How to Conduct a Merger & Acquisition

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Mergers and acquistions are risky business transactions but can yield high rewards.
Mergers and acquistions are risky business transactions but can yield high rewards. (Image: Jupiterimages/BananaStock/Getty Images)

Mergers and acquisitions are common practices in the business world. Two companies may decide to merge if it is mutually beneficial. Companies merge to save on operational expenses and control a bigger market share. Acquisitions occur when one company takes over another company. Some acquisitions are considered hostile takeovers because one company acquires another company against its will. The merger and acquisition process is complicated and requires each company involved to perform due diligence. Before the merger or acquisition is complete, the due diligence process should show all parties involved if completing the transaction will yield positive results.

Things You'll Need

  • Accountants
  • Lawyers

Schedule a meeting with the selling company. The purpose of these internal meetings is to discuss the objectives of the merger or acquisition. The meetings should produce a letter of intent stating each company’s position and desires regarding the merger or acquisition.

Sign a nondisclosure agreement. This agreement protects both the buyer and seller, with the clear advantage going to the seller. This agreement states that the buyer will not disclose any of the seller’s business matters should the deal fall through.

Perform due diligence. This is the most tedious and lengthy part of the merger and acquisition process. The buyer should look over the seller’s legal activity, financial records, customers, operations, technology, sales, annual reports and marketing functions. Buyers should look at any tax liens the seller may have and review all intellectual property rights.

Valuate the business you desire to merge with or acquire. Valuating a business is one of the most important aspects of mergers and acquisitions because it determines how much a business is worth. Several methods are used to valuate a business, including asset valuation, historical earnings valuation, comparable valuation and discounted cash flow valuation. Most companies use several methods to determine the value of another company.

Obtain financing for the merger or acquisition. The financing available to the buyer will depend greatly on the financial position of the company it is merging with or acquiring. Some companies discuss financing during the initial meetings. The buyer must prove his creditworthiness to lenders to complete the deal.

Negotiate specific terms of the deal. Representatives of both companies will come together with their lawyers to negotiate the final terms before signing agreements. Once terms are agreed upon, both parties will sign legal agreements that will make the deal binding.

Operate as a new company. Depending on whether the deal was a merger or acquisition, your company’s policies and rules may change. You may experience a change in staffing and high-level management.

Tips & Warnings

  • Choose a lawyer who specializes in mergers and acquisitions.
  • Not performing thorough due diligence can cause a buyer to acquire an unprofitable company, which will result in the buyer losing a substantial amount of money.

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