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Merger and Acquisitions Services | June 16
THE SEVEN STEPS TO A SUCCESSFUL MERGER

In an increasingly competitive market, it is imperative for companies to strike the right deal at the right time to pursue growth opportunities and strengthen financial performance. These growth strategies entail expansion of existing services, developing new service lines or markets by entering joint ventures or by acquiring companies of the competitors or other providers.

It is a proven fact that an acquisition can dramatically shift the position of an organization to a more advantageous one. This makes acquisition one of the most favourable tools to expand ones’ business as the advantages of this process often exceed those of other growth strategies. We outline some advantages below:

 

1.     Advantage on access: Acquiring a company with new attractive markets and improved client accessibility is one of the best ways for enhancing access in the existing as well as new markets;

 

2.     Leveraged Competitive Position: Acquisition leverages the company’s competitive position in the market, for instance, a company previously being in a subordinate competitive position may achieve a more dominant position after merging with a competitor company.

 

3.     Improved capacity without capital expenditure: Acquisition helps to get access to improved technology, talent pool, operational capacity for services at a lower cost and faster otherwise it has proven to be more costly and time-consuming if they were to be imported.

 

A successful merger is the pre-requisite to achieve these advantages and for a merger to be successful, there can be no substitute for a full proof strategy and proper assessment and planning. 

 

We, at Findoc, believe in this seven-step process for a successful merger and we have an impeccable track record of being successful in that. 

 

The seven steps:

 

1.     Determination of growth and market services: The company management contemplates the acquisition process when there seems to be a growth opportunity for the company with improved market services. However, the superficial idea of growth is not helpful, rather it has to be a thorough analysis of the growth potential. The company leaders should collect and analyze data extensively which should include the area of business, demographics, client base, profitability, competitive position, costs, consumer opinion, etc..

 

Market Example: Recently we saw a merger between Bank of Rajasthan and ICICI Bank. So we can infer that when ICICI planned to acquire Bank of Rajasthan in the year 2010, it must have seen a host of growth opportunities especially in enhancing branch networks. In northern and western India. This deal is a perfect example of a merger between an entity with a sturdy franchise base with a company with a strong capital base.

 

2.     Identification of target candidates: The second most important step in the process of merger is the identification of the potential candidate for the merger. The identification should be based on the analysis of whether the target candidate can meet the strategic and financial growth objective of the acquiring company. This involves the calculation of risk and devising ways to minimize them while maximizing potential.

 

Market Example: The best example in this step is the Axis-Enam merger. When Axis wanted to start investment banking, they would have taken a lot more money and time in setting up a system of their own. So Enam who is involved in this field was the best choice to meet the strategic and financial growth objective of Axis.

 

3.     Assessing the strategic and financial positionThis is the assessment stage just before the decision-making process. AT this stage it is important to ask certain questions like:

·        What will be the benefits after the acquisition?

·        What are the potential risks?

·        What is the stance of the decided target company compared to the other target companies?

This step entails a holistic assessment of the financial condition of the company along with its credit position. This assessment mainly focuses on the revenue of the company and a comprehensive study of its balance sheet.

Market example: When iGate acquired Patni Computer along with a private equity firm Apax Partners, the success of that deal was based on the assessment of the ‘strategic financial position’ and a sustainability test of the deal. iGate was ready to finance the deal consideration value of 1.22 billion dollars through debt and equity financing, cash in hand, and through a public offering of up to 10 million shares. Viscaria Limited is backed by funds and advised by Apax Partners who will invest in iGate in order to acquire the majority stake in Patni Computers.

4.     Decision making: After the previous steps of identification and analysis it is now time for the Board to take a call for a go or a no-go decision. While taking this decision, the Board deliberates on the fact that whether the strategic value addition is an interesting factor to proceed with the transaction. 

Market Example: When the Satyam Mahindra merger was in talks, it was a situation of the dilemma for the Mahindra leaders after the Satyam scam. However, after an analysis of strengths and weaknesses, the leaders took a bold decision to proceed with the proposed merger because they concluded that the benefits will outweigh the drawbacks and risks.

5.     Valuation: The fifth and most important step is the assessment of the value of the target. This step involves evaluation and selection for alternative structures for the process of merger. Suitability check of the merger plan and structure along with the valuation is the crux of this test. The valuation process should be practical and realistic

Market Example: In 2020, the most talked-about deal of Reliance Infratel and GTL Infrastructure was called off on valuations. It was said that R-com was the larger company with the dominant driver for valuation. When it did not find the cash-swap ration was favourable for them, they called off the deal. This implies that the companies have an implied obligation of not underestimating their value also at the same time should not fall prey to the unrealistic valuations.

6.      Due Diligence, Negotiation and Execution: Once the deal is proposed and accepted, it becomes an indispensable step to carry out a thorough due diligence process of the target company to assess fully the issues, risks and opportunities linked to the transaction. Due diligence is a process of review of the target’s financial, legal, and operational position after which the concerned parties indulge in negotiating for entering definitive agreements. This step also involves the assessment of required regulatory compliances.

7.     Implementation: This is the ultimate step of the process of the merger when the performance of the merger is monitored. The monitor seeks to analyze the following questions:

1.     Is the management successful in making the difficult operational changes for achieving the financial benefits

2.     What are the implications of Human resources?

3.     What are the legal and regulatory challenges involved and addressed?

4.     What are the risks of failure (financial, organizational, etc)?

 

Analysis of all these questions ensures a smooth amalgamation process

 

Market Example: In the Axis-Enam deal, it was decided that for a smooth implementation of the amalgamation process, Enam Chairman Bhansali will be an independent director in the Axis Bank’s Board and also director of Enam, Mr. Chokhani would be the CEO of Axis Securities. The change in the Board of directors and operational management was expected to help in securing the smooth implementation of the deal.

 

Conclusion:

 

It is a given fact that most of the deals fall short of their expectation in reality. The main reason which contributes to this poor performance is the poor implementation and monitoring process. The Company usually finds the right target but fail to stick to the planned process of execution. To avoid this, these 7 steps are a golden rule for a successful merger or amalgamation.


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