Michael's M&A Playbook: 5 Mergers and Acquisitions Process Steps
Understanding mergers and acquisitions is difficult because an M&A transaction can be complex, lengthy, and include many people. Nevertheless, you usually follow five steps from the beginning to the end in the M&A process map. Like with other stage-gate techniques, having a no-go decision that stops the project earlier is not unusual. Not all M&A transactions help you achieve your goals. Saying "No" to a target is sometimes the better decision. These best practice examples will make your next M&A process successful. This article is a brief overview, and you can find more tips and best practice examples in my M&A Playbook.
Mergers and Acquisitions Process Steps
Strategy formulation and pipeline development - Many companies start thinking about M&A when a specific opportunity arises. The more process-driven approach, however, begins with discussing the strategic growth plans and what role M&A can play in achieving those goals. Once you agree with your stakeholders, especially the Board of Directors, to start with M&A, developing a target pipeline is next. Define quantitative (e.g., revenue, EBITDA, and cash flow) and qualitative indicators (e.g., cultural and strategic fit) to rank the targets on an M&A scorecard. My proposal is also to reach out to investment banks and similar institutions that can help you find targets outside of your company's network.
Initial discussions with the target and Letter of Intent - Once you have identified a short list of companies that fit your strategy, you can reach out directly or via the investment bank. If the first discussions go well, the next step is to provide the target with a term sheet and letter of intent (LOI). I am not going into the details of the term sheet and LOI in this article because it can be a complicated topic, especially regarding the binding and non-binding elements of the legal documents. You want to be specific but keep it simultaneously vague enough so that you can adjust the purchase price or get out of the deal based on the due diligence findings. Also, make it contingent on all required approvals by governmental bodies and the Board of Directors. The valuation of the deal and which number you include in the term sheet and LOI is another crucial topic, and I plan to write a separate article about it.
Mergers and acquisitions due diligence, business case development, and value capture approach - Now it's time to assemble a team to perform the due diligence. You want to have people from different functional areas because you need to analyze and understand the target company's business model, competitive situation, go-to-market approach, operational processes, and financial results. I recommend using an external M&A lawyer for the legal analysis and an accounting firm for the financial and tax due diligence. Also, consider using other external experts for specific topics that are important to you, e.g., for R&D. Ensure that the external parties clearly understand the scope of work and include a Quality of Earnings (QoE) report with adjustments to the reported numbers in the financial due diligence. The goal is to understand the financial situation of the target better, and the QoE report is a good tool for that. Based on the information from the due diligence process, you develop a business case for how the M&A transaction can add value to your company, which is the value capture. Ensure that you have different scenarios and include a risk percentage. You have more information at this point, but it is still limited. The business case and value capture approach is an important milestone in an M&A transaction and is part of the stage-gate process. You and your stakeholders need to decide at this point whether the transaction makes sense or not. At this stage, develop the integration plan.
Negotiation - If you choose to proceed with the process, you continue the discussions with the target and start the negotiation, which includes the purchase price and the legal documents (i.e., the purchase agreement). There are different ways how to structure M&A transactions. For example, you can decide to buy the legal entity (i.e., a share deal), or you want specific assets (i.e., an asset deal). Asset deals limit the acquirer's liabilities, but separating the specific assets from the seller's entity is sometimes tricky. Escrow accounts (to park a portion of the purchase price), working capital adjustments after the closing, non-solicitation of key employees by the seller, and similar topics are also part of the negotiation. Your M&A lawyer can help you with those questions. Negotiation is a crucial point in the M&A transaction, and you want your best negotiator to lead this phase. Other people from your due diligence team and external experts support the negotiation leader during this phase. As a reminder, ensure you also consider required approvals from the Board of Directors and governmental bodies.
Post-closing adjustments and mergers and acquisitions integration process - Depending on the final purchase agreement, there may be some critical adjustments to the purchase price, such as a working capital adjustment. Work with an external accounting firm to review the opening balance sheet and find an expert for the (accounting and tax) purchase price allocation. You can now access all information and verify whether the seller presented everything professionally and materially correctly during the due diligence. If not, discuss the matter with your lawyer regarding potential claims. It is now also time to integrate the target (in parallel with those technical post-closing items). Your business case, value capture approach, and integration plan from the earlier M&A phase will guide you through this process. Choose a strong project manager to lead the integration. Here is a link to my article on successfully implementing performance improvement and restructuring plans.
Be Ready for Surprises and Develop a Solution-Focused Culture
Even if you have planned the transactions carefully and followed all mergers and acquisitions process steps, there are always surprises after the closing. The main reason is that you have limited information and access to key personnel during the due diligence phase. Typically, things turn out (at least slightly) differently. Focus on finding solutions and different approaches to address the new information. You can make it work!
Feel free to contact me to discuss specific mergers and acquisitions examples.
