Mergers and acquisitions (M&A) imply to collaborations between two or more firms. In a merger, two or more companies functioning at the same level combine for the purpose of creating a new business entity. On the other hand, in an acquisition, a larger organization buys a smaller business entity for expansion. Previously, Anand Jayapalan had discussed that merger and acquisition largely takes place to eradicate competition, boost operations, or gain a larger market share.
M&A are systematic and lengthy process that generally takes place in a series of stages. Usually, the stakeholders of the companies involved in such transactions carry out multiple rounds of negotiations before reaching mutually beneficial terms for the business arrangement. A few of the important steps in an M&A include:
- Developing a strategy for the merger or acquisition: Firstly, one needs to create an effective strategy to manage and direct the overall process of the transaction. Financial and legal professionals may create documents to guide negotiations and agreements between the companies, under the supervision of management staff. Such documents would define the purpose of the merger or acquisition, including strategies to convince stakeholders, as well as list the potential benefits of the arrangement.
- Identifying suitable target companies: Subsequent to identifying and finalizing a strategy, stakeholders meet to identify the criteria for preparing a list of target companies. The exact criteria would depend on the relevant business needs of a firm. As a few target companies are shortlisted, stakeholders need to evaluate the pros and cons of engaging in a business arrangement with each of them. Usually, business and financial analysts help the senior management to evaluate the growth potential, market performance and financial situation of individual target companies, so that an informed decision can be made.
- Planning the merger or acquisition: As the potential target companies have been identified, the larger firm contacts those companies with the initial offer for the merger or acquisition. Certain target companies may respond in a friendly manner and facilitate a mutually beneficial merger. However, many others may not respond positively, in which situation the larger company may consider the possibility of a hostile takeover or acquisition.
- Valuation: At this stage, professionals estimate the financial value of a business operation while taking into account its performance, infrastructure, brand image, products, market share, intellectual property and more. The stakeholders of the larger company use this information to guide business decisions related to a merger or acquisition.
- Negotiation: If the management of the larger company is content with the results of the valuation, they may engage in negotiations with stakeholders of their target businesses. These target companies may also engage in negotiations to secure a more beneficial deal.
- Auditing: A comprehensive analysis of the acquirer’s valuation of the target company comes under auditing. The auditors typically verify the market share, financial situation and other important variables of the target company. The goal of doing so is to make sure that the acquirer makes a correct valuation, as well as to prevent financial crimes and fraud.
Earlier, Anand Jayapalan had discussed that if the auditing process reveals no errors in valuation, executives or legal and finance professionals prepare purchase and sale agreements for the stakeholders of invested business entities to sign.