M&A Guide

What is Mergers and Acquisitions?

Mergers and Acquisitions (M&A) is the act of consolidating businesses or their assets. M&A aims to create an entity that will be more effective than two independent ones as:

• operational efficiency will increase;
• when turnover goes up, costs can be optimized;
• a bigger market share, wider distribution network, and other business’ KPIs are improved;
• financial resources uplift because the whole is more than its parts;
• there is lower risk of introducing new products/services to the market.

M&A is the growth strategy that businesses use to increase their size, market share, talent pool, customer base, and resources fast.

There are several types of transactions that fall under the M&A term. They vary depending on the roles they play in the process:

Mergers — usually involve same-size businesses, with each of the participants benefiting from the transaction (increased sales, higher operational efficiency, new opportunities, etc.). The acquired business operates within the acquiring entity following the deal.

Acquisitions — one company purchases another one to boost its efficiency and control a bigger share of the market. The acquired business keeps its name, as well as its legal structure. Depending on what the acquired party receives, the takeover may be hostile or friendly.

M&A process, decoded

M&A can take place at one of four auctions: broad, limited, targeted auction, or exclusive negotiation.

Auction type	Advantages	Disadvantages
Broad auction $ 100 mln + unlimited potential buyers	1. Broad auction bidding method can boost the company’s value as bidders compete to gain control over the business. 2. The seller gains additional reassurance that no buyers were overlooked and, in the end, alternatives and the ultimate valuation were maximized.	1. It is difficult to maintain confidentiality. The seller must provide prospective buyers with sufficient details, but there is no guarantee that potential purchasers will keep the information private. This means that news regarding the contemplated deal is more likely to reach the marketplace before the preferred time. 2.Takes a long time. The more there are likely buyers, the more time is needed for preparation, presentation, and marketing for each of them. 3. Hard to identify a less obvious buyer. 4. More burdensome for management teams, with more buyers to meet, questions to answer and enquiries to address. 5. The limited ability to negotiate and control the deal.
Limited auction $ 500 mln + 10-50 likely buyers	1. The relatively high safety of confidential company data. 2. Auction maximizes the dynamics of the market by producing competitive tension and can lead to the price growth.	1. Significantly fewer buyers compared to a wide auction at an average market. 2. Things can go slower since it is quicker to engage with just one buyer. 3. A limited ability to negotiate and control the deal.
most common Targeted auction $ 1 bln + 2-10 potential buyers	1. Auction is managed more effectively. 2. The preservation of non-public information and the absence of operational disruptions.	1. The disadvantage of the auction is that the exclusion of possible buyers from the process does not increase the total purchase price. 2. The chance of excluding a buyer that provides the best offer.
Exclusive negotiation no boundaries for the price 1 prospective buyer	During negotiations, the seller can keep it private and quickly get closer to the purchaser thus minimizing the interference with current operations.	It is impossible to find out the prices of other stakeholders.

*All numbers in the left column are given as an example. It is typical for M&A deals to use different types of auctions for different deals, e.g. targeted auction for a deal less than $1 bln.

Regardless of the auction type, every M&A participant usually follows more or less the same steps. Yet, some steps depend on the company’s role — whether the company is the buy-side (potential acquirers) or the sell-side (likely sellers).

M&A for buy-side

1. Craft an acquisition plan — it has to clearly outline the expectations for the contract.
2. Allocate responsibilities — clear responsibilities streamline and speed up the process.
3. Define M&A search criteria — establishing critical requirements for prospective sellers (e.g. profit margins, region, or customer base)
4. Look for target players — evaluating companies which may be interested in the deal.
5. Elaborate a plan — contacting targets that meet your requirements and seem to have a good offer.
6. Perform valuation analysis — gathering additional information (current financial records, etc.) to proceed with the target evaluation.
7. Negotiations — constructing an offer and negotiating its terms.
8. M&A due diligence — confirming or correcting the purchaser’s evaluation of the target entity ( liabilities, staff, clientele, assets, financial performance, etc.)
9. Drafting a purchase and sale agreement (PSA) — preparing the ultimate version of the document
10. Developing a financing strategy — defining financing details
11. Closing of acquisition — PSA is legally recorded, funds are transferred to the seller, and ownership of the entity or its assets goes to the buyer.
12. Integration — the merger begins.

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M&A for sell-side

The M&A procedure is mostly the same for both sell- and buy-side parts. Only five points from the above list are different: 

1. Design the deal strategy.
2. Distribute responsibilities.
3. Research potential purchasers.
4. Prepare documents and processes for due diligence.
5. Ask potential buyers if they intend to participate.

6-12. Similar steps.

For a sell-side, it is more important to focus on asset valuation (in particular, in the case of bankruptcy).

Here’s the comprehensive layout of the M&A procedure for both parties.

How does M&A look on paper

Essential documents when structuring deals are the Term Sheet (used for fundraising) and a Letter of Intent (LOI) (reflects the key terms of the agreement).

Negotiation Documents

Deal Documents

Term sheet Letter of intent (LOI)

Organizational and legal structure Trade register excerpts Licenses, approvals, permits, and certificates Shareholders’ agreement Corporate history Articles of incorporation By-laws Lists of all current stakeholders List of all officers and directors Overview of IP and trademarks Standard client contracts Top 20 customers or channels Top three supplier agreements Employee database Contracts of key employees Standard working contracts CVs of key personnel List of all lease agreements Guarantees were given by the company Financial agreements Insurance policies database Audited financial statements Current management reports Current business plan Tax accounts