Estimated reading time: 8 minutes
Mergers and Acquisitions have become a major part of many organisation’s growth strategies especially in the oil and gas sector. Given the current situation of 2020, we are witnessing a crash in the oil prices. The deal count of M&A might have fallen but the transactions have been much bigger with multiple deals above billion dollars. Firms go ahead with M&A deals for several reasons for example, to grow market share, value generation, access new technology etc. Given the benefits, mergers and acquisitions might seem very appealing, but they are a very risky business.
Whats worst is the going through the M&A process can be very intimidating for both parties involved. When it comes to properly executing the M&A process, organisations often fall short due to its complexity. Improper planning, lack of transparency, absence of security information, poor due diligence are some of the common mistakes which organisations. They end up paying more than the fair value of the deal. Having a good plan will help in avoiding costly oversights. We will be detailing the Steps in the Merger and Acquisition process:
1. Develop M&A strategy
Managers and leaders should develop and determine the high-level goals for the organisation and what they want to gain from this M&A deal. They should look at what their business purpose is such as for example increasing share in their current market or expanding product lines, or even customer base etc.
2. Set Search Criteria
After defining the M&A strategy and goals, organisations need to make a profile of their ideal merger or acquisition. Firms need to determine the key criteria like, what should this company provide? They can consider company size, financial position (profit margins), products or services offered. They can also look at customer base, culture, and any other factors pertinent to the position as a buyer. These considerations will help eliminate suboptimal candidates.
3. Identify and Contact Targets
They can appoint search team, where this team identifies, classifies, and assesses potential candidates that could satisfy the firm’s strategic growth and financial goals. They can start contacting them and reaching out. This will create a two-way conversation with potential targets and the discussion will help in gleaning more information about the company, understanding their interests, and assessing the overall amenability among the two entities.
4. Acquisition planning
The acquirer prepares the initial contract for one or more companies that meet its search criteria and appear to offer good value. The buyer would generally send a letter of intent (LOI) or teaser, in which he’ll express interest in pursuing a merger or acquisition and provide a summary of the proposed deal.
5. Performing Valuation Analysis
This is undoubtedly one of the most crucial step in any M&A process. The target company provides the buyer with more in-depth information about its business, generally in the form of a confidential information memorandum (CIM) or a deal book. This encompasses comprehensive data on the company’s history which will help with the valuation process. In addition to financial analysis, organisations should also consider culture fit, external conditions that might affect the success of the deal such as timing, and other forms of synergy. It’s very common of organisations to hire external counsel to assist in this crucial step.
After producing several valuation models of the target company, the acquirer should have sufficient information to enable it to construct a reasonable offer. The two entities meet to further discuss the possibility of a transaction and negotiate specific terms as well as a price.
7. Conduct Due Diligence
Once an offer with the final candidate is on the table, the acquirer must conduct due diligence. Due diligence is a comprehensive process that examines, evaluates, and analyses all aspects of the target company’s operations and financial position prior to establishing a definitive agreement.
8. Executing the Transaction
After due diligence is confirmed with no major concerns and that the company is a suitable fit, the two parties can proceed to negotiate the logistics of the transaction i.e. regulatory, operational, and cultural issues, constitute, and sign the final contract.
9. Integration Process
Once the deal is finalized, the parties involved should work together to successfully integrate into one entity. This involves planning of finances, organizational structure, roles and responsibilities, culture, etc. This process needs to be monitored for several months after the deal is done.
Mergers and acquisitions are considered as important & have become a key part of any business strategy. One good deal can be a great turnaround for any organisation and this is important that these deals are carried out properly otherwise the organisations will have to pay a big price for small mistakes. The steps covered above will help minimise the chances of occurrence of any such mistakes.