Process of M&A (Mergers and Acquisition)
The M&A Process is a multi-step process and can be short depending on the size and complexity of the transaction involved. Mergers and Acquisitions are that part of company operations in which two entities combine their assets fully or in part, to either form a new entity or function as one or the other. We’ve divided the overall M&A (mergers and acquisitions) process into 8 broad steps:
- Developing Strategy
- Identifying and Contacting Targets
- Information Exchange
- Valuation and Synergies
- Offer and Negotiation
- Due Diligence
- Purchase Agreement
- Deal Closure and Integration
Let us discuss each step in the M&A process in detail –
8 Step in the Mergers and Acquisitions (M&A) Process
#1 – Developing Strategy
The M&A process starts with the development of a strategy which involves various aspects. The buyer identifies the motivation behind the mergers and acquisitions transaction process, the type of transaction that they want to conduct, the amount of capital they are willing to spend for this transaction are some of the factors that the buyer considers while developing the strategy.
#2 – Identifying and Contacting Targets
After the buyer has developed the M&A strategy, they start identifying potential targets in the market that fit their criteria. A list of all potential targets is made and the buyer starts contacting the targets in order to express interest in them. The main purpose of this step is to obtain more information about the targets and measure their level of interest in such a transaction.
#3 – Information Exchange
After the initial conversation goes well and both the parties have shown interest in going ahead with the transaction, they begin the initial documentation which generally includes submission of Letter of Intent to officially express interest in the transaction and signing a confidentiality document assuring that the proceedings and discussions of the deal will not go out. After that, the entities exchange information such as financials, company history, etc so that both parties can better assess the benefits of the deal to their respective shareholders.
#4 – Valuation and Synergies
After both the sides have more information of the counterparty, they begin an assessment of the target and of the deal as a whole. The seller is trying to determine what would be a good price that would result in the shareholders gaining from the deal. The seller is trying to assess what would be a reasonable offer for the target. The buyer is also trying to assess the extent of synergies that they can gain from this transaction in forms of cost reduction, increased market power, etc.
#5 – Offer and Negotiation
After the buyer has completed their valuation and assessment of the buyer, they submit an offer to the shareholders of the target. This offer could be a cash offer or a stock offer. The seller analyzes the offer and negotiates for a better price if they feel that the offer is not reasonable. This step can take a long time to be completed because neither party wants to give the upper hand to the other by showing their hurry to close the deal. Another common hindrance at this step is that sometimes when the target is a very attractive entity, there could be more than one potential buyer. So often there is a competition among the buyers to offer a better price and terms to the target.
#6 – Due Diligence
After the target has accepted the offer from the buyer, the buyer begins due diligence of the target entity. Due diligence consists of a thorough review of every aspect of the target entity including products, customer base, financial books, human resources, etc. The objective is to ensure that there are no discrepancies in the information which was provided earlier to the buyer and based on which the offer was made. If some discrepancies come up, it could lead to a revision of the bid to justify the actual information.
#7 – Purchase Agreement
Assuming that everything has gone well, including the government approvals and no antitrust laws kicking in, both parties begin drafting the final agreement which outlines the cash/stock that would be given to the target shareholders. It also includes the time in which such a payment would be made to the target shareholders.
#8 – Deal Closure and Integration
After the purchase agreement has been finalized, both parties close the deal by signing the documents and the buyer gains control of the target. Post the closure of the deal, the management teams of both the entities work together to integrate them into the merged entity.
Regulations of M&A Transactions Process
Mergers and acquisitions Process Regulations are as follows –
- Antitrust – M&A processes are very closely regulated because they hold the potential to disrupt a fair and just market. M&A transactions need government approval to go through. If the government feels that the transaction is against the public interest, they will put Antitrust Regulations in place and disapprove the transaction.
- Laws – Various laws have been put in place to monitor the mergers and acquisitions transactions process and make sure that they are not against the public interest. For example, the Williams Act requires a public disclosure if a company acquires more than 5% of another company.
M&A transactions happen regularly and sometimes they take the shape of friendly transactions and sometimes they are hostile. They help companies to grow in the same industry as well as expand into new industries. The process of M&A transaction can be lengthy or short depending on the complexity of the transaction as well as size. The time period may also depend on the regulatory approvals required for the same. Recommended Articles
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