Mergers provide a variety of strategic benefits, regardless of type. Although it has been a challenging business year for the UK economy, with M&A activity in H1 2023 down by 21%, there are still opportunities to be had via successful mergers.
However, the key to a successful merger is and remains proper due diligence. Merging for the sake of merging is no guarantee of success and can detract from a business as a whole.
The first step to a merger is direction. This guide provides a handy checklist that all businesses can adapt and follow to increase their chances of a successful merger.
What is the process of merging two companies?
Every merger follows a distinct process to ensure that it makes sense for both sides and complies with legislation like the 2006 Companies Act and the guidance in The Takeover Code, known as “The Code.”
The fact is that most mergers will either fail to reach their goals or fall through before they can be completed. According to McKinsey, at least 10% of large-scale mergers and acquisitions are cancelled for one reason or another. Many more fail to achieve their goals.
To increase your chances of success, follow this checklist.
Pre-merger checklist
Various types of mergers exist, and every deal is slightly different. However, each merger can be boiled down to the same general principles.
If you have decided that a merger could suit your business, here are those initial steps to embark upon.
Evaluate the pros and cons
In other words, do your homework. This includes identifying potential targets and pinpointing the merits and downsides of going through with that deal.
Note that this happens long before you approach a target with a merger proposition. At this stage, you’ll use publicly available information to learn how the company functions and its key selling points.
Establish your goals
What is the primary purpose behind a merger plan?
It means crystallising your goal and thinking about how you will eventually communicate that goal to stakeholders. Defining your objectives is crucial to assessing the viability of achieving them and creating an action plan for getting there.
Build your team
Mergers are complex processes, and you cannot expect to handle them alone. With operational, legal and financial aspects to consider, you must have the people around you who you can assign to each aspect of the merger deal.
These include:
· Lawyers
· Corporate accountants
· Senior managers
· Communications professionals
You may seek to handle some aspects in-house, whereas others may be better left to third-party consultants. Again, every merger is different, so every team will also differ.
Cause and effect considerations
What impact will your merger have on your stakeholders?
For example, your shareholders may see their positions significantly diluted. Is that something they are likely to expect?
Have you considered the other company’s reputation? Will your customers respond well to merger plans? What will it mean for them?
Short-term, medium-term and long-term implications must be war-gamed out to determine what the merger’s chance of success is within the context of your objectives.
Merger costs
Mergers can often streamline operations and enable you to reduce costly redundancies within your current setups, but they also require an investment.
Obviously, there are direct costs, such as the price of hiring consultants to manage your merger. But staff turnover can also be a problem, as is loss of productivity during the integration process.
It’s tough to evaluate these costs, which is why calling in experienced UK merger professionals is pivotal.
Mid-merger checklist
The mid-merger stage occurs when you have already connected with the other company and expressed a desire to merge. Otherwise known as the transaction stage, you’ll jump into the nitty-gritty of carrying out due diligence and completing the merger.
Due diligence
Due diligence is the most time-consuming step in the merger process. Skip over this stage at your peril because it’s when you investigate the company’s business affairs you wish to merge with.
This process effectively confirms the information the other party has provided you. So, which areas should you cover as part of the due diligence process?
· Number of employees
· Employee skills
· Employee benefit arrangements
· Pending or threatened legal issues
· Regulatory/licensing issues
· Sales
· Cash flow
· Debts
· Customer metrics
· Assets
· Organisational structures
· IT issues
· Customer/supplier contracts
· Company culture
As you can see, a massive amount of effort goes into completing thorough due diligence. If you find anything adverse, you will have the opportunity to ask questions and for clarification. It’s most often during due diligence that mergers fall apart.
The planning stage
Assuming you’re happy with your due diligence findings, it’s vital to create milestones for each stage of the merger, including the finances, corporate agreements and any legal/compliance issues that may crop up.
During the planning stage, you’ll also consider a communications strategy. The principle of good communication is to consult your staff instead of broadcasting to them.
Building a corporate structure
Most mergers result in a brand-new UK company being created, with shares issued to the combined entity’s shareholders. This is where your legal and tax advisors must take the lead.
Additionally, the management teams of both companies must come together and collaborate on how the new operation will function.
These discussions shouldn’t stop at operational issues, but also consider how each party’s distinct cultures will come together.
The financial side
Finally, there’s the financial side. As opposed to a takeover, it’s unlikely that external financing will be necessary to complete the merger.
Still, a firm understanding of your target’s financial position and the potential tax ramifications of the deal are crucial.
One area that often causes considerable headaches is producing a valuation of the merging companies to determine a fair share price. Again, expect to bring in an expert.
Post-merger integration checklist
The biggest mistake you can make is assuming the completion of the merger is the end of the process. In many ways, the real work begins post-merger when you have the tall task of integrating each company into a single streamlined operation.
Unfortunately, this is where every company will have its way of doing things, meaning a strict blueprint is tough to divine; but, here are some principles your post-merger integration should cover:
Communication – Mergers can create significant anxiety. Smooth everything over with regular communications with figures at every level. You may even want to hold some formal Q&A sessions. However you do it, don’t leave your team in the dark.
Plan, Plan, Plan – Ultimately, the answer lies in the planning, and this should have begun pre-merger. Now is the time to execute and build upon those original foundations.
Prioritise – Think about the most important changes and focus on those first. For example, ensure that relevant leadership figures properly supervise each operational step.
Above all, don’t be afraid to change direction if things aren’t working out how you intended. Creative problem-solving is the order of the way with any integration.
Throughout this checklist, you may have noted the importance of consulting with the proper experts. Mergers are tricky, and bringing knowledge and experience onboard can mean the difference between success and failure.At Hilton Smythe, we have a team of experienced UK M&A professionals ready to support you during this delicate process. To learn more about how we can help your company, contact the team now.
