of the shareholders’ objectives and expectations (financial and non-financial)
    • Indicative value (preliminary valuation)/Timing of the sale/Clear definition of potential buyers/Appropriate sale process/Key selling messages
  3. Valuation (Things to Consider):
    • Uncertainty
    • The added value synergy that the buyer will bring
    • Majority premium
  4. Teaser:
    • A short marketing document
    • Generally no-name bases
    • Just to check preliminary interest of the investor
  5. Information memorandum:
    • Useful, enduring information regarding the business and the status of the company
    • Includes information that is required for the buyers own valuation
    • Does not include commercial secrets

Phase 2: Investor Search and Contacts

  1. Research
    • Conducting buyer / investor research
    • Getting approval from the client
  2. Teasers / Follow-up
    • Distribute widely the teaser to identified potential investors
    • Follow-up responses
  3. Confidentiality Agreement
    • Send out and receive confidentially agreement from interested parties
  4. Distribution of IM & Process Letter
    • Distribute the Information Memorandum
    • Respond the queries
    • Communicate the process to be followed
  5. Non-Binding Bids
    • Collect and evaluate non-binding bids
    • Selection of preferred buyer or short-list of preferred buyers
    • Letter of Intent (LOI, MOU) signed with preferred purchaser

Phase 3: Learning from the past, but looking towards the future

  1. Preparation of the Data Room
  2. Coordination of the Data Room
  3. Review the Findings

Why is it important?

Important actions are taken in this phase such as:

  • Go or no-go decision
  • Making informed investment decisions / In debt analyses of the performance of the target and related risks
  • Findings and adjustments directly effect valuation
  • Mitigating the risks of the transaction / Providing inputs for the Share Purchase Agreement (i.e. Representation & Warranties)
  • Obtaining leverage during the negotiation process

Phase 4&5: Negotiations and Closing

  1. Negotiations & SPA Signing
    • Negotiations of detailed terms of SPA
    • Comment and revise the SPA together with legal advisors
  2. Transaction Closing
    • Assistance with the legal advisors for the preparation of the applications to regulatory bodies
    • Follow-up the closing procedures
    • Assistance for post acquisition adjustments/earn-outs

Motivations of Seller and Buyer in M&A

Seller

  • Willing to retire
  • Need more capital to continue expansion
  • Believe the business needs multinational / strategic input
  • Need to reach export markets
  • Need technical expertise/know-how
  • Thinks “it’s time to get out” – market timing
  • Holding companies changing strategy

Buyer

  • Willing to expand its current operations
  • Grow its market share
  • Need additional brands
  • Need geographical diversification
  • Invest in more profitable industries

The Aim of Selling Shareholders in Certain Situations

Situation | Aim:

  • Owner reaching retirement | MAX PRICE
  • If owner needs more capital, to continue expansion | PRICE / GOOD PARTNER
  • Owner believes the business needs multinational input: | PRICE /GOOD PARTNER
    • Export markets
    • Brand names
    • Technical expertise
  • Owner thinks “it’s time to get out” – market timing | MAX PRICE
  • Holding companies changing strategy | MAX PRICE
  • The State: privatisations | MAX PRICE


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