Developing a Mergers and Acquisitions Strategy

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Mergers and acquisitions are an important part of the strategic long-term management of a company. So just what is a mergers and acquisition strategy?  A company merger is defined as the consolidation of companies or assets into one where the acquired company ceases to exist, and a company acquisition is when one company purchases another and the acquired company remains in place. The complexity of these strategies requires planning, deliberate process and thorough analysis.

Organizations use the M&A process for a number of reasons, including:

  • Improving cost efficiencies/economies of scale
  • Reducing or elimination of competition
  • Increased market share & growth
  • Diversification of risk
  • Adding core competencies

Because mergers & acquisitions can be a complex and challenging process, it is important that a company has a well thought out strategy in place to help ensure that the objectives of the organization are going to be met. A mergers and acquisitions strategy is a specific plan that lays out a company’s developmental goals, identifies target acquisition candidates, evaluates those candidates, and once a merger or acquisition deal is completed, integrates the organizations seamlessly.

An important component of any successful M&A strategy is to identify the team of professional business and financial advisors that will assist management in the process.  This team should include a strong M&A attorney, banking or financial resources, and CPAs who can assist with financial due diligence and tax planning.

 

The First Step in Developing an M&A Strategy

build a strong m&a strategic foundationInitially, the first thing you’ll want to do is to consider an organization’s overall corporate goals and objectives. The overall strategic plan should detail an organization’s current and desired profitability, product capabilities, market positioning, sales and distribution channels. Having clarity on your broader plan will help assure that strategic objectives are achieved through mergers or acquisitions. Your overall strategic business plan should be the foundation for all M&A initiatives.

The broader corporate strategy will help you to determine your target market, as well as your desired share of that market. After making these determinations, you can more easily identify the criteria of a potential transaction and the ways a merger or acquisition can help you achieve desired objectives. For example, when merging to achieve economies of scale, transactions will most likely result in a reduction of personnel where redundancy may exist. However, when merging to expand competencies, management may wish to retain the talent that comes with the targeted business.

 

The Next Moves in Building Your M&A Strategy

set merger and acquisition targetsAfter the first initiatives are completed, you will next want to determine the enterprise value of the organization and identify potential sources for funding a planned transaction, which may include cash, equity, or debt. There are a variety of methodologies for determining valuation and the ultimate cost of a transaction. This is where a professional financial consulting firm can be worth its weight in gold. Understanding if your target business’ value is best based on a multiplier of EBITDA, Discounted Cash Flow, Multiple of Annual Recurring Revenue, etc. is essential to negotiating the best acquisition price or merger valuation.

Next, it is time to create a list of potential acquisition targets. For each candidate, it is necessary to determine the organization’s target market, main products or services, financial performance, and corporate value. Creating a model of your acquisition accounting including the estimated cost of acquisition and potential return on investment is the next step in developing your game plan. After the valuation and return models are developed, the candidates should be organized based on their potential merits and business impacts.

These can be complex transactions. Once a target has been identified and approached, it is important to identify and address any potential concerns at the front end of the deal. Avoiding hurdles downstream is the best way to keep a deal from imploding.

Closing the Deal on your Merger or Acquisition

closing your m&a dealThe finalizing of a deal doesn’t mean the process is over. In fact, it may just be the beginning. The care and planning put into integrating an acquired company into the acquiring or surviving organization is often the key to determining the ultimate success or failure of M&A transactions. The benefits of integration may not be immediately apparent, and could potentially take up to a year or longer to be realized.

Without a strategy in place, mergers & acquisitions often fail to perform to their potential or worse, can be extremely costly. Careful planning related to mergers and acquisitions strategies is essential to M&A success, as it provides a process whereby any obstacles, concerns or potential issues can be addressed from the start. Putting the time and effort into carefully developing your M&A strategy will increase your chances of completing a successful transaction, and achieving corporate objectives through mergers and acquisitions activities.

 

At White Nelson Diehl Evans, we assist our clients in successful M&A transactions by providing advisory services such as business valuations, quality of earnings analysis, due diligence assistance and strategic planning associated with the potential tax ramifications of a planned transaction.  When considering the merger and acquisition process, consult your WNDE professional for help navigating these areas.

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Manager Profile: Melissa Hou

Melissa Hou, CPA, MST, is a tax manager.   In this role, she works with clients in a wide variety of...

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