M&A has become a very common tool used by businesses to penetrate new areas of activity and consolidate positions in various industries. Here is more about the buy-side in M&A transactions.
Buy-side in M&A process
Mergers and acquisitions (М&As) are transactions that, along with the transfer of ownership, imply, first of all, a change in control over the enterprise. Consequently, the acquisition of minors, focused exclusively on obtaining speculative income, blocks of shares from individuals or institutional investors (portfolio investments) do not apply to them.
The purchase of an enterprise is usually carried out through the purchase of shares (ShareDeal), which are offered either in the exchange or in over-the-counter trading. When purchasing legally dependent participation interests, the alternative is the transfer of the corresponding property items (AssetDeal). In contrast to the Share Deal, with an Asset Deal, there is a certain possibility to conduct a deal without its approval by the general meeting of shareholders.
The execution of the transaction from the buy-side M&A process can be represented as follows:
- development of a strategy, determination of goals and motives for the transaction;
- search and identification of a potential object for acquisition;
- assessment of the company and potential synergies from the transaction;
- due diligence;
- financing structuring and transaction execution;
- integration of companies and implementation of the strategy.
As we can see, the merge process is quite complex and consists of several large blocks. As you know, for the implementation of many transactions (especially large and international), companies involve a fairly large number of intermediaries, including auditors, financial, tax, and legal consultants. Investment banks in such transactions act as financial advisors and, speaking on the buy-side, are most actively involved in the search and definition of potential targets, their assessment and structuring of financing, and the execution of the transaction. In addition, banks usually do not start work until the buyer has a clear strategy and understanding of the main goals that the buyer sets for himself in carrying out the transaction.
The buyer and the acquired company can operate in the same market (horizontal merger), at different stages of value-added (vertical), or in unrelated markets (conglomerate). Direct economic advantages prevail in horizontal and vertical mergers, while in conglomerate transactions, financial advantages are often justified. International transactions (foreign direct investment) are distinguished by relatively higher operating costs and often lead to increased competition and restructuring of enterprises located in the local market.
Due diligence as a core step in M&A deal
Due Diligence has long been a key element of the acquisition process, which allows potential buyers to conduct a qualitative analysis of the acquired enterprise. Anyone interested in purchasing during Due Diligence gets access to a standardized set of data. In particular, due diligence, as a rule, provides:
- general information about the company: statement of registration, articles of association, information about the directors, company structure, affiliated companies, etc.
- information on the property status and liabilities of the company: a list of all tangible and intangible assets, information on the available short-, medium- and long-term liabilities (indicating debtors and creditors, interest rates, payment terms), mutual obligations within the company, etc.
- financial statements: annual and quarterly balances, income statement, auditor’s report, etc.
- existing agreements with the collective and trade unions in the framework of labor legislation, pension benefits, etc.
- other contractual obligations and rights: contracts within the company, leases, agreements with customers and suppliers, etc.
- information about possible legal processes (civil, labor, tax, administrative, etc.)