Mergers Acquisitions M&A Process

The combination or purchase of another company facilitated by an investment bank to create a new business entity

Author: Bakhtiyorjon (Ben) Yokubjonov
Bakhtiyorjon (Ben) Yokubjonov
Bakhtiyorjon (Ben) Yokubjonov
Currently an Investment Banking Analyst at Alkes Research (Tashkent, Uzbekistan based Investment Banking Boutique). Bakhtiyorjon (Ben) previously worked in private equity at Uzbekistan Direct Investment Fund and telecommunications at Uztelecom prior to joining Investment Banking team at Alkes Research. Ben is currently senior undergraduate, concentrating in Corporate Finance and Security Analysis at British Management University in Tashkent.
Reviewed By: Patrick Curtis
Patrick Curtis
Patrick Curtis
Private Equity | Investment Banking

Prior to becoming our CEO & Founder at Wall Street Oasis, Patrick spent three years as a Private Equity Associate for Tailwind Capital in New York and two years as an Investment Banking Analyst at Rothschild.

Patrick has an MBA in Entrepreneurial Management from The Wharton School and a BA in Economics from Williams College.

Last Updated:September 22, 2023

Overview Of The M&A Process

A merger and acquisition of companies, firms, and big corporations are considered one of the most significant events in the capital markets. As a result, the M&A deals process undergoes multiple stages before the deal is closed, while a merger is the process of the combination of two companies into one particular enterprise.

While an acquisition involves both parties actively participating in the deal-making process as one company buys all or a specific portion of the business or assets an enterprise sold.

Companies processing the M&A deals do not prepare the particular, well-defined, documented procedure and processes for their planning, implementation, and decision-making of mergers and acquisitions.

The M&A deal flow model has two stages: the pre-deal stage and the post-deal stage. The sub-stages of the pre-deal are the following but are not limited to:

  1. Formulation
  2. Location
  3. Investigation
  4. Negotiation

The sub-stages of post-deal are the following, but not limited to:

  1. Integration
  2. Motivation
  3. Innovation
  4. Evaluation

Key Takeaways

  • Every merger and acquisition process is different, which, as it turns out, requires the customization of adaptation of critical functions. And it is something that managers of the deals should be mindful of features of M&A deals.
  • M&A deals' experience is a key determining factor to the success of the deal closed
  • Positive results for well-defined M&A integrations, like lower costs, fast integration, achievement of projected synergies, executive alignment, protection of productivity, and maintaining customer focus.
  • Innovation in the enterprise is a crucial part of the growth of the revenue of the new enterprise.
  • The firm should train and identify those responsible for the enterprise's attempts at mergers and acquisitions.
  • Top management should be mindful of selecting the target candidates for the potential M&A deal.
  • Retaining critical talents of the enterprise is a crucial aspect of the agreement's success.

Pre-deal M&A process

If you are working on an M&A deal, you will need to develop a process flow that you need to follow rigorously since it is quite easy to get lost along the way.

As stated earlier, working on any M&A deal can be broken down into two stages - the pre-deal process and the post-deal process. 

Initially, a good strategy needs to be made in which the acquirer has a clear idea as to what type of company they would like to acquire and what they expect to gain from such a transaction.

Once the search criteria are set, the journey begins to search for the potential acquisition targets with whom the bankers can set up meetings to eventually explore the synergies between the acquirer and the target company.

During this entire process, it becomes really necessary that the bankers schedule regular meetings with the acquirers as well to let them know about the developments as well as to stay aligned with the decided strategy. Since the markets are constantly evolving, it is best to stay on terms with the acquirer firm.

Below are various pre-deal stages, along with what happens during those particular times between all the parties involved.

Pre-deal Stage: Formulation

Mergers and acquisitions are decisions in terms of the strategic level; that is why it is crucial to formulate a well-defined M&A strategy by preparing a specific analysis in the strategic analysis.

Despite this, most firms and companies will fail to implement the full range of strategic factors that strongly influence the transaction process. For instance, there will be minimal effort in analyzing the internal features of the firm's capabilities, which may be an addition during the M&A process.

Another issue in the process is the insufficient analysis and comprehensibility of the future industry consolidation. Additionally, many companies do not even conduct DD (due diligence) and integration attempts on the strategic desire for processing the transaction.

All of the errors mentioned above and failures have been evidenced to be the prevalent reasons for the poor performance of mergers and acquisitions.

A thorough strategic analysis provides the stage for well-performing M&A in several matters.

1) Firstly, it will give the management team to find the potential target firms during the upcoming location substage.

2) Secondly, the comprehensive strategic analysis provides the foundation for the due diligence of the target firm during the investigation sub-stage.

3) Thirdly, a thorough examination can be a basis for the strategic rationale for moving with the transaction process.

Even this will provide the drive for the integration attempt by drawing the comprehensive road map for the way and the extent firms will be in integration with their business operations, human resource management, and technology.

Pre-deal Stage: Location

After preparing a solid merger and acquisitions strategy, the location of potential target firms suitable for the firm's M&A strategy is one of the crucial factors to the transaction's success.

Prioritization of the target firm should include two perspectives: a strategic fit and an organizational fit.

1. Strategic Fit

Strategic fit will be in terms of close similarities or relatedness of both firms. The relatedness may take on two different forms within a transaction:

  • Horizontal M&A is present in the execution between firms closely related to the business operations, products, and services, with both firms doing business in the same market. 
  • Vertical M&A is present among the firms that possess the potential or existing buyer and seller relationships before the transaction is completed.

Conglomerate acquisitions include companies unrelated to the products and services they provide and the markets in which they make operations, and the firm's transactions progress through a diversification strategy.

High levels of relatedness are considered a massive contribution to merger success. But, on the contrary, the difference between the target and the buyer sides on the significant aspects of strategy.

2. Organizational Fit

Organizational fit can be characterized by the shared similarities between management styles, rewards and evaluation systems, company culture and values, and organizational structures.

With the combinations of firms with uncorrelated cultures, one firm will eventually gain dominance over the other, and the employees in the target firm will get discouraged. They will have a feeling of being underrepresented, like a second class in the newly-formed enterprise.

Pre-deal Stage: Investigation

The investigation stage of the M&A process includes way more granularity in assessing the target firm than during the location process.

Thorough and detailed due diligence of potential candidates for the M&A partnership should be explored in all the possible aspects of the target firm.

During the investigation stage, a detailed due diligence process should be implemented to cover the traditional aspects of a target company, which include:

  • Technical
  • Environmental
  • Operational
  • Legal aspects

Acquirers should also pay mind to nontraditional elements such as human resources or culture. The top management team's tendency to ignore the cultural and other related non-financial aspects impacts the underperformance record of the M&A processes. 

The insufficient due diligence related to the culture in most deal transactions is because of the management's interest in strategic fit presented by the potential combination or the underestimation of the cultural impact on the deal's performance.

Pre-deal Stage: Negotiation

The negotiation stage of the M&A deal presents the process and the criteria for a successful well-defined agreement between the firms. Those considerations include but are not limited to four key factors:

  • Performance
  • Legal Protection
  • Governance
  • Price

One of the essential aspects of the mergers and acquisition negotiation process is gaining agreement on specific terms and conditions related to the transition services for the different functions. Those functions include:

  • Information Technology
  • Financial Reporting and Analysis
  • Benefits Administration
  • Payroll

These functions are crucial to better integration of the firms.

Solid mergers and acquisitions negotiation agreements depend on the information collected from the investigation stage, the objectivity of both parties, and detailed, well-preparation for the negotiation process.

An essential aspect of the preparation for the M&A negotiation is collecting all available information about both parties in the talks, especially for cross-cultural negotiations.

Because almost all cultures present their negotiation side differently, insufficient information and knowledge, and understanding of the cultural values of other parties cause weak judgemental decisions that lead to poor negotiation agreements.

Post-deal M&A process

After the completion of the pre-deal stage, the merger and acquisition process is known as the post-deal stage, which involves integration, motivation, innovation, and evaluation sub-stages that eventually close the M&A deal.

The definition of the M&A deal is the combination of at least some aspects of the firm’s business process, human capital, and technology after the completion of the transaction. The degree of integration is different from deal to deal.

Some of the transactions are only present with higher degrees of integration to have the synergies present in the earlier stages of the M&A. In contrast, others have the requirements of less integration of the firms to have the desired performances.

The problems caused by poor integration attempts are not limited to large companies. Similar to large firms, smaller enterprises also have weaknesses in making mistakes, consciously or unconsciously, in decision-making, communications, and integration planning.

Despite most M&A transactions being terminated before the integration stage, the integration planning should be launched before the real deal is closed during the investigation and negotiation stage, even though the transaction will not be processed as planned.

Initial early planning will facilitate the integration attempt to start the immediate transaction closed once the negotiation stage is complete. The optimal integration practices that can increase the quality and performance of the M&A deals:

  • Clear identification of the expectations of transaction performance and targets
  • Required level of integration definition for achieving the desired synergies
  • Allocation of the appropriate resources related to integration and the integration manager designation and keeping those resources available during the integration attempt
  • Application of solid project management techniques and principles
  • Development and execution of the well-defined integration plans
  • Regular evaluation, tracking, and reporting of the progress of integration
  • Clear and consistent internal and external communications during the integration
  • Management decision-making about the integration activities in time and coordination.

Post-deal stage: Motivation

Engagement with employees is considered a vital part of successful M&A deals. Employee engagement positively correlates with the enterprise's profitability, productivity, safety, and customer satisfaction.

That is why during the motivation stage in M&A deals, top management should put significant effort into retaining key motivated talents from exiting or providing their key talent committed to the development of combined enterprises.

The initial component of the motivation is the identification of the key talents by implementing the particular criteria for each transaction.

During the merger and acquisition deal process, key talent is referred to as the people who contribute the most value to the combined enterprise and are considered to be one the rarest figures to make a replacement instead of them.

Apart from the specific individual or technical expertise, talented members of the enterprise should be identified according to what is required to execute the combined enterprise’s business strategy.

Post-deal stage: Innovation

Mergers and acquisition deals can decrease the cost of innovation by establishing economies of scale by rationalizing research and development (R&D) attempts to combine the enterprises.

The rivals engaged in M&A deals with their counterparties are not likely to go for expansion into the new R&D fields or leverage technological competencies in the markets and products of new companies.

In contrast, non-rivalry enterprises combining via M&A deals are likely to increase their research development and productivity significantly.

In terms of talent, provided the employee who is a crucial player leaves the enterprise following the M&A deal, it results in a high risk to the subsequent success of the combined enterprise.

Several integrative approaches have a positive influence on innovation features and performance of M&As:

  • Facilitation of the exchange of technical expertise between the combination of firms
  • A well-structured and executed integration communication
  • Job rotation between the employees and management of the combined firms
  • Delegating the decision-making level to the R&D team
  • Forming the new product management development teams

Post-deal stage: Evaluation

The performance of the M&A deals is usually based on:

  • The financial
  • Quantitative parameters
  • Accounting or,
  • The achievement of enterprises' strategic objectives

Despite this, presenting a comprehensive, well-defined assessment of success and performance measurement of M&As is based on the multifaceted approach that represents the complexity and interdependence of several stakeholders influenced by the transaction process.

However, there is no one particular type of performance measurement method that can thoroughly and comprehensively analyze M&A deals.

Strategic vs. Financial Buyers in M&A

Now that you know the process flow of an M&A deal, we will try to understand who are the different types of buyers in such deals. Generally, there could be two types of buyers - strategic and financial buyers.

The synergy between the acquirer and the target company plays a huge role in determining whether it is a strategic buyer or a financial buyer. Let's take an example to understand the strategic buyer.

Suppose that a company has several warehouses all over the country. Now, the businesses that are complementary to the warehousing-as-a-service business are the last-mile delivery service or the transportation business.

If the company buys either type of company, then it becomes a strategic deal to expand its offering in the logistics sector. On the other hand, financial buyers 'may' not always have a preference for the business. 

Their objective might be to help grow the business and eventually profit once the business has reached a certain scale and has a considerable number of buyers in the market.

No matter what the type of buyer is, M&A deals are some of the most exciting pieces of work to happen in the financial industry.

Why Do Companies Keep Acquiring Other Companies Through M&A?

Generally, a particular sector excels when there is a considerable amount of competition. The competition eventually leads to the development of distinct product lines and services, which brings out the leader in that particular sector.

However, the story doesn't always play this way.

Not every company is going to have unique product lines that a large number of customer wants; to being with, they may not even have a very large customer base.

When the competition is intense and the market is crowded, M&A deals make a lot of sense to cut off the competition of that they are no longer a threat. This eventually leads to inorganic growth of a country leading to increased revenue as well as customer base.

The consumer sector is one of the most crowded sectors in any geographical region. Although the total addressable market is pretty large, the companies find it difficult to sell the products or services due to intense competition.

As a result, a large number of companies are eventually due to mergers or acquisitions.

A company may even acquire product lines, intellectual assets, or human capital to gain an edge over its competitors. Once the synergy is established, the combined entity will have either an increase in revenue or a decrease in cost as a result of improved efficiency.

There may also exist a lot of other synergies such as technological synergy, product line synergy, target market synergy, etc.

Researched and Authored by Bakhtiyorjon (Ben) Yakubov | Linkedin

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