What is an M&A deal?
What is an M&A Deal? A Comprehensive Explanation of Procedures and Key Points
Uncover essential procedures and critical points for successful transactions of M&A deals
Have you ever heard the line "It's a deal!" in scenes depicting business negotiations while watching overseas movies or dramas? The word "deal" has recently become more prevalent in our daily conversations. For instance, in everyday talk, a car dealership formed through a contract between an automobile manufacturer and a franchise store is called a "dealer." Similarly, in the realm of M&A (mergers and acquisitions), the term "deal" is frequently utilized. However, the meaning of the word used in this context differs from the common usage of "deal" in our everyday language.
In this article, we will delve into the meaning of "deal" in the context of M&A, its procedures, essential points to consider, and tips for achieving success through deals.
1. Understanding M&A Deals
The term "deal" generally refers to "making a transaction." However, in the context of M&A, it describes the entire process of mergers and acquisitions.
A "deal" encompasses the entire flow from the preparation of M&A to post-merger integration. Specifically, it includes M&A preparation, negotiations with the seller (or buyer) and scheme selection, due diligence, M&A execution and closing, and post-merger integration (PMI). Additionally, in a large-scale M&A, it may be referred to as a "megadeal."
2. Understanding Deals in Financial Institutions
In financial institutions, the term "deal" is also frequently used. In this context, it refers to handling (or managing) assets deposited by customers in financial institutions.
A dealer in financial institutions manages the assets deposited by customers. For instance, a dealer who conducts foreign exchange transactions is called a foreign exchange dealer (also known as an "FX dealer" or "forex dealer").
3. Key Terms Related to M&A Deals
In M&A deals, various terms are frequently used. Here are the main five:
3-1. 1. Pre-deal
Pre-deal refers to the preliminary examination and preparation before implementing an M&A deal.
Specifically, it involves internal deliberations followed by engaging M&A specialists (such as intermediary firms) to formulate strategies for M&A and select target companies. Pre-deal encompasses setting M&A goals, methods, and all other aspects that affect the entire M&A. Therefore, the process at this stage must be conducted meticulously, including the selection of intermediary firms. If the pre-deal process is timely and thorough, achieving the desired goals may become challenging.
3-2. 2. Post deal
Post-deal refers to the integration procedures following the implementation of an M&A. Even after the final M&A contract is signed, the contractual procedures for both the seller and the buyer still need to be completed. Post-deal involves carrying out various practical procedures to put the agreement into operation. Specifically, it includes integrating production facilities such as factories and offices and multiple aspects like corporate culture, management style, salary systems, and sales methods.
Whether the expected synergy effects can be realized in an M&A largely depends on the integration procedures of the post-deal phase, often abbreviated as Post Merger Integration (PMI). Therefore, PMI is expected to be conducted with the support of intermediary firms or other professionals.
3-3. 3. Deal size
Deal size refers to the scale or magnitude of the transaction amount in M&A and is categorized into the following three:
| Small-scale Transactions | Transactions with a deal size of 100 million yen or less are termed small-scale transactions. Also known as small M&A, this category includes acquisitions involving individual businesses, small-scale enterprises, and Internet sites. Despite being less covered in newspapers, these small-scale transactions occur regularly daily. |
| Medium-scale Transactions | M&A transactions with deal sizes ranging from several hundred million to several billion yen fall under medium-scale transactions. Many M&A deals involving venture companies, well-established local companies, and small to medium-sized enterprises fall into this category. Compared to small-scale transactions, medium-scale transactions involve more considerations and challenges, and decisions regarding schemes and tax planning are often highly sophisticated. Therefore, they are usually conducted with the support of experts such as intermediary firms. |
| Large-scale Transactions | Transactions with deal sizes exceeding several hundred billion yen are considered large-scale transactions. Investment banks that undertake fundraising lead these transactions, and the negotiation and completion processes of M&A often take longer compared to transactions of other scales. Many of the M&A deals we learn about through television or newspapers belong to this category of large-scale transactions. |
3-4. 4. Deal Maker
A deal maker refers to M&A players primarily focused on creating deals for acquiring companies. Specifically, it includes acquiring companies, intermediary firms, financial advisors (FAs), and financial institutions.
3-5. 5. Deal Breaker
A deal breaker refers to factors that lead to the termination of an M&A deal rather than individuals causing the deal to fall through. Various risks (such as fraudulent financial statements or compliance violations) of different sizes may be uncovered during financial and legal due diligence. If, as a result of evaluating these risks, the decision is made to cancel the M&A deal altogether, these risks are deemed deal breakers.
4. Full Procedure of Conducting Deals in M&A
The process of conducting deals in M&A is subdivided according to its content and is primarily carried out through the following steps:
| 【Pre-Deal】 | 【Deal】 | 【Post-Deal】 |
| Engaging M&A Specialists【Pre-Deal】Develop M&A strategy [pre-deal]Select a company for M&A [pre-deal] | Deciding on M&A target company [Deal]Negotiate Terms and Determining the Scheme [Deal]Executing the Definitive Agreement [Deal]Conduct Due Diligence (Acquisition Audit) [Deal]Conduct Due Diligence (Acquisition Audit) [Deal]Finalize Terms and Crafting the Definitive Agreement [Deal]Sign the Final Agreement, Heading Towards Closure [Deal] | 10. PMI implementation [Post-Deal] |
4-1.1-Engaging M&A Specialists【Pre-Deal】
Initially, internally organize the strengths and weaknesses of your company and clearly define whether M&A is essential and what goals you aim to achieve through it. Merely following the trend of many companies engaging in M&A with a clear vision of what they want to accomplish makes achieving desired goals challenging. Once the decision to pursue M&A is solidified, the next step is to engage M&A specialists. Except for some exceptional cases, most companies need more experience or sufficient knowledge about M&A. Therefore, it's advisable to acknowledge that navigating M&A alone is unrealistic. M&A deals involve substantial investments, leaving no room for failure. A misstep could result in catastrophic damage to a company, hence the necessity of engaging M&A specialists.
When small and medium-sized enterprises (SMEs) engage in M&A, they often rely on M&A intermediary firms. However, choosing the right intermediary firm is crucial. If the firm has a limited list of target companies, you might be unable to approach your desired companies. Additionally, being assigned to an advisor with insufficient knowledge or experience could ensure a potential deal is successful. Therefore, seeking intermediary firms with a strong track record and experienced advisors is crucial.
4-2.2-Develop M&A strategy [pre-deal]
Once the contract with the intermediary firm is finalized, an overarching strategy for the entire M&A process is developed. It's essential to reconfirm with the intermediary firm what the purpose of the M&A is. While achieving the M&A deal itself can become the primary focus, it's crucial to remember that M&A is merely a means to foster company growth. Therefore, clearly defining what you aim to achieve through M&A is essential.
Through comprehensive and objective evaluations while grasping your company's valuation and market trends, you'll craft the M&A strategy. If you're the acquiring company, you'll consider which type of M&A aligns with your current situation:
- M&A for Expanding Existing Business: This type aims to absorb seller companies in the same industry through M&A to expand business scale, including revenue. It's utilized for cost reduction, leveraging economies of scale, and developing sales areas.
- M&A for Acquiring Related Business: This type aims to absorb companies engaged in related businesses through M&A to expand the range of products or supply chains.
- M&A for Acquiring New Business: This type involves welcoming seller companies engaged in unrelated businesses into the group through M&A to pursue diversification and mitigate management risks.
On the contrary, if you're the selling company, you'll clarify your company's strengths and then define the type of company you envision as the ideal buyer.
4-3.3-Select the Target Company for M&A [pre-deal]
Once the objectives and strategies of the M&A are clarified, the process moves to the specific selection of target companies. For the acquiring company, this involves searching for suitable targets from the list of potential sellers the intermediary firm provides, aligning with the company's needs.
At this stage, the information about potential seller companies is typically presented in anonymous "Non-Disclosure Agreement" documents. This Non-Disclosure Agreement allows browsing without signing confidentiality agreements, concealing details such as industry and area to protect the seller's identity.
If a potential buyer finds a non-name sheet intriguing, they proceed by signing a confidentiality agreement with the intermediary firm. Subsequently, they receive a more detailed document called an "Information Memorandum (IM)," disclosing further information about the company, enabling thorough evaluation for M&A.
On the other hand, creating non-name sheets is crucial for the selling company to search for potential buyers at this stage. Until the M&A deal is finalized, maintaining confidentiality is paramount to prevent leaks. Thus, non-name sheets must balance secrecy to protect the company's identity while generating interest from potential buyers. Typically, intermediary firms create non-name sheets after conducting interviews with the selling company.
4-4.4-Deciding on M&A target company [Deal]
Based on the company profile, the acquiring company determines the target company for the M&A. Following this decision, a crucial step is the "top-level meeting" between the seller and buyer executives.
The top-level meeting involves face-to-face discussions between the executives to understand each other's personalities, corporate culture, post-M&A strategies, and other aspects not evident from the company profile alone. Typically held at the seller's office, the intermediary firm facilitates the meeting, ensuring smooth progress and acting as a moderator.
4-5.5-Negotiate Terms and Determining the Scheme [Deal]
Once the target company for M&A has been decided, the next step involves negotiating the terms for the M&A to proceed. This includes discussions on various aspects such as the selling price of the target company, treatment of employees, contracts with suppliers, and the transfer timing.
In negotiating terms, one of the most crucial elements is determining the M&A scheme. M&A involves various schemes, and the choice of scheme significantly impacts both the seller and the buyer.
Here, we will introduce the central schemes used in M&A:
Stock Transfer
Stock transfer involves the acquiring company purchasing shares held by the selling company's shareholders, thereby making the selling company a subsidiary of the acquiring company. Typically, the acquiring company purchases all selling company shares, resulting in complete subsidiary status. Since the transaction usually involves only the buying and selling of shares, without the need for expensive procedures or complex formalities, stock transfer is commonly chosen as the scheme for most M&A deals. One of the advantages for the seller in selecting stock transfer is the relatively low tax burden at the time of share sale (approximately 20% flat rate), regardless of the selling price. However, a disadvantage is that with the consent of all shareholders, 100% of the shares can be transferred.
Stock exchange
The stock exchange aims to establish a complete subsidiary by exchanging the acquiring company's shares held by the parent company's shareholders with those held by the subsidiary's shareholders. Since the subsidiary shareholders receive shares of the parent company as consideration, they cannot monetize the received shares if the parent company is unlisted. Therefore, the parent company is usually listed as the one that is chosen for this scheme.
Stock Transfer
Stock transfer is one of the methods of corporate restructuring where an existing company establishes a wholly-owned subsidiary by transferring all of its issued shares to another company. In many cases, the existing company becoming a subsidiary involves two or more companies, and it may also include establishing a holding company with the parent company at the top.
The primary purposes of stock transfer include establishing a holding company for different companies to integrate their operations in a survival-driven business consolidation scenario or restructuring within a corporate group through establishing a holding company or integration and abolition.
Next, the benefits of stock transfer include not requiring acquisition funds to achieve full subsidiary status, similar to stock exchanges. Additionally, if more than two-thirds of the shareholders in the target company agree, the remaining shareholders can be forcibly excluded from dissent, allowing for full subsidiary status.
On the other hand, the drawbacks of stock transfer include changes in the shareholder composition of the parent company, similar to stock exchanges, complicated procedures that take time, and the potential for a decrease in earnings per share for the parent company, which could lead to a drop in share price, particularly for listed companies.
Business transfer
Business transfer involves selling only a portion of the target company, such as a division or a store, rather than the entire company, as in stock transfer. This scheme benefits companies with multiple outlets, such as restaurants or beauty salons, to divest unprofitable divisions. One of the advantages for the seller is that they can sell only the parts of the business they want to divest without the need to inherit unwanted assets or liabilities, which is often the case in whole-company acquisitions.
Company Split
Company split entails separating a part (or all) of a company's business operations from the parent company and transferring it to another company. This method is commonly used for fundamental restructuring or streamlining of business operations. There are two main types of company split: "establishment split," where a new company is established, and "absorption split," where an existing company inherits the business. While similar to business transfer in terms of separating and transferring assets, company split differs significantly in aspects such as the consideration being shares of the parent company and the absence of the need for individual contracts due to the transfer.
These schemes provide different avenues for structuring M&A deals, each with advantages and disadvantages. Understanding the nuances of each scheme is crucial for both buyers and sellers in M&A transactions.
Merger
A merger refers to the legal integration of multiple companies into one entity. However, cases where numerous companies merge directly are rare; more commonly, integration proceeds to a certain extent after becoming wholly-owned subsidiaries before the merger occurs.
There are two types of mergers: "absorption merger," where the parent company absorbs the subsidiary, and "new establishment merger," where a new corporation is formed to inherit the rights and obligations of the disappearing corporation through the merger.
In absorption mergers, the advantages include the expansion of the company's business scale and more straightforward procedures compared to new establishment mergers. Additionally, if the disappearing company has carried forward a deficit, it can sometimes be transferred. However, for the surviving company, especially if it is a non-listed entity, it might be challenging to issue stocks as consideration for the merger, requiring acquisition funds. Also, there are risks such as decreased motivation among the employees of the absorbed company in absorption mergers.
On the other hand, the advantages of new establishment mergers include a lower likelihood of negative perception due to the merger and the expansion of business scale. However, compared to absorption mergers, there are disadvantages, such as more complex procedures and costs and the need to reacquire permits and licenses.
4-6. 6-Executing the Definitive Agreement [Deal]
After extensive discussions, once various conditions and schemes of the M&A, such as the consideration and treatment of executives, have been primarily finalized, the seller and buyer confirm the agreed terms and enter into a contract. This is known as the definitive agreement. The definitive agreement is signed to facilitate negotiations toward the completion of the M&A based on the agreements reached thus far.
4-7.7-Conduct Due Diligence (Acquisition Audit) [Deal]
Upon the conclusion of the definitive agreement, the next step is for the buyer to conduct due diligence on the seller's company. Due diligence encompasses various aspects, including financial, legal, and tax matters. In particular, financial, tax, and legal due diligence are typically conducted by experts such as certified public accountants, tax accountants, and lawyers, and the costs can be substantial depending on the size of the seller's company. Furthermore, it is generally the buyer who bears all these expenses.
However, the buyer can accurately assess the seller's situation with due diligence. Therefore, due diligence is conducted by the buyer to evaluate the seller's corporate value accurately and to gain a proper understanding of the synergies and risks involved in the M&A.
Moreover, conducting due diligence allows any issues in the seller's company to be reflected in the purchase price or final contract. Due diligence plays a crucial role in the M&A process, as it ensures that the transaction is conducted at a fair price and under appropriate conditions, thereby preventing potential problems.
4-8.8-Finalize Terms and Crafting the Definitive Agreement [Deal]
Considering the results of the due diligence conducted after the signing of the letter of intent, the definitive agreement is drafted by adjusting the final purchase price, various conditions related to the M&A, and obtaining the consent of both parties. The definitive agreement consolidates these terms.
While the letter of intent summarizes the negotiation process and agreements up to that point, it is merely a non-legally binding contract, aside from clauses such as exclusivity and confidentiality. In contrast, the definitive agreement carries legally binding force, allowing for damages claims in case of contractual breaches.
4-9.9-Sign the Final Agreement, Heading Towards Closure [Deal]
When the final agreement is signed, the M&A deal is concluded. At the Japan M&A Center, in hopes of the shared journey thus far and future growth, we conduct an "M&A Closing Ceremony" with both parties who have successfully concluded the deal.
M&A is sometimes likened to a wedding between companies. However, just as the goal of a wedding is not the ceremony itself, the goal of M&A is not the closing ceremony. From here on, it's crucial to understand each other's corporate culture and hold hands to grow together. As a first step towards this, M&A Closing Ceremonies are held nationwide.
4-10.10-PMI implementation [Post-Deal]
With the signing of the final agreement, the M&A deal has successfully concluded. However, the seller and buyer companies still exist separately at this stage. Post-M&A, the process of actually integrating these two companies is known as Post-Merger Integration (PMI).
PMI integrates operational functions such as finance and IT systems and aligns corporate cultures and management visions.
Following an M&A, most employees from the acquired company may harbor concerns regarding their future treatment. The departure of core employees and mass resignations can only be avoided by addressing these concerns and ensuring complete understanding after adequate explanations. This applies similarly to dealings with clients.
Hence, to realize the envisioned synergies through M&A, executing PMI swiftly and accurately is of utmost importance.
Typically, PMI is carried out through the following processes:
| Execution Process | Implementation |
| Matching | Clarifying the vision to be achieved through M&A and then matching it |
| Pre-Closing Preparation | Identifying the necessary points for advancing PMI before the closure of M&A |
| Disclosure | Efforts are made towards employee care and other aspects during the announcement of M&A to prevent mistrust |
| Current Situation Assessment | Conducting interviews with representatives from the seller company to understand its current status for PMI implementation accurately |
| 100-Day Plan Creation & Execution | Listing and executing tasks in order of importance for the PMI to be conducted over approximately three months post-closure |
| Execution Plan Creation & Execution | Picking up items not included in the 100-Day Plan and sequentially moving toward execution |
| Monitoring | Monitoring the progress of the execution plan |
5. Factors Leading to M&A Deal Failures
M&A deals, even when conducted according to the procedure, only sometimes result in success. So, what are the circumstances under which deals fail? The patterns and causes of failed deals can be mainly classified into the following five categories:
- Misalignment of values and conditions
- Discovery of significant risks on the seller's side
- Deterioration of performance during the deal
- Inability to achieve expected synergy effects
- Internal leaks of information leading to confusion
5-1. Misalignment of Values and Conditions
It's common for each company to have its values and culture, which can lead to differences in values and conditions. These differences can be somewhat understood through top-level discussions conducted after the basic agreement. The problem arises when these value differences are not resolved even after integration.
For example, it would be challenging for employees from a company culture that prioritizes craftsmanship and quality improvement to work with those from a culture focused on pursuing business profitability and expanding scale. This is because their values regarding business are fundamentally different. Leaving this unaddressed may lead to the failure of the deal itself.
Furthermore, aligning conditions is crucial. In M&A, progress toward completion is often hindered unless the seller and the buyer compromise on conditions to some extent. Insisting only on the seller's (or buyer's) preferences can lead to growing dissatisfaction and mistrust from the other party. In such cases, the M&A deal may fall through.
5-2. Significant Risks Uncovered on the Seller's Side
Due diligence aims to detect various issues the seller company may have from multiple perspectives. Therefore, there is no problem with issues coming to light after due diligence. It countered a success in terms of due diligence. However, the problem arises when the uncovered risks are deemed too significant.
Suppose off-balance sheet liabilities or legal violations are discovered during due diligence, and the buyer determines that the risks are too significant to proceed with the integration through M&A. In that case, the deal will fail.
Nevertheless, discovering various issues through due diligence is fine. If issues can be identified in advance, it is possible to proactively address them before integration or negotiate solutions between the two companies.
5-3. Deterioration of Performance During the Deal
During an M&A deal, it's not uncommon for the performance to deteriorate. While this occurrence is not rare, if the deterioration is significant, it may lead to the deal falling through altogether.
Consider what would happen if the buyer's performance were to deteriorate drastically. In some cases, it may become challenging to secure the acquisition funding, rendering the M&A itself impossible. Therefore, even if there were no issues on the seller's side, the deal might still fail in such circumstances.
Conversely, what if the seller's performance deteriorates? Since M&A is not solely based on short-term profits and losses, minor declines in performance typically don't result in the deal collapsing.
However, if significant problems arise that could impact the continuation of future operations, the buyer may reject the M&A, leading to the failure of the deal.
5-4. Unforeseen Synergy Effects
One of the objectives of M&A is to create synergy effects through integration. Because the sum is more significant than its parts, leading to outcomes beyond mere addition (1+1=3 or 4), buyers pursue M&A deals even through challenging means.
To generate these synergy effects, the seller and the buyer must wholeheartedly commit to the M&A. However, even with complete dedication, the deal will end in disappointment if the anticipated synergy effects fail to materialize.
5-5. Internal Information Leakage Leading to Confusion
Information related to M&A must be confined to the minimum number of individuals. If by any chance information leaks within the company, baseless rumors and speculations may spread among employees, leading to increased anxiety. This could result in a mass exodus of employees in the worst-case scenario.
For instance, if key personnel responsible for the core operations of the selling company were to resign in large numbers, the post-M&A profitability would significantly decline, making it difficult to realize the envisioned synergy effects.
Therefore, in such cases, the deal would fail.
6. Key Points to Success in M&A Deals
Finally, let's introduce three key points to navigate M&A deals successfully.
6-1. Clarification of Objectives and Conditions for M&A
M&A is a means to propel a company forward, not an end goal. Defining the deal's success becomes challenging without a clear image of what you aim to achieve through M&A and the desired outcomes. Simultaneously, clarifying conditions such as the purchase price, corporate culture succession, and employee employment continuity is crucial. Clearly defining these conditions helps establish a clear vision of the goal.
6-2. Strive for Genuine Engagement from an Equal Standpoint
While M&A is a contractual act based on legal principles, the deal progresses through negotiations led by executives revolving around each other's valuable companies. Therefore, everything is not solely determined by conditions and amounts. It's essential to respect the other party's position and strive for genuine engagement from an equal standpoint, sometimes compromising when necessary.
6-3. Consult with M&A Experts
Engaging in M&A will likely be a once-in-a-lifetime experience for many executives. However, given its rarity, the lack of prior experience may leave one needing guidance about what to do and how to proceed. Therefore, consulting with experts is crucial.
Advancing through M&A requires a high level of legal expertise. Civil and specialized knowledge, such as corporate and income tax laws, are needed. Such knowledge is only commonly possessed if one is a specialist. Therefore, consulting with experts is essential to navigating M&A deals successfully. However, since choosing which expert to consult can significantly impact the outcome, it's crucial to understand this point thoroughly.
M&A matchmaking partners are screened from lists held by intermediaries and other experts and then narrowed down. Therefore, depending on the quality and quantity of the list, it's essential to note that it may be impossible to meet the ideal partner from the outset.
Besides advanced specialized knowledge, negotiation skills are also necessary for M&A deals. Knowing when to compromise and when to assert is essential for satisfactory results to be achieved.
To encounter experts skilled in such negotiations, choosing intermediaries with ample experience and a track record in M&A is crucial.
7. In Conclusion
To succeed in M&A deals, both the selling and buying sides must earnestly confront their current situations and clearly define "what is lacking" and "what they want." This is because starting with vague goal setting will only lead to progress if you know where the destination is.
Therefore, it is crucial to encounter the right experts. The role of professionals, including intermediaries, is to support both the selling and buying sides to achieve satisfactory results. Of course, leveraging various specialized knowledge, negotiation skills, and networks to fulfill their professional roles is essential. However, if they cannot support the fluctuating emotions of executives, safely reaching the goal of M&A is impossible. Therefore, it's no exaggeration to say that the first step to success in M&A lies in choosing satisfactory professionals.
Link content: https://inmergers.com/en/m-a-deal
#thaonguyen #CEOinmergers #chuyengiaM&A #muabansapnhapdoanhnghiep
%20(11).png)
.png)
.jpg)
Nhận xét
Đăng nhận xét