The Complete Guide to Mergers and Acquisitions by BCMS

If you’re a business owner and you’re thinking about selling your company, you might be considering doing this through a merger or acquisition. However, the prospect of handing over your business can be daunting. After all, it’s one of the biggest financial decisions you will make, so it’s important to get it right.

Like many business owners, you might be unsure about mergers and acquisitions, meaning it’s hard to tell whether they’re the right choice for you. Luckily, help is at hand. We’ve put together a comprehensive guide to provide you with some useful information and ensure you make an informed decision.

What are mergers and acquisitions?

Mergers and acquisitions are words used to refer to the consolidation of businesses. Companies often merge with or acquire other businesses if they are seeking to expand into new markets, gain a competitive edge or acquire new products, services, skills and expertise.

The terms merger and acquisition are often used interchangeably, but they have slightly different meanings. Put simply, an acquisition is when a company takes over another business, whereas a merger is when two companies join together to form a new organisation. In both of these situations, the underlying premise is that organisations acquiring other businesses or merging with them can become stronger and more valuable when combined. Larger companies will often buy smaller companies to become more competitive and cost-efficient, while smaller firms will allow themselves to be bought if they are struggling to survive alone or their owners or shareholders think it is in their financial interests to take this step.

In mergers and acquisitions, buyers can be strategically and/or financially motivated. Strategic buyers are often direct competitors or businesses operating in similar sectors. Financial acquirers, such as private equity firms, are looking to own the target company but not operate it.

What strategies are there?

There are many different mergers and acquisitions types. The one you choose for your organisation will depend on a number of factors, including your future objectives, the purpose of the transaction and the degree of control involved. Here are some of the main strategies explained:

Acquisition: An acquisition is when a buyer takes over a company, including its operations and brand. This usually involves a larger business obtaining the majority stake in a smaller company. In many cases, acquirers buy the shares of a business and carry on trading under the original name.

Merger: Mergers involve the joining together of two or more companies. Often they occur between businesses of a similar size and type and, in these cases, they can be referred to as a ‘merger of equals’. Usually, the combined company has a new management structure and adopts a new name. If the organisations involved were competitors, the merger is known as horizontal integration, whereas if one was a supplier or customer of the other, it’s referred to as vertical integration.

Conglomeration: A conglomerate transaction involves the coming together of companies that operate in different industries and have no similar business activities. 

Tender offers: When a tender offer happens, a business offers to purchase some or all of the stock at a set price from shareholders in an organisation. Some tender offers result in mergers.

Purchase of assets: The acquisition of assets is when firms bid for the assets of another company after approval from its shareholders. This often happens during liquidation proceedings.

Management buyouts: A management acquisition, or management-led buyout (MBO), is when a company’s existing executives purchase part of or all of the business they work for.

What does the process involve?

The mergers and acquisitions process can be complex and time-consuming, taking anywhere from several months to several years to complete. As such, many business owners and shareholders seek assistance from professional advisors to help them negotiate and complete the deal.

For those looking to sell, the first step in the process is identifying the right candidate by compiling a list of suitable companies. The most effective and efficient way to do this is to use a professional advisor, as they have access to a wide range of potential buyers and can create a competitive bidding process to get the best deal and price. Once you’ve identified possible acquirers, you’ll need to pitch to them by providing further information about your organisation.

At this stage, it’s a good idea to sign a non-disclosure agreement (NDA) to keep any shared information confidential and therefore to safeguard your company in case the deal falls through. A buyer will then send an ‘indication of ‘interest’ (IOI), followed by a ‘letter of intent’ (LOI) with an offer. Next comes the due diligence process, whereby the buyer analyses the seller’s firm, including its records, books, premises and inventory. As long as there aren’t any problems, both parties sign the purchase agreement and close the deal.

What are the pros?

Before going ahead with a transaction, it’s important to consider mergers and acquisitions pros and cons. One of the main benefits is that a combined company has more value than an individual company. For buyers, the acquisition process is a quick way to grow a business, increase its market share and gain access to new products, technology, customers and clients. It also allows buyers to gain resources and intellectual property that their companies lack. Acquiring new products and services can be more cost-efficient than developing them internally. For sellers, the benefits can include turning the value of a business into liquidity and no longer facing the risks associated with running a company.

From an operational point of view, there is also the significant cost advantages associated with larger companies to consider, including economies of scale in terms of production and purchase, as well as a company’s ability to raise capital. Through shared resources, overheads can also be reduced.

What are the cons?

There are several reasons why mergers and acquisitions fail on some occasions, whether it’s problems to do with the process itself or unforeseen circumstances. One common cause for concern is that these deals can lead to uncertainty among employees and there is always the chance of job losses. Another risk is integration issues between the firms involved. For example, it may be that there’s a clash of cultures between the companies.

There are also complexities associated with structuring these deals. A range of factors must be considered, including accounting issues, taxes, competition law and financing.

Acquisitions and mergers that are done without the aid of professional advisors can also bring about problems. A business owner who has no experience in mergers and acquisitions strategy and chooses to go it alone may struggle to achieve the results they want, whether they are looking for acquirers or searching for target companies. A failed acquisition or merger can mean that an otherwise robust company is left facing a variety of difficulties.

M&A checklist

Before proceeding with a transaction, it’s a good idea to have a mergers and acquisitions checklist to guide your steps and ensure you’re making the right choice, for example:

Have you checked your financial status? If you’re looking for target businesses, conduct a thorough financial check to determine whether you have the necessary money and liquidity to carry out a transaction successfully.

Have you analysed your business? Examine your firm’s strengths, weaknesses and growth opportunities to decide whether it’s ready for expansion. Consider whether it’s in the best interests of your company and whether it will allow you to make improvements and cost savings.

Have you considered external factors? Analyse the economy and market and consider how this will effect your plans for a transaction.

Do you have the right transaction team? Having an experienced team to assess and process the deal and forecast its results is crucial to ensure a smooth, successful transaction and integration. The team can include shareholders and professional advisors and lawyers.

Have you chosen your strategy? Analysing your current position and future aims can help you choose the right strategy and justify the transaction.

Are the companies involved a good fit? When looking for an acquirer or target firm, carefully consider businesses’ markets, products, customers, company cultures and management structures to ensure you’re compatible.

Have you assessed the target company’s financial status? If you’re acquiring a company, it’s important to do a detailed assessment of its financial strength, taking into account everything from its assets and revenue to its liabilities and financial projections.

How BCMS can help

BCMS is a specialist mergers and acquisitions advisor to shareholders and business owners who are looking to sell or merge their company. With over 25 years in the industry, our tried and tested approach has lead to hundreds of successful deal completions in a variety of industries.

Our team of dedicated advisors can help you research and contact potential partners, create a competitive bidding process, provide a detailed financial analysis and prepare key documents and contracts. In fact, we offer our expert advice every step of the process to ensure you get the best possible deal for you and your firm. If you want to find out more about mergers and acquisitions in the UK and how our mergers and acquisitions services could help you, contact us today or visit our events page.