The Ultimate Guide to Mergers & Acquisitions: What Every Business Leader Should Know

Mergers and acquisitions (M&A) are powerful tools for business growth, enabling companies to expand their market presence, acquire new technologies, and achieve economies of scale. However, the M&A process is intricate and requires careful planning, strategic insight, and meticulous execution. For business leaders, understanding the key elements of M&A is essential to driving successful transactions. This guide provides an overview of what every business leader should know about mergers and acquisitions.

What are Mergers & Acquisitions (M&A)?

Mergers and acquisitions (M&A) is the process of combining two or more companies through various types of transactions. Despite the name, M&A goes beyond buying or selling a company. Afterall, there are other ways to combine companies together without any party giving up ownership. Let’s look at some of the most common types of M&A.

Source: dealroom.net

1. Mergers

A merger is a corporate strategy of combining two separate business entities of roughly the same size into a single company to increase their financial and operational strengths. Unlike an acquisition, corporate mergers are mutual, and both parties feel they will benefit from the transaction. Typically in a merger of equals, there is no massive cash payment involved. Most of the payment is made through the stock exchange, where shareholders of both companies receive shares in the newly formed company proportionate to their old shares.

source: dealroom.net

2. Acquisition

An acquisition is the purchase of the entire company or a particular asset of the target company. This involves payment to the seller and the transfer of ownership to the buyer upon closing. To make successful acquisitions, the M&A process usually involves strategic deal sourcing, careful due diligence, and efficient integration post-close.

source: dealroom.net

The M&A Process: An Overview

source: corporate finance institute

The M&A process typically unfolds in several stages, each requiring attention and expertise. Here’s a brief overview:

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)

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, etc.) that will enable the acquirer to further evaluate the target, both as a business on its own and as a suitable acquisition target

Negotiations – 

After producing several valuation models of the target company, 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

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.

Purchase and sale contract – 

Assuming due diligence is completed with no major problems or concerns arising, 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

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 signed

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

Key Considerations in M&A Transactions

source: vertis

M&A transactions are complex and require attention to several critical factors:

1) Expertise

Expertise is the first and foremost thing you need to consider while choosing a technology M&A Advisory firm. Remember the fact that you are dealing with financials, organizational decision-making, legal matters, Intellectual Property, and more!

All this needs an experienced M&A team with rich expertise in successfully performing multiple M&A deals at their level.

An M&A Advisory can come from a wide variety of fields such as Accounting & Finance, Banking & Equity, Taxation, and more. However, an advisor who has been active in the target industry is more recommended!

2) Credibility

Given the fact that an M&A transaction involves revealing your confidential information such as IP, financials, data, regulations and more, it’s very important to check the credibility of the advisor you choose. When it comes to IP information, ensure your advisor presents all your credentials such as copyrights, trademarks and patents in a better way to the partner.

Credibility stands key in all phases of the M&A process, from taking up the project to exchanging information, performing negotiations, final execution, and post-integration process.

3) Longevity

Longevity in the market stands key to reliability on any service. The same is the case with M&A! There might be a good number of easily-available options in the market but choosing the right M&A Advisory firm with a minimum market presence of 10 years is highly recommended for expected productivity.

Longevity brings along the best practices and success track of performing similar transactions over the period, along with awareness on market trends.

4) Diligence

Diligence is very important for the partner you work within your M&A deal. The success purely depends on how well the process is understood and explored in a step-wise manner until the final execution. Each and every step is building block for the complete M&A process and missing of any single one can cause discrepancy.

A good M&A Advisor typically seeks a project plan, maintains proper documentation and takes regular feedback from both sides of the deal, throughout the process.

5) Industry-specific Choice

M&A Advisory with sound experience and expertise in your industry of operation is highly recommendable. Industry-specific choice gives you an advisory service that holds a better understanding of market and services, ability to quickly identify potential opportunities in line with your specific product line, and potential industry connections, ultimately resulting in the generation of more bids and value addition for your M&A transaction.

Common Pitfalls to Avoid

M&A transactions come with risks, and there are several common pitfalls that business leaders should avoid:

1. Insufficient due diligence

In a highly competitive deals market, opportunistic buyers may feel under pressure to seal the deal fast. In the rush to complete, it's all too easy to bypass the careful investigation that should take place before any acquisition decision. Alarmingly, many buyers seem quite prepared to complete the deal with only limited knowledge of exactly what it is they are getting. It may sound basic but, if you don't want any nasty surprises when the deal is done, you simply can't afford to view comprehensive due diligence as an optional extra. Companies recognize this, but are slow to change. A recent Maine Pointe Operational Due Diligence Survey in the PE market revealed that 80% of PE executives see an increased need for deeper operational due diligence, yet only 38% view it as a requirement on their deals.

2. Lack of preparation

When time is of the essence, it's never too early to start the integration process. With the right preparation you can be ready to hit the ground running on day one. To do this you need to have your integration team(s) set up and ready to go. Unfortunately, companies often underestimate the time it can take to pull together experts (both internal and external) and set up an infrastructure.

Most acquisitions have a 90 or 180-day plan post closure, yet few companies dedicate resources to achieving those goals, often relying on the existing management team to deliver improvements. As a result, the initiatives rarely get the attention needed to ensure success and the 90 and 180-day improvement plans are often not realized. Not only that, but many buyers start building their integration team months after the deal and, as a consequence, lose precious time and momentum post deal closure. 

3. Weak data analytics

Many organizations are not yet aware of the vital role intelligent data analytics can play in a successful M&A. Most M&A deals involve some form of data room, often containing hundreds, if not thousands of different documents in disparate forms (PDFs, MS Word, PowerPoint & Excel documents etc). The file structure of these documents is often poor, making critical documents difficult to find. Few companies have the data analytics skills or tools required to quickly assimilate, interpret, cleanse and visualize this data into real business insights. Consequently critical missing data is not identified, or requested from the target company until too late in the deal.

Information in the data room is rarely combined into a single data warehouse to provide “one version of the truth“. Without deep data insights and visualization, improvement hypotheses are often developed in a vacuum and are not fully validated or pressure tested prior to making and negotiating bids. Big data and advanced data analytics tools and capabilities offer a way to quickly analyse these disparate data sets in days, not weeks and provide actionable insights to develop post-merger integration improvement plans. 

4. Incompatible company cultures

In the rush to complete, it's easy to make mistakes in the people category. Leaders often focus too much attention on the financial components of the deal, and not enough on its impact on people and culture. Yet so-called 'culture clash' is one of the key reasons why M&As fail. Before the deal is done, it pays to figure out what the newly merged company will look like, how it will operate, what's going to change and why. Without clearly articulated answers to these questions, the two companies will never successfully merge.

A well-documented example of the damage a clash in cultures can cause was the 1998 merger between car producers Daimler-Benz and Chrysler. The goal was to become the world's third largest car producer, yet combining different knowledge background, work processes, product portfolios and last but not least, completely different corporate cultures, proved disastrous. Less than a decade later, Daimler-Benz sold its interest in Chrysler due to “irreconcilable differences“ in the organizational cultures.

5. Disregarding the critical 'human factor'

Keeping your best employees is key to a successful merger yet the very mention of the word puts employees on high alert. 20% leave the company soon after an announcement is made, taking with them their knowledge, experience and the relationships they have built over the years. A study by HR consulting firm, Aon Hewitt, found that, when a company is acquired, even if there is no significant impact on people's jobs, the number of actively disengaged employees increases by 23%. Low morale has far-reaching effects on employees' reliability and productivity, which ultimately impacts the customer experience in a negative way.

To counteract this and minimize the risk to the newly formed company, you need to communicate. Even when there is nothing new to say, share the dates when information will be available or when decisions will be made. In a merger situation, there's no such thing as too much communication. That extends to your customers, who will undoubtedly be wondering just how this merger is going to affect them. 

Conclusion: Driving Success in M&A

Mergers and acquisitions offer tremendous opportunities for growth and value creation. However, they require careful planning, strategic execution, and a deep understanding of the process. Business leaders who are well-versed in the key aspects of M&A are better equipped to drive successful transactions.

If you’re considering a merger or acquisition, partnering with experts can make a significant difference. For comprehensive M&A advisory services, visit Kuvera Consulting. Their team of professionals can guide you through every step of the M&A process, ensuring that your transaction is successful and aligns with your strategic goals.