M&A deals are hard to get right.
M&A deals are hard to get right. If not done correctly, M&A deals often don’t work out.
A recent study by S&P Global Market Intelligence found that the share prices of companies that had made an acquisition tended to underperform the broader index.
However, if done properly and with careful preparation, M&A can be a game-changing and transformative events in the life of any company. Having a process to exchange information and facilitate decision-making is vital. But as many studies show, M&A deals often don’t pan out quite the way they were planned.
Negotiating strategies can make a huge difference.
The #M&A negotiation process is often misperceived as simply a process of striking an agreement on the purchase price, forgetting the just-as-important risk allocation exercise which occurs in the negotiation of definitive contracts. S&P Global Market Intelligence, for instance, showed that share prices of firms in the Russell 3000 index that had acquired a company between January 2001 and August 2017 tended to underperform the broader index.
The negotiation process is lengthy and requires a vast amount of information exchange. In fact, many times M&A deals actually destroy value, as a study by consulting firm LEK showed.
Preparation and planning are not chores, they’re fundamental.
When it comes to preparation, the main ways to be ready for the twists and turns of a highly intense negotiation process are to (a) gather information on the counterpart and, (b) have sound valuation analysis in place.
Earnings per share also grew less quickly, and debt and interest expense figures tended to increase. When it comes to preparation, the main ways to be ready for the twists and turns of a highly intense negotiation process are to (a) gather information on the counterpart and, (b) have sound valuation analysis in place.
Legal documentation helps manage risk.
The legal framework creates the structural edifice of the negotiation process and serves four main purposes: memorialize in detailed legal language the business understanding between the parties, allocate risks, gather more information, and set out the consequences to each party when things go wrong.
The legal framework can be divided into two main phases: the first phase encompasses the Letter of Intent (LOI) (also called a Term Sheet or Memorandum of Understanding) and the second phase includes the definitive contracts and the due diligence process which aim to transform data into intelligence to guide the negotiation process.