Mergers & Acquisitions

Expanding to achieve higher and faster growth in products and markets

/ Finance / Cash Management

Understand all the dynamics and issues that may arise throughout the M&A process

What are mergers and acquisitions?

Mergers and acquisitions (M&A) is a general term people use to define the consolidation of companies and their assets through several financial transactions, such as:

  • mergers
  • acquisitions
  • consolidations
  • tender offers
  • purchase of assets
  • management acquisitions

One can also use the term M&A to refer to the desks found at financial institutions that deal with such activity.

Types of Mergers & Acquisitions

Since M&A is a general term, several other transactions fall under this category, namely:


When two boards of directors agree to combine each of their companies into one, it is called a merger. In the end, the acquired company is absorbed into the acquiring company, making the former cease to exist.


In an acquisition, the acquiring company becomes the major stakeholder of the acquired firm. However, unlike a merger, both companies preserve their names and even their organizational structures.


This transaction refers to an agreement between all the stockholders from two different firms to create a new company. After the approval of the consolidation, each company will receive equity shares in the new company.

Tender Offer

Tender offer occurs when one firm offers to buy the outstanding stock of the other at a specified price. The acquiring company will not have to go through the management and board of directors. Instead, they can make the offer directly to the shareholders. Tender offers usually lead to mergers in the future.

Acquisition of assets

This simply means that a company will purchase the assets of another company. The latter will have to seek approval from its shareholders before approving the sale. This type of transaction often happens during bankruptcy proceedings. Several firms may bid on the different assets that the bankrupt company holds, which are liquidated when they are transferred to the acquiring firms.

Management Acquisition

This is also called a management-led buyout (MBO), where a company’s executives acquire a controlling stake in a separate firm and making it private. These executives usually work with other financiers to raise funds for the transaction. This type of transaction is typically financed with debt.

Difference Between Merger and Acquisition

Mergers and acquisitions are two terms that are often interchangeably used. Both of these are ways that a company can expand and gain market share. Although they are similar in the sense that it refers to two companies joining together, there are still crucial differences that separate the two.

A merger means that two separate firms come together to create a new organization that is managed by both companies. On the other hand, an acquisition refers to a specific company absorbing or taking over a different entity. Let’s take a look at each term more closely.


This is what you call the transaction between two separate companies that want to consolidate into a different and new entity. The resulting joint organization would then have new ownership and a distinct management structure, with members from the two firms.

Money is not required in the completion of a merger. However, once it is approved, the power held by each firm would significantly decrease.


The main difference between a merger and an acquisition is the fact that in the latter, no new company is formed. In this transaction, the smaller company would be absorbed by the acquiring firm and the former would cease to exist. The assets that once belonged to the acquired business would go to the larger firm.

Another way of calling an acquisition is a takeover. Due to its more negative connotation, the acquiring companies usually use the term merger even when it is not. The larger firm would have complete control over the company and will make all the decisions themselves. Unlike a merger, companies will need large amounts of money to acquire a different firm.

Reasons for Mergers and Acquisitions

  • Expanding to achieve higher and faster growth in products and markets
  • Tax considerations
  • Boosting financial position for lower capital cost
  • Improving overall performance and development of company
  • Attempt to increase market share
  • Risk diversification – limits potential adverse effects of risks
  • Undervalued company – when the stock price or valuation is lower than assets value or potential earnings
  • Economies of scale – increased savings due to increased level of production
  • Strategic realignment – linking the organization’s structure and resources to the business strategy and environment
  • Technological change – increase output but no change in the input.

Key M&A Considerations

Before deciding on any M&A transaction, it would be best to understand all the dynamics and whatever issues that may arise throughout the process.

Negotiating Your Price

Most businesses are built with sustained growth in mind. IPOs and M&As represent ramps that accelerate growth from increased access to capital beyond what the business generates on its own.

The number of publicly traded companies in the U.S. continues to fall and some calculations say that it would take more than 500 IPOs per year to grow the number of public companies, and 360 just to replace delistings, volumes that are unlikely ever to occur.

So, unless you’re a runaway success like LinkedIn or Facebook, there is a much greater likelihood of your company being purchased than going public. Given that reality, here are first three fundamental issues to consider if you think M&A is in your future.

It is challenging to determine if the buyer’s offer price is equal to or higher than the value of the company. However, the key is to negotiate even when the price seems right until both parties reach a compromise. The whole process is incredibly time-consuming. To market, negotiate, reach an agreement, and close any M&A transaction, a company must allocate around four to six months of their time. The exact duration would depend on the buyer’s urgency and the seller’s ability to run a competitive process.

Capital Requirements

Cash remains king. Your executive team must know capital requirement issues cold when a prospective suitor comes calling. Properly and aggressively managing cash includes using weekly, monthly, and quarterly forecasts.  You will want a firm grasp of these issues so you can be
thoughtful about how the business scales, the cash requirements needed for that future, growth and how and when profitability come.

Cost Per Unit and Customer Profitability Questions

The question a suitor wants answered is, How can I make this business more profitable and get a greater return on it purchase?

To reasonably get to that answer, your CFO and executive team must know clearly how much the firm’s product and services cost, including sales and distribution costs, and how much the company could charge for their products and services by customer segment.

If your CFO has created systems that optimize individual product prices based on multiple dimensions (including geography, distribution channel and brand) you are ready to talk costs and profitability in depth with suitors.

Aggregating this data is the CFOs job. If they are not doing it, get someone who can, even on a part-time basis, so the legwork is done before the M&A process begins in earnest.

Sellers must prepare for the buyer’s due diligence investigation

It is only normal for a buyer to want to know everything there is to know about what they are buying. If they don’t, they may end up dealing with the selling company’s problematic contracts, intellectual property issues, and other hindrances. Buyers will want to review the seller’s financial statements and projections.

You need to be prepared for the requests of follow-up and supplemental materials within 24 hours. After that time, interest may wane. Make sure your schedules are done and start your own forward-looking identification of potential issues such as new accounting and reporting requirements.† You can be sure the prospective suitor will be coming in with a Big Four-caliber due diligence team and you will want to match them in terms of finance and accounting capability.

These reports will have to follow the generally accepted accounting principles (GAAP) since those are accepted standards.

Attracting Bidders

When there are multiple companies interested in the transaction, the competition increases and the seller may get a higher offer or better deal terms.

Select an excellent M&A team

It is imperative for a selling company to hire advisors that specialize in M&A transactions externally. They must be experienced in the related specialty areas. This may include attorneys and an investment banker.

The process may become easier when an investment banker is involved. They can provide helpful advice and assistance to successfully close the transaction.

IP Issues

Before acquiring a company, the buying company must go through a complete list of IP and all related documents.


Do not underestimate the importance of the letter of intent.
Although this document is non-binding, the bargaining power of the seller is greatest before signing the term sheet. To ensure getting a favorable deal, the letter of intent must be thoroughly reviewed and negotiated.

Create an excellent acquisition agreement

The seller’s counsel must be the first one to draft the acquisition agreement, which must include, but not limited to, transaction structure, all financial terms, conditions to closing, and provisions for the termination of the agreement.

Employee and benefits issues

What are the current obligations concerning health and wellness benefits programs such as retirement and pension plans, disability insurance, tuition reimbursement, paid maternity/paternity leave, flexible work schedules and remote working.

Stages in M&A

While there are not pre-prescribed stages involved in M&A transactions, stages can typically occur in the following sequence.

Stage 1: Pre-acquisition review
Stage 2: Selecting targets
Stage 3: Assessment of the value of the target
Stage 4: Conduct proper negotiations with the target
Stage 5: Integration

1. Pre-Acquisition Review

Valuation & Forward Looking Plans
Pre-acquisition review: The acquiring company must assess the need for M&A, determine valuation, and specify the growth plan moving forward.

2. Targets

Takeover Candidates

Selecting targets – searching for potential takeover candidates.

3. Value of Target

Detailed Analysis

Assessment of the value of the target – performing detailed analysis of the company.

4. Negotiations

Deal or No Deal?
Conduct proper negotiations with the target – includes reaching out to the company and coming to an agreement.

5. Integration

Deal or No Deal?

When the agreement of the merger is formally announced and a timeline and activities for how the two companies will come together, including management, products, technology, people and systems.

What M&A Firms do

The deal process is incredibly complicated and could be intimidating, which is why there are merger and acquisition firms that can assist each party. Here are the various types of merger and acquisition firms and their respective responsibility:

Investment Banks

They can provide vital market intelligence and a list of potential targets. The investment banks will then do a detailed analysis of the target’s valuation. For the selling side, they can conduct an auction to determine a buyer.

Law Firms

There are plenty of laws that are involved in these deals and transactions. Law firms are more than qualified to provide specialized legal handling.

Audit and Accounting Firms

These are the experts when it comes to evaluating assets, performing audits, and giving tax related information. They can also review the quality of a company’s earnings, receivables, outstanding debt, etc.

Consulting and Advisory Firms

These firms can guide the company through each phase of the merger or acquisition process, depending on their areas of expertise. They may focus on IT and systems, sales pipelines or human capital.

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