In this fiercely competitive economic environment where companies are financially constrained, corporate leadership look for growth opportunities to strengthen and secure their market positions and increase their profitability. To accomplish their growth plans companies need to diversify their business, enter into new markets, transform their existing portfolio of products and services, and at the same time adopt new technologies. According to merger and acquisition firms in India, companies can either choose to grow organically or through mergers and acquisitions. Organic growth by setting up green field projects requires huge capital investment and is also time-consuming. Mergers and acquisitions, on the other hand, is a quick and easy way to achieve the growth target. It requires less investment, your product portfolio is immediately expanded and you get ready access to newer markets. You also get access to new and latest technologies.
Merger and Acquisition is the combining of the assets of two companies to form a single entity. It has shown considerable growth throughout the globe in the last decade and the trend is all set to continue for the next 2 to 3 years. In India also, there have been a lot of mergers and acquisitions activities. The main reason behind the spurt in M&A deals over the last several years is the companies’ aspirations to achieve their growth plans in quick time with as little investment as possible. However, M&A transaction is a complex and long-drawn process which requires careful planning and execution. Professionals from the finance and legal field have to be engaged to complete M&A deal. Each M&A deal is different and takes different amounts of time depending upon the size of the deal and the complexities involved. Few essential steps in M&A transaction are discussed below.
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Devising an Acquisition Strategy
The first step in the M&A process is to devise an acquisition strategy. The strategy is based on certain factors, such as what the acquirer expects to gain from the transaction, whether the deal will help the acquirer in enhancing its portfolio of products and services, whether it will give access to new markets and new technologies. The buyer also needs to determine the type of transaction it wants to enter into, such as all-cash deal or share swapping, etc. The strategy also revolves around the capital the acquirer wants to commit to the deal. In brief, the strategy has to be in sync with the growth plans of the acquirer.
Identifying and Contacting the Targets
After developing the acquisition strategy, the next step is to determine the key criteria to identify the potential target companies. The search criteria could be the financial performance of the target including profit margins, geographical location, customer base, dealer network, etc. Based on the set criteria a list of the potential target is prepared, and the buyer starts to contact them to gather more information about the companies and to gauge their interest in such a transaction. If both the parties agree to go ahead with the transaction, further information is exchanged to make a better assessment. Merger and acquisition firms in India recommend signing of confidentiality agreement to ensure that the discussions of the deal are not made public.
Exchange of Information, Valuation and Synergies
If the initial discussion goes according to plan and both the parties show interest in going ahead with the discussion, there is exchange of information among them if it is a case of merger. If it is an acquisition deal, the acquirer submits the letter of intent to officially express its interest in the deal. The buyer requests for additional information, such as current and projected revenue, to further evaluate the target company’s business and its suitability as an acquisition. Based on the information exchanged, both the parties assess each other’s company. The seller tries to figure out what would be the fair price for the best interest of the shareholders. The acquirer on the other hand, tries to determine a reasonable offer price based on the synergies it expects to achieve in terms of cost reduction, increased market share, enhanced product portfolio, operational efficiency, etc.
Offer and Negotiation
After the buyer has completed the assessment using various valuation methods, it makes a calculated offer to the seller. The seller generally tries to negotiate for a better price as they often feel that the offered price is below their expectation. The deal is further negotiated and both parties try to get the best bargain out of it. If the target is attractive, there could be more than one suitor and the negotiations can go on for some time before a final price is agreed upon.
Merger and acquisition firms in India consider due diligence to be the most critical aspect of M&A transaction. It is a comprehensive exercise where minute details of the target company are examined. These details include financial metrics, assets and liabilities, employee strength, customer base, vendors, supply chain and logistics, legal obligations, etc. The objective is to ensure that there are no discrepancies in the information which was provided earlier. If the buyer finds any inconsistency, it may ask for additional information, and may even revise the original offer.
After the completion of due diligence, both the parties sit down to draft the final agreement documenting every aspect of the deal which includes the terms of payment. The parties sign the agreement to close the deal after which the process of integration of the companies begins.
Hi, I am Amy Johnes, a legal expert at Ahlawat & Associates – One of the top corporate lawyers in India.