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Published by Enhelion, 2019-11-25 07:43:16




6.1 Introduction

Merger and acquisition is a gripping approach widely practiced by companies that involves
buying, selling or combining different corporations or firms with an aim to attain faster
growth. However, the decisions on mergers and acquisitions are taken after examining
various factors for instance, the current business status of the company, the contemporary
market scenario, the threats and opportunities etc. Actually, success of any M&A activity
majorly depends upon the plans and strategies acquired by the involved companies.
Merger and acquisition strategies pave way for the corporate development efforts of a
company. These strategies on M&A are formulated to modify the strategic business plan of
the organization to a list of target acquisition prospects. Such strategies provide a structure
which assesses the acquisition candidates and assists the organization to recognize the
suitable ones.
There are various large firms that search out for potential companies, specially the smaller
ones, for mergers and acquisitions. Some firms might have their key cells, that accentuate on
mergers and acquisitions. M&A strategy is generally designed and created in compliance
with the policy of the organizations. Some of them choose to diversify in a separate and fixed
line of business, while the others prefer to reinforce their research facilities.

6.2 Merger and Acquisition Strategy Process

A merger entails a fairly complex legal consideration. The provisions for amalgamation of
companies are dealt under sections 230, 231 and 232 of the Companies Act, 2013. Since the
process is detailed and a bit complicated, companies hire the service of investment bankers
and other financial intermediaries to find suitable target companies and assist in the process
of negotiation.

The merger and acquisition strategies are deduced from the strategic business plan of the
organization which may differ from company to company and also depend a lot on the policy
of the respective organization. So, in merger and acquisition strategies, you firstly need to
find out the way to accelerate your strategic business plan through the M&A. In addition, you

need to transform the strategic business plan of your organization into a set of drivers, which
your merger and acquisition strategies would address.1
The method of merger and acquisition can be broadly categorized into two phases, viz. the
planning phase and the implementation phase on the basis of which the strategies are devised.

6.2.1 The planning phase
This phase deals with developing an appropriate strategy for merger and acquisitions and is
extremely critical as it puts the entire process on track and ensures that it reaches the intended
destination. It involves development of the business plan and the acquisition plan. Determination of business plan
The procedure of merger and acquisition is a strategic process as it encompasses identifying
target that fits into the strategic goals of the company, increases the net cash flow and
diminishes the risk. To have a clear idea on the merger plans, it is important that the company
evolves a business plan that effectively communicates the vision and mission of the company
and the strategy proposed to accomplish the mission.
While chalking out strategies, you need to consider the following points:

• Industry where a company desires to operate, compete and expand
• Determine how to compete effectively
• Undertaking an internal analysis of the company to understand its relative strengths

and weaknesses
• Defining the mission statement of the company
• Setting objectives intended to be attained
• Selecting the objective attainment strategy Develop an Acquisition plan

1 Merger and acquisition strategies, Business Map of,

Once the internal assessment is completed and the companies feel that the time is right for
framing of a merger and acquisition strategy, it starts preparing the acquisition plan. The plan
covers, inter alia, the following elements.

• Key objectives
• Resource assessment / constraints
• Appropriate tactics for implementing the proposed transactions
• Schedule / timetable for completing the process of acquisition
This step is critical as it gives valuable inputs on all the later stages of the process.

6.2.2 Implementation phase
It is often noticed that organizations chart out a great plan, but they falter at the execution
stage. This may happen because they might not be able to identify the right target or fall short
at the implementation stage. Hence implementation phase is as crucial as the strategizing
phase. A company should ensure that it is not only able to shortlist appropriate targets but to
translate the thought process effectively in action as well. Let us see in detail how this phase
is carried out. Search companies for acquisitions
Once the planning phase is completed, the company starts searching for potential acquisition
candidates. The search process involves establishing a primary screening based on factors
such as industry, size of the transaction and geographic location. The search strategy includes
the use of data bases, law / accounting firms, investment bankers, brokers, etc. for identifying
prospective candidates. Prioritizing potential companies
After the initial screening process, the reduction of the initial list of potential candidates
recognized earlier begins. This second stage screening may be carried out based onfacts like
market segment, product line, firm profitability, degree of leverage, market share, etc. Initiate contact with Target Company

In this step, the acquirer actually meets the target company and proffers for acquisition. The
method of establishing contacts with the target may differ from case to case. For example, a
small target where the acquirer has no contacts, a letter expressing interest may be sent. In
case of the medium sized company, the target is contacted through an intermediary; whereas
in the case of a large sized company, contact is again through an intermediary, but with the
highest level of management of the target company.

The acquirer should also ensure that the target company is valued so that a price can be
quoted while making an offer. The price should not be very low / conservative as the target
company may not show an interest. Likewise, it should not be very aggressive, as the acquirer
may be buying trouble in this case. The acquirer may use any one of the following methods
for the purpose:

- Discounted cash flow method
- Comparable companies method
- Book value method
- Market value method

Once the target company shows interest in the offer, the acquirer and the target company
enter into a confidentiality agreement. As per the agreement, the acquirer seeks historical data
and information and collects information from the target company. Similarly, the target
company seeks information from the acquirer to ascertain whether latter is seriously and
actually capable of raising the finance required for the contemplated transaction.

The confidentiality agreement is mutually binding and makes available to the parties
confidential information that is not available on public domain. The agreement generally has
a reasonable expiry period. If a transaction is not consummated within this period, the parties
revert to their old position and return the confidential information to each other.

The next sequence in the chain of events is to sign a letter of intent(LOI) / memorandum of
understanding (MOU). This letter represents the prefatory agreement between the parties to
go ahead with the deal. It generally includes the following information:

- Major terms and conditions
- Responsibilities of both the parties
- Mode of any payments
- Expiration date
- Non- competing clause
- Amount of the purchase consideration to be kept in the escrow account

Except for a failure to comply with the conditions mentioned in the LOI / MOU, there may be
no legal liabilities on the parties. Negotiate the deal

Under this step, a lot of activities continue simultaneously andhere the purchase consideration
is decided. ‘Purchase Consideration’ implies the following:

- Total purchase consideration
This is the value of cash, stock, new debts issues and/or non- financial assets taken
at current value that would be given to the shareholders of the target company
towards settlement of the purchase price.

- Total enterprise value
This is the total consideration plus the market value of the target firm’s debt
assumed by the acquiring company. The value represents the approximate value of
the investment made by the acquiring firm to purchase the target firm.

- Net purchaser price
This is the total purchase price plus other assumed liabilities less the proceeds
from the redundant assets of the target company. This amount may be more or less
than the total purchase price.
The acquirer also undertakes the due diligence process in the step. This process
facilitates verification of existing and potential assets and liabilities, identification
and quantification of risks, protection needed against prevailing risks, identifying
synergy benefits and post-acquisition planning.
If the due diligence procedurediscloses some information that persuades the
purchase price, then the same is taken as the initiatingfactor of negotiating the
deal. Once this is done, the acquirer and the target company provide a framework

to the deal; they construct an appropriate set of compensation, legal, tax and
accounting structure to deal with the issues of risk and reward. The structuring
process affects the issues such as determining ownership, mode of transferring the
assets, protecting the interest of the owners, methods of sharing the risk of the
transaction, etc. Develop integration plan
After the due diligence is carried out, the acquirer develops a plan for integration, focusing
primarily on the financial angle. This helps the acquirer ascertain the maximum price he can
offer to the target company for the deal. The purchase price represents the present value of
the target company plus the synergy created by the combination discounted at the acquirer’s
cost of capital. The acquirer should go ahead with the deal as long as the net present value
(NPV) is greater than or equal to zero. Obtain approvals and close deal
Once the deal is concluded, the acquirer and the target company need to obtain the consent of
the shareholders, regulatory authorities and third party. All filing demanded by law should be
done on the time to avoid legal hurdles.
It is requisite for the parties to the agreement to assure that all provisions of the companies
Act, SEBI Takeovers Regulations, provisions of the Competition Act, 2002, and implications
of the Income tax Act, 1961, is strictly observed. Once these requirements are fulfilled, a
definitive purchase and sale agreement needs to be prepared stating the obligations of both
the parties before and after the closing of the deal.
The length of the document depends on the complexity of the transaction. They are as

- Purpose of the acquisition
- Purchase price
- Allocation of price
- Mode of payment of purchase price
- Details of liabilities assumed
- Representations and warranties
- Covenants
- Undertaking that the target would abide by the warranties and the representations

- Agreement of indemnity for liabilities that may arise due to misrepresentations
and breeches of warranties and covenants Implement Integration
Having expectation and realizing them are two different things. Merger and Acquisition are
initiated with the hope that the combined entity would generate synergies. To attain the
desired synergy, the acquirer evolves a plan for integrating the two entities. The plan is
evolved with the sole objective of ensuring that the combined entity performs in line with the
expectations, based on which the deal was executed.
Thus, the process of M&A is quite delicate, complex, lengthy and time consuming; it needs
to be carried out effectively and efficiently. Showing unnecessary haste can prove costly and
detrimental to both the companies.

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