Key Steps in the Merger and Acquisition Process

M&As are highly complex and lengthy transactions that may take a few months to several years. The process involves multiple steps such as deal sourcing, due diligence, and the integration phase. Every step has its importance and plays a key role in determining the success of the transaction.

The following is a detailed breakdown of important steps in the M&A process. This article also addresses common challenges in M&As and important tools used in the process.

What is M&A in Business?

M&A is a short form of “merger and acquisition.” The business community uses this term to explain the consolidation of two business entities. It is important to note that mergers and acquisitions may be used collectively, but they are two different business strategies.

A merger means two different businesses join forces and make a new business entity. These businesses may belong to the same or even different sectors.

An acquisition is a transaction in which one business gains complete or decisive control over another business. The acquired company usually ceases to exist or operates under the acquiring company. 

Why Do Businesses Go for M&As?

The primary objective of an M&A is to create value and businesses can do it in different ways, such as:

·       Achieving economies of scale

·       Diversification

·       Entering new markets

·       Accessing new technologies

·       Expanding customer base

• Achieving economies of scale
• Diversification
• Entering new markets
• Accessing new technologies
• Expanding customer base

Many businesses acquire other entities to create a competitive edge or eliminate competition.

Types of M&As

M&A transactions have three major categories:

• Vertical. Involves two companies at different stages of a supply chain. For example, a manufacturer may acquire a distributor.

• Horizontal. Involves two businesses from the same industry and at the same stage of the supply chain. Examples may include the merger of two retail stores.

• Conglomerate. Involves companies from two different or unrelated industries.

The Step-by-Step M&A Process

Any business must clearly define its strategic goals before starting an M&A transaction. It is important to have a clear plan that has timelines, target criteria, and integration strategies. Here is how an M&A transaction usually takes place.

1. Target Identification

The M&A process starts with target identification. It is important for businesses to conduct comprehensive market research. This will help them understand current market trends and identify growth opportunities. The selection criteria for the target company can be based on financial performance, geographic fit, or customer base.

Companies can hire advisors and use industry contacts to explore off-market opportunities. The combination of a clear strategy and expert guidance will help the acquiring company identify targets that align with its strategic goals.

2. Deal Strategy and Valuation

This is the stage where the company defines the strategic reasons behind the merger or acquisition. It also evaluates how the move aligns with long-term business goals like market expansion or diversification. The process helps

• Identifying potential targets

• Analyzing industry trends, and

• Determining the financial value of a company

The acquiring companies generally use the discounted cash flow method or comparable company analysis for financial valuation.

A clear deal strategy makes sure the acquisition supports corporate objectives and offers a fair price that justifies projected synergies and value creation.

3. Due Diligence

Due diligence is one of the most important steps in the process. It is a detailed inspection of the target company from every possible perspective. Due diligence focuses on examining the company from different perspectives like legal and financial standings. The core objective of this stage is to identify underlying risks or liabilities and potential integration challenges.

The M&A teams assess the target company’s financial, legal, and operational documents to ensure transparency. The findings of the due diligence may lead to renegotiations and even a deal exit if there are significant underlying issues.

4. Deal Negotiation

Deal negotiation is a stage where both parties discuss and agree on the key terms of the transaction. These may cover price, payment structure, and liabilities.

The aim is to reach an agreement that fairly balances risk and reward for both sides. Legal advisors help protect each party’s interests during this process. Successful negotiation depends on factors like flexibility and a clear understanding of the deal’s goals to ensure lasting value for both buyer and seller.

5. Regulatory Approval

Regulatory approval makes sure the deal follows competition laws, industry rules and national interest guidelines. In Australia, the Australian Competition and Consumer Commission reviews how the deal may affect market competition and consumers. The Foreign Investment Review Board also checks deals involving foreign buyers to ensure they align with national interest. This process often requires detailed information and proposed solutions to any concerns. If serious issues are found the deal may be delayed or even stopped.

6. Integration Planning

Integration planning starts before the deal closes and it outlines how two companies will merge to achieve desired synergies. The process usually includes

• Setting integration goals

• Defining team responsibilities

• Develop communication strategies

Effective planning reduces disruption and makes sure the transition is smooth. A clear integration roadmap increases the chances of achieving strategic and financial benefits after the transaction.

7. Post-merger Integration

Post-merger integration is a stage where two businesses actually unify to become one. A detailed integration plan guides the unification of operations, systems, and teams. Dealmakers should take initiatives to remove redundancies and streamline operations.

A successful integration

• Ensures business continuity

• Improves performance

• Fulfills the strategic objectives of the M&A

Due Diligence in the M&A Process

As mentioned above, due diligence is one of the most important stages in the merger and acquisition process. It includes thoroughly evaluating a company’s operations and business data. The primary objective is to ensure that the target company’s records are transparent and there are no underlying risks. Due diligence helps the buying side decide whether it is worth acquiring another company.

Due diligence is of different types, including:

1. Legal Due Diligence. Legal due diligence involves an assessment of a company’s legal standing. It may include reviewing contracts, pending lawsuits, and regulatory compliance to uncover any legal risks.

2. Financial Due Diligence. Financial due diligence is about a company’s financial position. It involves examining the financial statements, debts, and liabilities of the target company.

3. Commercial Due Diligence. It focuses on aspects like market conditions, competition, customer base, and growth potential. Commercial due diligence helps assess whether the business can be successful in the long run.

4. Operational Due Diligence. This type of due diligence focuses on reviewing routine activities. These may include supply chains, systems, and human resources. Operational due diligence helps assess efficiency and integration readiness.

5. Tax Due Diligence. It focuses on whether the target company follows standard taxation policies set by regional taxation bodies. Tax due diligence helps identify underlying potential taxation risks for the future.

The due diligence process becomes simpler and faster with the help of online tools. Dealmakers can use a virtual data room for due diligence to ensure safe data sharing and real-time communication.

Tools Used in the M&A Process

The M&A process requires constant and secure communication and data sharing between concerned parties. Dealmakers employ different digital tools, like virtual data rooms, to keep things organized and connected.

A virtual data room provides everything needed for the M&A process in one place. It is an online digital data sharing and collaboration platform. Data rooms play a key role in different stages of the M&A process, especially during due diligence.

Certified virtual data room solutions like Ideals and Intralinks help dealmakers address the regulatory hurdles. These platforms comply with regional and international regulatory bodies like ISO and GDPR to ensure smooth transactions beyond borders.  

It is important to go for a trusted and compliant data room vendor. Looking for a secure and easy-to-use platform? Check our M&A data room provider comparison to choose the right one according to your needs.

Common Challenges and How to Overcome Them

The M&A process is not a smooth road and companies have to fight multiple battles. Here are some common challenges in M&As.

1. Cultural Clashes

Cultural clashes are among the biggest challenges for dealmakers. These mainly happen due to different leadership styles and workplace ethics. Cultural clashes often lead to talent loss as well. Dealmakers can minimize cultural clashes by

• Conducting cultural assessments

• Aligning leadership styles early

• Ensuring open communication across both organizations.

2. Post-deal Integration Issues

Integration issues are a massive challenge for dealmakers and merging entities. These usually occur due to differences in customer bases, technology platforms, and supply chains. Here is how to minimize these issues.

• Organize operational assessment during the due diligence phase to identify potential integration issues.

• Create a comprehensive integration plan with clear timelines and objectives.

• Appoint dedicated integration teams.

3. Regulatory Barriers

Regulatory barriers usually include complying with antitrust and cross-border laws. Concerned companies can minimize these hurdles by

• Working closely with regulatory bodies.

• Hiring regulatory and legal experts early in the process.

Key Roles in M&A Transactions

M&A is a process that requires cross-functional collaboration. Key roles in M&As include:

• Legal teams. They draft contracts and make sure everything is in accordance with legal guidelines.

• M&A advisors. They are involved in strategy making, deal structuring, and negotiations.

• Financial analysts. They build financial models and conduct due diligence.

• Board members. They provide oversight and approve major decisions.

M&A Process Timeline and Cost Breakdown

The cost of an M&A transaction usually ranges between 1% to 4% of the deal value. Mergers and acquisitions usually take months or even years based on the size of the transaction. Here is a timeline of the process.

Virtual Data Rooms vs Traditional Methods

Modern-day virtual data rooms have revolutionized the M&A sector by streamlining every step of the process. Here is why VDRs are better than traditional tools like emails and physical data rooms.

Explore more about top data room providers on datarooms.org

Key Takeaways

• The process of mergers and acquisitions involves multiple stages, including:

o    Target identification

o    Valuation to due diligence

o    Negotiation

o    Regulatory approval

o    Post-merger integration

• Due diligence is a critical phase that helps identify risks and ensures transparency. It plays a key role in determining whether the acquiring company should move forward with the transaction or not

• Digital tools like virtual data rooms can improve security and collaboration throughout the M&A process.

• Common challenges such as cultural clashes, integration issues, and regulatory hurdles. Companies can overcome these hurdles with proactive planning and the right advisory team.