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Describe the overall merger and acquisition process.

Describe the overall merger and acquisition process.

Answers

Kavungya
Phase 1 - Pre Acquisition Review:
The first step is to assess your own situation and determine if a merger and acquisition strategy should be
implemented. If a company expects difficulty in the future when it comes to maintaining core competencies,
market share, return on capital, or other key performance drivers, then a merger and acquisition (M & A)
program may be necessary.
It is also useful to ascertain if the company is undervalued. If a company fails to protect its valuation, it may find
itself the target of a merger. Therefore, the pre-acquisition phase will often include a valuation of the company -
Are we undervalued? Would an M & A Program improve our valuations?
The primary focus within the Pre Acquisition Review is to determine if growth targets (such as 10% market
growth over the next 3 years) can be achieved internally. If not, an M & A Team should be formed to establish a
set of criteria whereby the company can grow through acquisition. A complete rough plan should be developed
on how growth will occur through M & A, including responsibilities within the company, how information will
be gathered, etc.

Phase 2 - Search & Screen Targets:
The second phase within the M & A Process is to search for possible takeover candidates. Target companies
must fulfill a set of criteria so that the Target Company is a good strategic fit with the acquiring company. For
example, the target's drivers of performance should compliment the acquiring company. Compatibility and fit
should be assessed across a range of criteria - relative size, type of business, capital structure, organizational
strengths, core competencies, market channels, etc.
It is worth noting that the search and screening process is performed in-house by the Acquiring Company.
Reliance on outside investment firms is kept to a minimum since the preliminary stages of M & A must be highly
guarded and independent.

Phase 3 - Investigate & Value the Target:
The third phase of M & A is to perform a more detail analysis of the target company. You want to confirm that
the Target Company is truly a good fit with the acquiring company. This will require a more thorough review of
operations, strategies, financials, and other aspects of the Target Company. This detail review is called "due
diligence." Specifically, Phase I Due Diligence is initiated once a target company has been selected. The main
objective is to identify various synergy values that can be realized through an M & A of the Target Company.
Investment Bankers now enter into the M & A process to assist with this evaluation.
A key part of due diligence is the valuation of the target company. In the preliminary phases of M & A, we will
calculate a total value for the combined company. We have already calculated a value for our company (acquiring
company). We now want to calculate a value for the target as well as all other costs associated with the M & A.

Phase 4 - Acquire through Negotiation:
Now that we have selected our target company, it's time to start the process of negotiating a M & A. We need to
develop a negotiation plan based on several key questions:
- How much resistance will we encounter from the Target Company?
- What are the benefits of the M & A for the Target Company?
- What will be our bidding strategy?
- How much do we offer in the first round of bidding?
The most common approach to acquiring another company is for both companies to reach agreement
concerning the M & A; i.e. a negotiated merger will take place. This negotiated arrangement is sometimes called a
"bear hug." The negotiated merger or bear hug is the preferred approach to a M & A since having both sides
agree to the deal will go a long way to making the M & A work. In cases where resistance is expected from the
target, the acquiring firm will acquire a partial interest in the target; sometimes referred to as a "toehold position."
This toehold position puts pressure on the target to negotiate without sending the target into panic mode.
In cases where the target is expected to strongly fight a takeover attempt, the acquiring company will make a
tender offer directly to the shareholders of the target, bypassing the target's management. Tender offers are
characterized by the following:
- The price offered is above the target's prevailing market price.
- The offer applies to a substantial, if not all, outstanding shares of stock.
- The offer is open for a limited period of time.
- The offer is made to the public shareholders of the target.
Another important element when two companies merge is Phase II Due Diligence. As you may recall, Phase I
Due Diligence started when we selected our target company. Once we start the negotiation process with the
target company, a much more intense level of due diligence (Phase II) will begin. Both companies, assuming we
have a negotiated merger, will launch a very detailed review to determine if the proposed merger will work. This
requires a very detail review of the target company - financials, operations, corporate culture, strategic issues, etc.

Phase 5 - Post Merger Integration:
If all goes well, the two companies will announce an agreement to merge the two companies. The deal is
finalized in a formal merger and acquisition agreement. This leads us to the fifth and final phase within the M &
A Process, the integration of the two companies.
Every company is different - differences in culture, differences in information systems, differences in strategies,
etc. As a result, the Post Merger Integration Phase is the most difficult phase within the M & A Process. Now all
of a sudden we have to bring these two companies together and make the whole thing work. This requires
extensive planning and design throughout the entire organization. The integration process can take place at three
levels:
Full: All functional areas (operations, marketing, finance, human resources, etc.) will be merged into one new
company. The new company will use the "best practices" between the two companies.
Moderate: Certain key functions or processes (such as production) will be merged together. Strategic decisions
will be centralized within one company, but day to day operating decisions will remain autonomous.
Minimal: Only selected personnel will be merged together in order to reduce redundancies. Both strategic and
operating decisions will remain decentralized and autonomous.
If post merger integration is successful, then we should generate synergy values. However, before we embark on
a formal merger and acquisition program, perhaps we need to understand the realities of mergers and
acquisitions.
Kavungya answered the question on April 14, 2021 at 11:29

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