Are you considering a merger or acquisition? Correctly done, an M&A can prove beneficial to all parties involved. As lawyers with decades of experience in mergers and acquisitions, the team at AV Lawyers have put together this checklist of three common misconceptions to avoid when undertaking a merger or acquisition.
When dealing with mergers and acquisitions (M&A), every corporation’s transaction will involve a different process based on their individual business structure, internal policies and management processes. That said, the process will generally involve the following:
- Landscape and Acquisition Strategy:
Assessing the current market landscape and competitor set.
- Business Case Evaluation and Valuation:
Working with the M&A team, financial advisors and legal experts ahead of the Letter of Intent (LOI).
- Due Diligence:
Acquiring company performs an assessment of all relevant company functions and departments.
- Negotiations and Signing:
Upon the completion of due diligence and all necessary approvals, the final bid is negotiated and agreed upon.
- Financing and Implementation:
Finances are finalised and company integration begins.
Throughout the entire process, the biggest issue for companies looking at mergers and acquisitions is that of risk. Not only is identifying and measuring the initial investment often highly complicated, but maintaining compliance and performance after the merger or acquisition can be challenging as well. By their very nature, M&As are complicated and attract the need for fine-tuning and, attention to detail. It is always advisable to engage legal advice before proceeding with any deal but in the meantime, we have highlighted three key misconceptions about mergers and acquisitions that you need to be aware of.
Misconception #1: Mergers and acquisitions take up to six months
While shorter timelines are possible, most mergers and acquisitions will take at least 12 months to complete. Laying the proper groundwork (such as market research, developing your strategy, identifying prospective companies and so on) should not be rushed; similarly conducting thorough due diligence will take at least one month.
Companies that rush through the process will usually experience the negatives of this in the long-run. This was the case in 2012 when US construction company, Caterpillar, acquired China’s ERA Mining Machinery for $677M. However, Caterpillar failed to properly execute their due diligence and multiple instances of accounting misconduct were discovered months after the deal closed, souring the investment.
Be realistic about goals and resources, and recognise that a significant investment is necessary for a successful M&A. Before even considering an LOI, build a dedicated M&A team comprised of legal, corporate and financial experts to research the current market. By constantly analysing the current climate, you will be able to identify prospects while remaining focussed on your overall acquisition strategy.
Misconception #2: Always focus on closing the deal
Although it can be inviting, avoid the temptation to make closing the deal your solitary goal. Many CEOs and Directors will act aggressively when conducting a merger or acquisition, however it is essential to maintain discipline and caution at all times.
Although growth is important, it is equally necessary not to lose perspective. This was the situation for large corporations like AOL and Time Warner, eBay and Skype, and Hewlett-Packard (HPQ) and Compaq, who acted without a strategy, resulting in the failure of the above mergers.
Enlist a team of financial, legal and corporate experts to help you maintain an impartial and rational view when conducting your investigations and negotiations. Doing so will ensure that your actions are based on a clear strategy.
Misconception #3: The restructure can be handled later
Before issuing the LOI and up until securing the final offer, you should be considering how you will restructure the two companies into a singular corporation. There are two main elements that need to be considered.
Firstly, the existing talent and staff in both companies must be engaged with and given a clear progression plan within the new business. If employees are not fairly financially compensated or committed to the new business culture, they may leave. Secondly, most corporate restructures will also involve a range of complex issues such as company structures, taxation, share provisions, liabilities and much more. If the restructure is taking place across two or more countries, the requirements for compliance become even more complex.
By retaining the services of experienced M&A lawyers and financial experts from the outset, you will be able to ensure a smooth restructure that minimises employee friction and remains legally compliant.
When creating your Mergers and Acquisitions team, take the time to select advisors who are experienced in your particular needs. Here at AV Lawyers, we have assisted in transactions such as joint ventures, sale and purchase transactions, consolidations, tender bids, divesting, mergers, acquisitions (including not-for-profit organisations) and equity participation. Contact our team today to arrange an initial consultation and find out how we can support your business.