In an increasingly competitive and financially constrained environment, corporate leadership must identify and pursue growth opportunities that will strengthen their organizations’ market position and financial performance. Growth strategies include developing new service lines or markets, expanding existing service offerings and markets served, entering into joint ventures to develop or expand services/markets, or merging with or acquiring existing operations from competitors, or other providers.

Acquisition Benefits:

The advantages of mergers and acquisitions frequently exceed those of other growth strategies. Acquisitions can quickly and dramatically shift an organization’s position by offering the following:

  • Access advantages : improving accessibility to clients in new attractive markets and/or enhancing access in existing markets.
  • Enhanced competitive position : fundamentally changing the market position, for example, by moving the organization from a subordinate position to a more dominant position.
  • Program/service expansion : gaining the critical mass, capability, or position of strength in high impact or high margin services or “rounding out”capabilities in areas of deficit.
  • Fortified barriers to entry : creating barriers that preclude the competitive entry into a market.
  • Enhanced relationships with service providers :gaining access to or improving relationships with important referral sources, including specific service providers.
  • Increased operational efficiencies :facilitating reorganized service distribution and operations to significantly reduce the cost of delivering services
  • Enhanced capacity and avoidance of capital expenditures :providing operational capacity for services at a lower cost and/or in a better timeframe than would be required to create such capacity without an acquisition or merger.
  • Improved financial and credit position :enhancing the organization’s financial performance and credit rating, thereby improving access to capital and lowering the cost of capital.

To realize these strategic and financial benefits, leaders will need to assess their current ability to pursue mergers and acquisitions, and commit the time and resources needed to develop such capabilities, if currently limited or absent. Cultural willingness to integrate planning and finance is vital, as described later.

The Seven-Step Process: Mergers & Acquisition

A proven process for evaluating and executing mergers and acquisitions includes seven essential activities that occur as sequential steps.

A description of each step is as follows,

  1. Determine Growth Markets/Services:
    Leaders start the acquisition evaluation process by identifying growth opportunities in business or service lines, markets served, or any combination thereof. To determine growth markets and services, leaders must collect and analyze extensive data, including the following: client origin; demographics (population, age, employment/unemployment rates, income); employers; other competitors; business, program, and service mix (performance and profitability by service line); field staff; employees; utilization/case mix (demand projections); competitive cost/charge position; and consumer preferences/ opinions

    Example:
    ICICI must have seen lot of growth prospects in acquiring Bank of Rajasthan in 2010 as the amalgamation will substantially enhance ICICI Bank’s branch network, and especially strengthen its presence in northern and western India. The deal will combine Bank of Rajasthan’s branch franchise with ICICI Bank’s strong capital base

  2. Identify Merger and Acquisition Candidates:
    The second step of the acquisition process involves the proactive identification of the universe of potential merger or acquisition candidates that could meet strategic financial growth objectives in identified markets or service lines. This involves methodically identifying “likely suspects” as well as “outside the box” possibilities based on management experience, research, the use of consultants, and other methods.

    Example :
    Enam-Axis merger is a good example, from the Axis perspective and from the Enam perspective, it was a great deal. For Axis, they were to start investment banking or start broking on their own, it may have took them a lot of time and lot of effort, a lot of investment but here they have straightaway got a very good franchise. Enam was an excellent choice.

  3. Assess Strategic Financial Position and Fit:
    At this stage following questions shall be answered,

    • What are the likely benefits of a transaction with this acquisition target?
    • What are the risks?
    • How does this target compare to other targeted opportunities?

    Financial Position:

    A comprehensive evaluation of the financial and credit position of the target and the combined entities is based on solid utilization and financial forecasts. The assessment focuses on volume, revenue, cost, and balance sheet considerations.

    Example :
    Patni Computer has been acquired by iGate along with private equity firm Apax Partners. Both the companies have done their home work for assessing ‘Strategic Financial Position’ and sustainability of the deal. iGATE expects to finance the purchase consideration of $1.22 billion through a combination of cash-in-hand, debt and equity financing, including a potential public offering of up to 10 million shares.Viscaria Limited, a company backed by funds advised by Apax Partners, will make an investment into iGATE in order to facilitate the acquisition of a majority stake in Patni.

  4. Make a Go/No-Go Decision:
    Corporate leadership must determine the likely benefits and drawbacks of the proposed acquisition or merger according to the questions discussed earlier and make a high-quality decision.During the decision-making process, leaders identify whether the strategic value-added case for a combined entity is compelling enough to proceed (or not).

    Example:
    Satyam-Mahindra deal is good example to explain this decision making step. After the Satyam fiasco the leadership of Mahindra Group must have faced a lot of dilemma over ‘Go/No-Go Decision’. But the Mahindra leaders made a brave decision after considering likely benefits and drawbacks of the proposed acquisition. The leadership must have concluded that the benefits are heavily overweighing the likely drawbacks.

  5. Conduct Valuation
    The fifth step in the acquisition process involves assessing the value of the target, identifying alternatives for structuring the merger or acquisition transactions, evaluating these, and selecting the structure that would best enable the organization to achieve its objectives, and developing an offer.There are three key valuation methods: discounted cash flow analysis, comparable transaction analysis, and comparable publicly traded company analysis. To identify a realistic valuation range, corporate leadership should select best suitable method.

    Example:
    See the deal of Reliance Infratel with GTL Infrastructure in 2010. According to Analysts, the deal may have been called off on valuations. R-Com, being the larger company, would have been the dominant driver of valuation. If it found the cash and swap ratio didn’t work out in its favor, it might have decided to call off the deal. Means it is evident that the companies should not underestimate their value and at the same time don’t expect un-reasonable returns.

    After the decision-making step, the ‘valuation’ is the most important step, as it can ruin your deal if goes wrong.

  6. Perform Due Diligence, Negotiate a Definitive Agreement, and Execute Transaction:
    Once an offer on the table is accepted, leaders of the acquiring organization must ensure a complete and comprehensive due diligence review of the target entity in order to fully understand the issues, opportunities, and risks associated with the transaction.Due diligence involves a review of the target’s financial, legal, and operational position to ensure an accuracy of information obtained earlier in the acquisition process and full disclosure of all information relevant to the transaction.After due diligence is completed, the parties negotiate definitive agreements. Any regulatory approvals necessary for consummation of the transaction are obtained and the transaction is closedDuring transaction execution, the acquirer should monitor the acquisition or merger to ensure that the negotiated transaction continues to meet the goals and objectives established for the transaction at the end of the strategic assessment.
  7. Implement Transaction and Monitor Ongoing Performance:
    The analysis seeks answers to such questions as,

    • Will management make the tough operational changes required to achieve the financial benefits?
    • What are the HR implications? Is there constituent support (management, board, service providers, community, and employees)?
    • What are the legal and regulatory challenges (Court approvals, SEBI Regulations, Tax implications, etc)?
    • What are the financial, organizational, and community-related risks of failure?

    A successful merger or acquisition involves combining two organizations in an expedient manner to maximize strategic value while minimizing distraction or disruption to existing operations.

    This includes having a ready mechanism to deal with any future problem in the implementation of the deal. For example in latest Enam-Axis deal,

    Example:
    To secure smooth implementation of the deal, Enam Chairman Bhanshali would be on Axis Bank’s board as an independent director. Manish Chokhani, director of Enam, would be the CEO of Axis Securities. All these Enam directors’ experience will be certainly helpful in securing smooth implementation of the deal.

Conclusion:

We must acknowledge a hard fact that most of the deals are underachieved and fell short of expectations in reality. The main reason for such poor performance is a failure to monitor strict implementation of all these steps. The leaders normally do well to plan ideally for all these steps but once the process is started they fail to stick with it. Use of the seven-step process described in this article will certainly ensure maximization of the merger or acquisition’s value and contribution to improved market and financial performance.

The substance can be summarized in a famous quote,

The decision to merge was emotionally difficult. Control is only useful if it creates value for the shareholders. If there is a way to create more value for shareholders by relinquishing some control to a better or greater enterprise, then that is the responsibility of the management.

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Mergers and acquisitions have become an essential and integral part of corporate strategy and will gain more significance as competition intensifies and companies move up the growth curve. In fact, M&A should grow in magnitude across the scale regardless of type and size of corporate from the blue chips to S&M companies…… Know More.

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Financial re-engineering involves the radical redesign of core business processes to achieve dramatic improvements in return on investments. The company, may, in the long run, have some assets which are surplus or not being utilised by the core business. The effective utilisation of those assets / funds can increase value for stakeholders substantially. HU Consultancy offers financial re-engineering and debt restructuring …… Know More.

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1 Comments

  1. camilaparker says:

    Great Article. Whenever a company plans for merger and acquisition, it is very important for them to have a talk with their employees and let them clear all the picture. If any employee services are not needed, then let them clear on the subject and give him proper time, so that he may search for another suitable job . Otherwise, there is every danger of rebellion against the company. If a company is facing any problem in M&A process, then they can also take the services of M&A advisers. I have followed all the proper steps with the advice of Investmentbank merger and acquistion advisers.

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