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How to prepare your company for a successful M&A


If done correctly Merger & Acquisition (M&A) can help a company raise its top line, expand its geographic reach, increase its scope of services, and effectively catapult it to the position of a leader in its sphere. In recent years, India has seen an increasing number of M&A deals take form – with 2021 witnessing a remarkable spike in the value of such deals across the country.

As per a PwC report, in 2021, M&A deal activity in India was the highest in 5 years, with 806 deals taking place totalling to deal value of $48.9 bn. Businesses are looking to adapt to the changing times with vigour, whether through embracing technology, acquiring new markets, or diversifying their core businesses. This activity is expected to continue in 2022 as companies look to consolidate their positions in a highly competitive market. M&A is a fantastic opportunity to grow inorganically, however, there are several factors businesses should evaluate before undertaking this massive but potentially profitable exercise.

Creating a win-win

The buyer should prepare for M&A by ensuring that the strategic vision of both the acquiree and the acquiring companies align. This is an important aspect of M&A as deals tend to be structured in a performance incentive-led manner or a phased pay out process, and if there is vision mismatch it leads to conflicts between the companies making it a messy acquisition. The success of any M&A is dependent on the retention of the acquiree’s employees. While undertaking the exercise, it is crucial that employees are ready for the overhaul that the process brings. They should be willing to work under a different team or department head, and ideally be incentivised to continue working with the company. The buyer’s team should not be heavy-handed in their dealing as they are the acquiring company. The buyer stands to lose the most if the transaction does not come through.

Changing valuations and deal structure

The seller needs to keep in mind that M&A transactions can be a long process, sometimes lasting as long as a year with the valuation changing owing to multiple reasons. This change should be well anticipated and should not discourage the seller from undertaking the transaction or link it to bad faith on part of the buyer. Deal structure is impacted by a plethora of variables – such as the percentage of total deal size being paid upfront and the number of years the founder agrees to be retained – the acquired company should be clear on what is acceptable amount of risk that it is willing to accept and what it wants to cover upfront. Majority of the deals are structured to have a payment mechanism where the seller receives a certain percentage of the sale value after the company achieves success based on mutually agreed conditions. In most M&A deals, there is a non-competition clause for the founder as well. As per this clause, the founder of the acquired company cannot create another company in the same industry for a mutually agreed period of time.

Minimizing cost of transaction for the seller

One of the core challenges an M&A throws up is in taxation. A company can be acquired via multiple structures including full-stock sale or just selling its IP. Both come with their own set of tax challenges, including corporate tax, GST, and dividend tax. Determining the best deal structure to optimise tax savings is an important aspect to be cognizant of when executing M&A deals.

Seller should keep a clean book of accounts

It would pay to note that compared to the deal structuring process, the time taken to undertake financial due diligence takes longer. In order to temporally streamline the task, the acquired company should work on maintaining a paper trail for all the financial transactions it has undertaken. Every transaction that the seller company has undertaken should be easily traceable and agreements should tie in with billings and cashflow and adequately reflected in the seller’s bank account. A robust MIS helps maintain proper financial hygiene and record detailed financial statements.

Work with professionals

It is imperative to engage with sound M&A professionals who can completely guide companies on their transaction process. Both bankers and lawyers, who have worked on M&A deals before, need to be duly hired. They work with companies on the entire transaction journey, creating options on potential buyers/ sellers, evaluating the synergies and therefore relative valuation with a keen focus on maximising it, forming a valuation negotiation strategy and creating a commercial structure covering the valuation and other intangible aspects of the transaction. Working with professionals ensures that the transaction process is smooth and is expedited in the minimum time.

Is it worth it?

Yes! M&As help companies expand their product portfolio, geographic reach, and further achieve backward or forward integration along their supply chains. A few important points should always solicit full vigilance when executing these transactions. Being very clear with the goals of an M&A on either side, engaging with a sound banker, and ensuring team alignment on either side are imperative from a synergistic point of view. Founders should also try to gain clarity on the time required for executing a transaction, be prepared for fluctuations in valuation and maintain an accurate and comprehensible MIS. These factors working in combination should pave the way for a successful transaction creating tangible and intangible value benefitting all stakeholders.

(Sumir Verma is Founder and MD, Merisis Advisors)

(Sakshi Singh, Investment Banking Associate, Merisis Advisors contributed to this article)

(The one-stop destination for MSME, ET RISE provides news, views and analysis around GST, Exports, Funding, Policy and small business management.)

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