Mergers & Acquisitions
Mergers & Acquisitions
Companies were bought and sold throughout the world almost daily. However, most of the outcomes of these transactions do not the expectations. Based on our observations, there are a broad array of problems encountered by the buyer and sellers, and some of the common ones comprise the seller’s failure to maximize its value before it was sold, the seller did not structure the deal to be tax-effective, the buyer missed major issues during the due diligence exercise which adversely affect the value of the deal, the buyer is not aware of the deal has run afoul of local anti-trust regulations, buyer’s failure to integrate the acquired assets or businesses to fully realize the synergies, both parties lack the correct knowledge of valuing the business and asset, both parties failed to include important key terms in the sales and purchase agreements which required further negotiation, and more.
Our expert team is equipped with relevant expertise and understanding which could provide value-added advice and recommendations for answering most of these problems and more. Our scopes of services comprise the following.
Acquisition Objectives and Strategies
Our experience indicates most acquirers do not have a specific strategy or lack in clear strategy. Acquisition strategies are key elements of mergers or acquisition transaction, and depending on the objectives of the acquirers, some strategy yields a better result than other. Our team is equipped with relevant expertise to assist companies in reviewing the objectives of engaging in the acquisition transaction, and these objectives shall form the fundamental to the acquisition strategies. In addition, we shall also propose relevant guidelines in developing the conceptual frameworks that an acquirer should keep in mind when considering a potential purchase. The acquirers need to understand upon establishing an acquisition strategy does not necessarily mean they should restrict themselves to a specific strategy. Rather, they should consider using several strategies interchangeably. In short, the key objective of establishing the acquisition strategies is to ensure the acquisition project is profitable. Acquirers must therefore fully understand the reasons for them to acquire a business or assets, what are the targeted outcomes from this exercise, and how to achieve these outcomes, before initiating any acquisition negotiation.
Acquisition Process
Planning for acquisition by the buyers and sellers has an entirely different perspective. Buyers, particularly serial buyers, may follow acquisition procedures. On the contrary, sellers adopt a different set of steps. Our team shall assist both buyers and sellers by addressing different approaches and procedures in the acquisition process. Furthermore, it is important to note there is a variation in relevant approaches when the seller is in bankruptcy, and the buyer is acquiring the business or assets via seller auction. If relevant regulatory bodies are also involved in the auction process and usually from the standpoint of protecting the auctioned assets and/or business, buyers are expected to comply with a series of condition precedents applicable to different situations should the buyers have decided to proceed with acquiring the assets and/or business. Buyers should carefully consider the potential return and risk aspects of the project.
Exit Planning for Seller
Our prior experience concludes business is rarely sold through the receipt of an unsolicited offer from the buyer, and the owner was not prepared. The most successful sale is the result of months of planning by the owner, followed by years of preparation for the sale. Our team has proven experience with assisting owners/ sellers in exploring disposal options, identifying the most relevant exit planning activities that must be completed before disposal, establishing the timing of the sale, and several other issues. Our team has assisted both sides of the parties and is fully aware of the needs of the sellers in this process. We shall assist sellers in identifying available options, advising on the exit planning activities which must be completed before engaging in any buyer solicitation activities, and more. Many of the exit planning activities correlate to the Due Diligence exercises; therefore, to be fully prepared for close examination by any future buyer, our team shall assist with preparing a customized due diligence checklist for the business to be employed as a guide in preparing for the future disposal of its business.
Data Room
In the typical process of examining the documents of a target company, a seller needs to supply potential acquirers or bidders with extensive existing documents of their company for review purposes. If the seller is dealing with a single bidder, it is manageable in most circumstances. On the contrary, things can get out of control if the seller is dealing with multiple bidders, with each bidder seeking customized information. This is where the data room plays a critical role whereby documents are stored in a single location for easy access by bidders. Our team could assist with guidance in setting up the data room, how to organize them in a manner where it can cater to multiple bidders, and what security mechanisms should be in place to restrict access to qualified bidders. In the situation of larger merger and acquisition transactions, we recommend the use of an electronic data room as the choice of information distribution. As opposed to smaller merger and acquisition transactions, the typical approach is through the use of a physical data room since most of the bidders are local.
Target Valuation
The valuation of the targeted business is the basis for determining the purchase consideration which the seller offers to the buyer in acquiring the targeted business, and the price of which the buyer is willing to accept. There are multiple approaches to valuing a business, and depending on the basis and assumption of each valuation method, the valuation result may vary widely.
Irrespective of whether you are considering buying or selling your business, the two principles that are relevant to any company throughout the world are a good company and a good price. A good price is the valuation of the company or the company’s assets. Therefore, you must always know how much your business or targeted company is truly worth. Our professional team will assist you with business and asset valuation, valuation to comply with relevant financial reporting standards, and more. For more information of our valuation services, please refer to “Valuation“.
Analysis of Acquisition Synergy
In the process of a merger and acquisition transaction, the acquirer must establish the potential synergies to be realized at the beginning of the merger and acquisition process, upon which a target company has been identified. Synergy in the terminology of mergers and acquisitions is defined as the combined value of two businesses being greater than two businesses that operated separately. For instance, the net positive operating cash flow of the acquirer and acquiree is $5 million respectively. Therefore, the total combined net positive operating cash flow of the two separate businesses is $10 million. However, upon combining the businesses of the acquirer and the acquiree, the net positive operating cash flow of the combined businesses is $12 million. The additional $2 million is the synergy achieved upon combining the two businesses. From the perspective of the acquirer, the acquirer needs to identify and fully understand the relevant synergies since the identified synergies form part of the premium in the offer sale price, which in some cases may be well above the existing market price. Our team has proven experience in assisting companies in exploring a broad array of methods to identify and achieve the synergies, as well as the associated cost of these synergies.
Acquisition Personnel
The acquirer typically will attempt to assemble in-house team members to lead and engage in the mergers and acquisitions exercise. However, our experiences suggest this method usually does not yield a good result since the acquisition process requires skills that are not usually found in the company simply because these skills are not related to daily operations. Furthermore, seeking in-house management and employees to be actively involved in the acquisition process will result in severe disruption in the daily duties, which in turn affects the business performance of the acquirer as well as the loss of key employees. The recommended approach is for the acquirer to engage various external professionals for the exercise, although the engagement of these experts comes with high professional costs. Our team could assist with helping the acquirer understand different specialists that are commonly involved in the acquisition process, and through these understandings, how the company can curb these costs by getting in-house team members to participate in the process. In most circumstances, the external personnel involved in an acquisition comprise the Acquisition Attorney, the Investment Banker, the Valuation Specialist, other consultants such as Actuarial, Environmental, Human Resources, Proxy Solicitation (for the acquisition of a publicly-held firm and the acquirer elects to go straight to the shareholders with its offer), Public Relations (for large acquisition transaction), Investor relations (if the acquirer is a publicly-held company), Regulatory (for the specific regulated industry), Attorney who assists with filings as required by a publicly-held company.
Due Diligence Exercise
After both acquirer and acquiree have reached a consensus on the principles of the acquisition transaction but before entering the binding agreement, due diligence exercise will be initiated by the acquirer to verify and investigate all aspects of the acquiree’s business. The due diligence exercise shall assist the acquirer in identifying issues of the target company and these issues will subsequently be brought to discussion with the acquiree. Depending on the severity of these issues, the outcome may range from changes in the valuation of the target company which in turn affects the sale offer price to deal termination. In addition, through conducting the due diligence exercise, the acquirer can establish an expectation of the combined businesses in the future, and which synergy has a higher probability to attain than the others. Our team acquired relevant experiences and expertise in dealing with due diligence issues, which are generally categorized into three major aspects, due diligence preparation, establishing the expectation, and the due diligence costs. For most general due diligence aspects, the exercise covers the target company overview, corporate culture, management, employees, employee benefits, financial results, internal reports, revenue, cost structure, intellectual property, fixed assets and facilities, liabilities, equity, taxes, accounting policies, product development, selling activities, marketing activities, production operations, materials management, information technology, treasury and risk management, legal issues, regulatory compliance, service companies, and international issues (if applicable). It is extremely crucial to note that some of the “softer” aspects, including corporate culture, management, and employees are critical to the success of many acquisitions.
They are ignored by some acquirers in favor of “hard” aspects, such as accounting and legal issues, but our team has found that the success of an acquisition is usually founded upon proper deliberation of the “soft” aspect. Thus, although the major weight of the due diligence exercise will be placed on “hard” aspects, we urge particular attention to the people and corporate culture of the target company.
Legal Structure
In most cross-border acquisitions (acquisition in a foreign country), there are several legal structure options available in a business combination of the acquirer and acquiree. The choice of these legal structures has different tax implications, some of which could allow the acquiree or seller to defer the capital gain from selling the business, enabling the acquirer to minimize liabilities, and more. Our team has experience in working with foreign legal and tax expert relating to the selection of the legal structure of acquisition.
Documents related to an Acquisition
Documents typically found in the acquisition process comprise the letter of intent (or a smaller variation called the term sheet), the purchase agreement, and the closing memorandum (if applicable). A letter of intent lays down the objectives which the acquirer and acquiree aim to achieve. The purchase agreement outlines the terms and conditions of closing the deal, and the closing memorandum records the circumstances in which the purchase agreement was assembled. In addition to the different objectives to be accomplished by both parties, each of the documents have its legal implications which both parties should be fully aware of. Our team could assist by working with relevant experts with reviewing the acquisition documents to safeguard the interests of the parties.
Acquisition Integration
Upon the acceptance of the offer by the acquiree, and relevant documents have been signed, the next step for the acquirer is the integration of the two businesses. Integrating two organizations with different cultures, backgrounds, and histories post an immense challenge for the acquirer, and to ensure the integration is a financial success, the acquirer must realize the synergies identified at the beginning of the acquisition process. Depending on how ambitious the identified synergies are, realizing these synergies could expose the acquirer to significant business disruptions both in the acquired business, and its own business. The key to minimizing these disruptions is to have full support from the management of the acquired business. Furthermore, integrating two or more businesses requires a significant amount of resources and dedication, ranging from capital and time resources to having specialized integration team members to work on-site and on a full-time basis at the newly acquired business for a long duration, to ensure the integration is a success. Our team could assist by working closely with the integration team in smoothing the integration process whilst realizing the identified synergies.
Other aspect – Acquisitions Accounting
Our expert team could assist with advising the steps required to account for acquisition under specific accounting standards. The common accounting method used by the acquirer to account for an acquisition is the acquisition journal entry. Furthermore, consideration must also be given to the subsequent review of any goodwill arising from an acquisition, to determine whether the goodwill recognized at the point of acquisition has been impaired. If a sizable amount of goodwill has been recognized, its impairment will have a significant impact on the profitability of the acquirer, although it does not have any cash flow impact.
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