Anatomy of a merger: how it all works

While no two deals are exactly alike, the great majority share a number of common elements. They generally begin with a decision either to sell a business or to set out to buy one and then move on to a market approach. This is followed by agreement on basic heads of terms, the due diligence process, integration planning, and at the end of the process, the implementation of the sale or merger agreement.

The critical success factor, however, is preparation. "You have to be prepared and fully research the parties before commencing the process," says BDO corporate finance partner Katharine Byrne.

Deloitte head of M&A Anya Cummins agrees. "In my experience, preparation by both the buyer and the seller is absolutely critical. The buyer should, in particular, carefully consider the strategic fit of any acquisition target and have buy-in and approval from the senior level decision makers in the business before proceeding with an acquisition," she says. "Preparing for this process and ensuring that as selling shareholders you understand any potential issues that may impact on value or deliverability of a transaction before they are identified by a buyer is critical."

Preparation involves identifying the right target, either as a potential buyer or for acquisition, according to KPMG head of corporate finance Michele Connolly. "You can look at it in two ways," she says. "There are companies that have a specific target in mind and have been eyeing them up for some time, and there are those that want to expand into a new market and are looking for a business that will be the best fit for them. Are you looking for a business with complementary products or one that will help you diversify in terms of products or regions? That will help decide what you're looking for. Then you have to ask if the company is in the same head space and is open to acquisition or merger."

For vendors this means marketing what they have to sell. “You’ve got to identify the people to whom the business will have greatest value and then go out and market the business to them,” says Capnua managing director Eamonn Hayes. “These can include other businesses and private equity partners. An information memorandum is generally produced at this stage. It includes all relevant information and while it has to show the business in a good light, it also must be reflective of reality. Information memorandums are by their nature optimistic but there is no point in being so optimistic that it is not reflective of reality. They need to show the business’s weaknesses as well as its strengths. There is no point in getting a very large offer but then not being able to close the deal. In a competitive process it’s the competition and the strength of the business that drives the price. There is no need to oversell the business.”

Vendor due diligence is a useful way of getting all this information out to interested parties at an early stage in the process and is increasingly being employed in merger transactions. “Vendor due diligence means the vendor does the due diligence itself,” explains Luke Charleton, head of transaction advisory services with EY. “They usually get an advisory firm like EY to do it. It helps accelerate the deal process and it allows the vendor to look at it from buyer’s point of view. It allows the vendor to put in place plans to mitigate and ameliorate issues which have been identified. Overall, it accelerates other aspects of the deal.”

Having found a buyer or a partner, the next stage is to agree terms and a price and then close the deal. However, deals frequently fail even after all these points have been agreed. “A lot of deals are only appraised on economic grounds but successful deals are as much about people, culture and the overall fit of the organisations involved,” says KPMG head of transaction services Mark Collins. “But that mightn’t become apparent until you start to put deal together. Sometimes people find that is far more challenging than anticipated to get the deal done as a result. Problems in areas like tax, legal and so on can be ironed out but culture and people are far more difficult.”

EY corporate finance partner Graham Reid also says that human factors can get in the way. “When deals fail it tends to be when things the vendor said would happen don’t happen,” he says. “This causes a loss of confidence.”

Deals can go wrong even after they are closed. “Post-deal is probably the most critical part of the transaction,” Reid adds. “Many deals fail because the purchaser missed something during the process. The management team may not be what is required. You have to ensure the right team is in place to extract value from the transaction. Sometimes this means continuing with the old management team, sometimes it means augmenting it, and sometimes it means putting in a crack team to do it; but the real value is generated post-deal.”

Realising that value means planning for the post-deal integration as early as possible in the process, according to Katharine Byrne. “Most buyers use the due diligence process to identify any gaps and overlap in the management structures, mapping out the requisite changes to the systems and agreeing on the communication strategy for staff and clients,” she says. “However, understanding the culture of the business will be key to ensuring the success of the deal. This will help determine the speed and scale of the integration required. Rushing the integration often results in significant disruption which, following the distraction of the actual transaction, may seriously affect the trading performance of the business.”

Panel: Maintaining momentum

A key element of a successful merger process is the ongoing performance of the business while the deal is being done. If performance should falter, this can diminish the conference of the other party. By the same token, focus on the deal must be maintained if the parties are are not to become frustrated and lose interest.

“One of the other critical success factors for a transaction is deal momentum whereby all parties are driving the transaction forward towards a target completion date,” says Anya Cummins. “One of the reasons we see deals fall over is where the deal drags for a significant period of time, the management team become distracted with the deal process and the underlying performance of the business suffers. Having a well-planned process and pushing forward with momentum can greatly improve the prospects of success. For the seller, competitive tension in the process with more than one interested party, or even just the threat of a second potential buyer, can really help push a deal along at pace.”

“Don’t get distracted,” Graham Reid advises. “If vendors say they are going to grow the business, they should be able to demonstrate that during the transaction. If they get distracted and don’t do that, the price can be affected.”

Momentum is of paramount importance according to Michele Connolly. “Deals will take as long as you give them and they really do need someone to drive them across the line and make sure they are not dragged out.”