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A successful merger or acquisition involves specific steps prior to executing the transaction and integrating the target company. Custom merger and acquisition (M&A) business plans involve special expertise and due diligence.
In any merger or acquisition, the combined companies expect to produce net cash flow and financial returns greater than the sum of the individual companies. The two companies complement each other’s strengths and compensate for weaknesses. Available synergies are the motivation for a combination. The value of the synergies determines the price of the merger or acquisition.
From the start, management needs to focus on how an acquisition will create synergies. Properly crafted measurable objectives optimize the likelihood of a successful transaction and minimize wasted effort. Common objectives for pursuing mergers and acquisitions include:
Merging with or acquiring a company that serves essentially the same markets can potentially offer economies of scale in manufacturing, distribution, sales and marketing, and administrative functions. For example, if a manufacturer acquires a competitor with manufacturing plants that produce the same products and/or serve the same markets, the combined companies could reduce the number of plants while serving current and future demand. The production capacity of the combination must be larger than the two company’s original output. Underutilized capacity, more efficient equipment, and better processes are some reasons for this acquisition.
Rationalizing administrative functions is often a basis for combining companies. Headquarter costs are targeted for reduction.
A merger or acquisition can potentially expand the combined company’s product or service offers. For example, an office equipment and supplies distributor might acquire a distributor of laptop computers and personal electronic devices to create value. The additional products could increase sales through existing channels with minimal additional expense. An accounting firm might consider acquiring a company that installs accounting software to expand its services to existing clients and add new clients.
Entering new markets is another common motivation for combining companies. For example, a company that purchases a foreign company to establish a presence in a foreign market enters a new geographic market.
Entering a new product or service is different from expanding product or service offers. Typically, the new market has no relationship or only a slight relationship with the company’s current business. For example, Amazon.com initially served as a premier online retail book store. During the past decade, Amazon.com has dramatically expanded the number of market sectors it serves.
A company may seek to acquire a competitor to optimize its market share.
A company with erratic financial performance may acquire a healthier company with the expectation that the combination will stabilize financial results and over time, lead to increased profitability and cash flow.
While mergers and acquisitions can create synergies in many ways, it is important to prioritize the company’s objectives for a merger or acquisition. The priority is based on the company’s needs for increased growth and financial returns. Focus on the company’s top objective supports disciplined decisions and maximizes the potential for success. Additional synergies created in other ways simply enhance value creation.
Having determined the optimum priority objective, the company’s next step is to identify and qualify targets. Targets are identified in a number of ways. Competitors, suppliers, and even customers could be appropriate targets. If the company has an existing relationship with a potential target’s senior management, direct contact may be appropriate. Alternatively, the company could enlist another party to gauge interest in a merger or acquisition. An outside executive who has a relationship with the target, an investment banker, a legal firm, or even a industry trade association could be deployed. Other sources include private equity firms, angel investors, and business brokers.
Once there is agreement to investigate a merger or acquisition, the formal due diligence process begins. This critical step enables the company to evaluate the target’s competitive position, confirm that the target could address the company’s primary objective, assess the target’s financial condition, and identify material risks and opportunities. Due diligence qualifies the target and requires a number of steps:
Using the information obtained from due diligence, it is critical for management to follow a comprehensive M&A business plan. An all-embracing plan serves as the basis for negotiations with the target and financing parties.
An optimum M&A business plan focuses on how the acquisition will maximize value through synergies created by combining the company and the target. The plan might include an analysis demonstrating that acquiring the target:
An optimal merger and acquisition business plan provides the estimated value of the target and the company’s price offer. This document is the basis of negotiation with the target. As the target must be acquired for a value that meets the company’s financial return objectives, the company must be highly confident that the synergies reflected in the business plan will be achieved.
Our seasoned professionals stand ready to assist you in developing your optimal business plan.
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A distinguished member of the OptimalThinking.com business plan writing team, Tom Loftus, MBA has served as the Chief Financial Officer of two companies and Senior Vice President, Finance / Treasurer of Genesee & Wyoming Inc., a mid-size company listed on the New York Stock Exchange. Mr. Loftus has created numerous business plans and developed financial models for startup financing, acquisition opportunities, project and corporate financing transactions, government grant and loan applications and capital authorization requests.
Mr. Loftus is proficient in corporate valuations, operations planning, obtaining grant and loan funding and organization design for finance and accounting. He has extensive experience negotiating purchase and sale agreements and long term supply agreements with private companies, debt and equity financing agreements with commercial bankers, investment bankers and government agencies.
Rosalene Glickman, Ph.D. is the creator and best-selling author of Optimal Thinking, the basis of peak performance and value optimization. Dr. Glickman oversees select M&A business plans.
Our business plan writing team consists of seasoned executives and financial professionals dedicated to value optimization.