Mergers and acquisitions (M&A) are a form of external corporate restructuring. A merger refers to the coming together of two companies to form a single entity, while an acquisition involves the purchase of one company by another, usually a larger one. This form of restructuring is also one of the ways that a startup can exit. Generally, companies pursue M&As for various reasons, such as to increase their revenue, gain a competitive advantage, and diversify their portfolio.
The process of M&As can be complex, time-consuming, and expensive. There is no set timeline for how long the process usually takes, as it can range from anywhere between 6 months to several years, depending on the complexity of the transaction. Hence, it is important for founders of startups, as well as investors, who want to engage in these transactions to understand the process and what it entails.
Key Stages of the M&A Process
Preparation and planning
At this stage, the acquiring company develops an acquisition strategy, which involves having clarity on why they want to make the acquisition and what they expect to gain from it. It also involves setting the criteria for identifying the potential target companies and searching for these companies using the set criteria.
On the side of the startup looking to be acquired, this is a good point for it to define its goals for the potential merger or acquisition and create a portfolio of the relevant documents and data that a potential buyer might request.
Initial contact
After the acquiring company has completed its search for target companies that meet its criteria, they make contact and have initial conversations with the potential target company to obtain more information and see whether it is open to a merger or acquisition.
Valuation
If both companies are interested in moving forward with the transaction after initial conversations, the target company presents data on its current financials to the acquiring company. This data is then used by the acquiring company to determine the value of the target company, make a decision on whether to move forward with the transaction and develop a reasonable offer.
Offer and Negotiation
After valuation, the acquiring company develops and presents an initial offer to the target company. The parties can then negotiate the terms of the offer until they come to an agreement. At this point, a term sheet, which outlines the basic terms and conditions of the transaction, is prepared and signed by the parties.
Due diligence
The acquiring company conducts an evaluation of the target company’s financial, legal, and operational condition, including any potential liabilities and risks.
Approvals
Depending on the transaction and the laws that apply in the jurisdiction where the transaction is being conducted, approvals from regulatory authorities, shareholders, and other parties may be required.
Purchase agreement
If the due diligence exercise goes well and there are no major issues, and the required approvals have been obtained, the final contract for the transaction, which is usually a purchase agreement, is signed by the parties.
Closing and integration
Once all required agreements have been executed, the transaction is closed. Both companies would then need to work on integrating their operations, systems, and cultures.
In conclusion, the M&A process timeline can be complex and time-consuming, but with proper planning and execution, both parties can achieve a successful outcome. Each stage of the process comes with its own unique set of challenges, and the parties should be prepared to navigate these challenges in order to successfully complete the transaction.