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Mergers and Acquisitions: Top 7 Things to Keep in Mind

By January 12, 2022June 17th, 2024Blog8 min read
Mergers Acquisitions

On September 2020 Bharti Infratel’s board had approved the merger of a company Indus Towers. This deal will have a majestic impact creating the world’s biggest telecom tower companies with 1,69,000 towers. Earlier in 2019, Vodafone Group had bid over 44% stake in Vodafone Idea accompanied by seven foreign banks for financing arrangements once telco issued new shares to promoters with an Rs. Twenty-five thousand crore rights issue.

Vodafone Idea Ltd. – Rebranded itself as ‘Vi’ after their merger, which was due to their giant competitor, Reliance Jio Infocom Ltd., who bought large traffic in the telecom market.

Running a business isn’t a piece of cake, there will be obstacles, and with strategies and right decisions, the ladder of success can be climbed. Some build successful empires; some perish in rust while some merge of acquire.

Now, the question arises, what drives these mergers or acquisitions? Why is it different? Is it about logics or instincts? In the next few minutes read, we will acquaint you with the most essential and intriguing part of mergers and acquisitions.

A merger or acquisition occurs when two companies combine to form one and take advantage of synergies. A merger usually occurs when one company purchases another company by buying a specific amount of its stock in exchange for its own stock, and mutually they work under one roof. Whereas, an acquisition is different where the buyer company buys assets and shares of a company and functions on its own.

Before heading on want to know why mergers and acquisitions fail?

Know twelve key points to keep in mind considering the valuation of mergers and acquisitions from the viewpoint of the seller and its management:

1) Mergers and acquisitions involve a considerable amount of due diligence by the buyer.

Sounds a bit challenging right? Well, it isn’t that difficult to learn if understood with basics.

The buyer will want to know what he is buying and what are the obligations before carrying out the transactions. This would include, the nature and extent of the selling organization’s contingent liabilities, litigation risk, problematic contracts, intellectual property issues and much more.

Private equity buyers mostly follow stringent due diligence procedures that will entail an intensive and thorough investigation of the selling company by ample of buyer employee and advisory teams. Moreover, selling companies should create an online data room to deal with the due diligence process more efficiently. The online data room would include selling the company’s essential documents related to corporate, contracts, employee information, intellectual property information, capitalization table, financial statements, and much more.

In accordance to M&A deals, and experienced counsel in mergers and acquisitions can provide the selling company with an elaborate list of the types of documents that potential buyers will expect to see in an M&A-focused online data room.

2) Valuation of Mergers and acquisition is negotiable

When two parties negotiate, many factors are involved when we talk about M&A deals. Just like other terms involved in M&A deals, similarly, it is substantial to understand offer price and valuation. The factors include:

  • Whether the buyer is a financial buyer or a strategic buyer.
  • The trends in your company’s historical financial performance.
  • The valuation used in the last round of financing in the company.
  • The business sector of your company.
  • Business, financial and legal risks your company faces.
  • Whether there are multiple bidders or a single interested party.
  • Whether your company is a meaningful IPO candidate.

As good negotiators, buyers hold something back, leaving room for final “concessions” to close the deal. Accordingly, a reasonable counter-offer on price ordinarily should not be poorly received.

3) Mergers and acquisitions can take a long period to market

Usually, mergers and acquisitions can take a long period from inception through consummation (4 to 6 months). The time frame will depend on the urgency of the buyer to perform due diligence and finish the transaction, and whether the selling company can run a competitive process to sell the company, generating interest from multiple bidders.

However, certain dimensions can help in shortening the time frame like:

  • Conducting an auction process so that potential buyers will be forced to make decisions on a shorter time frame in a competitive environment.
  • Seller can have a draft disclosure schedule ready.
  • PowerPoints should be prepared and vetted early.
  • The seller should place all its key contracts, financial statements, corporate records and other material information in an online data room early in the process.
  • An experienced negotiator for M&A deals should be appointed to take quick decisions.

4) Multiple potential dealers to select the best deal.

As the phrase goes – ‘more the merrier’. Similarly, when there are multiple dealers, it will help the seller to get the best possible deal. Sealers can often obtain a higher price, better deals or both. With multiple bidders, each bidder can help in arriving at a favourable deal. Sellers prefer setting up an auction or a competitive bidding process to avoid being trapped in an exclusive demand. When multiple interested parties are involved in the bidding process, negotiation becomes more effortless.

5) Hire an Investment Banker

In the M&A deals, an investment banker should provide advice, drive a focused process, act as a right partner to the company’s CEO, the board of directors and management team.

What is the role of an investment banker in M&A deals?

  • Help in preparing confidential documents for potential buyers.
  • Design and execute an optimal sale process.
  • Coordinate meetings with potential buyers.
  • Identify and contact prospective buyers.
  • Assist the seller with an online data room.
  • Help with negotiations and other deals.
  • Coordinate the seller’s responses to buyer due diligence requests.
  • Advice on comparable market valuations.
  • Render a fairness option.
  • Help the management team in presentations to the company’s BODs

6) Definitive acquisition agreement is essential

A well-drafted acquisition agreement protects the credibility of the seller. Some of the provisions covered in an acquisition agreement are:

  • Transaction structure including share purchase, asset purchase, or merger etc.
  • Purchase price and related financial terms.
  • The milestones or other triggers for earnouts or contingent purchase price payments.
  • The nature and extent of the representations and warranties.
  • The scope and exclusions to the indemnity.
  • Provisions for termination of the acquisition agreement.
  • The treatment of employee stock options.
  • The responsibility and cost for obtaining any consents and government approvals.
  • The allocation of risks concerning unforeseen circumstances and liabilities.

7) Hire a great M&A Lawyer

M&A transactions include complicated, all-purpose agreements and deal structures as well as challenging legal issues. For a successful mergers and acquisitions process, the selling company should hire outside counsel that specializes in mergers and acquisitions deals. The M&A lawyer appointed should have complete command of the substantial applicable law and must be a skilled advisor, negotiator and draftsperson.

Moreover, a legal specialist M&A team that has worked together on many prior deals likely will be more efficient than a couple of attorneys who together claim to be expert in the many speciality areas that are critical to an M&A deal.

Recommended, Mergers and Acquisitions (M&A) with Covid-19: Highlighting Impacts and Consideration

The bottom line

As a shareholder of a company, your decision should reflect an amalgamation of mission and vision of your company. With accurate information and relevant consideration of the facts, you can set the right goals for your company.

Rakesh Narula & Co. is a leading valuation consulting firm with expertise in the valuation of the fixed assets in M&A, valuation for insolvency, bank lending, financial reporting, statutory compliances, investment banking, corporate finance, etc.