The level of expected synergy and the degree of achievement of the goals set for the transaction depends on the successful implementation of the preparatory stage of the M&A deal. So, what are the foundations of preparing for the acquisition?
The essence of the M&A deals
Mergers and acquisitions (M&A) are complex and unique processes. However, it is one of the forms of business reorganization. During the merger, a new company is formed from the other two, and there are two options: the companies are merged into one new one and completely cease to exist, or the assets of two different companies merge, and the firms themselves are not liquidated after the procedure.
During the acquisition, a legal entity interested in buying a new business acquires more than a third of the shares in the authorized capital of the absorbed company, which continues its development as long as it has other shareholders. Often, an acquisition can turn into a merger.
How to prepare for acquisition?
The M&A transaction implementation algorithm covers all the main stages, from developing a strategy and selecting a potential merger object to organizing control over achieving the set results and goals after the transaction. The general model of the M&A project implementation algorithm consists of 4 main stages, each of which can also be divided into several separate tasks, the quality of which depends not only on the transaction’s success but also on the financial well-being of the combined companies.
Researchers mainly distinguish three main stages in the process of M&A deal of organizations: the preparatory stage, the transaction stage, and the integration stage depending on the purpose of the study, considering various actions at each stage.
The goals of each stage of the integration process of organizations are different. The purpose of the preparatory phase is to collect the information necessary to make a decision on integration and to determine the purpose and strategy of integration. The goal of the next stage is to complete the M&A transaction. Finally, the purpose of the last stage is to perform actions leading to the integration of organizations or taking under the actual control of the activities of the acquired organization.
So, there are the following steps in the preparatory stage of the acquisition:
- Determination of the organization’s development strategy
- Business Case for a Merger or Acquisition
- Identification of a qualified team that prepares the deal
- Determining the criteria that the target company must meet
- Target company search
- Preliminary analysis of candidates and selection of a target company
- Preliminary verification and assessment of the economic activities of the target company (due diligence). Risk assessment
- Implementation of a data room for secure collaboration
- Simulation of integration processes, preliminary planning of the management concept, and transaction structure
- Pre-financing deal planning
- Preliminary calculation of the effectiveness of the transaction
- Verification of subjects’ consent to integration
- Planning the organization of a merger or acquisition
- Signing a preliminary contract
So, at this stage, the first acquaintance with the company occurs, information is exchanged, mutual interests are determined, and readiness for further negotiations is determined. The company owners should be prepared for the fact that there will be no agreement in principle on the integration of companies at this stage. In this case, it will be necessary to return to the stage of selecting a candidate company for integration or continue negotiations, making mutual concessions on the transaction price. The preparatory phase of the integration process of organizations ends with the signing of a preliminary contract.