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Pricing and offer
Understanding the M&A lifecycle
Signing the deal to buy or sell a company is often the most memorable moment for those involved in an M&A transaction. However, it is only one of the stages within the M&A lifecycle, in which each step impacts the other ones. This article is all about the second step: pricing and offer.
Mind your reputation
At this stage, you have identified the M&A target - or maybe you have been approached by a technology venture that matches with your ambitions. The time has come to make an indicative (non-binding) offer. Be careful though - “non-binding” may sound harmless, but actually it isn’t. In the TMT market, a typical multiple-deal-doer market, a trustworthy reputation as a bidder / buyer is crucial. If you don’t make a serious offer, you may not just lose this opportunity, but also future ones. At the same time, it is unwise to pay too much. So let’s take a closer look at the pricing and offer stage of the M&A cycle, to face the challenges and options and to lay the right foundation for the following stages of the cycle.
Case study: buying a foreign telecom venture
Let’s assume you want to acquire a foreign telecom venture, which has been identified as the right acquisition to diversify and expand your corporate activities in new markets. First of all, to set the right initial price, you need to answer a number of questions. Are your earlier presumptions about the strategic fit correct? How difficult or easy will it be to separate the M&A target from its current situation and integrate it into your business? What are its future profitability and synergetic benefits? What is the most beneficial legal and tax structure for the transaction?
No financial forecast available?
However, you don’t know the market in this particular country, its regulations, and the management of the venture. The selling shareholder has selected a small number of parties to make an offer, who have been granted access to a virtual data room with very limited information. In fact, all you can find in the data room is the current organisational structure of the venture, annual reports from the last three years and the budget for next year. There is no multi-year financial forecast available, which you need for proper initial pricing. This is not an exceptional situation – it often occurs. With an additional challenge in the TMT market: it is difficult to value new technologies.
Your organisation must draft a multi-year forecast itself. This means you need information from a large number of work streams, including HR, IT, Tax and business owners. You also need (foreign) market expertise and specialists in the fields of due diligence, tax, pension funds and valuation, either within your own company or – in many cases – from external advisors. However, if you appoint a team with representatives from all these work streams, it will be a challenge to manage and interpret all the information, and keep the transaction a secret until the deal is closed. You could also opt for a team consisting of only two or three people. But they will probably be flooded with information and not be able to interpret all the data either. In fact, what you need is a few dedicated professionals who can be the “spiders in the web”, gather the right information from the right people, know what is relevant and what is not, and can set priorities. This is crucial for your valuation model. For instance, if you by accident forget to include relevant information about synergy benefits, your initial price will be too low and you will be eliminated from the bidding process. It might be wise to appoint external specialists as project managers, although the decisions still need to be made by someone within your organisation – and decision time will always be short.
More than a number
Of course, the business case and your valuation analysis are key items to evaluate whether you want to pursue the investment opportunity. However, making an offer is much more than simply putting a number on a piece of paper. A good offer will not only mean a good price, but will also provide for the right transaction structure - for all stakeholders, shareholders, and managers – as well as terms and conditions, timelines and next steps. Making the effort to build a relationship with key decision makers (e.g. at business events, investor calls and meetings) and mentioning the names of your advisors as proof of your eagerness helps to proceed to next (due diligence) round. The due diligence stage should provide you with the information you need to make a final offer – are your presumptions about the company and the business case accurate?
A few final remarks: we often compare M&A transactions to buying a home. If your constructional advisor has found one or more weak spots in the house of your dreams, you expect your estate agent to mention those during the negotiations. So if you put all this effort into drafting a multi-year financial forecast of the M&A target, then please be sure to use it. Also, it is important to avoid a gap between the M&A deal team that focuses on getting the deal done and then moving on to the next M&A deal, leaving the business with the final stage of the M&A lifecycle: delivering the promised returns whilst they might not be involved in setting those promised returns. Finally, make sure that, next to forecast and valuation, you also organise documentation about how the forecast and the valuation have been drafted (e.g. the investment proposal that precedes the offer). This will be helpful when the actual deal is delivered and will add to transparency in terms of corporate governance.
The M&A cycle in a nutshell
Below we have embedded a picture of the M&A lifecycle and a short description of each phase. In the coming months we will publish a series of articles on each step of the M&A lifecycle, sharing stories and thoughts about each of these phases of the M&A lifecycle to offer you insight in the entire process and help you benefit from the promised returns of a deal. In the lifecycle we will emphasise the integration of your steps and actions, and what might happen if you deal with every step in isolation.
Identify the Right Deal. Either through active selection of companies or business units, or by reacting to offers in the market (one-on-one or by auction). This phase involves setting corporate strategy, identifying growth areas or selling non-core activities.
Pricing and offer. Initial pricing of a company and assessing how easy or difficult integration or separation is going to be, as well as which legal and tax structure will be most suitable (and its impact on pricing).
Perform due diligence. What do we buy? It is crucial to assess the real value of the company, the presence of ‘skeletons in the closet’, financial aspects such as balance and cash flow as well as non-financial analyses (e.g. company culture, integrity, operational synergy benefits, and operational analysis of real estate).
Execution. After the due diligence phase, a Sales and Purchase Agreement is drafted, the relevant authorities are informed and consulted, and the ‘closing’ procedures are executed.
Deliver the Promised Returns. After the transaction has been completed, the expected results must be achieved – how to realise synergies and to prevent that in a future strategic re-assessment the new business will be considered as a non-core activity and be resold (without any added value). And the final step: Post-Merger Integration.
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