Moving on Up Through Mergers and Acquisitions

  Initial Dialogue With Potential Targets Once sufficient information and analysis have been gleaned internally about potential targets in the M&A strategy, preparation begins to formally approach a target company about the possibility of a strategic dialogue. Some important areas to consider in determining whether to approach a target company include:

• • Corporate Strategy Alignment—How the M&A opportunity aligns to corporate-strategy objectives and priorities, describing its place in the overall M&A strategy.

 

• • Potential Market Opportunity—Estimates the potential addressable opportunity that could result from a potential acquisition or investment.

 

• • Company Overview—Contains information about a company, usually based only on publicly available information.

 

• • Key Questions and Focus Areas—Describes the key areas on which initial conversations will focus to determine whether the potential target represents a viable opportunity.

 

Once it’s determined that a company will proceed, it can interact with the potential acquisition or investment target to confirm the opportunity. Typically, additional information will be provided and deeper conversations will take place with management, after signing an NDA. The exchange of additional information typically includes materials and presentations by and subsequent discussions with the management team. The information and associated interactions should be sufficient to determine interest in and the potential feasibility of a transaction on a strategic, financial and operational level. Providing a Formal Indication of Interest If a company determines that it has an interest in continuing down the path of completing a transaction, its next step is to deliver a non-binding IOI. The IOI is a non-binding agreement that demonstrates strong intent to reach final agreement and consummate a potential transaction. The IOI details several individual provisions that help outline the basic structure of the contemplated transaction in the context of the individual characteristics and dynamics of the situation. While there can be a variety of important clauses, the standard IOI typical addresses the following:

• • The proposed transaction structure

 

• • The purchase price and treatment of rights

 

• • The exclusivity period

 

• • Adjustments to the purchase price

 

• • Employee agreements and employee bonus pools

 

• • Representations, warranties and covenants

 

• • The closing conditions

 

• • Holdback and indemnification

 

• • Confidentiality

 

• • Fees and expenses

 

Ahead of delivering the IOI to the target, a company typically has a strict process for approval, given the nature and the seriousness of such communications. Major components of a process approval at this stage might include:

• • Initial Acquisition Case Analysis—Contains initial business-case assumptions, initial business-case synergy assumptions and the detailed financials behind both, which allow for the computation of an initial estimate.

 

• • Preliminary Integration Planning and Principles—Outlines the organization of the integration planning teams and their responsibilities. Also addresses the initial thoughts on sales integration, product roadmaps and the roles/retention of key personnel.

 

• • Key Diligence Focus Items—Details the areas in diligence that must be confirmed in order to successfully complete a transaction.

 

Upon receiving internal approval, an IOI can then be delivered, which is usually followed by a negotiation around the proposed terms, so long as the terms stay within the parameters of what was approved. Any major variations to the terms and/or the spirit of what had previously been approved should be reviewed. Due Diligence After the Firm has come to agreement with the target company around the IOI, the two parties will likely enter into an exclusive negotiation period so that the potential buyer can conduct the diligence and integration planning necessary to attempt to successfully complete the transaction. Diligence and Planning are multi-day activities intended to get to the level of detail necessary to ascertain the status of every aspect of a target company’s financials, resources and operations in an attempt to uncover issues and risks that the transaction might pose post-closing. Closely related, but different, is the effort around integration planning, which focuses on similar areas but through the lens of business model-, physical- and cultural-integration requirements.