Mergers and Acquisitions FAQs - Part 1

Mergers and Acquisitions FAQs - Part 1

Helping to clarify the complex area of M&As.

By Marcia Smith

When should a business consider an M&A?

M&As can be particularly appealing during downturns as the companies involved hope that a value greater than the sums of the individual companies will be created. Often stronger companies will purchase other companies in order to create one that is more cost-efficient and competitive in the market.

During hard times, target companies may be willing to accept an acquisition if they’re aware that it will be tough for them to survive alone. If profits are low but your business has assets, than an M&A may be a good way to avoid further financial difficulties.

What are the key phases of an M&A transaction?

Although M&A transactions are typically a very complex procedure, they can generally be broken down into 4 key phases: strategic planning, valuation, negotiation and contract performance.

1. Planning is the first and most important step in M&A. First off, the company needs to assess its finances to understand whether it can support the activity. By understanding the firm’s current standing, it may then be able to become a prospective buyer, searching for targets.

2. In the valuation stage, it’s typical that non-disclosure agreements (NDAs) are agreed before discussing valuations. If a preliminary deal value and structure can be agreed upon, due diligence work should follow. Any problems found here can allow the company to break off any talks.

3. When the valuation and deal details are mostly finalized, in the negotiation stage, the two parties can work out the transaction details and then sign a sales and purchase agreement (SPA).

4. The final stage is to close the deal and initiate post-deal processes including redeployment of personnel and systems and integration of company procedures and cultures.

When are M&As most likely?

A company is most likely to accept an M&A when times are tough. On the flip side, a company is most likely to seek to acquire other companies when it feels it’s in a strong position, or needs to create a more competitive and cost-effective company.

Sometimes a company may agree to an M&A even if they’re not struggling financially due to the lure of a competitive offer. Likewise, a company whose finances are uncertain may still seek an M&A if they feel acquiring the other company’s resources will turn their business around.

What makes an M&A worthwhile?

There are several potential benefits to an M&A. A company may purchase a direct competitor in order to acquire a larger market share. In addition, they may be able to reduce their costs by eliminating duplicated overhead costs between the two companies. This can include staff reductions, economies of scale and acquisition of new technologies.

Another reason for an M&A may be to diversify the business of a company by purchasing a company in an unrelated field. Gaining new markets can help improve revenues by expanding distribution that can, in turn, lead to the generation of new sales avenues.

Should I get legal advice about an acquisition?

Quality legal advice is essential for several stages of selling a business. If you decided to seek competitive bidding, you might want to draw up a confidentiality agreement to protect any commercially sensitive information. When you’ve reached an outline agreement you’ll want to put the main points of the deal in a signed heads of terms agreement, then get legal advice on the wording of the final terms.

While the buyer’s completing due diligence, it can be tempting to want not to volunteer any information that could discourage them – but deception could leave you open to a legal claim. A legal adviser will help you to stay on the right side of the law.