By: André Jerusalem

1 – INTRODUCTION:

In order to explain and even demystify to our clients and partners some concepts often used in mergers and acquisitions (also popularly known as “M&A”), we will publish a series of articles on how such operations work. Our goal is to provide easy-to-read material, with a comprehensive analysis of the motivations, requirements, stages and agents involved in operations of this type.

Obviously, we will not exhaust the subject, and that is not our intention. M&A transactions are dynamic and unique by nature, that is, they are something that is constantly evolving. However, experience has brought several stages and care that are taught and shared, making M&As true processes, with a beginning, middle and end, and their stages must be completed by qualified professionals who are dedicated to the final objective, which is the closing of the transaction.

2 – ORIGIN OF M&A

In essence, the practice of acquiring (or merging) companies is as old as the existence of organizations. However, there are few records in antiquity of such practices, with one of the earliest records being the merger of the British East India Company (East India Co.) with a competitor, so that it could maintain its monopoly on navigation in the 18th century.

However, such operations began to gain greater volume from the beginning of the 20th century, when they became the object of study and analysis. During this period, large companies, especially in the USA, sought to obtain a monopoly on their market shares by acquiring competitors. It is no wonder that popular games such as “Monopoly” (Monopoly in the Brazilian version), which aims to obtain control over most of the board’s assets.

More than a century later, the mergers and acquisitions market has evolved, and during this period, protection mechanisms have emerged to prevent monopolies 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 body responsible for monitoring transactions that could impact the Brazilian economy.

3 – M&A OBJECTIVES

As seen above, at the beginning of the last century the main objective in a company acquisition operation was the search for a monopoly, however this objective has evolved, even 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 through the union of efforts that previously competed with each other within the same segment;
• Economies of scale through the expansion of production capacity;
• Scope gains through the joint production of more than one product or service;
• Expansion of territoriality through the acquisition of a player that already has a local presence
• Expansion of the market coverage through the acquisition of a player that already operates in a specific niche or segment;
• Limitation of competition through the “elimination” of a competitor;
• Increased Market Share through the acquisition of a product or service that represents a slice of the market;

It is also important to highlight that currently, many M&As focus on the acquisition of startups, that is, newly established companies that have accelerated growth and scalability of processes due to the use of technology. In this sense, such acquisitions often aim to acquire the technologies that were developed by the startup and its markets, since such results would not be obtained by a larger company (at least not quickly).

4 – PHASES OF AN M&A PROCESS

Like any process, M&A operations tend to follow a methodology that allows the buyer to analyze the target company, as well as the parties to evaluate the value of the business, payment conditions and terms, as well as other aspects.

In general terms, the main stages of an M&A process are as follows:

• Selection of legal and financial advisors who will advise companies involved in M&A analyses and negotiations;
• Negotiation of preliminary documents (term sheets, confidentiality agreements, memorandums of understanding, among others);
• Preparation of the financial assessment of the target company (valuation);
• Preparation of offer letter (binding or non-binding);
• Conducting the Process of Due diligence (investigation of the target company);
• Negotiation of contractual instruments and any retentions; and
• Closing of the operation.

In the next publications we will address each of the stages mentioned above, and in the next publication we will specifically address the players involved in an M&A operation and the role that each one plays.