By: Andre Jerusalmy
1 – INTRODUCTION:
In order to explain, and even demystify, to our customers and partners some concepts often used in mergers and acquisitions of companies (also popularly known as “M&A”), we will publish a series of articles on how such operations work. Our goal is to be able to provide an easy-to-read material, with a comprehensive analysis of the reasons, requirements, steps and agents involved in such operations.
We will obviously not exhaust the matter, and that is not our intention. M&A operations are dynamic and unique by nature and are constantly evolving. However, experience has brought several steps and cautions that are taught and shared, making M&As true processes, with a beginning, middle and end, and these steps must be accomplished by qualified and dedicated professionals targeting the final goal, which is to complete the operation.
2 – M&A ORIGIN
In essence, the practice of acquiring (or merging) companies is as old as the existence of organizations. However, there are few ancient records about such practices, one of the first being the merger of Britain’s East India Co with a competitor, so that it could maintain the monopoly of navigation in the 18th century.
However, these operations began to increase in volume from the beginning of the 20th century, when they became the object of study and analysis. In that period, large companies, particularly in the USA, sought to obtain a monopoly of their market shares through the acquisition of competitors. Not surprisingly, popular games such as the “Monopoly” emerged from this mentality, aimed at gaining control over most of the assets on the game board.
After more than a century, the market for mergers and acquisitions has evolved, and during that period, protection mechanisms have emerged to avoid monopoly or other forms of concentration that could harm the economy and competition, which is a necessary tool for progress. In Brazil, the Administrative Council for Economic Defense (CADE) is the agency responsible for monitoring operations that can impact the Brazilian economy.
3 – M&A OBJECTIVES
As seen above, at the beginning of the last century the main objective in an enterprise acquisition operation was seek a monopoly, but this goal has evolved, because in many situations the monopoly cannot be exercised due to the existence of legal restrictions.
However, among the main reasons that currently motivate an M&A, we highlight the increase in value that will be generated in the acquiring company as a result of:
- Synergy gains by uniting efforts that previously competed within the same segment;
- Gains in scale by expanding production capacity;
- Scope gains through joint production of more than one product or service;
- Territory extension through the acquisition of a player that already has a local presence
- Expansion of the market scope by means of acquisition of a player that already has an activity in a certain niche or segment;
- Limitation of competition by “eliminating” a competitor;
- Market share increase by purchasing a product or service that represents a market share;
Likewise, today many M&As are focused on the acquisition of startups, i.e., newly constituted companies that display fast growth and process scalability by using technology. In this sense, such acquisitions are often aimed at acquiring these technologies that were developed by the startup and its operating markets, as such results would not be obtained by a larger company (at least not as quickly).
4 – STEPS OF A M&A PROCESS
As with any process, M&A operations tend to follow a methodology that allows the buyer to analyze the target company, and for the parties involved to evaluate the value, conditions and payment terms of the business, as well as other aspects.
In general, the main steps of an M&A process are as follows:
- Selection of legal and financial advisors who will advise the companies involved in M&A analyses and negotiations;
- Negotiation of preliminary documents (term sheets, confidentiality agreements, and understanding memoranda, among others);
- Preparation of the financial evaluation of the target enterprise (valuation);
- Preparation of an offer letter (binding or non-binding);
- Conducting the Due Diligence Process (investigation of the target company);
- Negotiation of contractual instruments and eventual withholdings; and
- Settling the transaction
In the next publications we will cover each of the steps mentioned above, specifically addressing the players involved in an M&A operation and their roles.