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The Art of dealmaking: Understanding the nuances of mergers and acquisitions

Anand Bhadkamkar, Group CFO and COO at LS Digital explores the complexities of mergers and acquisitions, highlighting the importance of strategy, cultural alignment, and post-merger integration for long-term success.

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Among the several options available for business to expand their operations, Mergers and Acquisitions (M&A) stand out as a critical strategy to achieve business objectives in a relatively short span. However, in a dynamic market like India, successful dealmaking extends beyond mere financial calculations. Not only does it require a nuanced understanding of market positioning of your business and the one you plan to acquire but also requires one to gauge the cultural alignment, financial health, and long-term synergy potential.

At first glance, M&A seems pretty straightforward where both parties decide upon a certain amount and a set of terms, and once papers are signed, the deal is sealed. Despite it looking very simples, several studies have indicated that around 70-90% of mergers and acquisitions fail due to a multitude of reasons, showcasing the complexity of the process.  

Now, these numbers may look discouraging but there are several ways for companies to ensure that their plans move smoothly. By approaching acquisitions with a clear strategy and foresight, companies can effectively navigate the complex landscape of integrating new businesses into their own, ensuring long-term sustainable growth.

The first step in entering the M&A space is determining the reason and direction of the expansion. For many companies, this involves weighing the benefits of traditional markets against digital spaces. While large industry players may be financially out of reach, companies can target sectors that align with their strengths and capabilities. The next step would be executing a strategic selection process and shortlisting potential acquisition targets. Typically, this is done by filtering targets based on industry compatibility and the strategic fit of the company, ensuring that the target company’s goals are aligned with yours. 

Once a shortlist is ready, the next step would be to evaluate potential acquisition opportunities based on market intelligence. This involves gathering insights about businesses seeking divestiture or open to acquisition. Once you spread the word about being open to acquiring new businesses, one often receives several expressions of interest. In this scenario, leveraging the expertise of industry advisors and intermediaries is greatly beneficial. Not only do these experts serve as key facilitators but also connect buyers and sellers based on mutual interest and potential synergies, enabling a smoother M&A process. 

However, successful acquisitions are not just about finding the right strategic business partner-they’re also about ensuring cultural compatibility. The importance of aligning company cultures cannot be overstated considering an acquisition may falter despite the positive market feedback and business model, simply because the organizational cultures are misaligned. A proper dialogue between leadership teams of both the firms is instrumental for gauging the potential for long-term collaboration and shared vision.

After the perfect target is identified and its culture fit is evaluated, the acquisition process typically follows a structured pathway. Following initial discussions and the exchange of broad intentions, the next step involves drafting a term sheet. This is an extensive document that outlines the key elements of the deal, including valuation, salary structures, designations, and the roles of key personnel post-merger. These factors are particularly crucial in people-centric businesses, where the workforce often represents the most valuable asset. Subsequently, M&As of all kinds will have their unique term sheets focused on factors and elements prevalent in the respective industries.  

Upon thorough evaluation and agreement of the broad terms, the due diligence phase begins. The layman understands it as a detailed financial scrutiny but extends beyond that. Other factors like legal compliances, taxation history, and HR polices are also reviewed for a holistic understanding of the target company’s market position. 

Financial due diligence involves a thorough examination of the target's financial history, from bank accounts to revenue projections, to confirm the accuracy of presented figures. While future projections cannot be audited in the strict sense, it's essential to verify the reasonableness of underlying assumptions. A thorough review of their tax history is essential, since past irregularities could impact future operations after the merger. The target company's HR practices and legal compliance records provide valuable insights into their culture and risk profile. Any underlying legal issues discovered during due diligence could seriously compromise the deal's success. Looking closely at these areas helps avoid unwanted surprises and ensures a smoother transition.

After discussing terms and conducting due diligence, the final step is getting the legal documentation in place to seal the deal. This is extremely crucial considering the financial may already be a part of the term sheet, but legal agreements ensure both parties are protected in case of unforeseen events. These facilitate a smooth M&A process while mitigating risks, covering a wide range of scenarios for both the parties. 

Even after following all these steps to the letter, the M&A process is far from complete as the post-merger integration remains a key challenge in determining the success of a merger. It is important for both the acquirer and the investee to set clear expectations from the get-go to avoid any future conflict. This proactive approach can significantly reduce the risk of integration failures, which are a common occurrence in the M&A landscape.

Here, transparent communication plays a key role, especially when managing human capital. Proactively communicating with employees about forthcoming changes and transitions help them avoid situations that could lead to disagreements or build mistrust. Effective communication is vital in the initial stages of the merger for any amount of uncertainty can have a ripple effect, leading to loss of talent and a dip in productivity. This is particularly important in industries that rely heavily on human capital. In such scenarios, the acquired company’s involvement is integral for a successful transition. 

When M&A occur in technology focused industries, keeping talented people is often more important than the technology itself. Star employees walking out after a deal can tank its value. Smart buyers use tactics like performance bonuses and stock options to keep key team members invested in the company's future success.

Even after ticking all the right boxes, it is impossible to anticipate all challenges that could before, during, or after an acquisition. Be it a change in the socio-political landscape or the emergence of unpredictable variables when dealing with human elements of the merger, things can go south at any time. While one might not always be able to avoid such scenarios, it is possible to tactfully navigate them thorough meticulous planning and adapting to the situation when necessary. Legal safeguards might help mitigate risks to a certain degree, but flexibility will benefit both parties in navigating the complex landscape of M&A. 

By now, it is clear that M&A is an ongoing process. It demands constant monitoring, adjustment, and reinforcement of a new organisational structure and culture. It is only through constant efforts in the transition that the acquirer can ensure that the new entity will function smoothly and achieve its objectives.

M&A success isn't just about the numbers, it's about finding the right balance between financial strategy and people. Like any relationship, it needs both careful planning and the flexibility to adapt. Strong leadership and open communication are essential to making these deals work, and while mergers always come with their share of challenges, the most successful ones happen when companies look at the whole picture: the finances, day-to-day operations, and most importantly, the people involved.

This article is penned by Anand Bhadkamkar, Group CFO and COO, LS Digital

Disclaimer: The article features the opinion of the author and does not necessarily reflect the stance of the publication.

mergers and acquisitions Market positioning Synergy in M&A Post-merger integration