This blog covers the following aspects related to M&A .
1. Conducting due diligence for evaluating Target comp
2. Performing risk assessments for M&A
3. Valuation of Target company and submitting bid
4. Negotiations between the acquiring company and the target company
5. Obtaining Statutory approvals for M&A
6. Managing Post-merger Integration
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1. Conducting due diligence for evaluating Target comp
The top 5 key aspects of each function are listed below.
Key Areas to evaluate | Top 5 aspects (To be analysed & more can be added) |
Sales and Marketing | 1. Demand potential of products of the target company 2. Market share (Global & local) of different products 3. Channel partners & strength 4. Relationships with high-value customers, channel partners 5. After-sale service infrastructure |
Technology | 1. Know how capabilities and Intellectual property 2. Manufacturing Infrastructure & Capacity and Process Capabilities 3. Supply chain strengths 4. The quality infrastructure in the plants/factories/Vendors 5. IT Infrastructure/ERP |
Financial | 1. Past 5 years & next 5 years projections for Sales, market share, cash flows & profitability 2. Fixed costs 3. Long-term Liabilities 4.Audit reports (Statutory, Internal, cost etc) 5. Physical Inventories & Receivable status |
Management | 1.Risk assessment (Financial, market, operations & legal) 2. Leadership team profile, 3. Qualification of senior management, 4. Industry Standing /reputation 5. Corporate governance |
Human resource | 1. Key positions manning & Organisation hierarchy/levels, 2. Versatility & competency assessment 4. Retirement age, Pension-at different levels 3. Payroll, emoluments 5. Industrial relations & long-term agreements with unions |
Legal | 1. Statutory non-compliances 2. Legal cases in courts including consumer cases 3. Litigation status 4. Statutory demands 5. International level-disputes, arbitration, court cases |
2. Performing risk assessments for M&A
The top 5 assessment areas are as under:
· Market risks Evaluate
· Financial risks
· Operational risks
· Legal risks
· Human resource-related risks
3.Valuation of Target company and submitting bid
Choosing the valuation option method out of the few available as below and determining the most appropriate one (depending on the size and type of target company):
· Comparable company analysis
· Comparable transaction analysis
· Discounted. Cash flow analysis
· Assets-based valuation.
· Industry-specific valuation
Other -Qualitative factors include Market share, Brand value, Intellectual property,
Management expertise, Revenue growth, Strategic Synergy advantages
4. Negotiations between the acquiring company and the target company
A team of competent persons from the acquiring company needs to evaluate the following for determining the financial proposal:
i. Stock purchase option
ii Assets purchase option
iii Both
iv Any alternative
Further, the below aspects need to be factored in developing a purchase bid.
· Purchase price and taxes
· Payment terms -down payment and progressive based on milestones
· Exclusions
· Key manpower to be acquired from the target company
· Labour contracts/union agreements
· Covenants
· Employee emoluments, transfers, retirement age, and pension matters
· Regulatory approvals timelines and responsibilities
· Integration plans between the acquiring company and the target company and change management
· Communication links /contact persons for resolving conflicts/issues till complete M&A occurs
· Timelines for completion of M&A
5. Obtaining Statutory approvals for M&A
Depending on the type of the bidding company & nature of transactions, a few of the below applicable approvals may be necessary.
· Approval from SEBI for listed companies in matters related to the substantial acquisition of shares.
· RBI approvals in case M&A involves foreign investment or cross-border foreign exchange,
· Sector-specific approvals (from bodies like NCLT, TRAI, IRDA, etc as applicable
· Tax authorities vis a vis Capital Gain tax, transfer pricing, indirect taxes
· Competition Commission approval to prevent anti-competition activities under The Competition Act 2002
· Court approvals, as necessary, related to convening of meetings of shareholders, creditors, etc
6. Managing Post-merger Integration
Once the M&A negotiations are complete and the acquiring and target companies decide to merge, the following activities must be performed for a smooth transition.
· Executing M&A agreements
· Getting statutory approvals speedily
· Communicating key highlights of M&A to all stakeholders ( Vendors, channel partners, key OE customers, business associates, and employees at the appropriate time
· Meeting identified stakeholders by key people
· Integrating staff deployment with new organization structure
· Reviewing the compensation structure of the acquired company
· Retaining talented employees of the acquired company
· Assigning new roles in the merged entity
· Improving methods in all functions, as required for enhancing productivity, quality business, reducing costs, and market share increase :
· Meeting key vendors along with key professionals from the acquired company
· Meeting key Channel partners and key customers along with key professionals from the acquired company
Activities(including unethical) that can affect business adversely
· Due to diligent (DD) checklists not being exhaustive and DD performed by individuals rather than a cross-functional team
· The risk assessment process is not comprehensive and is not performed by specialists.
· Incomplete or & Inaccurate information gathering by the DD team for arriving at valuation on past financial performance and future projections for five years
· Incorrect assumptions on qualitative management aspects, long-term liabilities, technical strengths, Sales growth potential/market share projections, synergy advantages etc.
· inadequate market intelligence on competition bids/strategy
· Collusion amongst key members acquiring & target company
· Compromising on statutory requirements leading to delays
· Not preparing the organization for change management
· Pursuing a biased approach while dealing with the erstwhile employees of the target company acquired
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