- January 12, 2021
- Posted by: Ramkumar
- Category: Mergers And Acquisitions
Building The Right M&A Plan To Achieve A Growth Strategy
An M&A planning process starts with a business plan followed by a merger/acquisition strategy, which runs all consequent stages of the acquisition process. The business plan articulates a firm’s mission or vision and a business strategy for realizing that mission for all of the firm’s stakeholders. Stakeholders are integral groups, such as customers, shareholders, employees, suppliers, lenders, regulators, and communities. While the firm’s objective is to maximize shareholder value, this is most likely to be achieved when all major stakeholder groups’ interests get aligned. This post, i shall provide my insights on building the right M&A plan to achieve a growth strategy.
Corporate-level strategies involve managing a diversified or multiproduct firm and generally cross-business unit organizational lines. They entail decisions about financing individual businesses’ growth, operating others to generate cash, divesting some units, and pursuing diversification. Business-level strategies include the management of a specific operating unit within the corporate organizational structure. They may involve a unit’s striving to attain a low-cost position in the businesses it serves, distinguishing its product offering, or narrowing its focus to a particular market niche. The M&A plan is a specific type of implementation strategy and describes the acquisition’s motivation and how and when the Buyer will achieve it.
An M&A process is a series of activities culminating in transferring control from the seller to the Buyer. Some individuals quiver at following a structured process because they believe it may delay responding to opportunities, both expected and unexpected. Expected opportunities are those identified as an end of the business planning process:
- Recognizing the firm’s external operating environment.
- Evaluating internal resources.
- Assessing a range of options.
- Enunciating a clear vision of the business’s future and a pragmatic strategy for achieving that vision.
Unanticipated opportunities may arise as new data becomes available. Having a well-designed business plan does not limit tracking opportunities; instead, it gives a way to assess the opportunity quickly and substantively by defining the extent to which the opportunity supports the business plan’s realization.
The stages of the M&A process can get summed as follows:
- Business Plan—State a strategic plan for the entire business.
- Acquisitions Plan—develop the acquisition plan supporting the business plan.
- Search—search actively for acquisition candidates.
- Screen—screen and prioritize potential candidates.
- The first contact: Initiate contact with the target.
- Negotiation—refine valuation, structure the deal, perform due diligence, and develop the financing plan.
- Integration Plan—produce a plan for integrating the acquired business.
- Closing—obtain the necessary approvals, resolve post-closing issues, and execute the closing.
- Integration: Implement post-closing integration.
- Evaluation—conduct the post-closing evaluation of acquisition.
Building the right M&A strategy
If a firm chooses to execute its business strategy through an acquisition, it will need an acquisition plan. The M&A plan concentrates on tactical issues rather than on strategic matters. It includes management objectives, a resource evaluation, a market analysis, senior management’s guidance in administering the M&A process, a timetable, and the individuals accountable for executing it. These and the guidelines to apply when searching acquisition targets get codified in the first part of the planning process. After target identification, the M&A team must take several additional steps, including contacting the target, stating a negotiation strategy, defining the initial offer price, and evolving both financing and integration plans.
The initial steps in the M&A planning process involve documenting the necessary plan elements before searching for an acquisition target.
Further, observing the outcome of previous deals in the same industry can be highly useful in planning an acquisition. There is a strong positive relationship between premerger planning involving an analysis of past M&A’s in the same industry and postmerger performance. The correlation is high in cross-border deals where cultural differences are the greatest.
The acquisition plan’s objectives should be consistent with the firm’s strategic objectives. Financial and non-financial objectives alike should support the realization of the business plan objectives. Moreover, as it is valid with business plan objectives, the acquisition plan objectives should be quantified and include a date when the deal team should realize such objectives.
Financial objectives could involve a minimum return rate or operating profit, revenue, and cash flow targets to achieve within a specified period. Minimum or required return targets may be substantially higher than those specified in the business plan, which relates to shareholders’ required return. The required return for the acquisition may indicate a considerably higher level of risk due to the observed variability of the proposed cash flows’ amount and timing resulting from the acquisition.
Non-financial objectives address the motivations for making the acquisition that supports achieving the business plan’s financial returns. They could entail getting rights to specific products, patents, or brand names; rendering growth opportunities in the similar or related markets; generating new distribution channels in the related markets; acquiring new production capacity in strategically located facilities; supplementing R&D capabilities; and growing access to proprietary technologies, processes, and skills.
Early in the acquisition process, it is essential to ascertain the firm’s available resources and the time the leadership team will commit to a deal. Financial resources that are likely available to the acquirer include the internally generated cash flow from the business operation over standard operating requirements and capital raised from the stock and bond markets. In instances where the target firm is known, the possible financing pool includes funds contributed by the combined companies’ internal cash flow over standard operating requirements. Additional funding can get obtained by the combined firms’ ability to issue equity or raise leverage and proceeds from selling assets not needed to fulfill the Buyer’s business plan.
Financial theory submits that an acquiring firm will invariably attract sufficient funding for an acquisition if it can show that it can earn its cost of capital. In reality, senior management’s risk tolerance plays a vital role in deciding what the acquirer thinks it can manage to spend on a merger or acquisition. Risk-averse managers may be tilted to commit only a small part of the total financial resources that are possibly available to the firm.
Three basic types of risk defy senior management who are contemplating an acquisition. How these risks are perceived will decide how much of potentially available resources management will commit to acquiring.
- Operating risk is the capacity of the Buyer to run the acquired company. It is higher for M&As in markets unrelated to the acquirer’s core business.
- The financial risk applies to the Buyer’s readiness and capacity to leverage a transaction and shareholders’ willingness to accept a near-term EPS dilution. To maintain a distinct credit rating, the acquiring company must maintain specific financial ratios, such as debt-to-total capital and interest coverage. The Buyer can approximate a firm’s incremental debt capacity by analyzing the relevant financial ratios to comparable firms in the corresponding industry rated by the credit rating agencies. The difference represents the amount the firm could borrow without risking its current credit rating.
- Overpayment risk involves diluting EPS or reducing its growth rate emanating from paying significantly more than the acquired company’s economic value.
M&A plan for the Buyer
- Plan objectives: Recognize the explicit purpose of the acquisition and specific goals that need to get accomplished (e.g., cost reduction, access to new customers, or proprietary technology) and how the execution of these goals will ultimately facilitate the acquiring firm to achieve its business strategy.
- Timetable: Set a timetable for closing the acquisition, including integration if the target firm is to get merged with the acquiring firm’s operations
- Resource/capability evaluation: Assess the acquirer’s financial and managerial ability to close the deal. Identify the walkaway price in terms of the maximum price the acquirer should pay for an acquisition.
- Management guidance: Indicate the acquirer’s choices for a “friendly” acquisition; controlling interest; using stock, debt, cash, or some combination; and so on.
- Search plan: The deal team should state the criteria for target identification. They should develop a rationale for the targets identified and how they will contact the target firm.
- Negotiation strategy: Identify key buyer/seller concerns. Suggest a deal structure (i.e., terms and conditions) addressing all parties’ fundamental needs. Other points include acquiring (i.e., assets or stock structure) and tax structure and how they might “close the gap” within the seller’s price expectations and the offer price.
- Determine initial offer price: Provide forecasted 5-year income, balance sheet, and cash flow statements for the acquiring and target firms independently and the consolidated acquirer and target firms with and without the impacts of synergy. Identify an opening offer price, the composition (i.e., cash, stock, debt) of the purchase price, and why you think this price is relevant in satisfying both target and acquirer shareholders’ primary needs.
- Integration plan: The deal team should identify integration challenges along with possible solutions.
An acquisition’s success depends on the focus, comprehension, and discipline ingrained in a detailed and viable business plan that addresses four overarching questions:
- Where should the firm compete?
- How should the firm compete?
- How can the firm meet customer need better than the competition?
- Why is the preferred strategy superior to other plausible options?
An acquisition is just one of several options available for implementing a business strategy. The decision to pursue an acquisition usually rests on the desire to achieve control so that the acquisition will deliver the sought objectives more quickly than other alternatives. Once a firm has concluded that an acquisition is crucial to realizing its strategic direction, developing a merger/acquisition plan is essential.