The acquisition process begins with the search for, and identification of, a target company that will fulfill certain strategic objectives of the acquirer and ends with the acquisition and integration of that company into the acquirer’s operation. The entire process is made up of a number of discrete steps that can be grouped into five major phases:
From Process Initiation through Target Qualification
This initial phase of the process begins with the creation of a core team to manage the process and the identification of a target company and confirmation that the targeted company is a viable candidate for acquisition. The actual process by which this is accomplished can vary significantly from company to company and from one situation to the next. It may be readily apparent that a target company provides an excellent strategic fit and is the optimal candidate to fulfill the acquirer’s objectives. Alternatively, a screening process may be employed to identify potential candidates before they are approached. In still other cases, a candidate may make its availability known either through an intermediary, such as a business broker or investment banker, or through direct contact with executive management of the acquirer’s organization. Assuming that the process proceeds, the core team would ensure that a confidentiality agreement is executed; it would arrange a formal meeting with the principals of the target company to confirm their interest; and it would request sufficient preliminary information to perform a meaningful analysis and valuation of the target company.
The identification and qualification process for both public andprivate company acquisitions is similar but can differ in a number of important respects. When a public company is the target, the direct involvement of the acquiring company’s chief executive officer (CEO) early in the process is almost a certainty, whereas with a smaller, private company acquisition, there is a much greater probability that the CEO would delegate negotiations to a core team of senior managers who will keep him or her informed on an as-needed basis. In addition, the board of the acquiring company is likely to be advised by its management of its intentions to pursue a transaction. Smaller transactions generally do not warrant early board notification, especially at more acquisitive companies, where there may be many such pre-acquisition discussions in progress at any given time.
Although relatively rare and often unsuccessful, an acquirer of a publicly traded company may pursue a transaction on a non-negotiated basis, that is, a hostile bid that is opposed by the target company’s board, an option generally not available in private company acquisitions.
From Valuation through Preliminary Agreement
Based on the information provided, the acquirer will perform a preliminary analysis of the potential acquisition. This analysis would be used as the basis for internal discussions about the advisability of acquiring the target company and would include a preliminary valuation as well as the consideration of acceptable terms under which the acquirer would execute a transaction. Once internal agreement is reached on price range, other major terms, and negotiating strategy, the core acquisition team under the leadership of the CEO would negotiate basic terms of the transaction with the target company principals. These terms would generally be documented in the form of a letter of intent (LOI). It is during this phase of the process that the acquirer would also determine whether it needed outside financing to consummate the transaction and, if so, would initiate the process to raise the necessary capital.
If the transaction involves publicly traded companies, the agreement to pursue a transaction puts into motion a number of additional activities. The boards of both companies would most certainly be apprised of discussions and, typically, a host of legal, business, and financial advisors would be brought into the process in anticipation of drafting a definitive agreement (contract) and a fairness opinion (a letter that will eventually be sent to shareholders opining on the fairness of the purchase price and other aspects of the transaction).
The valuation arrived at will invariably result in a share price that is substantially higher than market value prior to these discussions. This premium assumes that the performance of the combined companies will yield synergies materially in excess of that premium. The extent of the typical premium paid in the acquisition of a public company is one of the features that set it apart from a private company purchase. That does not mean that purchasers of private companies do not pay premiums. However, whether one is paid and its magnitude is much more of a controllable variable in a private transaction.
From Due Diligence to Approval to Proceed to Contract
Once the parties have agreed to the basic terms of the transaction, the acquirer would proceed to the due diligence phase of the process. This would entail fleshing out the core acquisition team with additional internal staff and external experts to assist in due diligence, thoroughly briefing team members, developing a due diligence program, conducting the due diligence review, and reporting on its results. Assuming that no evidence of material impairment of the value of the target company is uncovered, the process would proceed to the contract phase. If major issues affecting value are uncovered, the transaction may be terminated or the purchase price may be renegotiated.
This would be a period of particularly intense activity if the transaction is between two public companies. The boards of both companies would be actively involved in discussions with their respective managements and their advisors, and the drafting of the definitive agreement and fairness opinion would have commenced.
Contract and Close
Negotiation of the granular terms of the agreement would follow successful due diligence. Private company acquisitions may involve the sale of stock or the sale of assets. The form of the transaction would have a significant impact on the content of the contract, specifically the nature of the representations, warranties, covenants, and conditions contained therein. If the transaction is for a purchase price of more than $53 million, there will almost certainly be a need for an HSR antitrust filing with the Department of Justice (DOJ) and the Federal Trade Commission (FTC). Assuming that the transaction will not result in an anticompetitive combination, the HSR filing will generally delay closing for about one month. In addition, a large private company acquisition may require the approval of the acquiring company’s board; even if it does not, management may still present the transaction to the board for comment.
If the transaction involves public companies, the process from due diligence to close is much more complex and lengthy. The definitive agreement will require the affirmative approval of the target company’s board and usually the approval of the acquiring company’s board. Securities regulations would require public disclosure of the impending transaction. In addition, a combination of this size and nature will undoubtedly require an HSR filing and may, in fact, require the divestiture of selected properties to satisfy the anti-competition concerns of the DOJ and the FTC. Shareholder approval will also be required, and steps leading up to such approval (possible prospectus preparation, proxy statement preparation, and proxy solicitation) will generally take several months to implement. Once all of these requirements are met and approvals are obtained, the transaction would proceed to closing.
There is virtually universal agreement among students and practitioners of M&As that poorly planned and executed postacquisition integration is one of the primary causes of acquisitions not meeting pretransaction expectations. Integration planning should begin at the early stages of the acquisition process, and those who are charged with integrating the businesses should have strong representation on the acquirer’s due diligence team. Aggressive timetables for accomplishing integration objectives should be set in advance of close, and the integration process should start immediately after the deal has been finalized.
The challenges associated with integration are the same for large and small companies, and any differences generally lie in the order of magnitude of those challenges. Integration is predominantly about the realization of synergies and the standardization of policies, processes, and procedures. The areas of synergistic opportunity are generally distribution, operations, systems, facilities, and infrastructure personnel.
Timely implementation is a key to the success of integration efforts. Implementation should be substantially accomplished within the first three to six months following the close of the transaction. Effective implementation is enabled by establishing clear objectives and assigning unambiguous accountability and authority to a team leader whose efforts are regularly monitored by an engaged CEO.
However, clear and thoughtful objectives and rapid implementation are necessary, but not sufficient, components of a successful integration plan. Employee buy-in is also a critical factor in maintaining productivity, retaining talent, and ensuring that the integration is effective in the long term. Key to establishing buy-in is clear, candid, and continuous communication. To the greatest extent possible, employees must be made to feel as if they are part of the process and the future vision of the organization.
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