Merger & Acquisitions, daring the challenges of process complexity to realign corporate growth

The business can grow either by internal or external expansion. In the case of internal expansion, a firm grows gradually over the time in normal course of business through improvement in working with market friendly strategy, acquisition of new orders, improved infrastructure, innovative technology, training & skill development and establishment of new range of products or services. The firm acquires a running business through corporate consolidation in the form of mergers, acquisitions, amalgamations and takeovers could be a significant features of corporate restructuring is considered as external expansion.

Mergers and acquisitions (M&A) is an important component of management, area of finances and corporate strategy dealing with purchasing and joining with other companies or exchange of assets and shares in various agreed terms. Mergers and acquisitions have become a popular business strategy for companies to create growth, drive innovation, deliver efficiencies, expand into new markets or territories, gain a competitive edge, influence in the industry or acquire new technologies and skill sets.

Mergers involves combining or coming together of two separate entities to create new single entity, joint organization while Acquisitions is one company taken over by other to create more value, achieve synergy, expand business reach or Increase market share, improved economies of scale and increased distribution capabilities through absorption or consolidation. The complexity of corporate strategy including valuation, structuring, financial analysis, due diligence and legal documentation.

Merger and acquisition process is challenging and most critical when it comes to corporate restructuring. One wrong decision or move can actually reverse the object of efforts. It should certainly be followed in a very conscious way that a company should gain maximum benefits with the deal. Though every company might have some unique and distinct features so the entire deal process strategy needs to be formulated in a very practical way to execute the transaction in truly professional manner and subsequently integrates the organizations seamlessly. The M&A Process is a multi-step process and can be short depending on the size and complexity of the transaction involved.

The detail assessment or valuation of current business is the first process of merger and acquisition includes examination and evaluation of both the present and future market value of the target company. A thorough analysis required to be done about history of the company with regards to capital gains, due diligence, tax planning, organizational structure, market share, financial performance and corporate value, distribution channel, corporate culture, specific business strengths, and credibility in the market to formulate a business valuation based on relevant comparables and industry multiples to match the specific industry expectations.

There are many ways of company valuation. The most common method is to look for comparable peer companies including comparative metrics :

1. Price-Earnings Ratio (PE Ratio)
2. Enterprise-Value-to-Sales Ratio (EV Sales)
3. Replacement Cost
4. Discounted Cash Flow (DCF)
5. Free cash flows

Understanding business value and strategic positioning within the relevant market of the business is paramount to a successful maturity of deal.

Business valuation & initial client engagement often takes into consideration the state of the relevant industry, the strength and reputation of the company’s leadership team, the company’s grip in the relevant market, financial performance to date, and anticipated revenues in the immediate future based on the existing revenue streams.

Due diligence is an audit or investigation of a potential investment to confirm facts typically includes the full understanding of a company’s obligations, such as their debts, liabilities, leases, distribution orders, pending litigation, long-term customer agreements, warranties, compensation agreements, employment contracts, and similar business components that may have a direct impact on a buyer’s decision.

Merger can be executed through absorption or consolidation further classified into three types from an economic perspective depending on the business combinations:

Horizontal Merger, Acquisition

Two companies come together with same line of business, products or services which operate & compete in the same geographical area and by merging they expand their range, increase the market share and reduce competition.

Vertical Merger, Acquisition

Two entities join in the same industry, provide complementary goods, services or product but they are at different stages of supply chain. They become more vertically integrated by improving logistics, consolidating staff and perhaps reducing time to market their products. When a company combines with any vendor or material supplier called as backward merger and when it combines with the customer, it is known as forward merger.

Conglomerate Merger, Acquisition

Two companies generally service different industries, business areas, markets or combination of firms engaged in unrelated lines of business activity to join forces or one takes over the other in order to broaden their area with range of services and products. The approach can help to reduce costs by combining back office activities as well as reduce risk by operating in a range of industries.

There are plenty of other ways to come together like consolidation define as two different entities joins to creates a new firm whereas the stockholders of both companies must approve the consolidation, subsequently receive common equity shares in the new firm. In an acquisition of assets, one company acquires the assets of another company after approval from its shareholders. In a management acquisition also known as a management led buyout (MBO), a company's top executive purchase a controlling stake in another company in an effort to facilitate fund raising through such transaction.

Some of the key steps in the process of merger acquisition needs to be understood:

• The broader corporate strategy helps us to determine target market as well as desired share of that market. After making these determinations identify the criteria of a potential transaction and ways for merger or acquisition can help to achieve desired objectives.
• Determine the enterprise value of the organization and identify potential sources for funding a planned transaction, which may include cash, equity or debt.
• Articulate clear vision, create model of acquisition accounting including the estimated cost of acquisition, return on investment, merits and business impacts. Develop a comprehensive M&A plan with milestones, timelines frequency and size of deal with detail terms.
• Thorough and factual due diligence of strategic, financial, legal and cultural factors is essential before proceeding with the deal.
• Consider the potential synergies, transparency, restructuring needs, risks involved, capital structure, cash or equity, various pricing mechanisms, terms and conditions and so on..

The Compiling & monitoring of well organised communications during the entire process play a critical role by preventing any distractions or miss-understanding. The communication team generally announce the success of deal and thereafter initiate to develop, engage and manage integration planning and execution.

The post merger integration (PMI) plans is the process of bringing two or more companies together, must be established before the deal closes to maintain synergies, ensure smooth functioning and maximize employee performance. Create targeted and focused communication and share it at the right time to the right people with the right level of expression.

There are many good reasons for growing business through merger, acquisition including :

• Acquire additional skills, knowledge by competent employee & restructuring
• Availability of funds for new development and expansion
• Improved market share with wider customer base
• Diversification of the products & services
• Reduce costs and overheads, increased purchasing power and lower operating costs
• Strategic reorientation and technological up gradation
• Diversification of risk and functional challenges
• Enhance professional expertise and combined customer insights for better strategic decision
• Tax benefits with tax loss carry forward
• Capacity building to face competition in global market
• Increased synergy and scale up production
• Equip with increased marketing capability
• Brand positioning, recognition & brand building

Successful M&A processes can be an important and value-creating proposition, but companies needs to be highly careful for selection, evaluation and integration of any potential deal. The business environment is getting complex, risky and unpredictable due to socio economic pattern of business, cultural and demographic changes of society, working culture & attitude, lifestyle, statutory regulations and dynamic global market competition. However due to multiple challenges involved in the internal growth process, firms should dares to undertake external growth options by way of mergers, acquisitions, takeovers or joint ventures on the basis of meticulous analytical data output, detailed audit, due diligence and thorough market study. In today’s competitive business environment, successful business management depends on the attitude, business ethics, proper understanding of the complexities and consequences of the merger and acquisition to realign the overall corporate business growth.

Note: Being a first year student of MBA Finance from IIM, tried to research, study, discussion with professionals and tried to compile the M&A concepts, analytics, execution strategy and Integration to fulfill the planned objectives of the transaction. I am keen to learn more so your valuable suggestions will be highly appreciated.