Mergers and Acquisitions: Overview of the M&A Process | Investment Banking

to spend some time with you taking a look at the M&A process in a little bit of detail so you understand the overall structure and the flow of a transaction the whole purpose of this is to give you a high-level overview of how the M&A process works and if you have that structure then everything I'm going to tell you that follows this will make some sense it's very important when you're pitching a client that you are clear particularly if you're going to offer him an advice through the whole process that you're clear to him how the process works and that helps him to understand it because very often if you have a new client they may not have gone through an M&A process before and equally you need to manage their expectations about the complexity and the time it's all going to take so let's start with step 1 which is the acquisition strategy it is important that your client or if you're the acquirer you yourself have a clear idea of what it is you want to buy what are you trying to achieve now this isn't about the detail of the company we'll come on to that this is about your strategic goals for your business so we're talking about you know the markets do you want to enter a new market or do you want to to get your hands on some new products you can sell to your existing customers do you want to go into a new geography now that might be a regional geography but that might also be an international geography do you want to acquire a competitor so you can increase your market share or eliminate some competent competitors from the market so that you can basically either raise your prices or have a easier competitive journey particularly if you've got somebody who's up-and-coming and who's potentially is going to be a long term threat to your business step two then moves on to the search criteria and here the more detail you can pin down the better now inevitably the perfect business is not going to exist I can tell you that from experience I've had clients come to me with a very long list of criteria and I've come back to them and said no you're gonna have to refine this because that company does not exist the sorts of things you're looking for are scale how big is the business where's it located what type of ownership does it have where is it positioned in the market does that positioning coincide with your positioning and this might be price or whatever where's the location of the business because if you're trying to improve your market position then you're geographically then obviously that's very relevant what are the customer base like what's the customer concentration like so if it's a business with 80% of its business going to one customer you probably want to stay away from that and the who are the partners and suppliers to the business and of course you would have some financial criteria the revenues the profits the cash flow the condition of the balance sheet and of course start to be thinking about the valuation and price that you attach to these criteria will have at least a look at evaluation in a minute with that criteria you can put together or your advisors can put together a long list of potential companies so you screen the market and you try to identify all the companies you can find that meet that criteria equally taking the opportunity to eliminate the companies that you find that don't meet that criteria so that you end up with a long list which you can then work through and try to refine so that you have something to look at in a more focused way let me give you an example I had a a client that was a very large listed US business and came to me and it wanted to buy an IT services business in Germany whose prime business was focus out focused around the SA P software space and at that time there were over 500 s AP partners in Germany so we went through a and exercise screening those partners and came up with a short list of two and we basically approached those two businesses evaluated them and in the end we bought one but that is the value of having a clear set of criteria a clear acquisition scope that you can look and then going out screening the market properly so you don't waste your time chasing after the other far 498 companies or whatever it was focus and good criteria make all the difference step 4 is the initial approach so you've got your shortlist of businesses and you go and talk to them you initialize conversations now you can either do that as an adviser on a no names basis keeping your client in the background or if you are handling the matter directly then obviously you go and have that start having a conversation with the owners of those businesses trying to identify if the businesses really are the sort of businesses that you want to acquire and obviously you're looking for information you may or may not sign a confidentiality agreement at this stage you probably will if the matter goes further but you're just trying to get a flavor of what the business is like is it the sort of business that you think it is and critically how interested are the owners of that business in selling it now at the end I will highlight a key point but basically you need to try to find out why the owners want to sell now it may be there for their own personal reasons which maybe they want to retire or you know whatever they've got they've got going on in their lives and they want to move on to something different the company might be going into the ground in fact one of the two sa B businesses we looked at yeah it was exactly the problem every time we went to see them we got a different set of numbers and they were worse than the ones before so you know you need to understand the motivation of the seller but equally if the seller hasn't got any motivation to sell then it's very likely that they may consider a deal if you offer them some really high pie-in-the-sky price which is way more than you really want to pay but if they haven't got a motivation to sell then it's probably not the right time to focus on them and try and find somebody who either wants to sell or needs to sell you now come to valuation which is step 5 and to come up with a sensible valuation you need to obtain detailed and current information financial information about the business and for that you need the own the business to hand that information over to you in order for them to do that you need to get a confidentiality agreement in place it's helpful as well if you can get their budgets for the year so that you can have some idea of what the forecast is for the business and if you're doing evaluation exercise one of the things you'll probably want to do is build your own forecasts of the business and having the management of the business giving you a start for that is very helpful value the business on a standalone basis however okay what is the business worth as it is because that is what the sellers are selling you can evaluate in your valuation the benefits to you of making the acquisition but and these are often called synergies but you don't pay for those okay their benefits to you so you want to have an idea of what the benefits are going to be and what the the uptick and value will be through your ownership but you want to value the business on standalone business because that's what the sellers are selling and of course use a range of valuation techniques use a discounted cash flow use some comparative numbers look at the the p/e ratios of public companies look at other deals that have happened in the market and of course the ownership of the business will affect the value and by that I mean if it's a public company clearly you're going to have to pay a premium to what's in the market if it's a private company the owners and it's a smaller company the owners may not be so sophisticated then they may prepare to accept a lower price if venture capitalists or private equity players are in then clearly they're looking for to maximize their exit value purely on the basis of the returns to their funds so they'll be tougher and a more experienced negotiator step six is all about negotiating the negotiating the deal to the point where you can sign a letter of intent and LOI so now you're having detailed discussions with probably only two or three businesses in order to get down to the real detail of what sort of detailed deal can you put together what sort of offer what sort of now what sort of valuation and what conditions will be attached to the deal both by you and by them and what you're trying to do here is to establish the key points in the deal that you're important to the seller because when you come to negotiate the fine points of the deal if you understand what what's important to them it's much easier to trade off the points and get the points in the deal that you want in return for dressing some of their issues and you want to get to a point where you have a non-binding letter of intent which basically sets out the key points of the deal and everybody signs up to that and says yes let's go ahead on this basis step seven is the due diligence process which is typically a six week possibly even sometimes longer process where you go into a detailed review of all aspects of the business and do get this information you and your advisors will submit detailed information requests ideally they'll have a data room where they've got all this corporate corporate information put in in good order and is easy to search and also systematically filed that today is very much an online exercise so all the information should be sitting there which you once you giving being given access to it should be able to answer all the questions that you have normally the due diligence review is conducted by specialist advisors the accountants the lawyers the management accountants maybe in the environmental advisors for whatever it is but it is a detailed process of really trying to find out and put trying to put yourself in a position that you know as much about the business as the seller does you'll never ever quite achieve that but that's the aim of the exercise so some of the things you're looking for you obviously want to confirm your view of the valuation of the business by looking through the details particularly the financial details of the business the key to this is disclosure you want to force the sellers to disclose everything good and bad about the business you want to know where the skeletons are in the cupboard clearly you're going to look at the finance you're going to look at the assets and liabilities of the business you can look at the property you're gonna look at the customers and suppliers you're gonna look at all the contracts with everybody that the customer has from kirb fliers to customers to employees anybody they were to contract with to the landowner to the property owners whatever it is you want to go through all these you also want to understand the contracts that they sell their products and services on they understand are they selling on a similar basis to to you and your in the contracts one of the key things you want to look for is change of control clauses where if there's a change of control you might find some to the the other party in that contract have a right of termination and these can be absolutely critical and if they exist you must find them and finally of course you need to look at all the personnel issues the management the staff HR to make sure you get completely underneath all those that's just a quick overview of all those issues the due diligence process information requests runs to pages and pages and pages I can't possibly cover all the detail in this short video in step 8 we're talking about the sale and purchase contract okay so you basically prepare this in parallel with the due diligence process it is started on the basis of the letter of intent which is part of the reason you have a letter of intent it gets that the initial draft of the sale a purchase agreement off the ground obviously there are a lot of conditions in the seller purchase agreement and these have to be negotiated there has to be detailed disclosure and you have representations and warranties and all these legal details your legal advisors will explain to you but the key is to have as much disclosure from the sellers as possible so that you know as much about the business you'll have to negotiate the working capital agreement and again I don't want to explain that in detail but in essence the company has to be left with enough cash in it in order for it to run normally you can't let the sellers strip out all the cash and then suddenly find you haven't got the cash in that business to pay the salaries so working capital is a critical critical negotiation and there are always a large number of other contracts and reports shareholder agreements as well if the seller retains a position in the business or a financial interest in the business so you've got all these other reports and agreements which come in parallel have been into closing meetings you think you've got 150 page sale and purchase gribbit and you've got a huge table and it's groaning with piles of papers because it's all the ancillary agreements and all the other disclosures which tie into the sale and purchase grivet it's a complex process step nine is acquisition finance now of course you will have gone into this deal knowing you can pay for it or how you're going to pay for it but this is the point in the deal where the finance kicks in so you must organize as well in advance you may be doing it from existing resources which kicking it ie the company that is the buyer has lots of cash on its balance sheet and it can pay out of the cash or it's gonna pay with its shares now if it pays with its shares if it's a private company - upon becoming it's not too complicated if it's a public company you've then got to have a formal share assurance process which makes life a little bit more complex so understand how the deals going to be paid for cash shares or whatever else it is and if you need to do any fundraising or debt raising then obviously that needs to be well organized as part of the overall process step 10 closing and post deal implementation now post yield implementation is really outside the M&A process but that's the follow-on step so clearly we all get into a room the principal's sign all the documents the lawyers are very happy the champagne is opened and basically and some bank far far away that money passes or the consideration process or the shares are issued to the the sellers and the deal closes and the deal is done and then whoever else is remaining in the business obviously needs to be then executing the post deal implementation plan which they will have been working on for a number of weeks so you'll know on day one you go into the new company or the company that's been acquired and you make the announcement of the employees and you know exactly what steps you're going to take in the next day few days week and weeks they're on so it's a complex but important process but I'm not going to go into post improper deal implementation in this series of lectures so to summarise the M&A process is pretty straightforward it does tend to follow a slogic 'el and sequential process but it is complicated and does require complex transaction management which is why experienced in this field and I did this force of 30 years is so important it's really helpful if you can anticipate problems before they come up and that really comes down to experience remember deals can crater at any time for any number of reasons you can have market conditions you can have the buyer pulling out you can have the seller pulling out you can have something coming up in due diligence which is a deal breaker you can have somebody putting up a condition which is a deal breaker somebody changing the price which is a deal breaker so it becomes quite a difficult process and it's a real personnel and man management exercise and the more you can build a relationship between the buyer and the seller the more likely the deal is to close and the key to this in my opinion is making sure that the seller has a really good reason to want to sell not only wanting to sell to your buyer but wanting to sell now and without that key motivation they can walk at any time so think about that in any of the deals that you do and try and find yourself really well motivated sellers so that's it for this overview of the M&A process I've given you quite a lot of content but I hope the structure makes it easy to understand and follow and certainly with that in your kit bag as it were then everything we're going to talk about will make some sense

Channel: John Colley

Views: 16,944

Rating: 4.9617224 out of 5

Keywords: Mergers and Acquisitions Overview of the M&A Process, Mergers and acquisitions, M&A Process Mergers and inquisitions, Mergers and acquisitions explained, Merger, Acquisition, Mergers and takeovers, Mergers and acquisitions investment banking, Investment banking, Mergers and acquisitions course M&A, M&A investment banking, M&A explained, Investment banking explained

Id: 9zn2lWCwVOg

Length: 17min 9sec (1029 seconds)

Published: Wed Mar 11 2020

Reddit Comments

[u/SwaggyJ505]

Building upon the chart that was posted earlier, I thought this video may be of interest to all. In particular, he mentions that the due diligence phase typically "takes about 6 weeks sometimes more." As of earnings, we were in various stages of the dd phase with the multiple interested parties which tells me that something is probably going to arise by next month.

Long n Strong!!!

[u/NegotiationNo9714]

The patents are not the most valuable part by the way. The most valuable part are the people who developed this technology.

Whoever wins they will also use permanently or for a long term the services of the existing team including Sumit himself.

The people at Microvision are the greatest leverage now.

[u/SwaggyJ505]

And if you're like me, here is a more in depth article which highlights the complexities of the M&A process:

https://www.google.com/amp/s/www.forbes.com/sites/allbusiness/2018/08/27/mergers-and-acquisitions-key-considerations-when-selling-your-company/amp/

[u/abs_89]

Thanks for sharing