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Unveiling the Deal: What Happens When Companies Merge

Vincent Yuan · updated on   · 10 min read
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Unveiling the Deal: What Happens When Companies Merge
Photo by Vincent Yuan @USA / Unsplash

This post is to go through the most important processes in the merger of companies and answer most interested questions for employees, shareholders and customers!

1 Company Merger Process

Acquiring a company in the U.S. is a complex process with various stages and potential outcomes. Here's a breakdown of the typical steps and what you can expect:

1. Pre-Negotiation:

  • Target Identification: The acquiring company identifies potential targets based on strategic fit, market potential, and other criteria.
  • Initial Contact: Discreet inquiries are made to gauge interest and gather information.
  • Non-Disclosure Agreement (NDA): Both parties sign an NDA to protect confidential information during discussions.

2. Due Diligence:

  • In-depth Investigation: The acquiring company assesses the target's financial health, operations, legal status, and other critical factors.
  • Valuation: Financial experts determine the target company's fair market value.

3. Negotiation and Agreement:

  • Letter of Intent (LOI): A non-binding agreement outlining key terms like price, structure, and timelines.
  • Negotiation: Both sides negotiate the final terms of the acquisition agreement, including purchase price, payment methods, and deal structure.
  • Definitive Agreement: A legally binding document outlining all agreed-upon terms and conditions.

4. Regulatory Approvals:

  • Antitrust Review: The deal might require approval from the Federal Trade Commission (FTC) or other regulatory bodies to ensure fair competition.
  • Industry-Specific Approvals: Depending on the industry, further regulatory approvals might be necessary.

5. Closing and Integration:

  • Closing: All legal formalities are completed, and the acquisition is finalized.
  • Integration: The acquiring company integrates the target's operations, employees, and systems into its own structure. This can be a complex and lengthy process.

What to expect:

  • Timeframe: The process can take months or even years, depending on the complexity of the deal and regulatory hurdles.
  • Costs: Significant legal, financial, and integration costs are involved.
  • Uncertainty: Regulatory approvals and market conditions can impact the deal's outcome.
  • Impact: Acquisitions can affect employees, customers, and the industry at large.

Additional points to consider:

  • There are different types of acquisitions, such as stock purchases, asset purchases, and mergers. Each has its own nuances.
  • Friendly acquisitions involve cooperation between both parties, while hostile takeovers involve a more aggressive approach.
  • The specific process and outcomes can vary significantly depending on the size, industry, and circumstances of the companies involved.

Now, let's break down each process and dive deep into how each process works, with some examples.

Photo by Vincent Yuan @USA / Unsplash

2 Pre-negotiation

The pre-negotiation phase in a company acquisition lays the groundwork for a successful deal or identifies potential roadblocks early on. Here's a more detailed breakdown of this crucial stage:

1. Target Identification:

  • Strategic fit: Aligning the target's strengths and weaknesses with the acquirer's goals and existing business.
  • Market potential: Assessing the target's market share, growth potential, and competitive landscape.
  • Financial attractiveness: Analyzing profitability, debt levels, and valuation multiples.

Examples:

  • Amazon's acquisition of Whole Foods: Focused on expanding Amazon's grocery delivery and brick-and-mortar presence.
  • Disney's acquisition of Marvel Entertainment: Aimed at acquiring valuable intellectual property and expanding its superhero universe.

2. Initial Contact:

  • Discreet approach: Using intermediaries, investment bankers, or direct contact depending on the situation and target receptivity.
  • Information gathering: Gauging the target's general interest, financial health, and potential deal structure.
  • Non-Disclosure Agreement (NDA): Protecting confidential information shared during discussions.

Example:

  • Microsoft's acquisition of LinkedIn: Initial contact reportedly occurred through a mutual acquaintance who connected Satya Nadella and Jeff Weiner.

3. Due Diligence Preparation:

  • Gathering internal resources: Assembling legal, financial, and operational teams for in-depth analysis.
  • Developing a due diligence plan: Defining scope, timelines, and key areas of investigation.
  • Negotiating access: Securing permission to review the target's financial records, contracts, and other sensitive information.

4. Non-Binding Negotiations:

  • Indicative offer: Presenting a non-binding price range based on preliminary valuation and market conditions.
  • Structure exploration: Discussing potential deal structures (stock purchase, asset purchase, merger) and their implications.
  • Exclusivity agreement (optional): Granting the acquirer temporary exclusive negotiation rights in exchange for a fee.

Remember:

  • Pre-negotiation is a delicate dance between expressing interest without revealing your hand too soon.
  • Thorough due diligence is crucial for understanding potential risks and opportunities.
  • Non-binding negotiations help refine deal terms and identify potential dealbreakers before investing significant resources.
Photo by Vincent Yuan @USA / Unsplash

3 Due Diligence

Due diligence is a crucial step in the company merger process, allowing the acquiring company to gain a deep understanding of the target company's financial health, operations, legal status, and potential risks. Here's a more specific breakdown of how it typically works:

Stages of Due Diligence:

1. Pre-Diligence:

  • Initial research and information gathering about the target company.
  • Signing a Non-Disclosure Agreement (NDA) to protect confidential information.

2. Financial Due Diligence:

  • Reviewing financial statements, tax returns, and internal controls.
  • Assessing the company's financial performance, profitability, and debt levels.
  • Identifying potential financial risks and liabilities.

3. Operational Due Diligence:

  • Evaluating the target company's business operations, processes, and systems.
  • Analyzing market position, competitive landscape, and customer base.
  • Identifying potential operational challenges and opportunities.

4. Legal Due Diligence:

  • Reviewing legal documents, contracts, and intellectual property rights.
  • Assessing potential legal risks, compliance issues, and litigation exposure.
  • Ensuring the target company is operating legally and has a clear title to assets.

5. Environmental Due Diligence:

  • Assessing potential environmental liabilities and regulatory compliance.
  • Identifying any environmental hazards or contamination on the target company's property.

6. Human Resources Due Diligence:

  • Evaluating the target company's workforce, employee contracts, and labor relations.
  • Identifying potential human resource risks and liabilities, such as employee lawsuits or unionization efforts.

Additional Points:

  • The specific scope and depth of due diligence vary depending on the size and complexity of the deal.
  • Experienced professionals, such as accountants, lawyers, and consultants, are often involved in the process.
  • Due diligence findings can impact the negotiation of the deal terms and price.
Photo by Vincent Yuan @USA / Unsplash

4 Negotiation and Agreement

The negotiation and agreement phase is arguably the most critical stage in an acquisition, where the terms are hammered out and the deal's fate is determined. Here's an in-depth look at how it typically unfolds:

1. Letter of Intent (LOI):

  • Non-binding document outlining key deal terms: Price, structure, timelines, contingencies, and exclusivity provisions.
  • Serves as a roadmap for further negotiations: Prevents wasting time if fundamental differences exist.
  • May include break-up fees: To compensate the target if the deal falls through due to the acquirer's actions.

Example:

  • SoftBank's acquisition of WeWork: The complex LOI included contingencies based on WeWork's financial performance.

2. Negotiation of Definitive Agreement:

  • Intensive process involving lawyers, advisors, and executives: Each side advocates for their best interests.
  • Key areas of negotiation: Purchase price, payment structure, warranties, indemnification, employee-related matters, and regulatory approvals.
  • Back-and-forth through drafts and revisions: Striving for a mutually beneficial agreement.

3. Deal Sweeteners:

  • Non-cash consideration: Stock, earn-outs, or other creative structures to bridge valuation gaps.
  • Management incentives: Retention packages or equity grants to key employees.

Examples:

  • Disney's acquisition of 21st Century Fox: Included a complex stock-based deal structure.
  • Elon Musk's acquisition of Twitter: Involved offering severance packages to some employees.

4. Finalizing the Agreement:

  • Legal review and approvals by boards and shareholders: Ensuring compliance and alignment.
  • Signing ceremony: Formalizing the agreement and marking a significant milestone.

Additional Points:

  • Negotiation is a dynamic process with power struggles and potential deadlocks.
  • Effective communication, flexibility, and a win-win mindset are crucial for success.
  • Cultural differences and regulatory complexities can add layers to the process.
Photo by Vincent Yuan @USA / Unsplash

5 Navigating the Regulatory Maze

Regulatory approval is a crucial hurdle in many acquisitions, aiming to ensure fair competition, consumer protection, and other societal considerations. Here's an overview of the process and common examples:

1. Identifying Relevant Regulators:

  • Industry-Specific Agencies: Depending on the industry, agencies like the Federal Trade Commission (FTC), Department of Justice (DOJ), or the Federal Communications Commission (FCC) might be involved.
  • Antitrust Regulators: The FTC and DOJ hold primary authority for antitrust reviews to prevent mergers that reduce competition.
  • Other Potential Regulators: Depending on the deal's specifics, agencies like the Securities and Exchange Commission (SEC) or state regulators might also weigh in.

2. Filing and Review Process:

  • Filing: Companies submit detailed information about the merger, including market analyses and justifications.
  • Initial Review: Regulators assess the potential impact on competition and other relevant factors.
  • Second Request: If concerns arise, regulators can request more information and conduct deeper investigations.
  • Public Comment: In some cases, the public can submit comments on the proposed merger.

3. Approval or Challenge:

  • Clearance: If regulators determine no significant anti-competitive harms, they grant approval.
  • Conditions: Approvals might come with conditions aimed at mitigating potential harms, like divestitures or restrictions on specific practices.
  • Challenge: If regulators believe the deal violates competition laws, they can file lawsuits to block it.

4. Timeline:

  • The process can vary significantly depending on the complexity of the deal and the level of scrutiny required. It can take anywhere from weeks to months, or even years in complex cases.

Examples:

  • AT&T's attempted acquisition of T-Mobile: The DOJ blocked the merger due to concerns about reduced competition in the wireless market.
  • Facebook's acquisition of WhatsApp: The FTC initially challenged the deal but ultimately approved it with conditions.

Additional Points:

  • The regulatory landscape can be complex and constantly evolving, requiring expert legal counsel for navigating the process.
  • The level of scrutiny and potential challenges can significantly impact the deal timeline and feasibility.
  • Understanding the regulatory environment and proactively addressing potential concerns is crucial for a successful acquisition.
Photo by Vincent Yuan @USA / Unsplash

6 Closing and Integration

Closing and integration mark the final chapter in a company merger, but they bring their own set of challenges and complexities. Here's a detailed breakdown:

Closing:

  • Formalization: Final documents are signed, legal formalities are completed, and the acquisition officially closes.
  • Regulatory Approvals: If required, all necessary regulatory approvals must be secured before closing.
  • Funding and Payment: The acquiring company finalizes the payment to the target company, often in cash, stock, or a combination.
  • Shareholder Votes: For public companies, shareholder approval might be required before closing.

Example:

  • CVS Health's acquisition of Aetna: The deal closed in 2018 after receiving regulatory approval and shareholder votes from both companies.

Integration:

  • Combining Operations: Merging business functions, systems, and teams from both companies.
  • Cultural Integration: Aligning company cultures, values, and communication styles.
  • Employee Transitions: Addressing employee concerns, managing potential layoffs, and implementing training programs.
  • Synergy Realization: Identifying and capturing cost savings, revenue growth, and other value-creation opportunities.

Challenges and Risks:

  • Integration complexity: Cultural clashes, resistance to change, and IT system integration issues can be difficult to overcome.
  • Synergy realization: Achieving projected synergies can be slower and more challenging than anticipated.
  • Employee morale and retention: Managing employee anxiety, skills gaps, and potential talent loss during integration is crucial.

Examples:

  • Disney's acquisition of Fox: The integration process was complex due to the size and diverse businesses involved.
  • Kraft Heinz's acquisition of Unilever: The merger failed to achieve expected synergies and led to cultural clashes.

Additional Points:

  • Effective communication, change management strategies, and strong leadership are crucial for successful integration.
  • The integration process can take months or even years, and requires ongoing monitoring and adjustments.
  • The success of a merger ultimately hinges on a smooth and well-executed closing and integration phase.
Photo by Vincent Yuan @USA / Unsplash

7 Frequently Asked Questions

Here are some of the most commonly asked questions about company mergers from the perspectives of employees, shareholders and customers:

Employees

For sure, the job security is the no.1 question. During a company merger, the evaluation of employee jobs typically involves several considerations. Let’s explore this from different angles:

Internal Assessment by the Merging Companies:

  • The merging companies themselves evaluate employee roles, responsibilities, and skills. They assess which positions are redundant, which are critical, and which can be integrated.
  • Job evaluations may involve comparing job descriptions, performance records, and qualifications.

Consulting Companies or HR Experts:

  • Some mergers engage external consulting firms or HR experts to assist in evaluating employees.
  • These experts analyze factors such as job functions, competencies, and market value.
  • They may provide recommendations on retaining key talent, aligning compensation, and managing workforce transitions.

Retention of Key Employees:

  • Identifying and retaining key employees is crucial. These are individuals with specialized skills, institutional knowledge, or leadership roles.
  • Companies consider factors like expertise, client relationships, and strategic importance.

Redundancies and Layoffs:

  • Unfortunately, some positions become redundant due to overlapping functions after the merger.
  • Companies decide which roles to eliminate based on business needs, cost savings, and efficiency.
  • Severance packages may be offered to affected employees.

Skill Assessment and Fit:

  • Companies evaluate whether employees’ skills align with the merged organization’s goals.
  • They consider adaptability, willingness to learn, and cultural fit.

Shareholders

This is a breakdown to show how shareholders are impacted during a company merger:

Exchange of Shares:

  • In a stock-for-stock merger, shareholders of both companies receive shares in the new combined entity.
  • The exchange ratio determines whether one company’s shareholders receive a premium above their share price before the merger announcement.
  • If the merger is favorable, shares of both companies may rise.

Dilution of Control:

  • Shareholders whose shares are not exchanged find their control diluted.
  • New shares issued to the other company’s shareholders reduce the control of existing shareholders.

Temporary Volatility:

  • Shareholders of the acquiring firm may experience a temporary drop in share value before the merger.
  • Shareholders of the target firm may see a rise in share value during the period.

Customers

Certainly! Let’s break down how customers are impacted during a company merger:aa

Service Disruptions and Miscommunications:

  • Integration efforts can divert attention from day-to-day operations, leading to miscommunications with customers.
  • Poorly managed systems migrations may cause confusion or delays in service.

Changes in Customer Service:

  • Customer service levels may fluctuate due to adjustments in staff, processes, or technology.
  • Customers might experience longer wait times or inconsistent support.

Product and Service Offerings:

  • Choices available to customers may change.
  • Some products or services may be discontinued, while new ones may be introduced.

Pricing and Terms:

  • Pricing structures could shift. Customers may face price increases or discounts.
  • Contract terms might be modified, affecting existing agreements.

Brand Perception and Loyalty:

  • Mergers can stress relationships with customers.
  • Brand loyalty may be tested as customers adapt to the new entity.

Communication Efforts:

  • Effective communication about the merger’s benefits and changes is crucial.
  • Transparency helps maintain customer trust.

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