How does M&A work?

Practically speaking, what can you expect from being acquired or selling your startup, and will it be a smooth or bumpy journey? In this article, we’ll give you a glimpse of the world of M&As and walk you through the key steps in the deal-making process.

What is M&A?

In essence, an M&A deal entails one company combining with another by acquiring it in whole or part. This can be arranged between industry giants, investors, private equity firms, new and established startups, and even competitors.

Behind every merger or acquisition is a company seeking to improve its performance or reinvent its business model, and entering into a deal proves that your business has what another company wants in order to achieve that. For example, with its acquisition of Uber’s Southeast Asia business, Grab was able to become a superapp by first venturing into food deliveries via Uber’s large transportation fleet.

As technology advances and competition grows, M&A deals allow both parties to benefit from funding, talent pools, larger market share, and operational and technological expertise, to improve efficiency, remain competitive, and reach new customers in new segments, resulting in effective expansion and overall revenue growth.

While mergers and acquisitions are becoming increasingly common, the process is often lengthy, ridden with complex issues, and potentially disruptive to your business. That said, they tend to follow a general pattern.

The ‘Typical’ M&A Process

While various models exist, these are the six key steps leading to deal closure:

1) Strategy and Planning 

As the classic quote goes, “If you fail to plan, you are planning to fail.” Answering some of these pertinent questions can help to build a clear roadmap and set expectations for the journey ahead:

What does your company hope to achieve with the deal?
How will your company acquire financing?
Which entities will be involved?
What would the end operating business model look like?

2) Target Identification

With a strategy in place, the next thing you need to do is to identify key criteria and search for potential target companies. You might want to look for companies with a certain customer base or intellectual property, in a certain industry or geographic location, or ones with subsidiaries or related entities. Shortlisting based on clear factors will help guide the due diligence process later on.

3) Valuation Analysis

Evaluating potential target companies can feel a lot like dating for marriage — identify and make contact with companies that meet your search criteria and seem to offer good value. Assuming initial conversations go well, you should proceed to get access to as much information as possible on their operations, customers, financials, products, etc. This in-depth valuation of the company will help to determine its value as a business, as well as a suitable merger or acquisition target.

4) Negotiations

The negotiation step is crucial and it’s also where deal fatigue may occur — this is when many deals fall apart. Not only does it lay the foundation for an eventual deal, but it also allows either party to show how amenable they are and their willingness to compromise to make a deal happen. Interested buyers will submit a Letter of Intent (LOI), a preliminary, non-binding agreement that outlines the deal framework with the proposed price and terms and conditions.

5) Due Diligence

This exhaustive (and exhausting) part of the process begins when the offer has been accepted. Due diligence aims to verify and confirm the information received, allowing the buyer to have a comprehensive view of every aspect of the target company’s business and detect possible risks, synergies, and opportunities.

6) Deal Closing 

After months of toiling and with the unsexy bit complete, parties can proceed to final negotiations and decision-making, and execute the transaction. There are two critical dates in the actual signing and closing process, jointly set by both parties — the date when the written agreement is signed, and the date on which the transaction is completed with the transfer of assets, company ownership, or shares under the agreed conditions.

Post-closure steps include financing and restructuring, integration and back-office planning, post-merger compliance, and ongoing business-as-usual monitoring.

Now that you’re familiar with the script and the role, in the next article, we’ll get you into rehearsals — taking you through key considerations and sharing advice from those who have trodden this path before — and you’ll soon be ready for the big stage.