Mergers & Acquisitions are strategic decisions which are taken by the management of any company after through examination of many important facts and considerations. Since decisions regarding Mergers & Acquisitions, like capital budgeting decisions are irreversible in nature it is very important that due attention must be paid to some basic issues before planning about it.
Hence the strategic planning can be broken down into five steps:
Step 1: Pre Acquisition Review
The first step is related with the assessment of company's own situation to determine if a Merger & Acquisition strategy should be implemented or is there any other alternative? If a company expects difficulty in the future when it comes to maintaining growth, core competencies, market share, return on capital, or other key performance variable, then a Merger & Acquisition (M & A) program may be necessary. If a company is undervalued or fails to protect its valuation, it may find itself the target of a merger. Therefore, the pre-acquisition review will include issues like the projected growth rate, inability of the company to sustain its market share in the future because of the potential threat from its competitor firms, under valuation of the company etc.
The company must address to a fundamental question. Would the Merger help improve the situation regarding the above or not? Will it affect the valuation in a positive manner?
Step 2: Searching and Screening of the targets
The second step in the Merger & Acquisition process is to search for those companies which can be the potential takeover candidates. It is important for the merging company to see whether the company to be acquired has strategic compatibility with the acquiring company or not. Compatibility and fit should be assessed across a range of criteria – size, kind of business, capital structure, core competencies, etc.
Searching and screening process should and must be performed by the management of the Acquiring Company without taking the help of any outside agency. Dependence on external firms should be kept minimum however if it is important to take the help of any outside agency.
Step 3: Valuation of the target company
The third step in the Merger & Acquisition process is to perform a thorough and detailed analysis of the target company. Acquiring company must confirm that the Target Company is truly a good fit with the acquiring company. This requires a thorough review of operational, strategic, financial, and other aspects of the Target Company. This detail review is called "due diligence."
Due diligence is the process of identifying and confirming or disconfirming the business reasons for the proposed capital transaction. Various factors like, customer needs, strategic fit, shareholder value etc is at the core of the analysis.
Several functions are involved in due diligence related to potential acquisitions, including strategy, finance, legal, marketing, operations, human resources, and internal audit services. The direction of due diligence efforts depends on what the company expects to gain from the transaction: employees, customers, processes, products, or services.
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.
A key aspect of due diligence is the valuation of the target company. In the preliminary phases of M & A. Total value of the company is calculated keeping in mind the value of the synergy expected from the combination and costs involved in the transaction. An example should give an idea of the calculation involved.
Value of Acquiring Company = Rs. 500 lakh
Value of Target Company = Rs. 250 lakh
Value of Synergies as per Phase I Due Diligence = Rs. 150 lakh
M & A Costs = Rs. 60 lakh
Total Value of Combined Company = Value of the acquiring company + Value of
the target company + Value of the Synergy – M & A cost
Hence Total value of the combined company = 500 + 250 + 150 – 60 = Rs 840 lakh.
Step 4: Negotiation
After selecting the target company it's time to start the process of negotiating. A negotiation plan is developed based on several key questions:
• How much resistance Acquiring Company is expected to encounter from the Target Company?
• What are the benefits of the Merger for the Target Company?
• What will be the acquiring company's bidding strategy?
• How much acquiring company should offer in the first round of bidding?
The most common approach to acquire a company is for both companies to reach an agreement concerning the Merger & Acquisition. The idea is to go for a negotiated merger. The negotiated merger should be the preferred approach to a M & A since when both the company's agree to the deal then there are chances that the process will be a smooth one and will go a long way in making the merger a successful one.
Step 5: Post Merger Integration
If everything goes as per planning, the two companies announce an agreement to merge the two companies. This leads to the fifth and final phase within the M & A Process, the integration of the two companies.
Every company is different in terms of operations, in terms of structure, in terms of culture, in terms of strategies etc. The Post Merger Integration Phase is the most difficult phase within the M & A Process. It is the responsibility of the management of the two companies to bring the two companies together and make the whole thing work. This requires extensive planning and design throughout the combined organization.
If post merger integration is successful, then it should result in the generation of synergy and that is the final objective of any Merger & Acquisition program.