M&A process: fundamental steps explained
Taking over a company is a powerful tool for those who wish to develop their activities, acquire new expertise, go international or, more generally, remove the barriers to entry into a new market. By developing through acquisition, the company extends its field of action more rapidly, but it also finds itself more quickly confronted with a risk, that of not controlling its growth and seeing its profitability decrease. This is a risk that can be addressed through prior reflection on the company’s acquisition strategy, and by taking expert advice to ensure the preparation of its acquisition project.
We will try to explain here the almost invariable process of an acquisition project.
The definition of a merger and acquisition
A merger and acquisition is defined as a combination of two companies with the aim of improving their turnover and profitability in the medium and long term. This development can take place through operations such as mergers, takeovers, equity investments or associations with other companies that are either competitors or complementary.
However, the main objectives differ depending on the nature of the integration:
- Vertical integration allows for rationalization of suppliers or sales outlets.
- Horizontal integration allows for the diversification of product ranges.
Increasing the size of the acquiring company also allows for economies of scale and can provide additional visibility that strengthens its bargaining power.
What are the three main stages of a merger and acquisition?
The merger and acquisition process is determined by three main stages: the strategic diagnosis phase, the in-depth analysis phase, and the negotiation phase.
- Strategic diagnosis
The strategic diagnosis phase must precede any acquisition project. This step is essential in order to determine the merits of the operation. The objective is then to evaluate the advantages of the acquisition project in relation to the constraints it presents, such as the absence or weakness of real synergies versus those hoped for, or a poor assessment of the integration phase.
Initially, this strategic thinking focuses on market analysis. This can be done using a classical SWOT, which is the traditional business strategy tool that facilitates final decision-making by taking into account four main factors: the intrinsic strengths and weaknesses of the company, which give it an advantage or a disadvantage over its competitors; the threats and opportunities, which are factors that could harm it or which it could use to its advantage.
After this strategic thinking, the candidate for acquisition must identify the target company. To do this, the company may mandate a specialized firm to conduct a search. After exchanging the first level of anonymous information with the seller’s advisor, the candidate for the acquisition will sign – If significantly interested – a confidentiality agreement that will allow the acquirer to access a detailed presentation of the transferring company, also known as information memorandum.
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- Analysis of the information memorandum
Then will come the analysis of the information memorandum, quickly followed by a meeting with the seller, and a visit to the target company’s premises. This phase will facilitate the diagnosis and evaluation of the determining economic and financial performance of the company over the long term.
If the buyer is confirmed during this first phase, the candidate for the acquisition will sign a letter of intent in order to deepen the analysis and initiate an acquisition audit. The letter of intent formalizes the conditions under which the acquisition candidate proposes to take over the company that is to be transferred. It is a basis for discussion that allows both parties to verify if they are in phase on the essential points before engaging in negotiations.
- The negotiation phase
The negotiation phase between the two parties can begin once the letter of intent has been signed by the buyer and accepted by the seller. It will be most often – and it is recommended – to be supported by an acquisition audit, also known as due diligence. This audit covers the following items:
- a review of balance sheets,
- a review of tax risks;
- the examination of risks to employees;
- the examination of possible disputes with third parties and, more generally, of legal risks;
- in some cases, also the ESG criteria (Environmental, Social and Governance) will also be examined – their importance has become paramount in the current period,
This analysis represents a significant mobilization of the purchaser’s time and the commitment to certain expenses for assistance by one or more advisors. The main objective of the acquisition audit is to allow the buyer to establish a basis for negotiation to justify any changes in the sale price and the implementation of guarantees.
The next steps are the legal setup and the financing of the project. The legal structures vary according to the specific situation of each acquisition project, such as choosing to take over the business or only the shares of the transferring company.
Financing depends on the characteristics of the project, the personal ambitions of the buyer, and results from the combination of several sources.
At the end of negotiations, the signature of the memorandum of understanding is the legal act that ratifies the acquisition. It commits both parties to complete the business acquisition process.
After the memorandum of understanding, the buyer will be able to proceed with the release of funds, sign the deed of transfer and complete the relevant administrative formalities.
After the acquisition, the integration
The integration corresponds to the actual implementation of the project. This harmonization step is of paramount importance to ensure the success of combining the two businesses. From the point of view of employees, the management teams must prepare people’s minds beforehand, in terms of internal and external communication, and with regard to customers and suppliers. Internally, the challenges and objectives must be presented in a clear, precise, and homogeneous way within each entity, so that the integration of employees is as smooth as possible, and that they share the same value creation objectives. Consideration of employees is all the more critical, as merger and acquisition operations can give rise to fears about the intentions of the buyer.
In cross-border or international operations, differences in culture and working methods also carry a significant potential for failure if difficulties are not understood and dealt with upstream. Nord France Invest can assist you with your project, and put you in touch with specialized firms in the Hauts-de-France region. Start your personalized support.
What can be the pitfalls of mergers and acquisitions?
While the goal of this type of project is additional value creation, the actual return may be less than expected. The pitfalls can be of various kinds, such as integration difficulties, an intuitu personae of the former manager which had been underestimated, a demobilization of personnel, etc.
In fact, the failure rate of M&A transactions is high. Most of the time this is due to risks that were underestimated upstream, during the strategic analysis phase or after the takeover during the integration itself.
The effective integration of human capital is one of the main key success factors of an acquisition merger. HR issues must be anticipated during the due diligence phase. The HR aspects of the operation should not be underestimated.
The analysis of weak signals from the market (beyond the sectoral ecosystem) is also to be taken into account in order to establish probable market evolution scenarios. Identifying the main visible strategies of the major players in the sector allows us to anticipate the underlying trends. The competitive benchmark will provide an overview of early indicators of significant change.
Finally, set clear, precise, measurable and achievable goals. Indeed, the merger and acquisition operation is not an end in itself, but only a tactical tool in the service of a more important strategic need.
The benefits of successful mergers and acquisitions are tangible:
- Improvement of supply or distribution networks,
- Gain in market share,
- Penetration of new markets,
However, it is important to keep in mind that these operations are complex, and require essential preparatory work on the strategic aspects of the project. It is therefore necessary to engage competent advisors to maximize the success of this process.
Are you looking for an acquisition opportunity in the Hauts-de-France region? As an Economic development agency, Nord France Invest can provide you with opportunities and put you in touch with consultants specializing in mergers and acquisitions. Start your M&A advisory now.
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