Key Stages in Merger & Acquisition Transactions

Nikhil Mogha

28 Oct, 2022

In a competitive world, the company tends to increase its operation all over the world. The acquisition of the company is one of the growth strategies included in their market strategies. The development of new service lines, and expansion of their service to new markets, can be achieved by joint venture or merging with the existing operations of other providers. The general steps involved in the merger or acquisition process are a hefty task and need prior preparation. Each arrangement is different and hence requires different strategies. A merger or acquisition arrangement is complex and requires detailed examination of the target company before entering any Merger & Acquisition Transactions. Therefore, the present article will discuss the general stages of Merger & Acquisition Transactions.

Benefits of Merger & Acquisition

The benefits of merger or acquisition are as follows: 

• Access to new markets:  The Company going into a merger shall enjoy the benefits of new customers in the market by offering them the new service line. The company can also increase its sales and productivity by marketing its product in the new market where the demand for goods is high.
• Diversification: The diversification helps the company to add as diverse portfolios to its business activities list as possible. The merger helps the company to acquire new skill sets and new products or service lines that will help them to diversify their expenses and earn good profits.
• Avoidance of International Competition: The cross border mergers are in trend nowadays. The company willing to expand its business activities across the world can adopt to merge with a company located in another country. This arrangement helps the company to avoid international competition as the product will be introduced in the international market through well-established existing channels.
• Protects from Losses: The well-established company can merge with the company going into losses. This not only protects the company from going into liquidation but also increases the acquiring company’s ability to acquire the customer base of the acquired company.
• Tax benefits: The Company going into a merger arrangement shall enjoy the tax benefits available under the different statutory acts. The acquiring and target company can claim different deductions and rebates on acquiring assets and shares.

Stages in Merger & Acquisition Transactions

• Determination of Market Growth

Determining growth in a particular market is prima facie the first step in the process of Merger & Acquisition Transactions. The company shall firstly evaluate the growth opportunities available in the existing business or service line. It can be acquired through extensive research and collecting data on client’s demand, other competitors, business programs, opportunity of a new business line in the new market, response of the customers and the market, competitive cost, charges and consumer preferences or opinions. The preliminary analysis of the market enables the company to strategies its transactions according to the need of the market and frame the necessary negotiation strategy.

• Development of M&A Strategy

Developing a good M&A strategy is the key aspect of Merger & Acquisition Transactions. It can be possible only by having a clear idea of the market structure and what the acquiring company wants to gain from that acquisition. The strategy shall be framed in such a way that it answers all the questions of the acquiring company. The strategy development enables the company to acquire a market structure that is more suitable and reliable.

• Contacting the Possible companies

After determining the growth market and developing the market strategy, the next step in the process involves contacting relevant parties. The identification of the potential merger & acquisition candidates who could meet the growth objectives of the new business or service line is the next step in the Merger & Acquisition Transactions. The company shall prepare a list of potential targets and starts contacting them. This step helps the company to acquire information about its targets and measure their level of interest in the Merger & Acquisition Transactions.

• Exchange of Information and Letter of Intent

After the possible candidate is identified, the company shall exchange the desirable information with another company. The acquiring company shall share the letter of intent with the other company, which shall dictate the terms of the acquisition. It is a non-binding agreement which includes the relevant terms of the transactions, including structure, purchase price, special closing conditions and terms of its employees after closing. Along with the letter of intent, the company shall also enter into a non-disclosure agreement, which would protect sensitive information from getting leaked to the public.

• Valuation of the Target Company

The acquiring company shall evaluate its financial structure and analyse if it is in line with its growth structure. This process involves acquiring information about the target company’s operations, customers, market structure, financial reports, products etc. The team of acquiring company shall analyse the data and perform first-hand analysis to determine the possible risks & opportunities associated with the Merger & Acquisition Transactions between them. A comprehensive evaluation of the target company’s financial position enables the acquiring company to make an informed decision and diligently move to the next step in the process.

• Conducting Negotiations

With all the information and valuation reports in hand, the acquiring company shall prepare a negotiation strategy with the target company. The acquiring company shall form a reasonable offer, which will help them to acquire the target company with less cost. The terms and conditions of the negotiation strategy shall be framed so that it shall be proved to be a win-win situation for both companies.

• Conduct Due Diligence

The due diligence^[1] process is started when the negotiation results in the acceptance of the offer. It includes a complete and detailed review of the target company in order to fully understand the risk and opportunities associated with the Merger & Acquisition Transactions. It involves the review of the target company’s financial and operational position to ensure that the information received earlier matches the current examination process.

• Purchase and Sale Agreement

After the due diligence is completed, the acquiring company and target company enter into a purchase and sale agreement. The acquiring company uses all the information acquired during the due diligence process and frames reasonable terms and conditions. It shall include all the cash, assets, liabilities and stock given to the target shareholders. The purchase agreement shall also include the date & time of payment and transfer terms to the target company shareholders.

• Signing and Closing the Deal

Assuming the purchase and sale agreement is finalised, the acquiring and target company make the M&A transaction official by signing the agreement. The signing of the agreement signifies the closure of the deal and binds both parties to the terms and conditions of the agreement. After the Merger & Acquisition Transactions become effective, the acquiring and target company shall make every effort to integrate the company into a merged entity.

Conclusion

The Merger & Acquisition Transactions are complex and require careful due diligence throughout the whole process. The failure of any M&A transaction depends on the company’s appointment of irregular techniques in the transaction. It is also advisable to adopt a third-party agent who will handle all the due diligence process, legal, financial and operational aspects of the target company and helps the acquiring company to make an informed decision. Henceforth, any company willing to enter into an M&A transaction shall follow the above steps to avoid any future risks.

Read Our Article: Due Diligence in Mergers and Acquisitions Transactions