Every week, business news sites are full of the latest merger and acquisition (M&A) transactions, whether rumored or nearing completion. For example, few could escape updates on ExxonMobil’s acquisition of Pioneer Natural Resources in late 2023.
The M&A process can take anywhere from 6 months to several years of diligent work and planning–on the part of the buyer and seller. What do each of these processes look like?
This post will take a closer look at the merger and acquisition process from concept to reality.
Although the exact processes followed in each M&A transaction will vary, most follow the broad outline below. From small acquisitions to large multinational takeovers, the steps discussed here provide a framework that allows companies to seize opportunities while protecting them from ventures that could prove expensive in the long term.
1. Strategize and identify targets
On the buy side, companies need a clear acquisition strategy. This starts with defining the goals of an acquisition, which could include:
- Moving into new markets
- Consolidating production
- Reducing costs
- Expanding market share
It also involves assessing the market and identifying gaps in your corporate strategy that a merger or an acquisition could address.
While it may be possible to fill gaps in-house, you may lack the expertise and time to devote to product development or entering new markets. An acquisition could be an effective shortcut, providing the products and market access you desire in a single transaction.
Profile your acquisition
Some companies create a profile of their ideal acquisitions. This could include answering questions such as:
- What benefits would this company provide?
- What culture would mesh well with our existing company?
- What would be the ideal financial position of the acquisition?
- How will it help our company achieve its long-term goals?
This profile can give structure to a buyer’s search for a potential target.
Review Confidential Information Memoranda
On the sell side, companies seeking acquisitions may draft and publish a confidential information memorandum (CIM). This document sets out the company’s current position and is designed to gauge the level of interest in the market.
The information memorandum provides enough information for interested parties to understand the company’s position and emphasize its value without revealing information. If a CIM piques your interest, the next stage is to enter into preliminary discussions and a Non-Disclosure Agreement (NDA).
This allows the target company to reveal the details the potential buyer needs without the fear of sensitive information falling into the wrong hands. The potential buyer can use this information to evaluate the target and complete an initial valuation.
2. Letter of Intent (LOI)
If the buyer is still interested after reviewing the information provided by the vendor, preliminary negotiations can begin. At this stage, the vendor may be fielding offers from various interested parties.
If the negotiations go well, a Letter of Intent (LOI) can be drafted, which paves the way for the start of the due diligence process. This is non-binding but sets out the agreement in principle for the purchaser to acquire the seller’s business. It also includes a provisional sale price.
The LOI provides the framework for the due diligence process by outlining:
- The terms of the transaction
- The purchase price
- Description of assets
- Liabilities, if any
- Confidentiality provisions
- “No-shop clause” that prevents the seller from negotiating with other parties
Crucially, the LOI also sets out the timeline for the due diligence process. This can provide impetus and prevent it from dragging on unnecessarily long. By entering into an LOI, the potential buyer has the assurance that they have the exclusive right to buy before embarking on the costly process of due diligence.
3. Due diligence
Due diligence is the most important step in the entire M&A process. Both sides can carry out due diligence but with slightly different goals.
Buyer due diligence
The buyer carries out due diligence to ensure that the company is in the position it claims to be before finalizing the transaction. The process involves auditing, verifying, and investigating every aspect of a potential deal to provide reassurance and identify potential roadblocks or dealbreakers.
This detailed process focuses on:
- Verifying information provided by the target company
- Identifying weaknesses in the business or its finances
- Valuing the transaction
- Ensuring that the deal complies with relevant legislation
Vendor due diligence
To accelerate the M&A process, the vendor may also undertake its own due diligence. This can help the vendor identify and overcome potential roadblocks to the sale’s success and stave off concerns that could affect negotiations over the final sale price.
Some buyers may choose to accept a vendor’s due diligence, secured with warranties and indemnities.
Making due diligence easier
Due diligence requires sharing a lot of confidential and sometimes sensitive information. Companies need a secure space to share documents, collaborate, and communicate. File-sharing applications do not have the security or features required to speed up the process. The solution is to use a virtual data room (VDR).
The best VDRs feature a user-friendly dashboard that allows you to navigate the documents you need and collaborate with other users. Access is restricted to authorized users only, and further levels of permissions allow you to control who sees particular documents. The most advanced VDRs even allow you to control documents after they have been downloaded.
The impact of due diligence
When carried out correctly, due diligence can help buyers to:
- Identify future obstacles
- Note opportunities for future growth
- Determine how scalable the business is and how well it will integrate with the existing business
Successful due diligence allows you to avoid potentially expensive mistakes while seizing lucrative opportunities. By identifying potential liabilities, it can help avoid legal difficulties after the takeover. It is also an essential opportunity to ensure compliance with M&A regulations, such as the latest Merger Guidelines issued by the Federal Trade Commission (FTC).
The due diligence process can strengthen your hand at the negotiating table. For example, you may have discovered weaknesses that, while not dealbreakers, will affect the amount you are willing to pay. This can be a strong tool that can help you acquire the company for the right price.
4. Final negotiations
After completing due diligence, there will be a brief period of introspection and consultation. This allows you, as the buyer, to consider whether this is the right deal for you. It is beneficial to seek professional advice at this stage from an outsider who can review the results of the due diligence process dispassionately and provide an objective viewpoint.
If you decide to proceed, it is now time to enter final negotiations. The information uncovered during due diligence may strengthen your position, allowing you to negotiate a more favorable purchase price. This is the point to agree on how the purchase will be financed.
The buyer’s legal counsel will draft a Sales and Purchase Agreement (SPA). This sets out:
- Transaction details
- Terms of the agreement
- Conditions
- Limitations on responsibility
- Representations and warranties
- Requirements to convey intellectual rights to the buyer
- Necessary third-party consents
The SPA may also include covenants–agreements not to do something (negative covenants) or to do something (positive covenants).
5. Closing the deal and the transition period
The SPA can be signed ahead of the closing date, but the sale isn’t officially complete until the bill of sale has been signed in an asset sale or the stock certificates are signed in a stock sale.
Signing day
On closing day, both parties will sign the agreements, and the buyer will deliver the final payment. This can happen either in person or virtually. It should be a non-event, as all issues should have been resolved long before closing day.
Post-closing integration
After closing, both parties need to work together to ensure a smooth transition for all involved. There may be post-closing covenants to fulfill. In a sense, the deal only truly closes for both parties once all the transition obligations have been fulfilled.
A post-closing integration checklist can help smooth this process. It can group actions under headings such as:
- Finance
- People
- Marketing and communications
- Legal
- Technology and IT
It should set out work to be done in advance of closing and over the following weeks and months.
How CapLinked Streamlines The M&A Process
There are many moving parts in the M&A process, but they are underpinned by robust due diligence. It can make the difference between a successful merger that paves the way for a lucrative future and becoming the latest AOL Time Warner.
At CapLinked, our Virtual Data Room software enables both sides to collaborate effectively on the due diligence process. Its features include:
- Central dashboard, with notification feed, messaging tool, and easy access to workspaces
- Secure vaults that allow you to share documents without relinquishing control
- Customizable permissions give you total control over your confidential and sensitive information at all times
- Collaboration tools allow for rapid responses to questions and speed up the due diligence process
Are you ready to join the 250,000+ professionals who already trust CapLinked for their virtual data room needs? Learn more and get a personalized quote today.
