Mergers and Acquisitions
M&A advisor for prospective buyers and sellers,
we search and match businesses for sale,
supervise the transaction process,
offer prior and post-merger integration,
negotiate agreements, do valuations and assist in due diligence.
Definition of mergers and acquisitions
Mergers and acquisitions are often used interchangeably as they are synonyms; however, they are different in their emergence.
• in the case of an acquisition, only a part of an enterprise is purchased, specific assets or certain activities
• in the case of a merger, there is a total takeover of a target company by the acquirer, whereby the target company ceases to exist as its activities, assets and debts are integrated into the enterprise of the acquirer (acquired business activities may be entirely absorbed or operate still as a “stand-alone” subsidiary)
• a third option is a “merger of equals”, where companies remain and jointly set up a new entity ( consolidation), in which they are incorporated (consolidation, combining companies will mostly be done by issuing stocks of the new parent company)
an exclusive agreement is a reverse merger, the buying a publicly-listed shell company by a private company and that merges into a newly public company with tradable shares.
Regardless of their type, mergers and acquisitions share a common objective to create synergies in an added value higher as the value of the sum of the independent companies.
Other (pre) mergers and acquisitions activities that occur are:
– create a new standalone company, a corporate spin-off, to increase the business position by better management, focus, expertise, own strategy and growth path, simplified cost models and processes etc.
– a divestiture, due to lack of synergy or absence of fit within the cooperation strategy
Mergers and acquisitions principles
• is a cost-effective method for growth and shareholder value
• an acquisition/merger must be more valuable as the sum of the 2 separate companies
• deal only creates value for a buyer if the synergies exceed the costs of acquisition and integration.
• the premium is the amount buyers did pay above the market valuation, the last 5 years, the average is 35% to 45% (higher the premium needs greater synergies)
• sellers naturally prefer, given the reduced risk, cash deals (which could lower the premium), over a combination and stock deals, although financing and tax may force not to choose cash deals
• choosing the correct financing mix is a huge factor in the acquisition costs
• competitors can easily copy mergers and acquisitions strategies at lower costs and even improve the outcomes (less waste and failures)
• the value of synergies are usually overestimated, and cost synergies are easier to achieve than revenue synergies
• acquisition costs require mergers to grow rapidly, but many fall far short of the expectations and even more than half actually destroy shareholder value.
• Shareholder Value at Risk (SVAR) is a prefix (percentage) to calculate the business value of the company if the intended synergies are not achieved or will take place
• mergers and acquisitions are investments for long-term to be realised benefits
• exist with the belief that the company can be better managed and achieve better results
• integration, cooperation in a fitting culture and change management and optimising the business are determining factors for success but are often immense underestimated
• deals are also often classified to capabilities; enhance (new, fill gaps), leverage (use existing) or limited-fit (ignore, acquiring company does not have the required product/market capabilities)
• tax considerations should be taken into account when structuring the arrangements and are frequently an impulse for mergers and acquisitions.
• size matters, 2 companies together are stronger and more valuable, especially in tough times
• larger M&A’s are big news and often highlights a CEO’s career
Deal payment structures
These could be;
• full payment of acquisition sum
or to lower direct cash payment sum and the risk
• whether or not a partial payment supplemented with a
– earn-out structure
– exchange of shares or stocks
– long-term leasing of fixed assets (some PP&E not in ownership)
– subordinated loan or another form of liability/commitment
Mergers and acquisitions motives
To sell a business
• no succession
– managing director/owner still has no demonstrable successor (family businesses, SMEs), an M&A (mergers and acquisitions) may ensure continuity
• financing needs
– the company does not have the resources to finance losses or the planned or needed growth, and continuity may be guaranteed by a possible M&A (mergers and acquisitions) as it will provide better access to capital markets
– narrowing business activities, sell off to focus and strength on others
• personal reasons
– the owner may have other plans or insights, loss of interest, circumstances etc.
– company growth and survival is critical and therefore ensuring continuity by reducing dependency and vulnerability, strengthening the position
• exit strategy
– investors/equity financiers are pre-eminently focused on the development of the company (within a specified period to a certain value) and to transfer their shares (or total company) to a strategic buyer
To buy an acquisition or merger of equals
It is all about synergy. Synergy is the most intended reason for buyers, as combining business activities will increase performance, decrease costs, supplement strengths and compensate weaknesses and thereby enhance shareholder value. The underlying impetus for achieving synergy and shareholder value could be;
– fast growing in market share by buying a competitor
• investment diversification
– purchasing an unrelated business to reduce the impact of own industry, reduce the effect of performance and profit of their sector (minimise vulnerability)
• competitive edge
– gain in competitive advantage, utilising core competence, by buying a competitor or any other business in a related industry sector with specific capabilities restructuring
– if a turnaround is needed, change of strategy, competitive scope, mission, vision, culture, an acquisition or merge can speed up the restructuring process
• financial restructuring
– investing and, or at the same time, making better use of, or acquiring additional financial resources or obtaining more attractive financial conditions
• tax benefits
– buying a company with accumulated tax losses may dramatically lower acquirer’s tax liabilities.
• erase competition
– besides gain a more significant market share, the primary objective is to eliminate (future) competitor(s)
– eliminating costs and save margins by vertical merger, buying of a supplier(s) or distributor(s) as an entry or expansion of distribution channels
• market power
– to successful and better utilise capabilities and resources needs a certain business size, economies of scale which can be reached by buying any business activity; competitors, suppliers, distributors or any other business in a related industry sector.
• rapidly market access
– buying a presence in an attractive market and/or the industry can solve entry barriers, faster access to knowledge, compliance with regulations/permits, existing business processes and customer base, etc.
• cross-border activities
– starting aboard or expanding the international operations under own control by an acquisition
• product development
– obtaining knowledge and resources and at the same time reducing the costs and risks of developing new products
• purchasing power
– cost savings through higher purchasing volume, more opportunities to negotiate discounted prices and terms with suppliers.
• acquiring technology and systems
– development and staying on top by integrating advanced, new technology, applications and systems by buying a smaller progressive firm
• access to financial markets
– large, major enterprises do have more and better options in raising capital and financing structures
• staff reductions.
– generating higher productivity at lower labour costs, mergers often involve remediation, job losses specific overhead and staff functions. Of course, costs of redundancy schemes and compensation packages must be taken into account.
Synergy requires implementation of a plan
Achieving synergy is highly underestimated and is easier said than done. Often the purpose of an M &A seems to be limited to the conclusion of the agreement, whereas this should be the start for achieving the intended results.
Achieving synergy requires:
• a scheduled plan
– formulate the starting points and the intended results and place them in a timeline
• a preparation.
– forming the organisation for this purpose, appointing the person in charge of the sub-processes, allocating resources, making various analyses
• an execution
– analysing option for optimisation, elaborating the plans in detail, making decisions and implementing the strategy and organisational changes
Varieties of Mergers
For serving the motives, there are some different kinds of mergers, such as;
• vertical merger
– a supplier merge to a customer
• horizontal merger
– competitors with same product/market
• market-extension merger
– companies with same products but in different markets merge
• product-extension merger
– selling in the same market related (but different) products.
– a merger of companies with no common business
Causes to cancel a mergers and acquisitions process
In practice, it occurs regularly: intended acquisitions will put on hold or cancelled. If the acquisition strategy and acquisition criteria have been carefully considered beforehand, and the interaction with the buying or selling party is positive, this may not happen or at least reduce the chance of discontinuation. Reasons for cancellation are usually pretty trivial, and these we have often come across:
• weak and inadequate intentions
– the underlying motives were insufficiently convincing to continue, prompted by personal ambitions insufficient support within the board and management and/or change in policy priorities
– high price cannot be justified, a seller is testing market at a high price level, the outcome of the due diligence often has consequences for the final price, negotiations do fail (sellers will be emotionally involved), and an acceptable compromise cannot be made.
• due diligence outcomes
– deal-breakers reveal serious deviations from what the selling party initially presented, and the buyer assesses merely the risks as high. This could be avoided if all was prepared correctly and correct information was shared in an early stadium. (selling party may not be aware of these abuse as information, and actual data is not always available or transparent)
– the structure raises barriers, such as f.e. regulations, taxes, no permission from authorities, with the result that benefits are not or only in limited extent accessible.
• chair dance
– the “chair dance”, dividing the titles and functions causes an internal power struggle, not precisely a wanted prospect to implement a merger
• ego clashes
– mergers and acquisitions deal-making can be a long and often pleasant engagement, confrontations of different insights, interests and time planning will demand empathy, mutual respect, patience and tact to make progress in the mergers and acquisitions process and to reach an ultimately valued agreement. Not all involved will make a positive contribution to this, but try to prevent a collapse as a result of unnecessary and avoidable collisions between egos.
• competition authority
– competition regulations and rejections by authorities can prevent some unwanted mergers
• fear to commit
– second thoughts, emotions, initial hesitation, negative or unpleasant negotiations and other irrational matters may decide to stop the mergers and acquisitions process
Mergers and acquisitions common failures
Bad mergers and acquisitions happen, and these often result in major losses in equity or shareholder values or even worse; distressed business. expected synergies appear to be disappointing, internal conflicts or insurmountable cultural differences, cost savings may be overestimated and even more complications can occur as a result of a mergers and acquisitions. Here is a list of common mergers and acquisitions failures that can cause major damage to the company
• cultural misfit – the most critical success factor!
– facts and figures dominate in the mechanical mergers and acquisitions process, but similar goals, values and views, willingness to let company interests prevail over their interests and being absolutely open to cooperation are conditions for success. Shape the binding factors as soon as possible.
• no, incomplete or failed integration – the second most critical success factor!
– often little priority is given to the internal organisation, even after years fundamental processes and also systems are left untouched, as cost savings due to optimisation and uniformity usually receive less attention and are experienced as difficult. Effectively managing operations after an M&A (mergers and acquisitions) mostly will demand some organisational restructuring and a clear post-integration plan should be made before the deal is closed because this is the base for the acquisition!
• even bad deal may not be cancelled
– rotten deals are closed anyway, lots of involved people will push to close the deal as to many hours spend, due to bonuses and promotions, and there is also hardly a point of return as all was expecting and information was published
– paid price for acquisition and additional costs of advisors and the integration is far too high and is not in proportion to possible added value and profit over time
• doubtful added value
– the better deals often have several reasons that underlie the mergers and acquisitions, and to some extent, this will limit the risk and make an investment profitable.
• lack of cash
– at limited investment room and too much has to be paid and withdrawn from the company, it will negatively affect working capital. If the cash flow is also low or negative, it certainly result in a restructure, both financially and organisationally.
• overwhelmed by offers
– wealthy, successful firms are frequently approached by deal professionals with proposals that will take a lot of time and expectations have been created. Clearly communicate acquisition criteria and if they are not similar, be selective and avoid the temptation to step in
• lack of mergers and acquisitions experience
– understanding the effects as mergers and acquisitions is certainly not a sinecure and certainly not an everyday practice, due to the risk it demands a lot of management; therewithal the management often cannot boast a long-term experience in making acquisitions successful. Enthusiastic about the opportunities, but the consequences are insufficiently thought through, and business is not on top of things.
• not making a tough decision
– not dare to take difficult decisions both in the pre-acquisition / negotiation process and the tumultuous post-acquisition consolidation, partly because this could have an impact on prestige and leadership. In mergers and acquisitions, the top management is responsible and will be forced to make difficult decisions.
• poor due diligence
– unseen, hidden, wrong analysis or wrong estimates in due diligence process and afterwards there are serious existing defects or setbacks (wrong analysis, estimates) that do not contribute to intended results, are seriously loss-making or jeopardise continuity.
• poor change & implementation management
– it disrupt the organisation, devastate working relationships, raw tension, uncertainty about employment contracts mergers and acquisitions is an revolution as compared to evolutionary changes. So ask yourself do you, and the company have the capabilities to control a revolution? In the event of poor change & implementation management, a company can go under.
• daily operations hinder and slow down integration/synergy
– no plan, no resources, acquisition opportunities are missed out as everybody is busy with their daily operational jobs, and a merger do need a dedicated team and with a final responsible officer (or hire them at Asia Investment Services)
• major unforeseen setbacks
– even if all information has been exhaustively analysed and due diligence has been properly exercised, future problems and losses cannot be ruled out. Think for example about litigation and claims, environmental issues, product defects, failing projects, market conditions etc.
• negotiations and contractual errors
In addition to unforeseen setbacks, obviously mistakes can be made in the closing of the mergers and acquisitions process, incorrect assumptions, estimates and clauses accepted that could have a major negative impact.
• lacking decisive management
– there may be various reasons for this; sudden departure of key persons, missing cooperation or the changed situation may result in poorer or disappointing performance, which means that the task remains behind, possibly an uncontrolled impasse arises and the intended results are not achieved.
• miscalculation customer Impact/perception
– if this occurs, despite the intensive use of marketing promotion and sales promotions this will always results in a large loss of market share
• employee disaffection and departure
– mergers and acquisitions often results in painful reorganisations, insecurity among staff, negative attitudes involuntary transfers and forced redundancies. Tumult, frustration, rumours, speculations and confusion will certain leads to productivity loss as high staff turnover can result in loss of expertise and customer relations, and also will affect increasing costs of hiring new employees.
• diseconomies of scale
– the increased company size of a merger may also lead to scale disadvantages; loss of control and higher operating costs (disproportionate increase).
• external factors
– business also highly dependent on the circumstances and these can have a bad effect on business and in particular due to investments on mergers; economic recession, changes in regulations, reduced market demand by replacement products, etc.
Post-merger, planning and activities of after the acquisition
In our opinion: success is a process, and that is largely determined by leadership and cooperation.
The preparation before closing the deal, as these determine the closing of the transaction and the ultimate success of the merger to a high degree. This phase is about supporting the acquisition process, working towards a takeover integration, and being organised for the task ahead.
• strategy and business planning
– the management team has to make a complete new business plan for post-merger
• forecasting return on investment
– appoint someone who is responsible for the ROI calculation (also calculate integration costs), as acquisition-related problems and costs are often equivalent or more as the weighted acquisition benefits translated into revenues (low or negative returns) if so terminate the acquisition
• compose an acquisition and integration organisation (transition team)
– steering group with chairman, project managers of the various sub-activities, define reporting and consultation structure, select counsellors for diverse needed expertise and give them a clear task
– change or complement project managers and staff members of the teams with executives/staff of the takeover company if the acquisition is (nearly) confirmed
– acquisition support teams: communication, strategy planning, culture (, due diligence, (negotiating) terms, assets, acquisition financing, regulations, data filling & security
• kick-off and compose subject and department teams
— continue with subject teams; communication, strategy planning, culture, organisation structure
— create other integration (joint department) teams, such as HRM, marketing, sales, finance, production etc. and also for the for the interfaces (avoid sub optimisation)
• plan and define the scope of team
– management should provide the criteria and, if possible, a template
– plan and set goals and milestones, time-schedule, budgets, staffing, roles and responsibilities, consultation structures, reports, formal records and its data management, define possible risks and the mitigation of them, interfaces, SWOT, etc.
– management must approve plans and make resources available
• communication channel
– keep employees and other stakeholders informed, build relationship through communication, lack of clarity leads to turmoil, low morale and low productivity
• bridging cultures
– merge failure number 1 is culture, clarify similarities and differences, determine the desired culture and its development, cross-communication, organise formal and informal meetings, build relationships and teams
• employee feedback
– install an employee welfare office, receive feedback, listen to all levels, increased involvement and get valuable information, but also build trust and treat information confidentially
• form new top management
– balance of power, how are the (new) positions redistributed, how to acquire and retain the required (management) expertise, how to prevent turbulence, and how to prevail corporate interests over personal interests?
• customers communication and contacts / PR
– strategy and activities to introduce the new company, vision and plans to the market, existing customers and new customers, establish relationships, convince (existing) customers of the added value and give the competition no chance to improve its position (as a counter-reaction). And what if you keep 2 or more brand identities, logo’s, new trade name, press releases, social media etc.
• staffing, employees compensation & benefits
organisation restructuring, forced redundancies, equalisation, compensation or not? It is about encourage motivation, retain key personnel and minimise employee turnover.
• legal advisor
– keep the legal advisor on retainer until you are sure all the process is complete. In particular, above mentioned, personnel remediation and equalisation conditions may have a considerable legal impact.
• IT systems
another critical issue, risk and costs can be enormous, so be familiar with possible consequences and study options
• unmanageable conflicts
act immediately, resolve drama, if not likely, seriously consider the termination of the acquisition
• financial planning
– how to finance the deal, restructuring balance sheet, debt financings and other methods of raising capital.
Mergers and acquisitions advisors roles
Dealmakers want to score and are not responsible for creating shareholder value, strategy and business plans, pricing and terms, holder value, the integration. Most investment bankers are just brokers. Asia Investment Services distinguishes itself by focusing on the long-term success of the acquisition for both buyer and seller.
• bring valuable experience in mergers and acquisitions processes
• representation of clients’ interests
• professional negotiator on behalf of the client, which is often appreciated by all parties
• offering more scope for deliberation and negotiations
• providing an extra leverage effect in the negotiation process
• are available and able to prepare, test options and do the dirty jobs
• define a crystal clear mergers and acquisitions strategy
• create a professional pitch book
• able to disclose multiple bidders simultaneously interested and involved in the MA process
• arrange a deal-making system including comprehensive documentation, recording agreements and reporting
• offering independent insights and objective assessments
• identifying (upfront) threats, weaknesses and risks (in acquisition process and planned integrations)
• get decision makers out of their the comfort zone and push them to make difficult decisions
• keep clients’ productivity and their focus on the existing, operational business (often entrepreneurs and management forget or ignore to run the existing business)
• plan and evaluate (and maybe monitor) the development after acquisition
• valuation of acquisition true financial value (current on-going business)
• forecasting of the merger financial value including estimated return on investment and the key drivers of the profits
• achieve the best sale price and terms
• identifying candidates (matching buyers and sellers) who add optimal value drivers to the business
• access to a network of highly experts, external advisors
• effectively coordination of process and deal (reduce stress, saving time for the client)
• capable to design tailor-made arrangements restraining unreasonable valuation expectations
• accomplish in an early phase pre-closing commitments (non-disclosure agreement, the financial and legal ability to enter into a contract, terms)
• will have proven checklist to share (increases joint insight)
• speed up the process and transaction (which is critical for success)
• able to structure information
Pre-merger turnaround to increase business sale revenue
It may be that if a seller wants to renounce, that the company must be first make suitable for a sale. This otherwise there will be insufficient buyers in the existing state the value will be far below expectations. The following aspects have a direct influence on the attractiveness. The owner must ask himself the following questions;
– can the company exist without the owner/entrepreneur?
– are all functions adequately occupied and is there a sufficient, powerful management team?
– has the company a adequate distinctive character to be attractive to a buyer?
– has the company streamlined processes, is it lean?
– is business and private strictly separated?
– is the company free of expensive private projects/hobbies that barely generate revenue?
If the answer to some of these questions is no, one could consider a pre-merger turnaround, which should lead to a higher return on a later sale. Also, notice that this should be started on time as this is usually a 2 to 3-year process. It is also an option to tackle this with professional parties, such as (interim commissioned) interim managers or venture capitalists.
We at AsiaInvestmentServices could be interested to make this a joint challenge.
For mergers and acquisitions processes see
M&A Business Transfer – Business for Sale, click here
M&A Business Transfer – Business Acquisition, click here