How Merger and Acquisition Deals are Conducted

How Merger and Acquisition deals are conducted

There can be a variety of motives behind a merger or acquisition. Some companies are hoping to increase in size or create a more efficient enterprise. Others want to raise the value of shares or eliminate a rival. Whatever the reason is, the procedure usually follows the 13 steps outlined below.

1. Identify Targets

Companies opting for M&A, usually draw up a list of possible enterprises, which they view as potential targets. In order to determine a suitable target, it is important to select target determinants such as e.g., geographic of the target, customer base, supply chain. These help to identify matching targets.

2. First Contact

The early stages are conducted through letters. However, an initial telephone call can be made to suggest a purchase. This enables a buyer to assess the target’s reaction and willingness to listen to further proposals. It’s advisable for a potential buyer to use a great deal of persuasive charm at this stage to encourage the target’s agreement.

3. Teaser

If a target responds, the first paperwork to be exchanged is an Executive Summary or a Teaser. This briefly lists the company’s assets, finances, services, and customers. When seeking a buyer, a company can send an anonymous Executive Summary to a potential purchaser to arouse interest.

4. Confidential

Once both parties agree to further discussions about a possible merger or acquisition they sign Confidentiality Agreements. These ensure the talks and their details remain secret.

5. Memorandum

The seller is then required to produce a Confidential Information Memorandum (CIM). This sets out in fine detail precise information about the business. Included are financial statements, company history, assets, customer base, number of employees and any other relevant details. It helps a buyer to make a balanced decision on whether to make an offer.

6. Indication of Interest

If the buyer intends to purchase the target company, an Indication of Interest (IOI) is forwarded. This states a determination to proceed with the purchase. At this stage, only an estimated value is placed on the business, rather than a definite figure.

7. Managerial Discussions

The buyer and the target finally meet in person. During these high profile meetings, the target supplies further information concerning the current state of the business. It usually includes a forecast of probable finances and performance. The meetings also allow both parties to assess the compatibility of their companies.

8. Letter of Intent

If the buyer has confidence in the information provided by the CIM and the personal meetings, a Letter of Intent (LOI) is issued. A precise financial offer is now included in the LOI.

9. Due Diligence

Once the LOI has been accepted, the buyer has direct access to the target’s books and records. This enables an accurate check on the company’s claims concerning finances and assets.  At this point, one of the biggest steps in the whole process is happening. Analyzing the Mergers and Acquisitions on a financial base, which means that the target will be valued on a stand-alone basis as well as with the potential synergies of the deal. This way the buyer can see how the investment expresses itself in numbers. 

10. Purchase Agreement

Eventually, both parties are satisfied with the offer and the authenticity of the target’s financial situation. They enter into an agreement, signing documents that are legally binding.

11. Deal Closure

With the discussions at the end, the task of signing and processing a large volume of paperwork is undertaken. The deal finally concludes with a simple exchange of money and company deeds.

12. Final Adjustments

Following the official closure of the merger or acquisition, various adjustments might need to be implemented. These ensure a smooth transition of the business as the new owner integrates the two businesses. Alternatively, they may continue operating as separate entities.

13. Closing Dinner

Usually, this event is organized by the investment bank. Either the successful purchase or sale is celebrated together with the supporting party.

At the end of this article, I would like to point out that these 13 steps are not set in stone and that there are of course exceptions. But to get an overview and to understand the individual steps it might be useful.

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