Updated: Apr 30
In these times of soaring revenue figures, fastest to unicorn races, and rapid growth rates, every firm wants to speed up the process of expanding its presence in the market. Oftentimes, the way of starting from scratch to establish a position in a new market seems to be a resource occupying task which might slow down the market entry, and give a window for already existing competitors to eat up the market share.
To outmaneuver this situation, a traditional route of mergers and acquisitions is used to bypass the route to market presence and to cater to an emerging market while reducing the acquisition costs. Mergers involve two business entities, usually of similar stature, size, and scale of operations, forming a combined business for the purpose of gaining a strategic advantage in the market over other competitors. Mergers are generally done with the mutual consent of both organizations, while shares are distributed proportionately among the shareholders. Acquisitions, on the other hand, implies that, one organization acquiring the business of another firm, with major shareholdings (at least 51%), with control over decision-making rights. Although the motto of both mergers and acquisitions is almost the same, to gain a competitive advantage by utilizing the resources of both organizations, acquisitions can sometimes happen without the mutual consent of the smaller organizations, terming them as Hostile takeovers.
A journey of an acquisition can be defined into three major phases, Pre Acquisition phase, Mid Acquisition, and Post Acquisition. Pre- Acquisition includes a detailed study of the industry one wants to venture into, what are the key competitive advantages a firm wants to gain, and a definitive objective for acquisition. In a recent involvement regarding the acquisition of one of our client, the objective was clearly defined to gain an advantage of the market presence of our client and to kill the competition by enabling the acquired firm with suitable resources required.
In the study phase of acquisition, various prospects are studied and elimination is done in order to list the top three to four companies that ticks all the boxes for a probable subsidiary. If you are looking to undergo acquisition by a large firm in the future, then here are some basics you need to prepare to get the optimum chance to clear out from the rest in the list
a) Make the business model very clear, easy to understand, and excel the execution of a business model
b) Show the predictable post mergers predictions both in numbers and resulting synergies. Both hard and soft synergies need to be pre-analyzed and defined accordingly
c) Get the customer segmentation ready revenue-wise, geographical segmentation, revenue cycle, working capital cycle, customer channels etc., worked up and clearly defined
d) Work on basic financial documents, Processes, Operational documents, Basic ratios which will be helpful in presentations and will deliver the value proposition more effectively
Once the hygiene factors are cleared, next comes the stage of mid acquisitions, here, the acquiring firm will visit the company with their key members, subject matter experts etc. Meetings with promoters regarding financial and operational information, detailed understanding of the revenue flow and projections. A thorough study of the basics of valuation, which method to use for valuations, industry growth rates, understanding of metrics important for valuations like Cost of Equity, Cost of Debt, WACC etc. to understand the lenses of calculation of valuation and to justify the numbers. Things get a lot more detailed, with the stage of justification of values and negotiations to a discussion of shareholding patterns post acquisitions, all key points are discussed and agreed upon amongst the key stakeholders. All these tasks are tedious and need to be done with at most attention as the future of the firm depends on them. It is advisable to take help from a third-party expert to facilitate things smoothly.
Once the offer is accepted, the process of due diligence, with an agreement stating all the terms and conditions on which the post-acquisition operations will be functioned, is done. All the terms are clearly defined, so as to avoid disputes in the later operation of the organization. Decisions are made regarding human resource allocation, the flow of material and information, working capital addition etc. considering the future strategies. In totality, the acquisition is a very strategic process with major long term impact on both the organizations and thus it should be tackled strategically realizing the impact it can have on the organization, especially the one being acquired.
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