Our Guide to the Mergers and Acquisition Process - Hilton Smythe

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Our Guide to the Mergers and Acquisition Process

Are you about to merge with another company or acquire a startup? Navigating the complexities of the M&A process is tricky even for experienced business people, so we cover everything you need to know about completing your next M&A deal.

Are you about to merge with another company or acquire a startup? Then, you’re likely wondering how the process works.

As of this writing, we’re in one of the lightest markets of the decade, with just $1.3 trillion in global M&A deals in the first half of 2023, but nothing about the process has changed.

Navigating the complexities of the M&A process is tricky even for experienced business people, so this guide covers everything you need to know about completing your next M&A deal.

What is an M&A?

A Merger is two companies coming together to create a new combined entity, with all parties typically of similar size and stature, and an Acquisition is one company purchasing another and absorbing it into its existing operations. 

In almost all cases, acquisitions involve a stronger party purchasing a weaker party.

M&A deals aren’t as common as you think, making up a tiny proportion of total business transactions every year.

This is why, in 2022, the UK saw just 992 inbound M&A deals (foreign companies acquiring UK companies). Likewise, domestic M&A deals have also shown relatively small numbers. For example, in Q1 2023, there were just 154 domestic M&A transactions, down by 105 from the previous quarter.

Terms to understand in an M&A

One of the first obstacles you’ve got is understanding the various specialist terms that come with the M&A business. So, here’s a sampling of some of the most common terms you might come across:

Add-On Company – Typically purchased by a private equity firm, this business is designed to enhance a platform company as an add-on to create a bigger entity.

Asset Sale – The sale of assets rather than the corporate entity.

Base Year – Current fiscal year.

Capitalisation – Taking into account historical and/or forecasted value into consideration.

Contingent Liabilities – Potential liabilities that may be assumed based on the outcome of a future event, such as a pending legal case.

Deal Structure – How a buyer pays for a business, such as cash, stock, earn-out provisions, etc.

Discounted Cash Flow Value – Present value of future earnings tempered by assumed risk.

EBITDA – Earnings before interest, taxes, depreciation and amortisation.

Net Cash Flow – Available cash after taxes and other expenses.

Net to Owner – The monetary amount realised by the sellers of a business.

Pro Forma Statements – Financial statements with hypothetical situations built into the data.

Recasting – Redoing financial statements by taking out superfluous and non-recurring expenses.

Stock Sale – A type of acquisition whereby the purchaser buys a portion (or all) of a company’s stock.

Note that this is a non-exhaustive list. Consulting an M&A specialist like Hilton Smythe to explain various concepts in plain English can be immensely helpful.

What are the steps in the merger and acquisition process?

Depending on who you ask, there are anywhere from five to seven M&A steps, but they each cover the same bases. With up to 90% of M&A deals collapsing before completion, you must know what you’re getting yourself into.

Here are the steps of the M&A process.

Step one – Initial research

The first step is to identify a target for your deal. Who would be a good fit for an upcoming deal?

In other words, you must identify the synergies between you and a potential target. Think about how an M&A deal with them would enable you to achieve your long-term vision.

This is also the step where you’ll consider how you’ll finance the deal.

Step two – The Letter Of Intent (LOI)

The LOI stage involves reaching out to the target and discussing the key terms of the deal. These may include:

  • Deal structure
  • Price
  • Timing
  • Extra conditions

These will be set out in an LOI or term sheet. Note that the majority of the document is not intended to be legally binding.

Step three – Due diligence

The next step is due diligence, the process’s longest part. It’s an information-gathering step that involves confirming the information provided to you by the other party.

You can determine whether the deal makes commercial sense by conducting thorough due diligence with the support of operational, financial and legal professionals. Also, you’ll have the chance to request more information and ask your own questions.

Step four – The “legals”

Assuming everyone is happy post-due diligence, you can move on to the legal aspects. Your legal team will negotiate the terms in the transaction documents and ensure that everything complies with UK M&A regulations.

In particular, your solicitors will review the sale and purchase agreement with a fine-toothed comb, with special attention paid to any warranties.

Step five – Closing

The closing stage is where the transaction will be completed. Again, your legal team will play a central role in this stage, as they’ll be responsible for gathering and preparing all the necessary paperwork.

Usually, the signing and exchanging of documents will occur at a completion meeting, with both parties and their solicitors present. However, it’s more common to do this virtually using eSignatures.

How long does the merger and acquisition process take?

It all depends on how smooth your deal is – generally, you can expect a timeline of six to eight weeks for a seamless M&A deal, with this rising to eight to twelve weeks for more complex deals.

However, it’s not inconceivable for deals to take anywhere from six to 18 months, especially if government intervention is warranted.  This may come in the form of the UK Competition and Markets Authority (CMA) or other industry bodies.

For example, if the UK CMA carries out a merger review, the body has a statutory deadline of 40 working days, meaning it could take 1.5 to two months in practice.

You can read more about the M&A timeframe in our dedicated blog.

Merger and acquisition process timeline

If you’re planning a future M&A deal, here’s a rough timeline:

  • Target Identification (Pre-Deal) – Six months to a year.
  • LOI Stage – One to two months.
  • Due Diligence – Six to eight weeks.
  • Legal Steps – One to two weeks.
  • Closing – One day.
  • Integration – Six months to several years.

How do you structure a merger and acquisition?

The structure of the deal is how the buyer will pay the seller for the deal to go through. In England and Wales, the exact structure will depend on whether you’re conducting a public or private M&A transaction.

Firstly, practically all private M&A transactions are share purchase deals, meaning all issued share capital is transferred to the buyer upon closing. Meanwhile, assets and liabilities remain within the target entity.

Alternatively, the deal may be structured whereby target assets and liabilities are part of it, but the entity remains with the seller.

Public M&A transactions are more complicated because of the extra regulations attached, as outlined in the UK Takeover Code. However, they can be structured in much the same way as any private M&A transaction.

Roles and responsibilities in the merger and acquisition process

Most M&A deals will include an identical cast of characters to address the operational, fiscal and legal factors. No deal can be completed by a single person, so building your team must be your first step.

Some of the essential figures include:

Managing Director – Ultimately, the managing director is the one who will be managing the overarching strategy and signing off on the deal.

Corporate Accountant – Your accountant will evaluate the financial risks, rewards and due diligence.

Consultants – Most companies hire a third-party M&A consultant like the team at Hilton Smythe to support them throughout the process. Consultants can also carry out objective evaluations.

Corporate Solicitor – Your legal team will be pivotal in ensuring that every aspect of the deal complies with UK law.

HR Specialist – Your HR department is also crucial if your deal involves hiring new personnel. They may also be responsible for addressing employee concerns and collaborating on communication with the marketing department.

A buyer’s steps in a merger and acquisition process

The M&A process looks slightly different depending on whether you’re the buyer or the seller. Knowing how these processes differ – and the steps unique to each side – is critical for constructing your battle plan.

These sections will cover the additional steps unique to the buyer and seller, which firmly fall within the context of the broader steps outlined earlier.

So, here’s what a buyer can expect:

1. Strategy – The managing director will come together with their team to develop an overall strategy for how they want to pursue an M&A deal.

2. Research – The buyer will agree on criteria for what makes an ideal target and then begin researching suitable targets.

3. Financing – How will financing be achieved? If this involves approaching a bank or a venture capitalist, the buyer must spend time raising funds before moving forward.

4. Valuation – Usually conducted through a third-party professional, the buyer will call in valuation agents to assess the value of a target.

5. Integration – The buyer must prepare an integration plan to realise the benefits of a completed M&A deal. This will also include processes for monitoring and evaluation.

A seller’s steps in a merger and acquisition process

 On the other side of the coin, what if you’re looking to find a willing buyer for your company? Again, you have several bases to cover before you can sell your business, including:

1. Sale Preparation – Sellers will prepare their company for sale by defining a strategy and compiling a portfolio of materials for potential buyers.

2. Connecting with Buyers – They may also approach potential willing sellers to consult with them on whether they would be interested in a merger or acquisition. This takes place as part of the bidding phase.

3. Accepting Bids – In cases where multiple competing buyers exist, sellers may need to take a step back and assess the pros and cons of different bids before moving forward.

What is an M&A deal structure?

 The way you structure your deal depends on your overall goals and circumstances. In an ideal world, you could simply throw a bunch of cash to complete a deal, but it’s much more complex than that.

The three most common structures include:

  • Mergers – A structure where two companies combine and create a brand-new entity, with everyone under one banner. You may be sharing ownership, issuing new shares, and also compromising on your future goals if this is your chosen deal structure.
  • Asset Acquisition – Cash transactions where certain assets are purchased, like intellectual property, but the seller keeps their company as before. In other words, it’s like selling part of your company.
  • Stock Purchase – Buying out the seller’s stock in whole or in part to assume ownership. This is by far the most common deal structure.

The benefits of the M&A process

With all this in mind, you may wonder why you would want to embark upon this process in the first place. Let’s examine the benefits of jumping into an M&A deal.

  • Grow your market share.
  • Enter a new market.
  • Expand your product range.
  • Acquire new technologies.
  • Poach core talent.
  • Access new intellectual property.
  • Eliminate a competitor.

You can only enjoy these benefits when your M&A deal is executed correctly. Rushing your due diligence or not having a long-term strategy could cost your company millions.

That’s why business owners choose Hilton Smythe as their independent consultancy for M&As. To learn more about how we can help, speak to the team today.

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