How to grow
Everyone knows that TeliaSonera acquired Eesti Telekom and Swedbank acquired Hansapank, as such large transactions make big headlines. Much less is known about transactions involving small or medium-sized non-public companies. How is a corporate acquisition executed?
The most critical step is finding a suitable target, whether it is a current cooperation partner or a completely unrelated company in a new market – there is always more than one option to consider. The proper target will strengthen the acquirer’s position, creating new opportunities. To find the proper target, we recommend thinking openly, drawing up a long list of potential targets. It is important since during the background collection phase many of the pre-selected companies might prove to be less interesting, while others can become more attractive due to the potential synergies and opportunities arising. Companies might have both hidden weaknesses and strengths – they need to be identified. At this stage, it is reasonable to involve an adviser, who would help identify those considerations.
I: setting the focus
Following examination of the targets, the most suitable candidate is selected to enter into negotiations over the terms and conditions of the prospective transaction will be started. This is a stage, demanding considerable amount of time and resources. In some cases, it is reasonable to enter into negotiations with several targets, as this may strengthen the buyer’s position in the negotiation process. Approaching the target, entering negotiations and agreeing on the terms and conditions require a mix of sector-specific competences and knowledge of human relationships.
II: background check
Next, the target company’s history, background and owners are studied in more detail. The purpose is to find out how the target company fits the acquirers’ business by relying on publicly available data as well as information provided by the current owners of the company. Usually, a non-binding offer to acquire the company follows. If the offer is acceptable for the owners of the target company, a letter of intent will be signed, which will set the basis for the subsequent due diligence analysis to be completed by the buyer.
III: due diligence analysis
The due diligence analysis covers financial, tax, legal and technical issues. The company’s balance sheet, the technical condition of assets and the validity of contracts are analysed. This step provides an answer to what is the current state and future outlook of the company. In this way, the buyer learns about the opportunities for both revenue growth and cost savings following the acquisition. The analysis may reveal risks and deficiencies that may in turn affect the terms and conditions of the transaction. For example, it may turn out that the cooperation agreement with strategic supplier will become void as a result of a change of ownership or that a solid financial performance of the company is based on financial support of the current parent company. In the event of hidden deficiencies, the buyer may terminate the transaction process. Such hidden deficiencies are always present; it is somewhat easier to identify them in small companies and more difficult in medium-sized or large companies. At this stage, it may be necessary to engage a legal and tax adviser, an auditor and/or a technical expert.
If the due diligence analysis indicates that the company is a solid candidate for acquistion, negotiations will begin to determine the conditions for the transaction. The buyer should seek answers to the following questions: what is the fair value of the target company; what synergies can be realised following the transaction; what are the benefits for the buyer,what kind of risks are involved in the transaction and how should they be mitigated.
The binding offer for acquisition may take the form of a written offer but be discussed as part of negotiations. The agreement between the buyer and the company’s owners must be formalized in the share sale and purchase agreement. Such contracts are often lengthy, and it is advisable to involve an advisor to draft them.
The signing of a contract for corporate sale and closing of this transaction occur at different points in time, similarly to the process of purchasing private house or an apartment. The period between signing and closing, which is aimed to give parties time to fulfil the conditions precedent, generally lasts from 1 to 4 months. The preconditions may include the securing financing by the buyer, obtaining the approval from the competition board, or elimination of certain deficiencies by the seller. The transaction adviser will keep an eye on the details and make sure that the transaction can be closed at the agreed time. At this stage, it is recommended to involve a communications adviser who will guide you through the next steps.
At this stage, the communication of the transaction must be arranged, keeping in mind both appropriate internal and external communication. It is in the interest of the parent company to ensure that the staff, clients and partners of the purchased company will take the news as positively as possible. It is important to avoid an information blockade, as it promotes uncertainty and rumours. The latter tend to be more fantastic, juicy and more negative than reality. Personal approach and timing are the key words.
Closing and communication of the transaction can be viewed as just another milestone in the process. The integration of the business processes and merging the business cultures of the two companies follows. Poor financial performance is one of the most common challenges at this stage. Anticipated cost synergies may not meet expectations set before the acquisition, also the growth in turnover might lag behind the forecast. At the stage of integration, it is not recommended to force drastic changes, without completely understanding the delays. On the other hand, there should be no unnecessary delays. For example, if the goal is to reduce the number of products or services in the purchased company, the correct timing would be immediately after the transaction is completed. At the same time, the company must be flexible in terms of making possible changes to the initial plan. In the case of a negative scenario, it can turn out that it is not possible to effectively integrate the companies, whether it is due to the human factor or for any other reason. In this respect, Skype is perhaps the most striking example from the Baltic States. eBay bought the company in 2005 and sold it to Microsoft six years later – sometimes even conglomerates cannot manage the changes well.