In this brief guide we describe the acquisition process from the beginning, as well as the different types of oprations.
- Decision to acquire companies as inorganic growth
- Criteria for acquiring a company
- Company search and selection
- Due Diligence
- Contract of acquisition
- Transaction Financing
- Post-Closing (Much more important that it may seem)
A Mergers and Acquisitions (M&A) Process in 10 steps, considering two aspects: Strategy to be followed and criteria to be considered:
1. Plan an acquisition strategy:
The first step is to set a goal. Have a clear idea of what you expect to gain from the operation or purpose of the business.
Normally the initial interest usually responds to:
- Use of surplus funds and increase in group value
- Lower cost of start-up
- deally, the value of the companies as a group should be greater than the value of each one individually.
There are 2 types of synergies depending on the type:
- Horizontal Acquisition: One Competitor Acquires Another
- Vertical acquisition: A company acquires a complementary company to grow faster
It is also necessary to consider whether the purchaser is industrial or financial.
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2. Establish the search criteria for the opportunity to be acquired:
It should be identified the key criteria that potential companies should have:
- Management. The management of the company to be acquired can be improved and the acquirer has the keys.
- Geography. The company to be acquired has to cover areas where the acquirer has no business.
- Treasury. The company to be acquired has a lack of treasury and the acquiring company can cover that lack in exchange for equity.
- Business areas. The company to be acquired develops business areas that are complementary to that of the company being acquired and can be integrated, generating economies of scale.
- International expansion.
- Elimination of competition.
3. Search for potential targets:
Here are some alternatives.
- Through the knowledge of the competence, the acquirer can know which objectives to acquire and in what condition they are.
- He can use a professional to do that job (Corporate Finance)
- Your usual financial institution (banks or others) may offer you opportunities.
4. Planning the transaction:
The purchaser must contact one or more companies that can be acquired. The purpose of these initial discussions is to obtain as much information as possible and to assess the potential transaction.
At this point, the companies usually enter into an NDA or confidentiality agreement, as normally confidential information is exchanged in order to advance the discussions.
5. Analysis of the company:
For those opportunities that seem to be feasible, a preliminary request is address the company for additional information. This additional information should be used to further evaluate the potential acquisition. Normally, the financial statements are examined without prejudice to others.
6. LOI (Letter of Intent) and Negotiations
First offer, normally non-binding but usually setting out the guidelines for the transaction. Once the initial offer is submitted, the companies start the negotiations in a more detailed manner.
7. Due Diligence:
Due Diligence is a comprehensive process that begins once the LOI has been accepted. The objective is to confirm or correct the evaluation that the acquirer has made on the company to be acquired.
The following aspects are reviewed:
- Financial: Review of the correctness of the figures provided and adjustment of the company’s valuation.
- Commercial: Examination of the corporate part of the company, assets, liabilities, contracts, licenses, customers, insurance, litigation, industrial and intellectual property, data protection, etc.
- Labor: Study of the status of the workers
- Fiscal: Review of fiscal aspects and their possible contingencies.
This Due Diligence report indicates the possible contingencies that may arise after the operation. These contingencies affect the negotiations as they usually lower the price or have a strong impact on the operation.
8. Drafting of contracts and other transaction documents:
The Due Diligence report plays a decisive role when drafting documents and planning the strategy to be followed.
At this point, not only the price is important but also other aspects. This is the case with:
- Method of payment
- Power sharing
- Rules that will govern the companies: Transmissions, governing bodies, decision making
- How to retain key people in the company
9. Finance for the operation:
The acquiring company must have foreseen the amount of funds needed to carry out the operation. In many cases the timing of the transaction depends on the inflow of funds from the acquiring company.
This operation can be leveraged. This is the case with LBO (Leveraged Buy Out). This operation usually complicates the operation of the transaction.
The company is required to meet the following requirements:
- Generation of stable cash flow to deal with debt
- A stable or slow-growing company. If it were a fast-growing company it would need to have the liquidity of cash flow to grow.
- Experienced team
- Low debt
- Possibility to reduce costs
- Existence of non-strategic assets in order to sell them and obtain liquidity
- Recommendable that the directors are members of the company
- Low working capital requirement and undemanding investment program
10. Closing and integration for the acquisition:
At this point there are 2-time lines:
- Signing of the commercial operation: via merger, acquisition, purchase of assets, etc.
- The effective integration of the 2 businesses. This point is often quite complicated as two different business units must be brought together. This mainly affects the internal functioning, personnel, computer applications. Etc. Normally these integrations are not straightforward but they are usually designed in advance. Businesses cannot stop its normal operation, otherwise they lose value. It is possible that after the integration the decision making and internal protocols have changed. That is why this integration process is usually designed meticulously and from the beginning of the operation.
If this article has been of interest, we also suggest you to read the following article published on our website: Legal Due Diligence