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Preparing effectively for a merger and acquisition

Ernst & Young predicted at the end of last year there would be a growth in mergers and acquisitions (M&As) in 2014, especially among medium and large businesses. Looking at the extensive list of daily deals on the Reuters website would indicate their predictions are proving correct. Chris Evans talks to the experts about how private business managers and owners should prepare for M&As and their aftermath?

The first question any business considering a merger or acquisition should ask is whether it is the right move to take. The motivating factors might be to increase market share, fill in a gap to their service or product portfolio, or expand into different UK territories or even abroad. Whatever the reason might be, the reality of conducting a transaction can be hugely complex, very expensive, time consuming and potentially disastrous if the fit isn’t right or the deal falls through. This is why thorough internal analysis of a company’s own business and major planning of any transaction and its eventualities is vital.

 

“Any company considering a merger or acquisition needs a well thought through overall business strategy and plan with a good understanding of the short and long term objectives, in order to establish how a transaction would fit into those,” explains Phil Cowan, head of corporate finance at accountancy and consultancy firm Moore Stephens.


Furthermore, consideration needs to be given to whether the acquisition is feasible, bearing in mind the finances, resources, time, and people management required. Sometimes the better option might be to grow organically, particularly for a smaller business that has never undertaken M&A activity before and could need more time to strengthen first. However, for those that still decide a merger or acquisition is the right step forward, there is the task of finding the right company.


For large global companies with their own dedicated M&A teams, used to undertaking transactions, there is often a prescriptive process they follow to identify a target, initiate talks and get the deal done. That’s not to say that it always runs smoothly, because deals rarely do. But the task doesn’t seem so daunting and the negative cost effects of a failed transaction tend not to be so disastrous. However, for the less experienced or uninitiated, the process and repercussions are massive.


“Finding a company with the right fit is not a trivial task,” warns Simon Mollett, a partner at corporate finance advisers Beechcroft Associates. “You need to lay down the specific criteria of what you’re looking for, and then search extensive databases, and whittle it down to say 20 potential targets. Then dig deeper to see who owns them and how they’re run.”


Once the shortlist is down to a handful or less, research about these companies is necessary, usually from the internet and Companies House to establish more about their finances, products and structures. Then there’s the hard task of approaching the targets to see if they’re interested in a potential merger or being bought out. Some might be primed and ready with the owner looking to retire or the business seriously struggling and desperate for a buy-out. But caution is still the key word. Most businesses don’t want everyone knowing they’re looking to buy, sell or merge. 


Some companies choose to use an adviser to make the first tentative approach without revealing their identity, while others send a senior executive to assess the company’s strategic objectives before making their motives known. Either way, it is best to have any discussions at a neutral place like a coffee shop so as not to arouse suspicions. 


Even if a target company does show interest, the initiating company still needs to decide whether they are the most interesting or appropriate. It is also important to be aware in an acquisition that the seller might be prompted to bring on advisers to conduct a full scale auction, which totally changes the landscape and buying prospects.


“After the initial chat, and once interest has been established, then the two companies would put a confidentiality agreement in place to protect both sides,” says Sanjeev Gandhi, a partner at Quantum Partners, a mid-market corporate finance and consulting business. “Then the CEO or M&A team would get to work with their research and send out a top level information request, which would include the finances, locations of offices (including what leases they’re tied to), and shareholdings.”


Financial forecasts for before and after the deal are a must, and will inevitably differ between the acquirer and target company. These projections will have to synergise to create a different landscape post transaction, which could include cost savings, marketing and sales synergies, and downscaling.


However, it is important to stress that any due diligence process is not just about the finances and figures, but also the management teams, staff and culture. These will prove to be huge issues once the deal is done. The other hurdle to overcome at the pre-transaction phase is knowing when to inform customers and suppliers. Their support regarding the deal is extremely important, but if you tell them too early and the deal falls through that could be awkward and leaving it too late might destabilise them. It’s a judgement call of the two parties.


With regards to an acquisition, once an evaluation is agreed, a non-binding indicative offer letter is sent out, followed by toing and froing over the price until it’s agreed, due diligence ensues,  and then the papers are signed. All the while, a post transaction task list should be drawn up, including handling communication, integrating staff, structure of management etc.


“Post transaction, all the planning needs to be implemented. Managers from the various departments (HR, finance, IT etc) of the acquiring company should have done their homework about their respective departments at the target company, and so it is a case of integrating them together, including the systems,” says Mollet. 


“However, the acquirer or merged entities won’t know how confident or competent their respective managers are or what motivates them, so this needs to be ascertained over a period of weeks or months. Likewise, the leadership structure in a merged entity will have to be agreed.”
As for handling staff, customers and suppliers, it is a case of timely communication and encouraging them that the deal will be of benefit to the business, adding more resources, value and money. And, of course, for the negatively affected departments in a merger or acquisition, especially those losing their jobs, legal processes and best practice must be followed.


“At the end of the day it is always about keeping the people happy. Communication in the right fashion and at the right time is key, otherwise you could have disillusioned and disgruntled staff and lose customers or suppliers, costing millions to the business,” warns Gandhi.


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