The M&A

Process
and It’s
Alligators

www.corporatefinanceassociates.com
 The M&A Process and
It’s Alligators

Introduction

This paper will describe the Merger and will break it into four major sections, which
Acquisition (M&A) process for small to medium usually, but not necessarily follow each other in
sized companies. It will discuss the process from time. Figure 1 (below) describes the flow, and
the view of both the “buyer” and the “seller”, potential points of backtracking.
based on our experience that each “side” in this
process should not only understand what they It is also important to bear in mind that a buyer
need to do, but should understand what the other and seller do not need to be at the same stage in
players in the process are doing at the same this process when they first enter into
time. It is also important that each participant in communication. Sellers and buyers may identify
the process clearly understand the goals and and approach target companies which are not
objectives of the other parties as well as their actively pursuing the possibility of acquiring or
own. A mutual knowledge of the process, clear being acquired. This difference in planning
communications and a mutual respect will maturity means that the initiating party will
accomplish much toward completing a successful occasionally have to show patience, and wait for
merger or acquisition. the party to “catch up” in the process.
To simplify the description of the process, we

Planning & Target

Positioning Identification
Negotiation

Target
Approach

Figure 1

Strategic Planning and Organization

Buyers Both Sellers

wAssemble M&A Team
wDefine Strategic Objectives
wDefine Acquisition Strategy wDefine Selling Strategy
wDefine Acquisition Criteria wDefine Buyer Criteria
wPrepare Selling Memo

When a company first seriously considers M&A grow as the transaction progresses. They need to
activity, whether as a buyer or a seller, they identify team members, including a senior
should put together an M&A team, which may executive with time to devote to the process,

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assign responsibilities, and educate the team on Similarly, a seller should define the
their responsibilities if needed. This team will be characteristics of a desirable buyer, and develop
a combination of internal staff and external team a selling plan to guide them in approaching
members. Some companies are able to develop potential buyers. For larger companies which are
and retain an internal M&A staff, but this is not publicly traded, and whose value is relatively
the case for many companies. For sellers well known, a one or two stage “auction”
especially, this may be a one time transaction, strategy may be appropriate. This strategy
and external consultants can help anticipate publicly announces that the company is
issues which may be the difference between a “exploring opportunities” with respect to the
successful and an unsuccessful transaction. business. Interested companies are expected to
step forward and express their interest. A second
Companies need to determine their strategic stage may be added to maximize value, by
objectives very early, as they form the reducing the number of bidders, and setting
foundation for all that follows. For buyers, some minimal criteria. For smaller companies
M&A is nearly always a strategic, as opposed to and for more complex technology based
a financial, decision. They typically desire to companies this is not a usual strategy, so the
strengthen their competitive position by emphasis will be on a negotiated sale, preferably
acquiring products, technology, distribution or with more than one interested buyer.
in-place customers. Sellers may desire to exit
their company for financial purposes, or they Developing these acquisition and selling
may determine that they cannot continue on a strategies requires the input of team members
desired strategic path without combining who have been through the process before, and
resources with an acquirer. who understand the wide range of deal
possibilities which are not immediately obvious.
These strategic objectives lead directly to the
next planning step. A potential buyer should After the planning has been completed, a selling
develop acquisition criteria which define what company should create a Selling Memorandum,
kind of target company will help them meet their which presents their company’s value in it’s
strategic goals. At this point they should develop most favorable light, as viewed by the type of
a general acquisition strategy - that is a general buyer the selling company hopes to attract. The
idea of the terms they desire for any acquisition. memo is not a Business Plan, but needs to have
This includes deciding if their stock will be used such a plan behind it. It is a selling document,
as part of the purchase price, and if external and cannot be well focused without a definition
funding from banks or other investors will be of it’s target audience. The selling company or
needed. A decision should be made regarding the its agent must put themselves in the mind of an
general size of the desired acquisition, to match acquiring company in creating this Selling
available resources. Memorandum.

Buyers Both Sellers

wDistribute Acquisition Criteria wDistribute Selling Memo
wIdentify Potential targets
wEvaluate Strategic Fit
wAccomplish Initial wAccomplish Initial
Acquisition Screen Buyer Screen
wPrioritize Targets

Identifying the Targets

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At this point in the process both the buyer and objectives would be met by a deal with that
seller will distribute their respective acquisition target company.
criteria or Selling Memorandum through their
contacts or those of their agents. Depending on The priority of both buyers and sellers at this
the strategies chosen, this initial distribution may point should be to find targets which are good
be very widespread, or limited, pending strategic fits with their objectives. Sellers should
identification of high priority targets. It is be assessing the probable ability of their target
important for both buyers and sellers to require buyer to successfully complete a transaction, by
binding (on themselves and any outside advisors) looking at the targets financial resources and
confidentiality agreements concerning any data acquisition track record. Buyers should consider
which is released, both now and later in the the operational feasibility of an acquisition or
process. merger, and specifically how their strategic
needs will be met.
Both the buyer and seller, as well as their agents,
will then go through the process of identifying At the completion of this phase, companies
potential buyer or seller “targets”, using should have a prioritized list of target companies
established networks, as well as searching to contact. Often this will be in the form of an
through the vast mountain of available “A” list and a “B” list, which will guide them
information which modern technology has through the following contact process. They
created. At this point, having acquisition or should also be open and responsive to unsolicited
buyer criteria is absolutely essential to prevent opportunities as a result of having distributed
wasting significant amounts of time and money. their acquisition criteria or Selling
As potential targets are identified, these screens Memorandum.
are applied, to assure the original strategic

Approaching Potential Targets

Buyers Both Sellers

wMake Initial Target Contact
wAccomplish Due Diligence wSupport Due Diligence
wPrepare Letter of Intent (LOI) wRespond to LOI Intent
wNegotiate LOI

the confidentiality of their strategic plans, and

Executives of buying and selling companies may perhaps get initial information from potential
contact the identified priority targets directly or acquisition targets more easily. At some point
through an agent, which may have several during this phase of an acquisition, the principals
benefits. For a selling company, using an agent of both parties will need to meet and develop a
has the obvious advantage of maintaining the trusting working relationship. Third parties and
confidentiality of their company’s availability on outside team members can help orchestrate this.
the market, thus maintaining the internal morale
of the company through some of the early Selling companies may also have to respond to
exploratory discussions. An agent can also potential buyers’ requests for information either
screen out serious and qualified inquiries from directly or through an agent. Initial due diligence
“kick-the-tires” responses. investigations will take place during this phase.
At some point the selling company will have to
An acquiring company may also find advantages make some of their employees and staff aware of
to remaining anonymous, as they can maintain the potential company sale, which can have a
disruptive impact on daily operations.

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 early operational integration considerations. This
Buyers will be gathering available public initiates a negotiation process. Although LOI’s
information on any companies they wish to are usually considered not to be legally binding,
approach, as well as analyzing the available they certainly do set the direction for the
selling material from their target. Typically a Definitive Agreement, and legal counsel will
buyer will want more information on a target need to review the LOI after the business
company than the seller wants to release, objectives and issues are documented.
resulting in early negotiations and discussions
centered on access to information. The buyer The seller will review the LOI and usually will
will need to gather enough financial and market develop some counter proposals for various
information to make an initial valuation of the aspects of the offer. The buyer and seller will
target company, and will need enough often have several meetings during this phase,
operational information to determine how the with team members providing support. Primary
companies might be able to combine. issues should be at the business level, rather than
detailed legal issues. The purpose of a negotiated
After the buying company feels they have LOI is to capture the guidelines set by the
adequate input, they will prepare an initial Letter respective parties, and to set the framework for
of Intent (LOI) if the target company still is an negotiating a Definitive Agreement. The LOI
attractive match with their acquisition criteria. will usually set forth conditions prohibiting the
They will also need to revisit their acquisition selling company from negotiating with other
strategy, given what they will now know about potential buyers while Definitive Agreement
the target company. The LOI should contain not negotiations are underway. Agreeing to an LOI
only the price they are willing to pay, but should is one of the major go/no-go points in the
discuss acceptable financial terms and possibly process for both buyer and seller.

Negotiating a Definitive Agreement

should attempt to minimize this disruption by

Once an LOI has been accepted by a potential clearly defining their information needs, and by
seller, a detailed investigation, or due diligence, coordinating through specified channels. If the

Buyers Both Sellers

wAccomplish In-Depth Due wSupport In-Depth Due
Diligence Diligence
wPlan Operational Integration
wPrepare Detailed Valuation
wAddress Legal & Tax Issues
wNegotiate Definitive Agreement
wClose

phase will follow. The buyer will take the buyer is successful in acquiring the target
initiative in requesting and analyzing data from company, they will benefit by having minimized
the selling company. The data will cover issues the negative impact of the due diligence phase.
of products, markets, facilities, people,
accounting processes, and other legal issues such It is important for operating level management of
as contingent liabilities. The seller should both buyer and seller to meet and develop an
anticipate spending a great deal of time initial concept of operational integration as part
of the process of developing a Definitive
responding to buyer requests, while the buyer Agreement. This operational level coordination

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will inevitably surface issues which will need to who can handle team coordination, and can
be negotiated. The seeds of many unsuccessful, optimize the time use of senior executives, who
or at least disappointing, acquisitions have been must remain involved. This “quarterback” (who
sown by incomplete or half-hearted attempts at may be internal or external) can also facilitate
planning for life after the acquisition. Obviously negotiations by proposing “straw-man” options
the buyer wants a successful integrated operation and positions which might not be appropriate for
after the deal, and the seller will also typically the respective company principals.
have a vested interest if the terms of the deal
include a pay-out over time related to the success When a definitive agreement has finally been
of the combined operation. In some acquisitions negotiated to the satisfaction of the buyer and
the seller may remain with the acquired seller, a formal “closing” will normally be held.
company, and will be part of the operational Often the final financial terms will not be known
integration. exactly at that time, and the agreement will
specify how the settlement will be affected by a
To support the negotiation of the Definitive strict accounting taken as of that date. Deals
Agreement, the buyer will take all the have been broken at the closing table, so the
information obtained during the detailed due teams should be prepared to respond to issues
diligence, together with the proposed operational even at this point. After closing is complete, and
integration concepts to accomplish a detailed the signatures are dry, the acquiring company
valuation of the target company, as they plan on must then build on the foundation of the
operating it. This valuation is important, in that Definitive Agreement to build a healthy and
it helps the buying company determine their profitable new or expanded operation.
“push back” position, and helps prevent getting
caught up in the emotion of a negotiation. Summary
Several funding structures will need to be
considered, and third-party sources of funding, The acquisition or merger of businesses is a
such as banks, may need to become involved complex process which should be understood by
during these negotiations. The buyer’s full all parties involved. It is essential to have a
acquisition team will be involved in these qualified team in place, working with company
negotiations, with legal counsel taking a more owners and managers to develop the objectives
active role as the deal moves closer to final and strategy for that company. These strategic
agreement. objectives provide a “touchstone”, to which all
later activities should be tied. Another key is to
While the buyer is developing their negotiating accomplish adequate due diligence, both as
position, the selling company should be buyer and seller, in order to understand the value
developing their own position by anticipating the of the company being acquired, as it is planned
issues and values as seen by the buyer. It is very to be operated by the acquiring company. This
easy for a selling company to fixate on what they allows both buyers and sellers to not only
think their company is worth, rather than looking anticipate the other party’s positions, but to
at the acquisition through the eyes of the buyer. understand the reasoning behind them. This
Often an outside team member is the best source mutual understanding of value will underlie the
of this objective view, and their input should be negotiation of a successful acquisition, and lays
considered in developing the seller’s negotiating the foundation for a successful company after the
position. transaction is completed.
Negotiation of a Definitive Agreement can be
Related References
time consuming, and will typically divert senior
management attention from the running of their
respective businesses, which should remain their Joseph H. Marren, Mergers & Acquisitions, A
highest priority. It is helpful for both buyers and Valuation Handbook (New York; Irwin
sellers to have a “quarterback” for this phase, Professional Publishing, 1993)

Corporate Finance Associates The M&A Process and It’s Alligators Page 6
 Milton L. Rock, Robert H. Rock and Martin
Brian J. Miller, Editor, Ernst & Young, Mergers Sikora, The Mergers & Acquisitions Handbook
& Acquisitions (New York, Wiley and Sons, (New York; McGraw-Hill Inc., 1994)
1994)
Bruce R. Robinson and Walter Peterson,
Strategic Acquisitions (New York; Irwin By: Dr. Roger P. Neeland
Professional Publishing, 1995) Corporate Finance Associates

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