This is the part of the series of articles on Mergers and Acquisitions, make sure to check all other articles including:
Part 1: What Are Mergers And Acquisitions
Part 2: Synergies In M&A Deals
Part 3: Outline Of Business Valuation Techniques
Part 4: Quick Overview Of M&A Process
Part 5: Selling Business To Private Equity
Part 6: Selling Business To Venture Capital
Part 7: Letter Of Intent (or “LOI”) In Mergers And Acquisitions
Part 8: Due Diligence Process
Part 9: Principles Of Negotiating In Mergers And Acquisitions
Part 10: Sale And Purchase Agreement
Part 11: M&A Deal Closing
There are variations between private deals and public deals, but essentially the flow of what happens is the same. It is the technicalities that vary. So let’s start at the beginning, when a board of a company has decided it wants to make an acquisition, or indeed it wants to merge with another company for strategic regions, which we can understand because we have looked at why companies want to acquire or merge.
The first thing the board will do is evaluate the opportunities. And this means they look at the other companies in their market and evaluate them against the strategy that they want to follow, and identify targets, and then decide on a target. They will probably decide on two or three targets and explore those simultaneously. If it is a public company the deal will start with an acquisition of some shares in the open market before the transaction must be made public.
In the US one can acquire up to 5% of the shares before having to file with the SEC a declaration about the transaction. There are similar rules in most other markets about this sort of stake building, this in order to stop people “snick up” on their targets.
And if the target company gets wind about somebody building a stake in it shares, it has the ability to approach them and ask them to disclose that stake publicly and explain their intent, in particular whether they have the intention to buy the company or just hold the investment.
If it’s a private deal, there is no pre-stake building, and the buyer will make a direct approach to the target company. During this process the company that wants to make the acquisition or the merger will work with their financial advisors who help evaluate the value of the target, and decide on a price they are willing to pay for this target business.
Once this initial valuation is done, the buyer will make an approach to the target company, sometimes through the advisors or a personal connection, but in every event, there has to be a discussion initialized between the two. And if it is a public offer, then the buying company will make a public tender offer through the business press to the shareholders for their stock. And that mayor may not involve a discussion and a meeting with the target company board, depending on the hostility or the friendliness of the deal.
In a private deal, typically a letter of intent is delivered, which sets out the proposed terms of the deal, and there are some aspects of this letter of intent which are binding, but most of the elements of the letter of intent are non-binding until the deal is consummated and the sale and purchase contract is concluded.
Along the way the target company will be subject to due diligence, which is when the buying company goes in and checks the legal, financial and all various other details of the target company, this with the aim to make sure there are no “skeletons in the cupboard”.
The letter of intent is subject to negotiation. The buying company does not have to accept it. If it’s a private deal, then there is a matter of the confidentiality (by means of NDA), and keeping the deal private between the two parties. The target company will usually respond to the approach, and of course, can accept the offer straight away which clearly seldom happens.
What is much more likely is that the target company either rejects the offer or will want to negotiate the terms, the price, the form of consideration, the timing, et cetera. And this is when a negotiation and a discussion starts, to improve the deal from the target’s point of view.
The target company may not like the buyer at all, and may therefore seek alternative offers from other buyers. This is particularly the case if it is a public company, as it is seen publicly as a takeover target and this provokes speculation and forces the management to come up with a very resolute reason why they are turning the offer away, or must go and find a better deal from somebody else. This can of course also include approaching private equity buyers to take over the business or another public company.
If the deal is large enough, then there will be regulatory implications. There are going to be authorities such as SEC, the stock exchange, or competition regulators who get involved. If you have very large companies merging or acquiring one another, then you will undoubtedly get regulatory interference and process involved in the transaction. And of course, if you are doing a very big deal in Europe, you will also get the EU having to approve it as well. So there are a whole series of hurdles, and sometimes these deals are announced, and they can take over a year to close.
Due diligence is a phrase that is often used but seldom understood. In essence, as the buyer, it is your responsibility to thoroughly check what you are buying. In this process, you can expect the assistance of the seller and it is only reasonable. But do not assume that the seller is telling you the truth, not hiding anything material and providing you with everything you need for your detailed review, including answering any questions that may arise from your investigation.
Due diligence can take anything from six to twelve weeks, and for major public corporations can be much longer.
Why is due diligence important? The purpose of due diligence is to make sure that the buyer knows exactly what he is buying. The seller knows his business inside out or should do. The buyer has to find out as much as he can in the limited time available to try to identify any unknown risks, as well as to verify what he has already been told about the business. This will enable the buyer to finesse the key terms of the deal or renegotiate if necessary. It will also provide the evidence and context for the representations and warranties in the sale and purchase agreement.
In parallel with due diligence, during which you get all the documentation in place, the seller purchase agreement (or “SPA”) and all the other agreements are being arranged. In every deal you literally have a large table full of piles of documents, and the lawyers normally run the meetings closing meetings tell everybody who has to sign what. But it is a complex arrangement, and basically things have to be done in the right order.
The sale and purchase agreement is defined not just by your LOI, which is its starting point, but by the quality of the due diligence process. This document defines the relationship between the two parties, not only after close, but in the run-up between deal signing and closing. If any issues come up, everyone will turn to the letter of the intent and its spirit. If that can be invoked to resolve the matter, that is great. But if it cannot be resolved, then litigation is normally the next step.
Provided you get the deal signed and agreed, the consideration is paid to selling shareholders in a private deal. This may literally be a bank transfer which goes into the account of the target company’s owners, or if it is a public offer it is a question of getting the whole brokering process of people sending in their share certificates with acceptance forms and getting cash back.
And of course, you can have cash paid for the stock, or you can receive more shareholder paper, such as share certificates in the new entity or the buying company, in consideration for your stock in the target company.
This was a quick run through the mergers and acquisitions process. It is literally an outline because there is so much detail that one can go into.
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