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3. l. LITERATURE REVIEW
3.1.1. MERGER ANS ACQUISITION PROCESS:
The process of merger and acquisition is likely the most important factor in the deal as it
influences the profitability or benefit of the deal. The great concern of all the companies
who are planning to take over another company or merge with another company is
whether to go for merger or acquisition, it is one of the difficult part involved in the
process because the process can heavily affect the benefits determined out of merger or
acquisition. So, the main aim of the process should be such that it would maximize the
benefit out of the deal. The step wise implementation of any process of merger ensures its
profitability (Finance, 2004).
The process starts in a variety of ways. Acquiring companies’ management, as part of its
ongoing strategic and operational reviews, assess the competitive landscape and
discovers alternate scenarios, opportunities, threats, risks and go-forward value drivers.
Mid and senior level analysis is done by both internal personnel and external consultants
to study the market place.

The Beginning: Research

Mid- and senior-level analysis is done both by internal personnel and external consultants
to study the marketplace. This analysis assesses the direction of the industry and the
strengths and weaknesses of current competitors.

With the mandate and objective of increasing the value of the company, management -
often with the aid of investment banks - will attempt to find external organizations with
operations, product lines and service offerings, and geographical footprints that are
complementary to their own existing operation. The more fragmented an industry is, the
more an intermediary can do in terms of analyzing the companies that may be suitable to
approach. With relatively consolidated industries, such as large commodity-type
chemicals or bridge manufacturers, a company's corporate development staff is inclined
to do more of the M&A work.

Starting Dialogue

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Smaller companies often undergo leadership planning and family issues, and such
concerns may present opportunities for an acquisition, merger, or some derivation
thereof, such as a joint venture or similar partnership. Most potential acquirers employ
the services of a third party such as an investment bank or intermediary to conduct initial,
exploratory conversations with targeted companies.

Is your company for sale?

The M&A advisor contacts several companies that meet their client's qualified acquisition
criteria. For instance, a client company might wish to expand to certain geographical
markets, or may be interested in acquiring companies of a certain financial threshold or
product offering. Once the advisor is engaged in initial dialogue, it is prudent not to ask
blunt questions such as "is your company for sale?" Operators often find such a direct
inquiry to be offensive and often raise insurmountable barriers to further discussions.
Even if the company is currently for sale, such a direct approach will likely trigger a flat
rejection. Rather, effective M&A advisors will ask whether the potential target is open to
exploring a "strategic alternative" or a "complementary working relationship" in order to
drive value for its shareholders and/or strengthen the organization. (What value driven
manager or shareholder will say "no, I do not wish to increase the value of my
company?") Such a query is gentler in its approach, and coaxes existing owners to
contemplate on their own that partnerships with external organizations can create a
stronger overall organization. (For more see, Mergers Put Money in Shareholders'
Pockets.)
Keeping Communication Open
Further dialogue typically revolves around the potential of, and strategy for, market share
increases, diversification of product and service offerings, leveraging of brand
recognition, higher plant and manufacturing capacity, and cost savings. The intermediary
will also find out what the target management's objectives are, as well as, organizational
culture in order to assess fit. For smaller companies, family disputes, an aging CEO, or
the desire to "cash out" during an unusually hot market that is flushed with investor
capital (as well as unusually low capital gains tax rates), can present a valuable
proposition for considering a merger or acquisition. (To read more on brand recognition,

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see Advertising, Crocodiles And Moats andCompetitive Advantage Counts.)

If there is interest in moving forward with the discussions, other details can be covered.
For instance, how much equity is the existing owner willing to keep in the business? Such
a structure can be attractive for both parties since the current shareholder can take a
"second bite at the apple". That is, the existing owner can sell most of the current equity
now (and receive cash), and sell the rest of the equity later, presumably at a much higher
valuation, for additional cash at a later date.

Two Heads are Better than One

Many mid-market transactions have the exiting owner keep a minority stake in the
business. This allows the acquiring entity to gain the cooperation as well as expertise of
the existing owner, who is often also the day-to-day manager, as the equity retention
(typically 10-30% for mid-market transactions) provides the existing owner incentives to
continue to drive up the value of the company. Minority stakes should not be ignored.
Many exiting owners who retain minority stakes in their businesses often find the value
of those minority shares to be even higher with new owners and more professional
managers than when they previously controlled 100% of the business. Existing owners
may also want to stay and manage the business for a few more years. Thus, stock
participation often makes sense as a value-driven incentive. In a competitive market,
many incoming shareholders who succeed in finding a good acquisition opportunity do
not want to risk blowing their deal by taking a rigid stance with sellers.

I'll show you mine ...

Many advisors will share their client company's financial and operational summary with
the existing owner. This approach helps to increase the level of trust between
intermediary and a potential seller. Additionally, the sharing of information encourages
the owner to reciprocate this sharing of company insights. If there is continued interest on
the seller's part, both companies will execute a confidentiality agreement (CA) to
facilitate for the exchange of more sensitive information, including more details on
financials and operations. Both parties may include a non-solicitation clause in their CA

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in order to prevent each party from attempting to hire each other's key employees during
sensitive discussions.

Once a more thorough set of information has been communicated and analyzed, both
parties can begin to grasp a range of possible valuation for the target company given
possible scenarios in the future. Anticipated future cash inflows from optimistic scenarios
or assumptions are also discounted, if not significantly, in order to lower a contemplated
range of purchase prices.
Into the Mixing Bowl: LOIs to Due Diligence
Letters of Intent
If the client company wishes to proceed in the process, its attorneys, accountants,
management and intermediary will create a letter of intent (LOI) and furnish a copy to the
current owner. The LOI spells out dozens of individual provisions that help to outline the
basic structure of a transaction. While there can be a variety of important clauses, LOIs
can address a contemplated purchase price, the equity and debt structure of a transaction,
whether it will involve a stock or asset purchase, tax implications, assumption of
liabilities and legal risk, management changes post-transaction and mechanics for fund
transfers at closing. Additionally, there may be considerations involving how real estate
will be handled, prohibited actions (such as dividend payments), any exclusivity
provisions (such as clauses that prevent the seller from negotiating with other potential
buyers for a specific time period), working capital levels as of the closing date, and a
target closing date.

The executed LOI becomes the basis for the transaction structure, and this document will
help to eliminate any remaining disconnects between both parties. At this stage, there
should be a sufficient "meeting of the minds" regarding the two parties before due
diligencetakes place, especially since the next step in the process can quickly become an
expensive undertaking on the part of the acquirer.

Due Diligence
Accounting and law firms are hired to conduct due diligence. Lawyers review contracts,

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agreements, leases, current and pending litigation, and all other outstanding or potential
liability obligations so that the buyer can have a better understanding of the target
company's binding agreements as well as overall legal-related exposure. Consultants
should also inspect facilities and capital equipment to ensure the buyer will not have to
pay for unreasonable capital expenditures in the first few months or years after the
acquisition.

The accountants and financial consultants focus on financial analysis as well as

discerning the accuracy of financial statements. Also, an assessment of internal controls is
conducted. This aspect of due diligence may reveal certain opportunities to lessen tax
liabilities not previously used by existing management. Familiarity with the accounting
department will also allow incoming management to plan for consolidation of this
function post-transaction, thereby reducing the duplication of efforts and overhead
expenses. A buyer should understand all of the legal and operational risks associated with
a proposed acquisition.

Sealing the Deal

Prior to the closing of the transaction, both the seller and the buyer should agree to a
transition plan. The plan should cover the first few months after the transaction to include
key initiatives in combining the two companies. More often than not, acquisitions lead to
shakeups in executive management, ownership structure, incentives, shareholder exit
strategies, equity holding periods, strategy, market presence, training, make up of sales
force, administration, accounting and production. Having a checklist and time line for
each of the functions will facilitate a smoother transition. The transition plan also helps to
guide and direct mid-level managers to complete tasks that move the combined company
toward achieving its business plan and financial metrics. It is the go-forward plan after all
that, if accomplished, realizes the value for both the exiting and incoming shareholders

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