M&A Roadmap

W578 Final Project

Key elements, potential problems, safeguards and remedies for a successful
transaction.
 Figure 1: The M&A Process

Introduction – An Overview of the M&A

Process
The process of mergers and acquisitions (M&As) is
complex and integrated by nature. Figure 1 captures the
fundamental configuration of M&As in stages that describe
a natural flow of the transaction, processes that should take
place during every stage, and background factors that –
albeit not directly manageable – exert a major influence in
the transaction. Eight business areas are involved during
each stage, and they represent required inputs from the
corresponding departments in the acquirer’s company to
achieve a prosperous outcome.

The arrowed semi-circle that surrounds the stages represents the iterative and interrelated nature of the M&A process. A
stage should never be considered ‘closed’; the people involved in the transaction must maintain a high-level view of its
purpose and not get lost in the details from each stage. Additionally, there is a certain overlap between the stages (e.g.,
successful integration begins during due diligence, and might even be achieved by terms in the structure of the deal).

Background factors
As mentioned before, the background factors affect the outcome in different ways. The interest of the acquirer’s and
seller’s owners is value creation, which in turn is the main driver of the deal; consequently, the value that managers expect
to extract from the deal must be properly justified to the owners to obtain their buy-in. The economy plays the role of
determining key financing conditions and may influence valuations in times where M&As are, in fashion terms, ‘in’ or
‘out’. A special effort should be placed to maintain customer satisfaction in both corporate entities, to ensure that they
will remain loyal, and to help them understand why the transaction will also provide value for them. Competitors’
reactions to the announcement and execution of the deal should be anticipated; it is a fatal mistake to assume that the
competitive landscape is static and that competitors will simply observe the event and carry on with their operations as
they did before. Finally, the government plays a supervising role that seeks to preserve healthy competitive environments
and transparent financial reporting through various agencies; unless their conditions are met, the deal will not be
approved.

Processes
An effective communications policy is primordial to a deal’s realization; it should outline who needs to know what, at
both ends (acquirer/seller), and at all times. Communication flow between the stakeholders is essential. Financial
analysis dictates if the transaction is within budget, and provides a forecast of the target’s growth and expected economic
contribution to the acquirer. As more details are unveiled across the stages, these forecasts will become more accurate.
Failure mode and effects analysis (FMEA) is a procedure from operations management whose goal is to identify potential
failure modes based on past experience (in this context, previous M&As) and classify them by severity and likelihood 1.
This concept also suggests that companies get better at M&As as they gain more experience. Negotiation begins the
moment the acquirer contacts the potential target for the first time to show their interest; it peaks during the structure and
due diligence stages, when the deal’s terms are tailored and then adjusted to reflect risks that were discovered in the
process. Coordination mechanisms should ensure that every member of the acquisition team has a clear grasp on what is
expected from the deal and how it fits with the overall corporate strategy. Once established, these mechanisms provide
data for planning purposes. These plans must be constantly updated to reflect the latest findings in each stage of the
M&A process.

1
From Failure mode and effects analysis (Wikipedia)
1
Phase I – Strategy
The objective of the merger or acquisition determines the challenges faced by the acquirer. Error: Reference source not
found illustrates the strategies that dominate contemporary deals and presents recommendations to face the challenges that
arise from each of them2.

The
Table 1: M&A Strategies The
and Challenges Geographic The Product or The M&A as The Industry
Overcapacity Roll-up M&A Market Extension R&D Convergence
M&A M&A M&A
Example Chemical Bank Banc One buys Quaker Oats buys Cisco acquires 62 Viacom buys
buys scores of local banks Snapple. companies. Paramount and
Manufacturers in the 1980s. Blockbuster; AT&T
Hanover and buys NCR, McCaw,
Chase; Daimler- and TCI.
Benz acquires
Chrysler.
Strategic The acquirer A successful Acquisitions extend a Acquisitions are A company bets on a
Objectives (within an industry company expands company’s product used in lieu of in- new emerging
with excess geographically; line or its international house R&D to industry and tries to
capacity) will operating units coverage. build a market establish a position
eliminate capacity, remain local. position quickly. by culling resources
gain market share, from existing
and become more industries whose
efficient. boundaries are
eroding.
Major  You can’t run a  Members of the  Know what you’re  Build industrial-  Give the acquired
Concerns merged company acquired group may buying: the farther strength company a wide
until you’ve welcome your you get from home, evaluation berth. Integration
rationalized it, so streamlined the harder it is to be processes so that should be driven by
rationalize processes. If they sure. you buy first- specific
quickly. don’t, you can  Understand how the class businesses. opportunities to
 Don’t assume afford to ease them target achieved the  This category create value, not by
your resources in slowly. success that led you allows no time a perceived need to
are better than  It’s more important to buy it. for slow create a
the acquired to hold on to key  Expect cultural and assimilation, so symmetrical
companies’ employees – and governmental cultural due organization.
resources. customers – than to differences to diligence is a  As a top manager,
 If the acquired realize efficiencies interfere with must. be prepared to
company is as quickly. integration.  Put first-rate, make the call about
large as the  If a strong culture  The bigger you are well-connected what to integrate,
acquiring one is in place, relative to your executives in and what to leave
and its processes introduce new target company, the charge of alone; also, be
and values differ values with better your chances integration. ready to change
greatly, expect extreme care. Use for success. Make it a high- that decision.
trouble. carrots, not sticks.  The more practice visibility
 These tend to be  These are win-win you have, the better assignment.
onetime events, scenarios, and they your chances for  Above all else,
so they’re often go smoothly. success. hold on to the
especially hard to talent if you can.
pull off.

2
From Not All M&As Are Alike – and That Matters (article)
2
Best practices
The list below encapsulates practices that tend to increase the rate of success in M&As, as well as indicators of potential
problematic areas3.

Figure 2: M&A strategy - best practices and potential problems

Remember that the ultimate goal of M&A is to provide value to shareholders

through profitable growth.
The M&A process should begin with the identification of gaps in the
company’s resources or capabilities by applying the tools for profitable
growth:
Strategy – Porter’s Five Forces, Porter’s Value Chain Analysis, SWOT
analysis, Balanced Scorecard, etc…
Marketing – 4 Ps Framework (Product, Price, Place, Promotion)
Best Supply Chain – cost, quality, delivery, resource optimization
Practices
Finance – sources of cash
Human Resources evaluation
Scan the marketplace constantly. Look at all potential deals in your market,
not just the deal at hand.
Define line-of-sight measures that track the value you expect to gain from the
acquisition.
Use measures consistently for both deal evaluation and long-term performance
measurement.

Lack of a clearly articulated vision of what makes a target attractive leads to

inaccurate valuations. Make sure you know what you’re buying before you
start looking for targets.
Don’t cast strategy aside in the face of an exciting opportunity.
What If the transaction is related to an industry or market that is new to you (and
Can Go your company), delusive cash-flow projections are common. To avoid this
Wrong? pitfall, commission outside help from consultants and/or investment bankers,
and look beyond the financial statements of each potential target.
Enforce managerial discipline by aligning incentives to the success of each
deal (as opposed to simply its execution). This will stop managers from
pursuing deals to improve their personal reputation.

3
From Mergers and Acquisitions: From A to Z (chapter 3), The Fine Art of Friendly Acquisition (article), Secrets of the M&A
Masters: Revealing the paths to a successful deal (article), and class discussions.
3
Phase II – Structure
Although there are countless ways to structure a deal, Figure 3Error: Reference source not found lists what might be
considered as the core five structural alternatives of M&As 4. Other non-traditional structures include spin-offs,
consolidations/rollups, leveraged buyouts (LBOs), and employee stock ownership plans (ESOPs).
Figure 3: M&A Structural Alternatives
The 10 key issues that affect the structure of each
deal are:

1. How will tangible and intangible assets be

transferred to the purchaser from the seller?
2. At what price will they be transferred, and according to
what terms?
3. What issues discovered during due diligence may affect the price, terms,
or structure of the deal?
4. What liabilities will be assumed by the
purchaser? How will risks be allocated among the parties?
5. What are the tax implications for the buyer and the seller?
6. What are the long-term objectives of the buyer?
7. What role will the seller have in the management and growth of the
underlying business after closing?
8. To what extent will third-party consents or
government filings or approvals be necessary?
9. What arrangements will be made for the key management team
of the seller (who may not necessarily be among the selling owners of the
company)?
10. Does the buyer currently have access to all of the
consideration to be paid to the seller, or will
some of these funds need to be raised from debt or
equity markets?

4
From Mergers and Acquisitions: From A to Z (chapter 7)
4
Valuation overview
Table 2 presents a summary of the three predominant valuation approaches and under which scenarios they can be most
useful5.

Table 2: Valuation methodologies

Problem type Recommended Summary Other considerations

valuation method
Operations Adjusted present Apply basic discounted cash
(assets-in- value flow relationship to each of
place) the business’ various kinds of
cash flows and add up their
present values.
Opportunities Simple option Cash, time value, and risk all
(real options) pricing still matter – each enters the
analysis in two ways: as an
option, and as an underlying
asset.
Equity claims Equity cash flow Estimate the company’s share
of expected future cash flows,
adjusted for fixed financial
claims, and discount them at
an opportunity cost that
compensates the company for
the risk it is bearing.
Powerful, versatile, easy to learn.
Shows value of each ‘piece’ of the target.
Easily adapted from WACC.
Hard to discern what is a project characteristic and
what is an option characteristic
Most useful as a supplement, not a replacement,
for the valuation methodology already in use.
Hard to learn.
Doesn’t fit naturally into most companies’
existing capital-budgeting systems.
Leverage is difficult to measure properly when it
is high and changing (it works more like a call
option).
More specialized than APV.
Requires more support or, at a minimum, more
inputs from corporate financial and capital-
budgeting systems.

Financing
The key factors in financing an Figure 4: Financing sources
acquisition are the size and complexity of
the transaction, the buyer’s cash position,
the market for the buyer’s securities, the
terms of the purchase price, and the
macro financial-market conditions.

Figure 4 offers a summary of the sources

that an acquirer can utilize to meet the
financial terms of the deal.6

5
From What’s It Worth? A General Manager’s Guide to Valuation (article)
6
From Mergers and Acquisitions: From A to Z (Chapter 9)
5
Phase III – Due Diligence
The due diligence work is commonly divided between two teams that must remain in constant communication: the
financial and strategic team (managed by the buyer’s management team with assistance from its accountants), and the
legal team (buyer’s counsel with assistance from technical experts). The best way to ensure that no stone remains
unturned is through effective preparation and planning, which is usually achieved with a comprehensive checklist 7.

The framework in Figure 5 can be used as a guide to the due diligence process 8:

Figure 5: Due diligence framework

Macro-environment Legal/environment
Compatibility audit Financial audit Marketing audit
audit audit

Information systems
Production audit Management audit Reconciliation audit
audit

Key considerations and common mistakes

Table 3 lists the main factors that should be kept in mind during the due diligence process, as well as some of the most
common pitfalls that ultimately lead to unsuccessful transactions 9.

Table 3: Due diligence reminders

Key considerations Common mistakes

1. It is common for sellers to become defensive, evasive, and 1. Mismatch between the (complexity of)
impatient during DD. documents provided by the seller and the (lack
2. Keep a foot on the brake. Recognize at all times that there of) skills of the buyer’s review team.
may be a need to terminate negotiation if the risks or potential
2. Poor communication and misunderstandings.
liabilities in the deal exceed what is anticipated and there is
no effective way to insure against them. 3. Lack of planning and focus in the preparation of
3. The best way to ensure that no stone remains unturned is the DD questionnaires and in the interviews with
through effective preparation and planning, typically the seller’s team.
achieved with a comprehensive checklist. 4. Inadequate time devoted to tax and financial
4. Dedicate time to determine whether there is a cultural fit. matters.
Don’t underestimate the importance of finding and retaining 5. Lack of reasonable accommodations and support
strong management teams.
for the buyer’s DD team.
5. Supplement qualitative research on the management team
with quantitative research on market trends from independent 6. Ignoring “the real story” behind the numbers.
market surveys.
6. Work with operational managers to confirm the
‘deliverability’ of synergy assumptions and provide the
7
From Mergers and Acquisitions: From A to Z (chapter 5)
8
From Due Diligence, a Strategic and Financial Approach
9
From Mergers and Acquisitions: From A to Z (chapter 5), Secrets of the M&A Masters: Revealing the paths to a successful deal
(article), Unlocking Shareholder Value: The Keys To Success (article)
6
 reassurance that the identified benefits are robust.
7. Begin planning the integration of both companies at this
stage.

Regulatory factors reference

Every merger or acquisition is circumscribed in a regulatory environment. The next sections refer to the relevant
legislations and entities that exert influence within this environment. 10

Environmental laws
In general, environmental laws require notification to government authorities in the event of chemical releases and other
emergencies. Some of these laws are: the Clean Water Act; the Toxic Substances Control Act (TSCA), the Resource
Conservation and Recovery Act (RCRA); the Comprehensive Environmental Response, Compensation and Liability Act
(CERCLA, or “Superfund”); and the Emergency Planning and Community Right-to-Know Act (EPCRA), along with
other state laws.

These legislations present the problem of allocating liability for potential environmental problems. Both seller and buyer
will usually seek environmental audits to uncover these risks, and buyers tend to request coverage with representations
and warranties.

The Securities and Exchange Commission (SEC)

SEC regulations apply to any publicly-held company that intends to acquire a ‘significant’ target – which is defined as a
company whose assets or pretax income is greater than 10% of the acquirer’s. In these cases, the SEC requires
notifications in the acquirer’s 10-Q and 10-K reports, registration statements (if the acquirer wants to issue new securities
for the target’s shareholders), proxy information (if the transaction must be approved by the acquirer’s or the target’s
shareholders), and tender offers (i.e., offers directly to shareholders rather than negotiating through management).

Federal Antitrust Laws

In essence, these laws prohibit acquisitions that may substantially lessen competition in any given industry. For vertical
acquisitions – which are rarely a problem –, the issue in question is whether the deal will result in the creation of
unacceptable barriers to entry by forcing entrants to enter at both supplier and purchaser levels. In the more troublesome
horizontal acquisitions, there is an ample variety of factors to be considered, such as market shares, market concentration
(as measured by the Herfindahl-Hirschman Index), resulting barriers of entry, changing market conditions, and product
characteristics that affect the possibility of price collusion.

The entities in charge of deciding if a transaction can proceed are the Federal Trade Commission (FTC) and the U.S.
Department of Justice (DOJ). The Hart-Scott-Rodino Antitrust Improvements Act requires advance notification of the
deal and submission of information about business operations to both of these entities if the qualifying criteria is met (the
size of the transaction exceeds $212M, or is between $53M and $212 and one of the parties has annual net sales or assets
exceeding $106M). There is a filing fee that ranges from $45,000 to $280,000 depending on the size of the transaction.

Sarbanes-Oxley (SOX) Act

This U.S. federal law appeared as a result of the major corporate and accounting scandals of the early 2000s, and sets new
or enhanced standards for all U.S. public company boards, management and public accounting firms[ CITATION Sar11 \l
1033 ].

Even though SOX doesn’t explicitly mention M&As, it has lead acquirers to enhance their due diligence processes to
ensure that the target company successfully complies with the new transparency standards. Failure to do so might result

10
From Mergers and Acquisitions: From A to Z (chapter 6)
7
in embarrassing and costly surprises, personal liability for executive officers, and/or damage to the acquirer’s market
reputation11.

Phase IV – Integration
Integration planning should begin at the strategy phase of the transaction, and continue to be refined as the deal evolves.
Most integration plans address the business areas shown in Table 412.

Table 4: Elements of an integration plan

Management team Organization/Responsibilities Corporate Identification

Cultural Alignment Information Systems Product Definition
Manufacturing Processes Customer Retention Services Standardization
Post-closing Registrations Technology Transfer Process Sale of Surplus Assets
Environmental Rectification Restructuring Plan Performance Measurements
Consolidation/Redundancies Legal Issues Accounting Practices
Compensation and Benefits Supply Chain/Vendors Communication Plan
Corporate Policies Distribution Channels Training Plans
Tax Filings Marketing PLans

The integration team

Integration must be treated as a parallel project, rather than a phase, in the company’s existence. Ideally, by following this
approach, the integration will be less disruptive to the firm’s day-to-day operations. Accordingly, the bulk of the work
involved in executing the integration plan should not rest on the newly formed leadership team. Instead, a team of
preferably experienced individuals from both firms – including someone who is a ‘champion of the merger’ – should be
appointed to handle the integration efforts prior to closing the deal, in order to allow for proper planning. In cases where
there is a lack of knowledge in post-merger integration, outside consultants can provide advice and guidance. 13

What needs to be integrated?

An exhaustive revision of potential integration synergies should be made in every area of the target’s business in order to
highlight the parts that, through integration, will provide the most value to shareholders – ideally, in the short term.
Consequently, a merger does not imply full integration; each deal has a different ‘ideal’ degree of integration. Table 5
exemplifies some of the available choices in this aspect 14.

Table 5: Integration extent for deal rationales

Buyouts / Private Equity Corporations

Active Investing Scope Scale
Low Functional Overlap High Functional Overlap
 Minimal integration  Selective integration  Comprehensive integration
 Fix or improve existing  Keep different cultures; harmonize  Adopt dominant culture or combine
culture where integrating to gain best of both

Selecting the management team

The selection of the management team depends on the strategy behind the acquisition, and the extent to which it is
necessary to integrate both companies15, as illustrated in Figure 6.
11
From Sarbanes Oxley: Impact on Corporate M&A (presentation)
12
From class discussions
13
From Note On Postmerger Integration (article)
14
From Where Do You Really Need to Integrate? (article)
15
From Unlocking Shareholder Value: The Keys To Success (article)
8
In most cases, it is vital to maintain at least part of the existing leadership team in the newly formed entity – after all, these
managers were responsible for making the company an attractive acquisition target in the first place, and they have a
profound understanding about their business model that it would take others a long time to develop.
Figure 6: Integration level versus
Several measures can be taken to ensure that the leadership team stays on board, but management team
the key is demonstrating long-term commitment to its people. This can be
achieved by: Portfolio
Business
 Proposing salary and wage adjustments Replace the
 Establishing an incentive bonus plan tied to realistic, attainable goals management team
 Providing employee contracts to key members of the management team
 Reviewing the seller’s benefit plans and assuring employees that the
transfer will be orderly and fair Full Integration
 Explaining any potential structural changes with care and clarity 16 Retain and
incorporate existing
managers
An interesting trend is observed in recent Asian acquisitions 17, where the
acquirers usually build the leadership team of the acquired company from its
incumbent management along with select local hires, and they refrain from
placing their own staff into key roles. This practice is believed to build trust within the acquired employees by showing
them that their way of doing business will continue to be respected.

Cultural integration
Culture issues should take a place of privilege in the integration list of priorities. Each cultural conflict that is dismissed
as non-relevant can potentially affect employee motivation, which will inevitably translate into a decrease in productivity,
and ultimately, profits. In addition, cultural differences that get pushed back to a later stage of integration will reinforce
certain practices that eventually will have to be dealt with, which will make it more difficult for the acquirer to steer the
company in the right path.

To achieve effectiveness in cultural integration, the tactics depicted in Figure 7 can be implemented18.

Figure 7: Cultural integration's hard tactics

Decision making People selection Key performance

Designate clearly who makes Make the tough "people indicators
decisions, and how decisions" quickly and cascade Adjust metrics to the company's
this priority downward through new vision and strategy as
the organization quickly as possible

Compensation Promotion / career Internal and external

system/incentives
Reflect the new vision
Reward employees for meeting
new performance goals
development /
performance-evaluation
HR should redesign its systems
so that they support and reflect
the new culture
communication
Continuously and consistently
reinforce key messages on vision,
strategy, and culture

16
From Mergers and Acquisitions: From A to Z (chapter 3)
17
From A lighter touch for postmerger integration (article)
18
From Where Do You Really Need To Integrate? (article)
9
Works Cited
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2. Not All M&As Are Alike--and That Matters. Bower, Joseph L. s.l. : Harvard Business Review, 2001. #R0103F.

3. The Fine Art of Friendly Acquisition. Watkins, Robert J. Aiello and Michael D. s.l. : Harvard Business Review,
2000. # R00602.

4. Sherman, Andrew J. Mergers and Acquisitions from A to Z, Third Edition. s.l. : AMACOM, 2011. ISBN 978-0-8144-
1383-8.

5. O'Sullivan, Kate. Secrets of the M&A Masters: Revealing the paths to a successful deal. CFO Magazine. 2005.

6. What's it Worth? A General Manager's Guide to Valuation. Luerhmann, Timothy A. s.l. : Harvard Business Review,
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7. Gillman, Luis. Due Diligence, a Strategic and Financial Approach (2nd ed.). 2010. ISBN 9780409046991.

8. Zietsman, Megan. Sarbanes Oxley: Impact on Corporate M&A. Bureau van Dijk. [Online] 2004. [Cited: 04 28, 2011.]
http://www.bvdep.com/expertforum/Deloitte-Sarbanes-Oxley.pdf.

9. Failure mode and effects analysis. Wikipedia. [Online] [Cited: 05 01, 2011.]
http://en.wikipedia.org/wiki/Failure_mode_and_effects_analysis.

10. Kelly, John, Cook, Colin and Spitzer, Don. Unlocking Shareholder Value: The Keys To Success. 1999.

11. Note On Postmerger Integration. Patel, Lipi and Bourgeois, L.J. s.l. : Darden Business Publishing, 2009. # UV
1024.

12. Where Do You Really Need to Integrate?: Mastering the Merger. Harding, David and Rovit, Sam. s.l. : HBR- HBS
Press Chapter, 2004. Prod. # 2371BC.

13. A lighter touch for postmerger integration. Cogman, David and Tan, Jacqueline. s.l. : McKinsey Quarterly, 2010.

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