How Merger & Acquisitions Work

Mergers and acquisitions (M&A) are transactions in which the ownership of companies, other business organizations, or their operating units are transferred or consolidated with other entities.

As an aspect of strategic management, M&A can allow enterprises to grow, shrink, change the nature of their business or improve their competitive position.

From a legal point of view, M&A are types of corporate transactions or restructuring initiatives.

These transactions can have various legal forms, such as mergers, acquisitions, consolidations, tender offers, purchase of assets, and management acquisitions.

The M&A process involves numerous stages and important steps such as identifying acquisition targets, conducting due diligence, valuation analysis, structuring the transaction, and planning the integration process.

The M&A transaction includes the negotiation of definitive agreements, followed by the closing of the transaction.

M&A can be used to improve a company’s market position by accessing resources such as human capital, technology and markets.

Acquisitions and mergers also enable companies to expand into new markets, increase market share, add new products and services, as well as access new sources of funding.

Recent Trends in Mergers and Acquisitions

One of the major trends has been the increasing number of Consolidation transactions among companies, especially within an industry.

An example of this type of transaction would be a merger or acquisition between two or more companies to reduce costs and increase efficiency.

This is often done to strengthen a company’s market position and gain a competitive advantage.

Another major trend has been the rising importance of strategic acquisitions.

These types of transactions involve a company purchasing another company’s products, services, or technology to gain an advantage in a specific market or industry.

This trend is driven by the need for companies to remain competitive in an ever-changing market.

The use of public-private partnerships (PPPs) is also on the rise.

PPPs are agreements between private and public entities to build infrastructure, develop educational resources, or provide social services.

These deals require companies to leverage resources from different sectors (public and private) to reach a common goal.

The trends in mergers and acquisitions are determined by the current economic, political, and technological environment.

Companies need to be aware of the trends and make strategic decisions to ensure they remain competitive in their respective markets.

Regulatory Framework for Takeovers and Mergers in India

The Takeover Regulations (Substantial Acquisition of Shares and Takeovers) Regulations, 2021 is a comprehensive regulation for the Indian takeover regime, issued by the Securities and Exchange Board of India (SEBI).

It consolidates the hitherto existing takeover laws such as the SEBI (Substantial Acquisition of Shares and Takeovers) Regulations, 2011 and the SEBI (Substantial Acquisition of Shares and Takeovers) Amendment Regulations, 2014.

The regulations prescribe thresholds related to open offer in case of acquisition of shares, as well as in case of merger.

They also prescribes other compliances to be provided by the acquirer such as filing of documents, conducting a due diligence, and offering a minimum share price.

The regulations also deal with protective measures against any possible abuse of the takeover process.

These measures include restrictions on a person or body corporate acquiring a very high percentage of the target company’s underlying voting rights, which may result in them having a dominant stake.

The regulations are applicable to listed companies, companies that intend to get listed, companies intending to take over another listed company and medium to large private companies that have more than 500 shareholders.

The regulations also prescribe conditions for takeover exemptions and exemptions stemming from various foreign investment regulations.

Parties in Merger and Acquisiton:

The parties involved in a merger and acquisition (M&A) transaction generally include the buyer, the seller, and their respective advisors.

Corporate Buyer: The corporate buyer is a company that intends to acquire another company.

Target Company: The target company is the company that is being acquired by the corporate buyer.

Investment Bankers: Investment bankers are advisors to both the corporate buyer and the target company.

They help facilitate the merger or acquisition and advise both parties on the terms of the deal.

Legal Counsel: Legal counsel represents both the corporate buyer and the target company.

They will ensure the merger or acquisition follows all laws and regulations and works to protect both parties.

Regulatory Authorities: Regulatory authorities review and approve the merger or acquisition.

These authorities ensure the transaction is compliant and that the terms of the agreement are fair and equitable.

Shareholders: Shareholders of the target company must approve the merger or acquisition before it can be finalized.

Shareholders of the acquirer must also approve the terms of the transaction.

Closing: The last step in the merger or acquisition process is the closing. This is when the deal is finalized and all funds and assets are exchanged.

Role of investment bankers in M & A:

Investment bankers play a vital role in mergers and acquisitions (M&A) transactions.

They help both buyers and sellers in the process by providing extensive research of the market and industry.

    The primary tasks of an investment banker in the M&A process are to:

    1. Identify potential buyers or sellers
    2. Provide an independent view on the M&A considerations
    3. Prepare financial forecasts and models
    4. Develop an appropriate bid structure
    5. Negotiate the terms of the transaction
    6. Prepare the legal documents
    7. Handle due diligence on behalf of both parties
    8. Assist with the closing process
    9. Manage post-merger integration activities
    10. Monitor the performance of the businesses after the transaction has closed.

    Benefits and Challenges of Merging Companies

    Benefits:

    Increased financial strength: Merging two companies can bring together their resources, including cash, machinery and technology, create a larger company with greater capital resources with which to pursue opportunities.

    Increased business opportunities: By combining two companies, a larger business is formed which can access new markets and products, potentially leading to greater success.

    Leverage brand recognition: Merging can help create a stronger brand with more public visibility and more marketing and advertising opportunities.

    Challenges:

    Employee layoffs: It can often result in fewer job opportunities, as job duties and responsibilities may overlap or be eliminated.

    Regulatory and legal complexity: The laws and regulations of any overlapping jurisdictions may be complex. Also any antitrust or competition laws must be submitted to and approved by regulators.

    Corporate culture clash: Merging two companies often involves integrating different corporate cultures, with different ways of doing things and different expectations.

    This can lead to tension, mistrust and strife in the workplace.

    How to Value a Company Prior to Merger?

    Valuing a company prior to a merger is essential to ensure that the deal is beneficial to all parties involved and to maximize the return on investment.

    There are several methods of valuing a company that should be used in order to get an accurate assessment of the company’s worth.

    Analyze the financial statements of the companies. Examine financial performance and growth rates, as well as the balance sheets of potential merger partners.

    Consider such factors as debt-to-equity ratios and sales growth.

    Evaluate the relative contribution of the companies to the combined business. Analyze the strategic fit of the potential partners.

    Consider such factors as the cost advantage and projected market penetration of the merged business entity if the merger is successful.

    Estimate the potential level of synergy in the merger. Estimate the projected cost savings and revenue increases that could result from combining the two companies.

    Calculate the estimated value of the merged entity. This can be done by subtracting total liabilities from total assets and adding in estimated synergy savings to arrive at an estimated value.

    This can also be done using discounted cash flow analyses, debt-to-equity ratios and other valuation methods.

    Verify the conclusions of the valuation analysis by obtaining independent appraisals and opinions from outside parties such as investment bankers and valuation experts.

    How to Structure a Merger or Acquisition

    The process of structuring a merger or acquisition involves an assessment of the target company, an analysis of the costs and benefits of the transaction, and the development of a plan for the combined organization.

    This includes due diligence activities to identify and address any legal, financial, or operational issues that may arise.

    Identify Opportunities: Researching and identifying potential companies to acquire or merge with can take a significant amount of time and effort, but it’s the most important and often the first step in the process.

    Get to know the company, consider its strengths and weaknesses, and whether it would be a beneficial addition to your own organization.

    Complete Due Diligence: Also known as investigative research, due diligence may include legal, financial, and tax reviews, customer and supplier inquiries, and gathering necessary documents.

    It’s important to consider the risks and potential liabilities associated with the target company before making a move.

    Negotiate the Deal: Carefully review the conditions of the proposed agreement and gain the necessary approvals from all stakeholders.

    Identify any significant differences in culture between the two companies and determine the best approach for integrating them.

    Develop an Integration Strategy: Strategizing the merger involves determining the management structure, job roles and responsibilities, employee benefits, and more.

    Make sure that everyone involved understands the company’s key objectives and how they will be achieved post-merger.

    Finalize the Agreement: Throughout the process, make sure that proper regulatory filings, documents, and approvals are obtained.

    Once all requirements are met and the agreement is signed, the transaction is complete.

    Communicate and Execute: Communication is key to smooth integration and completing the transaction. Keep stakeholders informed of all developments and progress.

    This includes employees, customers, suppliers, and shareholders.

    Finally, implement all newly developed structures and processes and work towards meeting the targets and objectives of the merger.

    The Negotiation Strategies of Mergers and Acquisitions


    Mergers and acquisitions (M&A) involve complex negotiations that require the ability to assess risks and opportunities, understand the motivations of the other parties, and plan strategies to achieve maximum value for both sides.

    Establish Ground Rules: The first step in any negotiation strategy should be to establish ground rules that both parties agree can be the foundation of the negotiations.

    This will ensure the negotiations move in the right direction and are based on mutual respect and trust.

    Set Realistic Objectives: Both parties should be realistic in their objectives, ensuring they have realistic expectations prior to negotiating.

    It is important to understand what is achievable and also to make sure there is enough room to negotiate; this will prevent the negotiation from breaking down.

    Conduct Due Diligence: This is one of the most important steps in any negotiation.

    Due diligence should include conducting an analysis of the sectors involved and the market data, researching each party’s financial position and other due diligence related to the merger or acquisition.

    Utilize Leverage: It is important to utilize the leverage available in any negotiation. Strategies such as tactical retreats or concessions allow the negotiator to move the negotiation in the desired direction.

    Identify Trade-offs: During negotiations it can be helpful to identify items that are negotiable and non-negotiable. This will allow both parties to make concessions whilst maintaining their goals.

    Respect All Interests: It is important to remember that a successful negotiation will result when both parties walk away satisfied.

    Taking into account the interests of all parties by compromising wherever necessary can ensure all interests are respected and a successful outcome is achieved.

    Be Prepared to Walk Away/Close the Deal: This is a key step in any negation. Being prepared to walk away if necessary, shows strength and also allows the negotiator to move forward with the strategy if it is deemed that the goals cannot be achieved.

    However, it is also important to remember, when the opportunity arises, to be prepared to close the deal if and when it is deemed the best course of action.

    Opportunities for Investment Post-M&A


    Following a successful merger and acquisition, there are several investment opportunities that become available.

    Synergistic investments: After an M&A, there may be attractive synergistic investments that the combined entity can pursue, such as cost synergies, improved processes and systems, and cross-selling opportunities.

    Follow-on investments: If a company has made one successful M&A, additional investments can leverage the combined entity’s competitive advantage and/or cost synergies gained from the first merger.

    New product or service launches: Following an M&A, the combined entity may be well-positioned to launch new products or services leveraging its product or platform synergy created by the M&A.

    New customers or markets: The increased scale may enable a company to access new customers or markets, particularly in emerging markets.

    Leveraging of existing assets: Companies can reinvest in existing assets following an M&A, such as working capital, technology, or brand recognition, to further increase their competitive advantage.

    Expansion of existing operations: The combined entity may be able to expand existing operations to drive further efficiencies and synergies.

    This can include adding new facilities, establishing new product lines, or entering new markets.