Insight on Mergers and Acquisitions


Thursday, June 01, 2017 3:25 PM/Greenwich Research

The Merger and Acquisition Process

The process involved in M&A is usually lengthy and comes with decisions that are far reaching in determining the future of the surviving organization(s) after the transaction. This process can be typically divided into three broad stages:


At this stage, the objective and strategy of the company are reviewed by its management and directors. Also, decisions about a horizontal or vertical growth, market penetration, expansion, creation or diversification are made.

Thereafter, in line with its overall objectives, the company decides on the business combination strategy to adopt. i.e. whether to pursue opportunities via strategic acquisition, merger or partnering (a joint venture) etc.

Time and cost for the proposed investment would also be estimated at this stage with the aid of financial advisers.

Identifying Partners

The M&A process involves a continuous, and increasingly detailed review of prospective organizations until the target/partner is identified.

A decision when to involve professional advisers will be influenced by time, resources and skills of directors/management, as well as cost factors. Selecting compatible target/partner involves significant time. and the process remains the same irrespective of who undertakes it.

The process starts with drawing up a ‘long list’ of potential targets/ partners. Each company is reviewed against key criteria at the planning stage to arrive at a short list.

Some of these criteria include: strategic fit with the existing business, relative organizational size, management composition, peculiar transaction costs, tax efficiency and human resource quality etc.

Once all required information have been gathered on potential targets, they are then narrowed down using an objective scoring method.

The selected M&A partners are contacted to commence preliminary discussions relating to the transaction. Subsequent to the preliminary discussions, a Board Meeting will be convened to further discuss and approve the merger/acquisition.

The meeting also comes with the responsibility to sign the Memorandum of Understanding (MOU) and a Non-Disclosure Agreement (NDA), which will guide the activities of the appointed professional advisers going forward.

Some of the professional advisers that are usually involved in M&A transaction are Financial and Legal Due Diligence Advisers, Solicitors to the scheme and company, Reporting Accountants, Registrars and Auditors.

In the case of an acquisition, a non-binding offer will usually be made at this stage to the target company based on the perceived value.

Due Diligence

Due diligence involves an investigation into the affairs of the target/ partner. It results in the production of a report detailing relevant information on the aforementioned.

The due diligence phase is usually the most cumbersome and expensive stage of the M&A process as it involves a determination of the right price for the intended acquisition.

However, this stage exposes the seller to a huge amount of risk regarding the release of confidential information to the buyer, who might be a competitor. The buyer will need to access the target company’s records so as to better understand the internal structure and operations of its business.

Here, the initially signed NDA will serve to protect the target company’s interest in the face of highly classified information that the buyer requires to check, in verifying the value proposition of the seller.

Because in the case of a deal break down, the target company becomes instantaneously disadvantaged considering the extent of trade secrets shared with the intending buyer during the process.

Some of the assignments that are normally covered during the due diligence process includes:

·         Review of the seller’s financial statement items for the prior threen to five years including the minutes of board meetings. 

·         A review of the tax liabilities, legal structure, employee disagreements and other pending litigations of the selling company. 

·         An analysis of the general breakdown of the customer base and sales evaluation to check the validity of turnover figures. 

·         A review of intellectual property rights including trademarks, patents, and other areas of unique and intrinsic value. This is particularly substantial for technology companies. 

·         An appraisal of other outstanding commitments that aren guaranteed by the company or its principal officers.  

Constant communication between the merging entities’ M&A consultants and its project team members help to consolidate the vast amount of information gathered during the M&A process. Some of the business valuation approaches used during the M&A process include: 

·         The Discounted Cash-flow method (DCF) 

·         The Relative Valuation approach (e.g. P/E, Price/Book)

·         Historical Earnings Valuation method. 

Closing and Transiting to New Ownership
Once the due diligence stage is over, the parties to the transaction will receive the report and agree on the share exchange ratio, composition of Board of Directors and then execute final documents, usually through their solicitors.  

If it is an acquisition transaction, a final offer is made by the acquiring company and the appropriate funds are transferred as may be required.

There are also regulatory requirements that are peculiar to each jurisdiction which are considered necessary to effectively conclude the transaction. In Nigeria, a Pre-merger/Pre-takeover Notice must be filed with and approved by the Securities and Exchange Commission (SEC).

This will precede the formal application for the approval of the proposed merger or acquisition.

Studies have shown that many cases of M&A failure can be attributed to poorly planned and executed integration of the merging entities, rather than the strategic case for merger.  

It follows that organizations that invest sufficient time and effort in executing their merger and acquisition processes are much more likely to follow through on all stages, invest well and subsequently increase the post merger value for the shareholders. 

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