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Executing Effective M&A - Part 1 Critical steps to take up to 18 Months before your deal begins

PART 1 OF 31

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Executing Effective M&A, Part 1

Introduction

In the world of mergers and acquisitions, executing a smartly conceived, well-timed plan is everything. To be successful, M&A activity must have clearly defined goals that are communicated repeatedly to all team members, and the deal must follow a structure that allows those goals to be accomplished in a methodical way.

Most importantly, M&A transactions that succeed in creating enhanced value always follow certain steps before, during and after the deal itself.

In Part 1 of this 3-part series on Executing Effective M&A, we will examine the critical pre-negotiation preparations that must take place to properly position a deal for success and ensure value creation after the deal is done.

Creating an M&A Masterpiece

Industry experts in the M&A world sometimes refer to “the art of the deal.” It’s a phrase that encompasses the hard-to-characterise actions that separate a successful venture from one that’s doomed to failure and it includes the experience, insight and knowledge displayed by the deal team in order to ensure that a transaction ultimately creates the value that was intended.

But, bend this metaphor into a slightly different shape and you see that the “art” of a deal might only be a rigorous process, impeccably implemented.

Imagine an M&A transaction is an actual piece of art, perhaps an oil painting by a master craftsman. The painting process is broken down into a series of discrete steps before the masterpiece is achieved. The artist first must select a compelling subject, assemble the right paints, solvents and brushes, create and refine the initial sketches, and then continually rework the final image until the piece is finished and its worth can be assessed in the marketplace.

Similarly with M&A, each step in the process—from long before the deal begins until after it’s concluded—must occur with the proper subject, in the proper place, at the proper time, using the proper tools.

Companies must painstakingly select the correct potential target from among all the possibilities available to them; they must assemble the people to pursue the project, they must conduct rigorous due diligence to fully understand the deal, and once it’s done and the two new entities have been integrated, only then will management understand how the market values their creation.

Both acquirers and sellers can benefit from examining their deal-making in light of this progression from beginning to middle to end. Following each stage methodically, as well as industry best practices, can ensure that a deal is ultimately successful on all levels.

We will start by examining how the M&A process can be positioned for success even before the deal begins. (In Parts 2 and 3 of this series, we will look at best practices during deal due diligence, and also best practices for post-merger integration.)

What time is the right time for M&A?

M&A activity occurs when a company or group decides to pursue changes that will result in a greater monetary value being created than previously existed.

Over the past few years, the M&A process has become more fractured, more complicated and lengthier than ever before, as would-be buyers exercise greater levels of caution for fear of making a poor buying decision.

The after-effects of the worldwide recession definitely dampened the M&A market; however there are strong signs of confidence returning, a desire for quality investment opportunities and clear hot-spots for particular industries.

According to the Institute of Mergers, Acquisitions and Alliances (IMAA, www.imaa-institute.org) a non-profit organisation that tracks M&A activity worldwide, M&A transactions peaked in 2007 in both value and volume, before slipping to what the organisation anticipates will be a nearly decade-long low number of transactions in 2013.

At the end of 2013, a number of high profile, high dollar M&A transactions had boosted worldwide deal values, even though fewer transactions occurred as a whole.

In the U.S., the ongoing recovery of the stock market, which reached historic highs in the autumn of 2013, have supported renewed interest in M&A, although not at quite the pace previously seen during stronger economic times. The robust balance sheets corporations accrued during the downturn are playing a part in sparking new M&A interest, as companies start to eye competitors and think of expanding through strategic acquisitions.

In Europe, where the economic recovery continues to labour on, the downward trend in transactions has been very pronounced. The value of announced M&A deals in 2013 fell to a level not seen since the mid-1990s, and Europe remains tentative as the slow upturn continues.

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Executing Effective M&A, Part 1

Announced M&A activity for the Asia-Pacific region in 2013 fared similarly, with deal value dropping from a high in 2010, although the IMAA’s projections showed a belief that the full 2013 value would in fact approach 2012 levels.

Even during periods of uncertainty, however, companies who want to grow still seek new product lines, new markets and new geographic inroads. Organisations that wish to sell an asset want to realise the value they have achieved with that product or they want to move in a new direction when that asset is no longer necessary to the strategic corporate direction.

In any case, both buyers and sellers could benefit tremendously by positioning themselves for M&A efforts long before they sit down with a prospective partner.

In fact, preparation for M&A should begin as much as 18 months prior to an actual deal, particularly in light of today’s ongoing market where buyers are wary of economic turmoil, political uncertainty and increasingly litigious and regulated conditions.

In some sophisticated companies with extensive experience in M&A, such as private equity (PE) firms who manage a large number of portfolio companies, internal company documentation may be assembled and prepared a year or even more prior to a potential sale.

The reason?

PE management know exactly what type of documentation and information potential acquirers will be looking for and the format in which they will be most easily able to review it. Starting preparations early allows them to precisely tailor that information to match the requirements of due diligence.

In addition, by beginning to prepare and collect all M&A information well in advance of a sale, everyone on the PE deal team has time to carefully examine and digest that information. They can take the time to identify potential gaps or areas where more documentation is needed. They can do a ‘dry run’ due diligence on their own data, testing that their information systems and financial data are both solid and that their internal processes stand up to scrutiny.

They can also anticipate the types of red flags that a purchaser might raise and then work to reduce those issues and ensure full disclosure in order to increase a buyer’s confidence levels. These sophisticated players in the M&A world understand that a good process that contributes to faster, easier due diligence results in a better M&A experience for everyone involved.

Unlike other companies who have little to no experience with M&A, PE firms understand this ‘before-deal’ preparation will eventually allow them to sell their portfolio companies to the right buyer, at the right price, in an expedited fashion.

Preparing for success: Going to market and preparing for due diligence

It’s a truth that shows up repeatedly throughout the M&A world: Deals that drag on and on often have an unsatisfactory outcome. A key reason that deals get bogged down in due diligence is that often a company has not properly prepared for the process.

Due diligence processes that tend to falter are ones where the target company really didn’t understand what types—and how much—information a thorough due diligence review would demand. In those cases, would-be purchasers have to continually request more and more information to complete their diligence, which both slows down the deal and gives the impression that the target company is at best naive, and at worst, lax and unprofessional.

In a company that is unprepared, documents have to either be gathered ad hoc, or in worst-case scenarios, created ad hoc because they don’t exist in a usable format. That puts incredible strain on internal resources within the company, and hurrying to supply documents in response to specific requests can lead to mistakes and other errors that will potentially kill a deal.

From a seller’s perspective, preparing for due diligence involves assessing how an asset can be best packaged for sale. Especially in the markets that seem to exist now, company management must decide early on how their asset might best be restructured, fine-tuned and ultimately financed.

By starting the process early, in advance of actual negotiations, the owners of an asset have the opportunity to present it in the best light. They can proactively address any possible stumbling blocks that might trip a potential buyer, such as regulatory, compliance or even political concerns for the market they operate in. This is particularly true for companies that operate in certain emerging markets where the potential for corruption has been well reported, or in markets where increasing government involvement and regulation of issues, such as bribery, are on the rise.

In addition, the faster an asset can be prepared for due diligence, the more ability a seller has to quickly react to fluctuations in the market. If a would-be seller maintains a state of asset-readiness by beginning document collection

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well before an expected deal, it becomes possible to quickly trigger the deal when market windows are most favourable.

Pre-deal preparation is also important for prospective acquirers today.

For companies considering an acquisition, it’s critical for those involved to painstakingly identify and then communicate what they want to accomplish with an acquisition: is it to extend the corporate footprint, to bolt-on an opportunity, to gain a geographic foothold in a certain region or even to take out a competitor?

Aligning the due diligence team with the corporate goals from the outset is essential. Taking the time internally to focus the acquisition team and key internal contacts on the merits of an acquisition ultimately lays the groundwork for a rewarding deal conclusion.

How a virtual data room (VDR) enhances pre-deal preparation

A good document process and a good system that fosters thorough reporting on critical subjects, such as financials, legal and regulatory compliance efforts, anti-bribery provisions, intellectual property concerns and human resources issues will go a long way to actually executing a deal. As such, a virtual data room (VDR) can be the critical tool that allows dealmakers to present all relevant information in a secure, centralised, web-enabled and easy-to-use format.

Another benefit of employing a VDR before you go to market is that it easily allows you to coordinate a geographically dispersed team without expensive and time-consuming travel. A VDR greatly simplifies coordinating pre-deal activities with expert advisors, wherever they are located, including bankers and legal/accounting/HR experts. Everyone can gather and post information to a single, secure platform, and then use that platform for all pre-deal reviews.

By using VDR technology to benefit the deal team, worries over e-mails that could potentially be leaked, or the problem of attachments that are too large to transmit easily are removed. And, because the VDR serves as a central repository, it’s much easier to keep multiple people from duplicating effort. A VDR keeps everyone focused inside one homogeneous platform to accomplish the document collection. It expedites information gathering by allowing for collection and verification of exactly what’s needed, including the right version of any particular document.

Using a top-of-the-line VDR also means potential partners from anywhere around the world can easily log in to the

solution to conduct early, “first look” due diligence. If a VDR with industry-leading security features is employed, dealmakers can remain in complete control of who sees what information by virtue of the ability to grant varying rights to different users. There are no limits in terms of potential targets or potential acquirers.

A company in China could sell itself to a company in Oslo, and vice versa. A potential acquirer can log in to the VDR from their desk and examine a potential acquisition anywhere in the world. It is exceptionally easy for potential partners to review a deal and the potential buying audience for an asset is greatly expanded.

In addition, by using the specialised tools built into the highest-quality VDRs, once potential partners are invited to review a deal, an effective audit trail is established, along with excellent insight into a potential partner’s motivations. The VDR “owner” can see exactly what information different groups are viewing, down to the exact amount of time they have spent on a particular page. This provides critical insight into buyer intent and indicates what concerns they might have, allowing time for a proactive response.

From the buyers’ standpoint, using a VDR as a due diligence vehicle means they will see a well-organised, searchable repository of documents, which provides a favourable impression of the asset and the company selling it.

Finally, if the correct VDR from a 3rd party vendor is selected, advantage can be gained from their extensive industry expertise, including pre-built indexes designed specifically to help post the right types of information for more than 250 specific industries, such as mining or technology or pharmaceutical sales, or for specific deal types, such as distressed asset sales or bankruptcy actions. Selecting the right VDR partner can also provide access to their expert consultants who can help design a best-practice workflow among team members to enable the end goal to be achieved more quickly.

In Part 2 of Executing Effective M&A, we will examine best practices for due diligence during the deal, and in Part 3, we will look at how you can employ specific tools to improve post-deal integration.

To learn more about how Merrill DataSite can help you prepare for your next M&A transaction, visit www.datasite.com or e-mail info@datasite.com today.

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Executing Effective M&A, Part 1

M&A Checklist: Critical considerations prior to the deal starting

Up to 18 Months pre-project open

Preparation for M&A should begin as much as 18 months prior to an actual deal opening. Preparing for due diligence early allows you to quickly react to fluctuations in the market and new opportunities.

Assemble the management team to identify proposed strategies on either the buy or sell side: i.e., identify the long-term goal to buy or sell in order to: “gain new technology”, “find a strategic partner to fund further growth”, “enter Market X with an established entity,” etc.

Discuss and identify critical metrics for an ideal transaction: “We want access to an established regional sales team”, “We need a financial partner that can deliver X million in growth”, etc.

Assess how an asset can best be packaged for sale. Discuss and examine how the asset might best be restructured, fine-tuned and ultimately financed.

Identify key individuals in the company who will need to prepare information about the asset, including HR, IT, sales and marketing, legal, accounting, etc.

Select a high-quality virtual data room (VDR) provider to create an accessible, centralised document repository that will allow team members to collaborate and review company information in one place.

Implement the VDR before you go to market to coordinate a geographically dispersed team.

Take advantage of your VDR provider’s industry expertise - pre-built indexes designed to help post the right types of information for specific industries, such as mining, technology or pharmaceutical sales, or for specific deal types, such as IPO or distressed asset sale.

Enlist your VDR partner to design a best-practice workflow among team members. A VDR will keep everyone focused inside one platform to accomplish document collection and will help you collect and verify what’s needed, including the right version of any particular document.

Communicate to the larger team that the company is preparing for an eventual transaction, and that corporate materials need to be collected as a “dry run” for anticipated due diligence.

Ensure you are reporting on critical subjects, such as financials, legal and regulatory compliance efforts, anti-bribery provisions, intellectual property concerns and HR issues, and that this is documented.

Identify potential trouble spots that may need attention, i.e. ongoing legal disputes, problematic sales commission structures, existing covenants that may affect a sale, etc. Address any red flags that might trip a potential buyer, such as regulatory, compliance or even political concerns for the market in which you operate.

Begin and continue internal due diligence on the data, testing all systems and financial information are solid and that internal processes will stand up to external scrutiny.

Identify potential gaps or areas where more documentation is needed and fill those gaps.

Help internal team members become familiar with the type and amount of information potential partners will request, and ensure internal systems and personnel are fully prepared to meet requests and answer questions quickly and accurately.

About Merrill DataSite

Merrill DataSite is a secure virtual data room (VDR) solution that optimises the due diligence process by providing a highly efficient and secure method for sharing key business information between multiple parties. Merrill DataSite provides unlimited access for users worldwide, as well as real-time activity reports, site-wide search at the document level, enhanced communications through the Q&A feature and superior project management service – all of which help reduce transaction time and expense. Merrill DataSite’s multilingual support staff is available from anywhere in the world, 24/7, and can have your VDR up and running with thousands of pages loaded within 24 hours or less.

With its deep roots in transaction and compliance services, Merrill has a cultural, organisation-wide discipline in the management and processing of confidential content. Merrill DataSite is the first VDR provider to understand customer and industry needs by earning an ISO/IEC 27001:2005 certificate of registration – the highest standard for information security – and is currently the world’s only VDR certified for operations in the United States, Europe and Asia. Merrill DataSite’s ISO certification is available for review at www.datasite.com/security.htm.

As the leading provider of VDR solutions, Merrill DataSite has empowered more than two million unique visitors to perform electronic due diligence on thousands of transactions totalling trillions of dollars in asset value. Merrill DataSite VDR solution has become an essential tool in an efficient and legally defensible process for completing multiple types of financial transactions.

Learn more by visiting www.datasite.com today.

About Merrill Corporation

Founded in 1968 and headquartered in St. Paul, Minn., Merrill Corporation (www.merrillcorp.com) is a leading provider of outsourced solutions for complex business communication and information management. Merrill’s services include document and data management, litigation support, language translation services, fulfilment, imaging and printing. Merrill serves the corporate, legal, financial services, insurance and real estate markets. With more than 5,000 people in over 40 domestic and 22 international locations, Merrill empowers the communications of the world’s leading organisations.

Executing Effective M&A, Part 1

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