Through the medium of this paper the researcher intends to draw emphasis and parallel towards the essential stages of mergers and acquisitions and what form they take and the process they adopt to undertake a successful deal or a transaction. The paper will firstly introduce the topic of mergers and acquisitions and will deal with the key terminologies while outlining the prime difference between them. Further the paper would dwell into discussing how strategies and synergies play an important role in deciding the fate of the deal and establishing the necessary groundwork. Then the researcher would understand the various types of mergers and acquisitions and what process they adopt and the key examples along with the major M&A deals in the United States.
In the next part of the paper the researcher would elucidate upon the topic of M&A process and with the help of infographic depictions would analyse the reasons for the development of these concepts into a successful deal. Further on the motivations and considerations would be cited and then the key benefits would be understood. The majority of the paper would then focus on the essential stages and steps of the M&A deal and how do buyer and seller respond individually and their outlaid roles and duties. Then the researcher would undertake a brief analysis of the M&A deal structure and the best practices it adopts thereby portraying the key challenges and problems the M&A process undergoes. Lastly the researcher would provide plausible solutions on how can the challenges be overcomes and how effective thought processes can improve the way we look at M&A and analyse the same.
Infographic Demonstration of M & A
What is Merger & Acquisition?
The basic meaning of merger and acquisition can be explained as in the consolidation and compilation of companies and their assets through multiple types of financial deals. Most of these transactions include tender offers, management acquisitions, purchasing of assets, consolidations, mergers and acquisitions. The concept of merger and acquisition does not mean the actual deal, it means the various terms and references associated and departments involved in making and structuring a deal.
What a merger basically does is gives a company to another company known as the acquiring company and as soon as that happens the name of acquired company is often erased and removed. However in an acquisition what happens is that the acquiring company often takes a small or large portion or department of the acquired company and the acquired company in this case does not have to change its name or legal composition in order to be eligible to abide by the law governing them.
Merger and acquisition forms an integral and important part of corporate finance since it helps in the expansion of companies and in analysing and creating their future growth stimulus. Some common examples of merger and acquisition include when two CEOs of different companies join hands for better interest of both their companies or when a large company may want to acquire small companies in order to boost its competition practice and develop better and improved tools of administration and effectiveness. The most renowned and latest example is Alphabet, Google’s parent company acquiring about 200 smaller companies like Picasa and Android Inc in order to accelerate its market dominance and increase its presence.
The most likely reasons why companies enter into the process of merger and acquisition is to increase their market growth, invest in their future, expand their company’s marketability like one in the form of a horizontal merger wherein a company buys a competitor’s company to increase the business of their own. Another prime reason for a company to enter into a merger and acquisition is to benefit and expand their supply-chain pricing power and this is commonly referred to as the vertical merger wherein companies purchase the distributors supply chains in order to cut down their costs and resources. Another common instance of a merger and acquisition is to cut down the competition and accelerate profit whereas some other reasons include diversification, synergies, sharpening businesses, roll-up strategies and technology and skills modifications and enhancement.
On a more professional account a merger can be said to be a form of corporate strategy which combines two different and diverse entities into a single uniform company to increase the operational and financial strengths. Some reasons for companies to enter into mergers is to cut down costs and to achieve better capital to launch new products into the market.
Similarly an acquisition can be said to be when one company purchases one or all portions of another company or corporate asset. Acquisitions are mainly entered into in order to increase growth overnight and also to build on the other company’s strengths and synergies. Other common reasons include those to increase market share, to control underutilized assets and to gain access to distribution channels.
Difference Between Mergers and Acquisitions
Both the terms mergers and acquisitions describe and mention about the joining of two companies, but both these should not always be used interchangeably. Some of the major differences in mergers and acquisitions are that in a merger two companies having different identities join to create a new organization with a new legal identity. In a merger the ownership and management structure is new along with the employees and there is no requirement of cash to compete. However, in an acquisition no new company is formed as an existing company’s shares is acquired by the buying company and this leads to the closure of acquired company. The buyer takes all the rights and responsibilities and undertakes all the operational and managerial decisions.
In an acquisition last amount of cash are required to compete and often these transactions and deals take the shape of a hostile takeover. Whereas in a merger it is a friendly deal and transaction. Acquisitions are therefore considered to be more hostile than mergers and people often tend to use the word merger even where it does not apply and exist as most companies commonly use the word as an M&A Deal, rather than specifying whether it is a merger or an acquisition.
M & A Strategy
Most of the M&A transactions and deals require adequate and extensive planning and this is known as the M&A strategy. This strategy needs to be comprehensively and meticulously adopted by companies in order to be successful in their M&A deal. Most general motives where a company undergoes a M&A deal is profit and financial extension and maximization and reducing risk and behind these motives like various other detailed reasons like synergies, economy of scope, market revenue, cross-selling, taxation and more and these motives can only be fulfilled when a strategy to work around them is developed with detailed and elucidative research and distinction. Since M&A deals are so diverse and varied, no two deals are similar and nor do their strategies merger.
Types of M & A
There are various forms of mergers which are adopted and implemented for a successful M&A deal and some of the most common and essential forms are as follows:
It is a merger when a company merges or acquires another company having the same service line or product supply chain to the final customers. The companies entering into such a transactions belong to the same industry, are at same stage of production and have same set of loyal customers.
In this type of a merger the companies merging or consolidating belong to different stages of production. For instance we can take the example where a car company acquires another company that supplies seat covers, then this is a form of vertical merger, since industry is same but the stages of production is different.
This commonly occurs when two companies belonging to a specific industry, offering different products and services have the same customers merge together to create a bigger company. For such a merger to be valid, the products of the companies must complement each other. For instance, a merger can be held concentric when a mobile company merges with a company producing cell phone covers.
When two companies have nothing similar and unique businesses combine are considered to have entered a conglomerate merger. This merger is commonly undertaken to expand the industries and increase the growth.
Examples of Successful M & A
Pixar/ Marvel and Disney
Pixar was acquired by Walt Disney Co. in 2006 for $7.4 billion and after that movies such as Toy Story 3, WALL-E and Finding Dory have generated billions in revenue. After 3 years of this acquisition, CEO of Disney Bob Igner then set out and acquired Marvel for about $4 billion and soon about 11 marvel movies have generated more than $3.5 billion as revenue. This strategy by Disney is therefore considered to be a very successful and well thought acquisition.
Google and Android
Android was acquired by Google in 2005 for about $50 million and that point of time Android was not well known and didn’t have a well-established base in the telecom industry. Soon after it was acquired by Google, It provided Google the wings to compete with Microsoft and Windows Mobile and Apple’s iPhone and therefore this acquisition is considered to be a huge success and recent developments showcase that about 54.5% of the US population use or are subscribed to Google Android services as of May, 2018.
Mobile and Exxon
In 1998 both these companies had announced their plans to merge and at that time these companies were the first and second largest oil producers in the United States. This deal was closed at an enormous sum of $80 million and after this deal the investors have seen nothing but immense acceleration in terms of their profits and their shares have gone up by about 293 percent with reinvested dividends.
Biggest M & A in US
Mannesmann and Vodafone
This was one of the biggest M&A deal locked in the United States in 2000 as well as in the history of M&A as it was worth about $180 billion. Vodafone being an operator from United Kingdom acquired Mannesmann being a German owned industrial conglomerate company. This deal boosted Vodafone immensely and made it the largest telecom operator. Though it is the largest merger to date it was not successful since Time Warner and American Online entered into a merger in 2000 for about $164 billion and since that time internet could only be operated and accessed by the AOL. Due to the change in the American society and transition towards the world of technology and internet, the deal between Vodafone and Mannesmann lasted for only about nine years and soon Time Warner became an independent company in 2009.
Warner-Lambert and Pfizer
This was one of most massive acquisitions of 2000’s worth for about $90 billion in the pharmaceutical drug industry. It is still know to be one of the most hostile acquisitions of the history since before this deal Warner-Lambert was going to be acquired by American Home Products, as a consumer good company but they walked away resulting in large break-up fees and this gave Pfizer the chance to step in and enter the deal. This acquisition became responsible for the creation of the second largest drug company and finally Pfizer obtained the total control over Pfizer’s profits which indeed amounted to a whopping $13 billion.
Why the Process?
The process of M&A is very essential and crucial because M&A transactions happen at tremendous frequencies and this also because businesses of all diversifications are looking for strategic implementations and moves to increase and expand their market share and grow and build their customer base and cut down costs and resources and therefore M&A is so important as the opportunities provided by M&A is otherwise unattainable.
Brief into M & A Process
What is M & A process?
The process of M&A refers to the amalgamation and consolidation of various business entities and assets which develop over a series of different financial transactions. This process mainly includes the steps involved in acquiring or merging a company from the beginning to the end and this therefore includes the key components such as research, planning, closing, due diligence and implementation of activities.
Key Terms and Definitions
- Merger – It is said to be an agreement between two companies with the motive to consolidate functions and assets and therefore to function as one united company.
- Acquisition – It is more commonly known as a term where one company purchases a portion or large part of another company and the so called acquired company ceases to exist and function.
- Acquired company – It is the company known as the target company which is purchased by another company.
- Acquiring company- It is generally known as the buyer and the company which purchases the acquired company.
- Friendly acquisition – In this type of acquisition the acquiring company purchases another company with due approval of the target company’s stakeholders and board of directors.
- Hostile acquisition – Here the acquired company directly initiates an offer to the other company’s shareholders and board of directors and this offer is known as a tender offer.
- Conglomeration – This term refers when companies merging are completely unrelated in the market and have no ties or previous existence in terms of the services and products they exchange.
- Leveraged Buyout – This is a term used when in an acquisition the acquiring company purchases the target company mainly using large sums of borrowed money.
- Joint Venture – This is more commonly referred to as a partnership between two or more business entities and this is mainly undertaken for the execution of a particular project or development.
- Discounted Cash Flow – This is when during the process of a valuation model, the future cash flows are estimated using a discounted rate and this allows a company to make projections for its monetary worth.
Importance of Synergy
During an M&A transaction or deal synergy is known and termed as the financial benefit resulting from the combination of two business entities. The M&A deal can only be worth if the projected performance and value of the merged or acquired entities is greater than the sum of its individual parts. Synergy forms a very crucial part since it is the driving force of any merger and acquisition deal and a synergy can be accomplished in multiple ways but in general a company calculates synergies based on two broad forms such as hard categories known as cost savings and soft synergies known as revenue increases.
Motivations and Considerations for M & A Deal
There are several reasons and considerations why companies choose to opt for a merger or an acquisition and they can be mostly to achieve common economic objectives or to diversify their supply chain, to cross-sell different products and services to an existing customer. The most common motivations for companies include uniting common products, increasing commercial market share and entering a foreign market in terms of an international M&A deal.
Considerations for Executing an M&A Deal
- Financing the deal – this step is particularly important since it answers the questions whether one pursues with a stock or an asset deal and makes us think about the prospective additional costs and tax implications, comparative ratio analysis and other capital expenditure and replacement costs.
- Rival bidders – it is also important to keep an eye on other buyers or any other third party interested in the target company since the target company would not stick to one company, but would rather explore its options.
- Target closing date – the timeline prepared during strategizing the M&A deal should be kept in due consideration and often it seen that deals inevitably take longer to anticipate and therefore having a timeline and keeping a close eye on the date of completion could help in expediting the processes and limiting the stalling.
- Market conditions – assessing the market conditions should be of prime importance and the acquiring company must be aware of the marketplace of that product and also if the conditions are not read well then the merger or acquisition can be unsuccessful. Further companies should also invest and research on the various product and market forecasting techniques and agencies and should consult outside experts to create chances of a more financially viable and valuable deal.
- Laws – most of the M&A deals fall shorts in terms of their approach towards the legal grounds and if securities and guidelines have been checked thoroughly and reviewed, it indeed increases the chances of moving quickly towards a successful M&A deal.
Roles and benefits of M & A
Most M&A deals and transactions follow a definite slate if characters wherein their roles and duties are mentioned extensively and in detail. Some of the most critical roles essential for the success of an M&A deal is as follows:
- CEO – It is the CEO who majorly has the signatory authority to sanction and seal a deal and is responsible for making the bigger decisions based on the analysis of the risks and awards in the deal.
- CFO – He or she is one of most critical actors in the M&A deal and holds a crucial responsibility in the motive for an M&A deal to be completed. The CFO mainly evaluates the liabilities, rewards and financial risks of the deal and therefore deals with the management of the due diligence process and thereby reporting the information to the CEO.
- External Consultant – Most companies to be double sure involve a third party or company to help with the valuation and due diligence processes and this party is known as the external consultant. An external party can indeed remove the factor of emotional bias from the equation and therefore face the numbers at hand more objectively.
- Investment Bankers – They are the ones who act as financial advisors in an M&A deal and more commonly represent either one of the parties during the process.
- Legal aspects – Many companies seek help of legal counsels or firms to go through the intricacies of the deal and to ensure that there M&A deal meets all the requirements and legal parameters laid by the regulatory authorities.
Benefits of M&A
Most of the benefits of a merger or an acquisition when executed systematically and strategically can help in enhancing the position of the deal and make it chances of being more successful even more. M&A deals often improves the financial credit facility of companies and leads to development and expansion of companies in to bigger ventures. M&A also helps to allow and build business relationships, heighten brand recognition. Increase cost effectiveness, cut down costs and resource and indeed expand the offerings of their products and services.
Steps involved in M & A process
Steps from the Buyers Side of an M&A
- Development of an acquisition strategy – the most crucial and first thing a buyer needs to do is to strategize and intellectualize how they intend to undertake an acquisition. The building of the strategy also leads to the accomplishment of hope by the purchasing company and also various considerations like market conditions, future projections and financial positions are undertaken.
- Setting M&A search criteria – Another important step is to define the M&A goals and a profile of the ideal acquisition or merger. The buyer should primarily consider the other company’s financial position, company size, products and services offered, customer base, culture and other pertinent factors. Further a proper scrutiny is required of all the essential factors required in the due diligence and valuation process and therefore the buyer should not waste time in entertaining any suboptimal candidates.
- Searching for potential target companies – The next step and the most research oriented is to search the prospective target company you want to merge or acquire. Since a strategy is developed and all the information is available, the buyer can easily assimilate the provided data and details and therefore target the potential companies.
- Acquisition planning – After the target company is locked, the next step is to initiate and begin the acquisition planning process and as a buyer you should send out a letter of interest to that company to pursue a merger or an acquisition thereby providing a summary of the deal. Sending the letter of interest would therefore help in developing an idea about the valuation of the other company as well.
- Performing valuation – One of the most critical steps in this process is where the target company would provide the buyer with the important information related to the valuation and other information about its business. Further the buyer should also consider a culture fit and understanding the external conditions that would affect the success of the deal and therefore the buyer should further assess and understand multiple valuation models and then decide whether to pursue the deal or not.
- Negotiation and signing of the deal – This is the time where the buyer company decides whether to go or not go for the deal and then would further critically evaluate whether the valuation models of the acquiring company would increase the valuation and financial benefits of its company or not. As soon as the buyer makes this call, the period of negotiation is entered into where both the parties give their final offer and then the deal gets locked upon the signature of both the intending companies.
- Performance of due diligence – now, before the transaction is finally realized the buyer company undergoes a due diligence process where the buyer performs and measures the financial analysis of the other company. Here the buyer creates operational analysis and financial modelling and therefore assesses the culture of the firms. The timeline to be incorporated for due diligence process is about 30-60 days and this schedule varies depending upon the nature and transactions of the deal.
- Creation of purchase and sale contracts – once the process of due diligence gets completed then next process involves the drafting of the purchase and sale contracts and after which all the relevant parties sign these contracts and then the deal is considered to be closed.
- Creation of the final financing strategy – though most of the analysis and strategizing is complete at this point, there is still scope for some minor adjustments to be made and this is when the final contracts are signed and the terms and conditions are agreed upon.
- Beginning of the integration process – as soon as the deal is finalized the work of integrating the companies begins and this therefore works on the fronts of all the roles and responsibilities, culture, organizational and financial analysis. This effect and effort is then monitored and evaluated over the months or even years to come.
Steps from the Seller’s Side of an M&A
1st phase – Preparation for Sale
- Defining the strategy – this is the first step of the process from the seller’s side wherein the seller identifies and defines the goals set to be accomplished and the executive team along with a counsel looks upon defining the objectives in order to pursue the sale and to indemnity the right potential buyers. The seller during this process needs to be realistic and should have an accurate idea about the company’s financial position an the market decisions it adopts in order to drive the strategy forward.
- Compilation of materials – During this stage the seller has committed to pursue the sale and therefore needs to make a comprehensive kit that formally helps in preparing the company to present to present itself to the potential buyers.
2nd phase – Holding Bidding Rounds
- Contract with buyer – in this step the seller is contacted by the buyer or the seller directly contacts the buyer and during this the seller needs to be strategic and select the course of contact it wants to make with the buyer and whether the seller wants to encourage potential buyers or scale down to a single one. Further the seller should not become overwhelmed and also should not waste time on unlikely candidates.
- Starting bids received – In this step the initial contact is established and the buyer has reviewed the materials and therefore the seller starts to receive bids. At this point the seller should not settle for the first or initial offer and though attractive enough should look at options.
- Meeting with interested bidders – in this step the seller meets the potential buyer and learns about the company’s needs, objectives, proposed offerings and intents.
- Receiving the letter of interest – After the buyer has met the seller the seller will receive the letter of intent in which the buyer would expressly state the interest in pursuing a merger or an acquisition and thereby provide a summary of the same.
3rd phase – Negotiation
- Negotiation with all the buyer who have submitted bids – During this step the seller will not list down the interested companies it is ready to negotiate with and this should reflect the strategic intent of the company which was laid out at the beginning of the process. Also by this time the seller should have enough information about the buyer and therefore should move forward with the deal.
- Drafting of the definitive agreement – As soon as the seller moves forward with the deal, the buyers and sellers would work together to draft a final deal.
- Entering into an exclusivity agreement – Now since both the buyer and seller are locked an exclusivity agreement is signed wherein the seller or the buyer cannot pursue further negotiations or solicit interest from any other potential buyers or sellers.
- Facilitating buyers due diligence process – Now since the deal is locked and the buyer has been given two months to complete the due diligence evaluations, the seller can help and expedite the process. The seller can help by preparing all the documentation before hand and by staying in close touch with the buyer so that issues could be handled swiftly.
- Final board approval – Now after majority of the steps are finalized and accomplished and that the buyer has completed the due diligence, the seller solicits the board for final approval.
- Signing of the definitive agreement – Now this is the last step from the seller’s side and this is where the final agreement is signed and the deal is closed. At this stage the seller would have merged or been acquired by another company and this starts the beginning of the integration process from the buyer’s side if an acquisition or from the new company’s perspective if a merger.
M & A deal Structure
In mergers and acquisitions the deal structure is referred to as the terms and conditions of that particular deal and that indeed outlines the rights and obligations of each contracting party. Though M&A deals vary in various diversifications, they are mostly categorized into three board categories based on the structuring of an M&A deal.
- Stock purchase – this is when the buyer purchases a large amount or the whole amount of the target company’s shares or stocks from its stockholders and thereby leaves the company intact and the assets safe, but the only change occurs that the ownership is new.
- Asset acquisition – this type of structure is when the buyer buys majority of the seller’s assets and assumes the liability of the assets chosen too and these transactions are the ones primarily paid in cash or with stock.
- Merger – it is when different companies integrate and form a new single entity. Here there is no compulsion for a buyer and a seller both.
Best practices in M & A
The process of M&A is quite complicated and relies merely on the deep analytical skills, attention to detail and a pinch of compromise. Here are some the best practices to adopt for a successful M&A.
From the Buyer’s side
- The buyer should approach the target company diplomatically
- The leadership should be retained and experienced
- The culture should be the first contact after the integration
- The buyer should develop trust between the seller and the intermediary
- A transition plan should be created to take the integration process forward
- The growth and success of the deal should be monitored continuously.
From the Seller’s side
- The seller should not directly jump to the first offer and should wait for more offers and make a calm and considerate decision
- The seller should find retained advisors and leaders who would keep the company in the best interests
- The seller should engage in conversations with the buyer and the intermediaries
- The seller should bring several buyers to the table to increase its valuation.
Problems and Solutions in M & A Process
Though most of the M&A deals and transactions are viable and the most suitable option to scale and expand an organization and to create new synergies and an integrated process it is important to assimilate a multitude of dynamic variables in order ascertain the culture of the company, keep the longstanding practices intact and develop relationships with people. However even these well-structured and thought relationships run a high risk of getting ruined and breaking the harmony.
Problems in the M&A Process
- The communication plays an integral part of the M&A deal since the managers and the employers are the people directly influenced and involved in this chain of communication and their channel and medium of communication will decide the fate of the deal.
- Another problem is the employee retention challenges since often when companies merge or are acquired it leads to multitude of options for employees and various employees who would be working since a long time but not meeting the new standards would fall short and won’t be retained. Further poor transparency and consistency within the administration system also causes this problem.
- Another major problem is the inadequacy in regards to the execution of due diligence since sellers often don’t make their company as appetizing as possible and open to futuristic plans and this unwarranted problem leads to the dismal failure of the deal.
- Cultural clashes become a prime reason for the failure of M&A and this happens when companies merge or a new company is acquired it often takes time to get accustomed to the new cultures and often when other companies join a company it becomes difficult for them too to adapt to a different set of cultures and get going. This problem indeed affects the deal and the process in entirety.
Solutions to Improve M&A Process
- To bridge the gap of communication and administrable hierarchies and divisions based on cultural differences
- To improve the accessibility to clients by providing attractive market conditions and enhancing the access to the existing market and supply chains.
- To maintain and fundamentally change the market position optimistically and thereby seeing competitors in the positive limelight.
- To increase operational efficiencies and thereby cutting down costs due to expansion
- To improving the financial and credit positions of the company so that buyers and sellers can target the company easily in a proper flow and systematic procedure.
- To restrict and fortify barriers to entry and to preclude only those barriers that lead to a competitive entry into the market.
- To maintain an enhanced and dynamic relationship with service providers and employees both already existing and newly joined as a result of the deal.
Most of the times we notice that deals and their structures fail to meet their expectations and fall short of the reality they were created to reach. The most common and primary reason for such a poor and unreasonable performance of a deal is the failure of the deal to monitor the way in which the process and steps are to be followed and implemented. What happens in most deals is that companies and employees set objectives and realistic goals and expectations, but the way they function and the process they adopt is the cause of the failure of the deal. What we need to do in order to accelerate the performance of the deals and regulate and provide better and smooth mergers and acquisitions is to follow an accurate method of steps to develop a successful merger and acquisition and we need to make sure that the contribution and value of the said deal is approved and in regard to the improved market and meeting financial performance.
A renowned companies CEO had said in this well acclaimed quote that “the decision to merge was emotionally difficult. Control is only useful if it creates value for the shareholders. If there is a way to create more value for shareholders by relinquishing some control to a better or greater enterprise, then that is the responsibility of the management.” This quite completely summarises the importance of a deal and how crucial it is for its success for the procedure adopted to be implemented in complete honesty towards optimistic and realistic fulfilment.
Further we have noticed that many a time’s mergers and acquisitions transactions which occur between companies involve two categories mainly one adopted between companies who share a friendly and cooperative dynamics and the other where companies rely their future upon hostile takeovers and deals. These deals and categories help companies create their base as well as grow and expand in the industry and this process of managing a deal is often lengthy or sometimes short depending upon the nature and complexity of the transaction as well as the size of the merger and acquisition and also the time period required for the deal to be settled varies depending upon the time period taken and required for seeking the regulatory approvals.
Major companies which fail in creating a balanced and successful deal or a merger and acquisition can instead start looking for more relative and leading practices thereby featuring experienced and well acclaimed buyers in order to get more realistic stakeholders involved for their deal at the right time and point during a transaction. Therefore we can conclude by saying that companies need to understand the importance of the steps and stages involved in a merger or acquisition and how crucial they become in deciding and finalising a deal, further companies in order reach a successful deal completion should understand the parts and roles of various stakeholders and learn the formula to involve them at the right time in their deal.
- What are mergers and acquisitions?
- What are the differences between mergers and acquisitions?
- What are the key terms and concepts involved in mergers and acquisitions?
- What are the steps involved for a successful merger and acquisition?
- What are the roles and benefits of mergers and acquisitions?
- What are some of the best practices of mergers and acquisitions?
- What is a merger and acquisition deal structure?