Mergers and acquisitions (M&A): Complete Guide

M&A Overview

Mergers and acquisitions (M&A) take place when one organisation takes control of another organisation. The worldwide-agreed explanation of M&A arrangement is when one organisation has, in excess of, 50% ordinary shares (or voting privileges) of the acquired organisation – the transactions can be domestic, where an organisation in the United Kingdom acquires another United Kingdom organisation, or worldwide. M&A transactions are termed as ‘outward’ when a United Kingdom based organisation gains control of another organisation in a foreign country, whereas, inward M&A transactions are termed as ‘inward’ when an overseas organisation acquires an organisation in the United Kingdom.

Different kinds of mergers

1. Horizontal Mergers

   Horizontal merger takes place when one organisation takes over or merges with another organisation that manufactures or deals with comparable services or products. Both the organisations taking part in a horizontal merger are from the similar industry and this means that organisations are direct competitors. For instance, if an organisation manufacturing cars merges with a different organisation, from a similar industry, manufacturing cars then such a merger is labelled as a horizontal merger. A horizontal merger dissolves competition, enables an organisation to upsurge its market share, and revenues.

2. Vertical Mergers

   Vertical merger takes place when both the organisation are in the similar trade, but either of the two offer goods or services that are mandatory for the other in order to complete the product cycle. For instance, if an organisation manufacturing shoes takes over another organisation that manufactures leather, then such as merger is labelled as a vertical merger, since the leather produced by one organisation is consumed by the other for manufacturing shoes. Such mergers primarily take place to secure supply of indispensable goods, and evade interruption in supply. Vertical mergers enable an organisation to save cost and attain a greater profit margin as intermediary cost is removed.

3. Concentric Mergers

   Concentric merger takes place between organisations that offer services to the same client but the services and products offered are dissimilar. Here, the products might be complementary such as a computer system firm merging with an organisation that manufactures UPS.

4. Conglomerate Mergers

   Conglomerate merger takes place between two organisations operating in totally diverse industries and merger to form a new organisation. This is typically done to expand into other industries, thereby, minimising risk and leveraging workforce expertise.

Dissimilarity amongst Mergers & Acquisition (M&A)

Merger and Acquisition strategies

Let’s understand this under three specific heads:

• Principle: Strategic and Financial Rationale

  Through Principle, we are talking about financial and strategic reasoning for M&A. Few imperative focus areas include:

  1. Would the prospective acquisition permit a corporation to enhance its strategy, thereby, having a positive impact on clients, and eventually in the long-term reflect in the growth and profitability?
  2. Once the strategic reasoning is accessed, a corporation must evaluate if M&A is the best route going-forward, or whether there is a choice to construct vs. buying another corporation.
  3. In order to invest the capital judiciously, a vigorous procedure for opportunity evaluation is critical.
  4. The selected option should be the one that offers maximum risk-adjusted return on capital – the selection process must take into account capital necessities, execution risk, and speed to market.
• Process: M&A Due Diligence & Assessment Process begins with the demanding deal selection process and alternate assessment process. Once the deal selection process is done, a business must do an M&A due diligence and determine how to go ahead with the deal. An imperative characteristic of the due diligence process is to evaluate on the basis of available data, leaving favouritism at the door. If an organisation’s findings in the diligence process amend the deal value, a corporation must be ready to renegotiate the deal. Another important aspect of the due diligence process, is that, the team leading the process must be the same as the one that will be incharge of integrating and running the business going forward. This makes certain that the correct questions are being asked, probable amalgamation challenges are learnt early, and eventually the people with the go-ahead with be responsible for its success.
• People: Fitting in People Successfully Post M&A The people aspect of an M&A should not be overlooked. People-related essentials need to be well thought-out during the assessment process and this goes well beyond the human resource aspect for mergers and acquisitions. People are backbone of an organisation, and it is essential to have a smooth transition and integration of the new groups.

Importance of integration in M&A

Merger integration and restructuring is a composite exercise. It requires modifications in all functions, with inter-dependencies that have to be accomplished in a day-to-day work environment. Integration, during M&A process, involves the following:

• Business process standardisation
• Human resource integration
• Information technology and internal IT infrastructure integration
• Organisational consolidation and group-wide strategy planning

Corporate bodies and acquisition approaches

With regards to private acquisitions, the purchaser is characteristically a limited liability corporation, private or public. In case, a limited liability corporation purchaser does not have adequate resources or is a recently formed corporation, the seller will usually request for a corporate assurance from the purchaser's owners. The seller is typically a public limited company or a private limited company.

Restrictions on share transfer

An articles of association and any stakeholders' contract, need to be verified for any privileges investors may have to make before transferring shares or additional constraints on share transfers. There is also a possibility of a drag and tag-along rights if the target has a number of stakeholders. Drag-along rights enables a specific selling stakeholder (typically the chief stakeholder) to call for all the other stakeholders to sell their stocks. A tag-along right enables stakeholders with the right to call for a selling stakeholder to take account of shares of that specific stakeholder while selling shares. Other requirements may allow some transfers between a set of stakeholders or permit stakeholders to offer some security interests without affecting any of the privileges mentioned previously.

Preliminary agreements

In a two-sided deal, a ‘letter of intent’ may be negotiated, which largely defines the chief contractual conditions of the proposed sale.

These terms usually comprise:

1. The acquisition price, and any modifications to the acquisition price, for instance through the usage of closing accounts or locked box.
2. Types of guarantees that may be agreed
3. Non-compete agreements that may be agreed

Letters of intent often comprises an indicative schedule, and exclusive and confidential (or non-disclosure) provisions. However, a letter of intent is not generally lawfully binding.

DNS Accountants and M&A

Strategic decisions around acquisitions, and mergers have continually been imperative for private equity (PE) investors, corporations, and financial institutions. Our clients have faith in our recommendation to help recognise and evaluate viable options, and accomplish their most composite deals. Our clients value our ground-breaking approach and high-degree of personalised attention. DNS Accountants aim to provide exceptional service, earn client’s trust and establish a long-term relationship. Our well-qualified workforce and know-how enables us to plan resourceful deal structures, win agreements, and implement dynamic strategies for acquisition targets acquirers, and sellers.

We assist clients across businesses, especially:

• Chemicals
• Consumer
• Financial institutions
• Pharmaceuticals and healthcare
• Infrastructure
• Natural resources, including metals and mining, energy, and oil & gas
• Private equity (PE)
• Real estate
• Technology, media and telecommunications (TMT)

About the author

Sumit Agarwal
Sumit Agarwal (ACMA ACA India), the Managing partner of dns accountants is a highly respected accountant with expertise in helping owner-managed businesses.