Mergers and acquisitions have become one of the most popular ways of expanding a business. Knowing where to invest and to merge with which company is a crucial aspect of mergers, which requires a lot of planning, preparation and strategic evaluation. The major objective behind mergers is that businesses share the same strategy of cost optimisation, business expansion, market growth and earning a larger market share.
The process of consolidating the assets of two or more business houses or the coming of two or more companies together is known as merger and acquisition. It is a business strategy that results in forming one single entity by acquiring or merging more than one company. It is a form of investment decision that the company's shareholders take to increase their market share.
Merger and acquisition is an integral aspect of investment banking. One can gain a deeper understanding of mergers and acquisitions by enrolling on an insightful investment banking course. Read on to imbibe a profound understanding of planning and preparing for mergers, the various stages involved in a merger and best practices.
Stages of a Merger and Acquisition Transaction
Merger and acquisition transactions can be different due to their dynamic nature. Some transactions can be simple and open-ended, whereas some can involve certain complicated turns of events. Merger transactions vary depending on their nature, size, number of employees, regulatory implications, international commitments, fiscal considerations and so on.
However, all merger and acquisition transactions follow a basic process involving 5 major steps. The degree of complexity in these stages may differ depending on a particular merger or acquisition.
Assessment and preliminary review
The first and foremost step to begin a merger and acquisition transaction is to prepare a memorandum of information. This has to be done even before a purchaser is found for the entity or company that is up for merger. Generally, the vendor draws the information memo and broadcast set to evaluate market interest. This helps the vendor to ascertain suitable buyers willing to buy a portion of a business or the entire business at the highest possible price.
The information memorandum contains all the relevant information necessary for the purchaser to decide whether to buy the company or not. However, it does not reveal any sensitive or confidential information related to the business. To gain access to confidential company data, parties have to indulge in a non-disclosure agreement (NDA) to protect sensitive information concerning the business.
Negotiation and letter of intent
The next step is negotiation, followed by due diligence when there exists more than one suitable purchaser. However, in an event where there is only one buyer in the running, it is routine for the parties to start discussing certain matters prior to the merger's contractual phase. This can be done either before or at the time of commencement of the due diligence process.
The important matters of concern in this phase can be listed as follows:
- Competition law implications and findings, and if any of it requires pre-clearance from the office.
- Matters related to employment law considerations.
- Important matters related to various licenses.
- Aspects of fiscal implications.
- Tracking of market conditions.
Additionally, both the purchaser and vendor must put out certain terms and conditions for the merger to be reviewed by both parties. Such terms are contained in a letter of intent, and the parties have to agree to continue with the merger.
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Carrying out a due diligence exercise on the target company is common in an M&A. Generally, where there is only one buyer, the advisors chosen by the purchaser carry out the due diligence exercise. The seller also conducts a due diligence exercise for multiple reasons, such as for facilitating the sale of the company shares, finding any potential problems that may act as a barrier to the sale, searching for any warranties, etc.
The purpose of due diligence is to cover legal, financial and fiscal areas, ensure fair pricing and spot any potential risks that may arise out of a particular merger and acquisition transaction. It takes into account a variety of legal aspects and determines whether this merger will result in any legal ramifications or not.
Negotiations and closing
Following the final phase of the due diligence process, the potential purchaser analyses and reviews the advisors' reports to take the final call about the merger. It also establishes the significance of the deal. The parties then finally negotiate and decide the terms and conditions of the merger, its pricing, transfer of rights and all other important aspects of the deal.
After finalising the merger, both parties discuss the pricing of the assets, liabilities and indemnities of the business that shall be included in the Share Purchase Agreement (SPA) or the Assets Purchase Agreement (APA).
Post-closer implementation/ integration
The final stage is signing the share purchase agreement that includes detailed clauses relating to the rights regarding acids and liabilities of the business, issuing notifications, obtaining consent and so on. Additionally, both parties can arrange for a post-closing integration that will allow them to acknowledge their common business intent.
Merger is a part of the capital market, which is a crucial concept of investment banking. One can build a career in investment banking by learning the fundamentals of mergers and acquisitions.
Mergers and Acquisitions Best Practices
Companies can improve the chances of a successful merger by implementing the following strategic best practices:
- Aligning the organisational objectives and market positioning of the acquiring and target company.
- Conduct strategic planning and proper integration.
- Indulge in cultural integration by eliminating cultural differences.
- Engage and communicate with the stakeholders seamlessly.
- Perform risk management analysis while considering a merger.
- Keep track of the post-merger performance.
Merger and acquisition is a delicate process that requires extensive research, knowledge, planning and expertise in investment banking activities. This domain contains multiple components for which a strong hold on investment banking operations is important.
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