KEY FACTORS OF A SUCCESSFUL M&A DEAL

Global M&A deal making reached record levels in 2021. A combination of high corporate profits, cheap credit, private equity cash, and elevated share prices have all combined to push deals past the?$4 trillion?threshold. But what this surge in dealmaking tells us more than anything is that companies everywhere know that M&A is unquestionably the best way to achieve growth.

The phrase?mergers and acquisitions (M&A)?refers to the consolidation of multiple business entities and assets through a series of financial transactions. The?M&A process?includes all the steps involved in merging or acquiring a company, from start to finish i.e. planning, research, due diligence, closing, and implementation activities, which we will discuss in depth in this article.

But before going into some technical detail, we should make it clear that Merger and Acquisition are two different terms, but are used interchangeably but generally together. Actually “Merger” is a transaction through which two or more companies - usually equal in stature - merge to create a larger entity. The fact that both are equals, or near equal, is an important distinction. It means that the shareholders of the two existing companies will receive a pre-agreed proportion of shares in the newly created company. On the other hand “Acquisition” occurs when?one company acquires another?for some consideration that could include cash or equity. In an acquisition, the acquiring firm is invariably larger, although not always.? Likewise, where a merger is collaborative in nature, with both sides having to agree to the deal,?an acquisition could be hostile?(i.e. the management of the firm being acquired are against the transaction).

An M&A deal can be a long time in the making, stretching months or years from conception to execution. In that time, the deal will move through a number of stages and milestones. Here are the typical milestones in a merger or acquisition :

Pre Deal

1. Identification of Opportunity:?An M&A deal begins when an acquiring company decides that it has a strategic rationale to make an acquisition — or, less often, when a would-be seller decides they need to divest.
2. Negotiations:?Negotiations begin once an acquiring company has reached a ballpark valuation for its purchase. The negotiations culminate with the preparation of a letter of intent (LOI) in which the parties state their agreed-upon terms.?
3. Due Diligence:?The acquirer conducts an exhaustive examination of the financial and operational health of the company it wants to purchase, a process called?doing its due diligence. Assuming that due diligence doesn’t turn up any problems, the two companies sign a definitive contract.??

?Post-Deal

1. Preparation for Day 1:?Purchasers must lay a lot of groundwork for the first day that the new business combination is active, called Day 1 in M&A jargon. Some integration steps may take place over weeks or months, but leaders have to make some decisions right away, such as who will be in charge of the acquired organization. Among the detailed questions they must answer are these: Will you merge systems (such as IT at the purchased unit) with those of the buyer, or will you eliminate them? How will you define and transmit the organizational culture???
2. What to Do on Day 1:?The first official day offers management an important opportunity to set the right tone. You may want to plan events and training that explain how the new structure will function and calm any jitters among staff resulting from organizational change. Some buyers choose to hold a celebration or special day with speeches, town hall meetings, and refreshments. You will be making a first impression on the staff of the acquired company and will want to put your best foot forward, including minimizing glitches and snafus that may arise from the combined administration, systems, and networks.??
3. Integration:?The first one hundred days are a time of intense focus on integration. But, full integration can sometimes take years. Some M&A experts place extra importance on the integration of IT, given how crucial data and networks are to all businesses. These pros generally recommend that you do not take on multiple new projects until information systems are solid. A little later we will cover the main IT integration strategies that you use in mergers and acquisitions.?
4. Installation of New Leadership:?Acquiring companies often want to install new leaders in purchased units under the belief that fresh executives will be more enthusiastic about carrying out a new game plan and more loyal to the new owner than legacy leaders. Buyers must also prepare for the potential attrition and loss of star performers in the target company.?Research dating back three decades?shows that turnover among senior management rises at a merged company, with a quarter of top executives leaving within the first year and more than half leaving within the first five years.

When you execute a merger or acquisition strategically and intelligently, you enhance your company’s competitive position in the market and improve its financial credit. In addition, the M&A allows you to enhance business relationships, expand your offering of products and services, heighten brand recognition, and increase capacity at a lower cost.? But it should be kept in mind that not all M&A give fruitful results, history has seen many M&A failures like Google and Motorola, eBay and Skype, Microsoft and Nokia, and many more.?

So based on the milestones of the M&A(Pre or Post) there are some key factors which ensure success of a M&A activity:

Pre Deal

1. Choosing the right partner : As wrong choice of partner can lead to difficult negotiations and loss of information, and occasionally to nothing happening at all.
2. Trust between the parties: this ensures that negotiations run smoothly, leading to a higher chance of the deal being brought to a favorable conclusion.
3. Due diligence and good valuation :? Poor valuation can result in an inflated price, which will make the merger or acquisition look like a failure in hindsight, however smoothly the integration proceeds.
4. Experience from previous mergers and acquisitions
5. Communication before the execution of merger or acquisition: They guide the process and furthermore ensure that communication within the company remains open and honest. Stressed-out employees, distracted by the uncertainty of an impending merger, can cause the company’s performance to plummet.?

Post Deal?

1. Quality of Plan : The organization chooses how the target will be implemented and this needs to happen according to a comprehensive plan backed by compelling logic.
2. Swiftness of Integration : It promotes trust in both parties. However, it shouldn’t be too hasty – this can backfire.?
3. Execution of plan : The most crucial factor in the post-transaction phase is the “high quality of the execution of the implementation policy.” Once a consensus about the right strategy is reached, it is, of course, vital that the practice reflects the plan as closely as possible: Poor communication creates confusion among the executors. Change management and a sound cost estimate during the process enable changes to be made efficiently.
4. Strategic Fit : Pay attention to how the strategy of the target aligns itself with that of the initiator: If the target has complementary assets and strategies, few adjustments are required, but if this isn’t the case, the integrated company needs to undergo changes to ensure a strategic fit.
5. Organizational Fit : it is obtained by ensuring that parallel structures in the two organizations are unified efficiently. With two companies operating in the same industry, this will most likely develop more easily than when different sectors are involved. Even so, in this case it’s often possible to unite departments like human resource management and marketing.
6. Cultural Fit : bringing together different national or, on a smaller scale, corporate cultures, can result in a lot of miscommunication. Here, especially, thought-through management is a must.
7. Calculation and realization of Synergies : When one organization takes over another, operational costs can be lowered because the organizations complement each other, leading to significant gains. Ensure the feasibility of the planned synergies by estimating them carefully and following through on your strategy.

Apart from these, there are few other factors, which can be termed as Macroeconomic success factors:

1. Legislation and state of economy of the region: National or international legislation can enable or obstruct mergers, given its influence on financial reporting and international property. Mergers and acquisitions involving organizations with a significant market share are often controlled by the legislative power. Favorable legislation and a healthy economic climate inspire confidence in both parties, which increases the chance of success.

Abortive attempts at mergers and acquisitions can cost companies lots of time and money. In a worst- case scenario, business-sensitive information is exchanged, which puts the company at risk. “No transaction is the same, no client is the same, and no M&A process is the same. Recognizing this reality at the outset is paramount and limits any idea of patterns or techniques that can be predictive of success,” says Klick of The McLean Group. He continues, “From my experience, the best M&A negotiators are those who spend the time working closely with their clients. They understand the nuances of a client’s business, the competitive landscape, and industry issues.”?