When it comes to understanding corporate mergers and acquisitions, we’ll get straight to the point: it’s best to involve professionals as early as possible.
That’s because corporate M&As are complex and nuanced, and, though many people use the terms interchangeably, there are differences between them. Every situation is unique – and what’s right for one business might not be the best solution for another.
To help you build an understanding of corporate M&As, we’ve put together this guide outlining the terminology, steps, and considerations involved.
Overview of mergers and acquisitions
Let’s start with the basics. A merger is when two companies join together to form one. An acquisition, on the other hand, is where one company buys another. The company being bought, in this situation, is often referred to as the target.
Broadly speaking, there are two types of M&As: private, where two privately-owned companies that are not traded on the stock exchange make a deal; and public, which involve companies that have shares traded on the stock exchange and multiple shareholders.
Either way, before a deal moves forward, there has to be due diligence – making sure financial and legal records are examined closely to identify any risks or opportunities – as well as valuation, and then a process of integration.
Preparing for a merger or acquisition
Before taking part in an M&A, either as the buyer or the target, there’s lots to consider. This is where professional guidance starts becoming critical. You’ll need an accountant to help you:
- consolidate your understanding of your financial position in the market
- work out your strategic goals
- create financial models to evaluate what impact an M&A might have on your business.
If you’ve decided an M&A makes strategic sense, identifying an appropriate target is the next step.
You may have one in mind already, or have existing relationships that you can explore. Alternatively, you might know what type of business you’d like to partner with, but be unsure of the specifics. Market research, in-depth industry analysis, and an exploration of networks and relationships are key here.
Once you think you’ve identified the right target, you’ll need an accountant (and a lawyer!) to look into them closely – how financially healthy are they? What legal or financial risks or opportunities might they pose to you? How does their reputation stand up?
The target company will need to be valued and, again, an accountant can help with this. There are several different methods used when it comes to valuing private businesses – from basing the valuation on profits, to using earnings multiples – and the best approach depends on the specific circumstances.
What you’re looking to understand, though, in a business valuation, is how much the company is worth and how much you should pay for it – based on financial metrics like earnings, assets, and any debt or liabilities.
Structuring and financing the deal
There are several different ways to structure and finance M&A transactions – each with their own benefits and risks.
Negotiating the terms of a deal and structuring a transaction is best left to a team of professionals who understand your strategy and what you’d like to gain from the M&A.
When it comes to financing an M&A, most companies don’t have enough cash in the bank to purchase another business directly. Usually, you’ll need to look at other ways of paying for it.
The most common options include debt finance (borrowing money from a private equity company or traditional bank) and equity finance (which involves issuing new shares).
From helping with identifying the most tax-efficient structure and scrutinising each clause closely, to advising on the benefits of debt financing vs using cash reserves, making sure you’ve got the right people on board is essential.
While there’s lots to think about before a deal is complete, M&As often live or die by what happens next. Successful integration once the transaction has gone ahead is critical – but it’s often overlooked.
There are many factors to plan for, including:
- cultural differences
- recruitment and retention
- systems, software and financial integration
- reporting and controls
- communication strategies.
A good accountant will help you create a post-transaction integration strategy, giving you the tools you need to hit the ground running as soon as the ink on your M&A dries.
The help you need
Corporate M&As can be a great way to expand your business, enter different markets, or join forces to reach new heights – but you’ll need sound professional advice to get it right.
For more advice and guidance, speak to our team of corporate mergers and acquisitions experts, who’ll be happy to help.