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How to do Private M&A Better

posted 12 months ago

Recently, the masses got a taste of how businesses grow in India via the now popular TV show – Shark Tank India. Business deals in real life, however, are far more complicated and involve several additional steps and processes to be completed in order to fall into the “successful deals” category. An M&A deal can be said to be “successful” if the buyer’s key objectives for the transaction are achieved.

Alas, there is no magic formula to guarantee the success of any deal. Invariably, buyers have different objectives and drivers for their M&A deals including inorganic growth, existing portfolio expansion, entry into new markets, vertical integration or horizontal integration.

So what are the key factors that buyers must keep in mind in order to maximise their chances of success while making M&A deals? Let us discuss the eight most critical elements.

  1. Planning: Inorganic growth through M&A is not merely a financial transaction but a much more complex process which requires careful planning and consideration. The benefits of planning in an M&A transaction cannot be overstated. Buyers should carefully screen the sectors with growth opportunities and invest time and resources in identifying and evaluating the right target. Management capacity is often limited and therefore, it is important that time and resources are invested judiciously, and buyers don’t recklessly pursue M&A opportunities.
  2. Team: Buyers must plan to have appropriate internal and external teams in place to support through the M&A journey. The external advisors include valuers, legal, financial, accounting, tax advisors etc. The internal teams include functional teams responsible for business growth, finance and legal departments and the top management of buyers who are the ultimate decision makers. A well-balanced and functional team with a collaborative approach is essential to successfully complete an M&A deal.
  3. Valuation: Over valuing or under valuing a target is perhaps the most common factor for failure of an M&A deal. Buyers must evaluate both the intrinsic value of the target based on the size and nature of its operations and its growth potential as well as the strategic value which is the incremental value that buyer can derive from the M&A deal. In case buyers and sellers are unable to agree on a valuation, then tools such as purchase price adjustments and earn-outs can aid the parties in bridging the valuation gap.
  4. Structuring: Structuring an M&A deal is a complex process and depends on variety of factors such as nature of investment (strategic or financial), regulatory restrictions, requirement of obtaining governmental / regulatory approvals, regulatory oversight in the sector etc. Buyers must obtain comprehensive legal advice covering all bases before finalising the structure of the M&A transactions as it can have an impact on the overall timelines and documentation for the deal.
  5. Due diligence: Buyers have been increasingly placing reliance on vendor due diligences instead of conducting a comprehensive buyer due diligence. While this can help in expediting the deal timelines, however, there are risks of window dressing by the sellers. Buyers should ensure that the key areas of interest and the value drivers are comprehensively probed into by the buyers. Buyers can also seek extensive disclosures from the sellers at the stage of definitive documents to flush out any significant information.
  6. Documentation: A very important facet of an M&A deal is risk allocation between the parties. While any M&A deal is inherently fraught with risks, buyers should seek appropriate protections in the form of exhaustive representations, warranties and indemnities from the sellers in the transaction documents to protect against any potential exposure. For any risk areas identified during due diligence or structuring exercise, buyers can negotiate special protections such as right to set-off any potential losses from future payables, holdbacks, escrow arrangements or exercise of call option at default or put option at premium.
  7. Post-acquisition integration: Successful integration of the target with buyer’s group holds a lot of significance for any successful M&A. Buyers should give due weightage to cultural computability of the target such as business philosophy, chemistry between the top management and among the staff while evaluating the target. Buyers should always be proactive rather than being reactive. Buyers should also plan well in advance for the integration before closing of the acquisition. The management teams should meet and align regarding business plan and strategies as well as hierarchy and reporting matrix should be drawn up for clear roles and responsibilities. Buyers should positively engage with the employees of the target to make them comfortable with the change and keep them incentivised to deliver growth.
  8. Project Management: because an M&A transaction involves a complex series of inter- related events or activities to be achieved by milestone dates,  some of which must be dealt with in parallel and others of which must be dealt with sequentially,  having excellent transaction project management capabilities on the team and real time reporting is essential to ensure proper coordination and timely allocation of resources to key tasks. 

Each M&A deal is unique, and the risks involved in an M&A deal cannot always be foreseen. Buyers should certainly keep the above-mentioned pointers in mind throughout the M&A journey to enhance their chances of achieving success in an M&A deal. It is advisable for buyers to retain services of reliable and experienced M&A advisors to assist them in all aspects of the M&A transaction and ensure a successful conclusion of the M&A deal.

Khaitan & Co – Prasenjit Chakravarti and Nitish Goel

The content of this document does not necessarily reflect the views / position of Khaitan & Co but remain solely those of the author(s). For any further queries or follow up please contact Khaitan & Co at [email protected].

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