THINGS TO CONSIDER BEFORE BUSINESS MERGER AND ACQUISITION
Mergers and acquisitions (M&A) are defined as consolidation of companies. Differentiating the two terms, a merger is a legal consolidation of two entities into one entity, whereas an acquisition occurs when one entity takes ownership of another entity's stock, equity interests or assets. From a commercial and economic point of view, both types of transactions generally result in the consolidation of assets and liabilities under one entity, and the distinction between a "merger" and an "acquisition" is less clear. The two terms have become increasingly conflated and used in conjunction with one another. Contemporary corporate restructurings are usually referred to as merger and acquisition (M&A) transactions rather than simply a merger or acquisition. M&A is one of the major aspects of corporate finance world. Here are some things to consider before business merger and acquisition:-
SET YOUR GOALS:-
In putting together your M&A strategy, you should analyze both your competitive position as well as your future objectives. That means understanding what you're doing with your business, where you want to go and what you value most. That means making sure you understand what it is you are trying to gain through this transaction.
LIQUIDITY AND FINANCIAL CONDITION:-
Before you enter any transaction, determine if you have the financial wherewithal by performing a thorough financial health check. Since the recession, most organizations have shifted their focus away from profit and loss statements and towards liquidity, That means asking if you have enough liquidity to carry off a transaction successfully. Once you determine if you have the liquidity to make and sustain an investment, then ask if your capital structure can bear the added strain. If not, assess a range of debt and equity capital funding strategies that will give you the balance sheet you need to be successful in the M&A game.
INTERNAL COMMUNICATION:-
Whether you are doing a deal or just working to grow your business, internal communications play an integral role in motivating staff and drawing on their unique insights. Whether it's finding efficiencies, identifying emerging trends or fresh thinking on how to win business, your staff is your most powerful asset for business growth.
ESTABLISH A NEGOTIATION COMMITTEE:-
The board should establish a Negotiation Committee (the Committee) comprised of disinterested, experienced board members and negotiators to negotiate the price and the terms of the acquisition proposal from any interested acquirers. It is important for the Committee to bear in mind that the negotiation process is a means to an end and will work best only if they identify their fundamental goals at the outset. The mandate of the Committee should be to secure the transaction offering the best value for the shareholders and the company. Thus, understanding the basic strategy objectives to be derived from the transaction will make for better decision throughout the negotiations including when to stretch and when to stop on key issues such as price, integration, future investments and governance.
HIRE COMPETENT ADVISORS:-
Negotiation committee should hire appropriate and competent advisors to assist them in addressing major and sensitive matters. Aspects of this transaction where expertise may be relevant include financial evaluation, due-diligence, valuation of the company, sale process design and implementation, legal, tax, regulatory and compensation arrangements. The use of expert advisors would be evidence of an effort by the Committee at conscientious, transparent and informed decision making. And the lack of such advisors may be seen as evidence to the contrary.
M&A RECORDS:-
It is not enough for the Committee to do a good job, it must do it properly. The Committee should be aware that its decisions may be challenged in court. Thus, contemporaneous minutes of the Committee's meetings represent a primary record of what was done and how well it was done. Minutes should convey a meaningful sense of the subjects discussed, the written and oral material presented, the participation and interaction of the members of the Committee, key advice and recommendations provided and other indicia of the deliberative process in which the Committee engaged. Good advisors would often prepare financial, legal and other presentations for the Committee to help them make rational well informed decisions. These materials are evidence of due care and can be useful memory aid for the Committee in litigation. These materials should be compiled, on a meeting by meeting basis, and be available to demonstrate the written information that the Committee considered in its deliberative process. Naturally, the Committee would be faced with many decisions and pressures from the trade unions, politicians and litigants so always recommended that keep all records properly related to M&A.
EMPLOYEE SELECTION:-
This is the toughest part. System selection may make some of the decisions easier. But you need to look after your rock stars. If you have to outplace one of your specialists because the new company is going in a different direction, bend over backwards to get this person plugged into your network and spend the time to get the person settled. Employees not let go because of a system change become another sales effort. If both sides can identify their top 20% of employees from a value contribution standpoint and their bottom 10% (taking into account potential for junior staff), you have the opportunity to really build a stellar team. Typically, if you did your hiring right, your top 20% are the type that can adapt to a changing environment. Fight hard for these folks so they can keep their jobs.
BRAND STRATEGY:-
A strategy using the information gained from marketing research, the attributes of the acquired brand can be mapped to those of the existing or parent brand. A recommendation on brand strategy can be made: merge or absorb the acquired brand into the parent brand or keep the two separate. Even if the decision was made from the outset, the mapping is still a valuable tool, especially if the decision is to migrate to the parent brand. Knowing how the values and attributes of the acquired brand align with, or even enhance, the parent brand is essential to planning the communications programs that will support the migration.
A marketing communications plan should be developed with the goal of communicating the new brand to the market in a way that key audiences will find relevant and motivating. There are no absolutes in terms of tactics and timelines, and the market will not react to a corporate policy or dictation. It will understand the transition on its own terms and in its own time. The idea is to develop a plan that will help the market and key audiences gain awareness, understanding and preference for the new or revised brand.
INTEGRATION:-
The success or failure of an acquisition lies in the nuts and bolts of integration. To foresee how integration will play out, we must be able to describe exactly what we are buying. The best way to do that, we've found, is to think of the target in terms of its business model. As we define it, a business model consists of four interdependent elements that create and deliver value. The first is the customer value proposition: an offering that helps customers do an important job more effectively, conveniently, or affordably than the alternatives. The second element is the profit formula, made up of a revenue model and a cost structure that specify how the company generates profit and the cash required to sustain operations. The third element is the resources such as employees, customers, technology, products, facilities, and cash companies use to deliver the customer value proposition. The fourth is processes such as manufacturing, R&D, budgeting, and sales.
PROPER VALUATION:-
There are two basic types of acquisitions. In the first kind, a company acquires another to strengthen its current business model. We call such deals "leverage my business model" (LBM) acquisitions. In the second case, a company uses an acquisition to "reinvent my business model" (RBM), or at least diversify its business strategy. RBM acquisitions most effectively raise the rate of value creation for shareholders, it's ironic that acquirers typically underpay for those acquisitions and overpay for LBM ones. The stacks of M&A literature are littered with warnings about paying too much, and for good reason. Many an executive has been caught up in deal fever and paid more for an LBM deal than could be justified by cost synergies. For that kind of deal, it's crucial to determine the target's worth by calculating the impact on profits from the acquisition. If an acquirer pays less than that, the stock price will increase, but only to a slightly higher plateau, with a gentle upward slope representing the company's weighted-average cost of capital, which for most firms is about 8%. Ultimately, the "right" price for an acquisition is not something that can be set by the seller, far less by an investment banker looking to sell to the highest bidder. The right price can be determined only by the buyer, since it depends on what purpose the acquisition will serve.
CLOSED AUCTION STRATEGY:-
A strategy is to follow the closed auction method in order to obtain the best deal for the company. The Committee should ask all those interested to acquire the shares to make a sealed bid for the shares by a fixed deadline. The Committee with the assistance of its investment bankers and advisors should prepare a descriptive memorandum that is circulated to the prospective bidders.
Prior to the bidding, the Committee should send a draft contract and related documentation to all the prospective bidders. Interested bidders should be allowed to engage in limited due diligence and then submit their bids together with any comments on the draft contract. A closed auction often has more than one round and may involve simultaneous negotiations with more than one bidder. A significant advantage of a closed auction is that it can be effective even if there is only one bidder. Because a bidder has no way of knowing whether there are other bidders, it can be expected to put forward its best bid. In addition, the Committee in a closed auction can negotiate with bidders to try to elicit higher bids.
KEEP IN MIND THE FOUR C's:-
In doing your best to ensure that your M&A transaction fulfills all the goals and objectives you have hoped, suggest using the "Four Cs" to keep you on target:
Compensate: If you want existing management to stay, make their targets achievable and compensate appropriately.
Communicate: People on both sides of the transaction should be completely aware of what's going on to help quell rumors and paranoia. People will respond to uncertainty by assuming the worst.
Care: How you react to challenges can make all of the difference. Even small inconveniences can generate ill feelings. Respond quickly and completely.
Cull: If you must say goodbye to any members of management, make your decisions quickly, but carefully.
CONCLUSION:-
The business environment has rarely been more favorable for M&A. Capital is superabundant and interest rates are low. The world economy abounds with big opportunities. Buying into a market is often a company's best tool for tapping into that growth potential. Not every company has what it takes to pursue M&A successfully. The best have a deep understanding of their strategy and begin from a position of strength. This review and discovery should extend beyond the financials, products and business strategies to examine branding and marketing of the acquired or merged company. Return to Articles Index