Mergers & Acquisitions (M&A) Process

Table of contents

What is the management term “M&A process"?

The term Mergers & Acquisitions has established itself both as a component of strategic management and as a term in economics language usage. The M&A process usually refers to a merger of two companies into one legal and economic unit, whereby at least one of these companies loses its previous legal independence. In contrast with this, when acquiring corporate units or an entire company, none of the companies involved have to give up their legal independence. Acquisitions usually involve the buyer having an economic influence on the target, so to speak changing the helmsman, while the construction of the ship remains the same. 

What are the objectives of a mergers & acquisitions process?

The objectives of an M&A process can be diverse and always depend on the respective circumstances. M&A processes are usually aimed at 

  • improving market position, market power or turnover,
  • taking over well-rehearsed processes or experienced employees, or 
  • through the integration of the target company to exploit synergy effects that have a positive effect on the return on investment, or "ROI", of the acquiring company. 

What are the phases of an M&A process?

Typically, a company purchase can be divided into five phases: 

1. Preparation and contract initiation phase

At the beginning, the strategic decision is usually made by the seller in the preparation and contract initiation phase as to whether he wants to sell the company or a certain part of the company and, if necessary, by what means the company transaction will be realised. In principle, a company can be sold and transferred in two ways. With the (i) share deal, the shares in the target company holding the business are sold and transferred to the buyer, and (ii) with the asset deal, the individual assets forming the business (e.g. land, machines) are transferred to the buyer. 

2. The corporate auditing phase (due diligence)

The preparation and contract initiation phase is followed by the phase of auditing and analysis of the company. This is also called due diligence. In doing so, the buyer and their advisers subject the target company to an intensive audit in order to identify inherent and imminent risks at the target company. An in-depth audit, with the involvement of expert know-how, is also strongly recommended for the acquisition of medium-sized companies.

3. The phase of the contract negotiations and the subsequent signing of the contract (signing) 

Even during or at the latest after the end of the due diligence, the parties involved deal with the negotiation of the purchase contract. Whether a share deal or asset deal is appropriate depends not only on the interests of the parties but also on a variety of legal and tax criteria. For example, in the share deal, all contractual relationships and liabilities of the target company that may not be known to the buyer are usually taken over. On the other hand, in the asset deal the buyer often only assumes those contractual relationships that the parties have determined in the purchase contract. This is usually done by means of complex creation of inventory directories and lists, which are usually attached to the purchase contract as appendices. The subsequent signing of the purchase contract is also called signing. 

4. Execution phase

After signing, the parties involved prepare the execution of the purchase contract. The execution conditions provided for in the company contract must be brought about by the execution date. Occasionally, the purchase requires, for example, the approval of the anti-trust authority, or the approval of certain committees (e.g. supervisory board, advisory board), or also the absence of significant adverse developments of the target company. Sometimes, the purchase contract also provides that ancillary agreements must be signed between the parties involved, usually on or up to the execution date. An ancillary agreement might include, for example, the conclusion of a trust contract with a trustee to secure a part of the purchase price in the event of any warranty claims, the conclusion of (separate) transfer agreements, or granting a shareholder loan by the new shareholder to the target company. 

5. The integration phase and post-closing measures

The integration of the acquired company usually requires considerable management resources. If the target company continues to work as usual for a longer period of time despite the sale, changes are all the more difficult to implement later. Certain enforcement measures, such as a joint press release and the notification of suppliers and customers, should take place as quickly as possible. The integration of the target company into the IT structures of the buyer is also usually an important measure of integration. If the necessary adjustments and restructuring are not tackled as a direct result of the company purchase, valuable momentum can be lost. Whether a company purchase proves to be economically successful for the buyer depends largely on the integration phase. The acquisition or merger targets initially set, such as the increase in market position or the use of synergy effects, should be achieved as efficiently and successfully as possible. 

How can M&A projects/M&A processes be successfully designed?

The failure rate of the non-professionally supported M&A processes lies in a range of 50% to 80%. In the absence of due diligence, the desired implementation of synergy effects and the use of growth potential often does not succeed. This shows in particular the importance of careful company analysis before concluding contracts, which creates a starting point for structuring the desired change process. 

The fine difference between failure and success is usually marginal. Often, failure can be averted by taking into account the following 6 factors.

1. Timely breakdown of procedures
2. Determination of the optimum purchase price
3. Determination of the optimum time
4. Thorough assessment of the opportunity and risks (due diligence)
5. Secure contract negotiations and
6. Professional integration. 

Legal support in the M&A process

Purchase or sales decisions not only entail legal but also business and, in part, emotional challenges. DIKE Schindhelm, as a professional consultant, not only helps to keep the M&A process on course for success, but also provides support and relief for the company and management.

Our competent team will be happy to advise you and assist you with all your questions. Get in touch today!

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Please note: The above explanations are not exhaustive. They are only for initial information. They do not replace in-depth advice. We would be happy to help you with this.