What is M?
The abbreviation M stands for ‘Mergers and Acquisitions’ in English. In German, it is often referred to as ‘Fusionen und Übernahmen’. This collective term is used to describe transactions where a company is bought (acquisition) by another company or investor, or merged with another company (fusion).
The Management of an M Process
The takeover or merger of a company represents a more or less complex process. Especially in transactions involving large companies or corporate units, the successful completion of a purchase or merger requires the participation of numerous specialists. These essentially include lawyers, tax advisors, auditors, IT experts, and management consultants such as those at digatus.
In the vast majority of cases, an M process is led by a so-called M advisor. For larger transactions, M advisory is often handled by specialized departments of investment banks. For smaller transactions, the M process is usually led by independent M consulting firms.
The M Process at a Glance
There is no scientifically universally valid sequence of an MA process. Generally, the process of buying or selling a company can be divided into the following five overarching phases:
1. The Preparation Phase
2. The Due Diligence Phase
3. The Contract Negotiation Phase
4. The Execution Phase
5. The Post-Closing Phase
Each of these phases is further divided into various individual steps, which do not have to be implemented in the same way in every MA process. Moreover, the scope and duration of the individual phases depend on the size and complexity of the companies involved and the type of buyers and sellers.
1. The Preparation Phase
The Transaction Preparation
The first phase of an M process involves preparing the entire process. Typically, the seller(s) of a company engage a specialized M advisor to design and lead the M process. To prepare for a transaction, the M advisor and their team analyze the company to be sold in detail and compile a so-called ‘Information Memorandum’ for potential buyers, which summarizes all essential information about the company in a compact form. Additionally, during the preparation phase, the M advisor prepares all documents necessary for carrying out the transaction and deposits them in a so-called ‘data room’, which can take both physical and electronic form.
An essential part of the preparation phase is determining the company’s value, on which the achievable purchase price for the company sale is based. For this purpose, the M advisor creates a valuation model that generates a company valuation based on the company’s profit and loss statement, balance sheet, and cash flow statement. The art of company valuation lies in maximizing the sale price for the seller on the one hand, while on the other hand making the requested price realistic enough not to deter potential interested parties.
The List of Potential Buyers
In consultation with the company seller, the M advisor also plans the further course of the M process during the preparation phase. On one hand, specific time periods are set in which the individual process phases should take place. On the other hand, the seller and M advisor jointly discuss and determine which potential company buyers should be approached during the process. For this purpose, the M advisor typically creates a comprehensive list of potential buyers (the so-called ‘long list’), which is subsequently reduced to a list of interested parties to actually be approached (the so-called ‘short list’).
In this context, some sellers refuse to approach direct competitors of the company for sale out of fear that sensitive data could enter the market. Therefore, the list of potential buyers usually includes, alongside strategic interests, financial investors, family offices, and other investors.
Last but not least, M advisors and sellers must agree on whether they want to conduct the M process as a structured bidding procedure with multiple interested buyers in parallel, or whether exclusive negotiations should be initiated with a single party from the start.
The Initial Approach
The preparation phase concludes with the initial approach to potential interested buyers. The M advisor contacts the investors on the shortlist and usually provides them with a teaser that summarizes the highlights of the company for sale on a few pages.
2. The Due Diligence Phase
The Management Presentation
Those investors who express further interest in the acquisition target after the initial approach are usually invited to a management presentation in the next step. As the name suggests, potential buyers meet the company’s management at this event. Typically, the management presents the company, and interested buyers have the opportunity to ask questions. The M advisor and often the sellers also participate in the presentation. A company tour is frequently part of a management presentation.
The Due Diligence
If there is still an intention to buy after the management presentation, interested buyers are then given access to the data room and have the opportunity to conduct their ‘due diligence’. This Anglicism (German: ‘gebührende Sorgfalt’) refers to the thorough examination of a company for sale by the potential buyer.
During due diligence, the economic, financial, tax, technical, and legal aspects of a company undergo detailed analysis. Interested buyers are supported by specialized consultants in conducting due diligence. These include auditors, tax advisors, IT experts, lawyers, and management consultants.
Depending on the industry, size, and complexity of a company, due diligence can be more or less comprehensive. The following four due diligence partial examinations take place in almost all transactions:
Commercial Due Diligence
Commercial due diligence examines a company’s market, positioning, and competitive situation. The focus is on the opportunities and risks of the company in its market.
Financial Due Diligence
Financial due diligence scrutinizes all aspects of a company’s finances and funding.
Legal Due Diligence
During legal due diligence, all legal frameworks of the company are put to the test. This includes, in particular, contracts with customers and suppliers, employment contracts with management and employees, lease agreements, as well as trademark, patent, and environmental law.
Tax Due Diligence
Tax due diligence clarifies the tax aspects of the company.
For some companies, the following partial examinations may also be necessary as part of due diligence:
IT Due Diligence
IT due diligence analyzes all hardware and software systems used in the company, as well as the IT organization and IT processes. An IT due diligence provides a solid foundation for the purchase decision, price negotiation, and post-merger integration. Because especially in this process, there are more cost risks hidden than might appear at first glance.
At Digatus, we conduct IT due diligence and develop a comprehensive solution for further steps such as the IT carve-out project or a possible integration scenario.
This is how an IT due diligence proceeds:
1. Recording the current state of the overall IT situation
2. Preparing a proposal based on the planned corporate strategy
3. In case of a short timeframe for the sales process: Creation of a red flag report
After this thorough IT examination, costs can be better estimated and potential cost traps avoided. Accordingly, IT due diligence should by no means be neglected, but quite the contrary, its importance and significance should be prioritized and focused on.
Operational Due Diligence
Operational due diligence examines the operational aspects of the company, such as production processes and workflows.
Environmental Due Diligence
This due diligence clarifies the environmental risks and all environmental legal aspects of a company.
The Purchase Offer
Based on the results of the due diligence, the potential buyers submit a non-binding offer for the purchase of the company following the company audit. The submission of this “Non-Binding Offer” (NBO) is always a balancing act for the interested buyers. On one hand, the offer should leave room for negotiation to allow for price adjustments during the final contract negotiations. On the other hand, the non-binding purchase offer must not be too low, as there is a risk that the MA advisor or the seller may not want to continue the process with the interested buyer.
3. The Contract Negotiation Phase
If the non-binding purchase offer is positively received by the seller, the contract negotiation phase can begin. This involves the precise design of the purchase agreement. In addition to determining the exact purchase price, this includes numerous other important clauses. One of the most important among these is the detailed description of the condition in which the company will be transferred from the seller to the buyer. Furthermore, warranty statements are also a significant aspect of the purchase agreement. These regulate the guarantees the seller gives to the buyer regarding the condition of the company over a specific period. Very often, the negotiation of the details of a purchase agreement is handled by the lawyers of the parties involved. The conclusion of the contract negotiation phase is usually the final purchase offer, known as the “Final Offer”.
4. The Execution Phase
When the contract negotiations between interested buyers and the seller are successfully concluded in all details, and the “Binding Offer” is also accepted by the seller, nothing stands in the way of signing the final purchase agreement. The so-called “Signing” marks the beginning of the execution phase.
In this phase, all agreements outlined in the company purchase agreement are implemented, and in particular, the legal framework for the company takeover is established. For many transactions, the approval of the antitrust authority must also be obtained. A company purchase or sale can still fail in the execution phase, although this is rather rare. The final transfer of the company to the ownership of the buyer is called “Closing”.
5. The Post-Closing Phase
The post-closing phase following the closing can take very different forms and extents. Depending on the type of buyer, the future of the acquired company can look very different. If the buyer is a financial or private investor, the acquired company is usually continued as a separate entity. However, financial investors often integrate acquired companies wholly or partially into existing portfolio companies. If the buyer is a strategic investor (competitor), there is a high probability that the acquired company will be completely absorbed into the acquirer and disappear from the market.
In this final phase, a so-called “Carve-Out” may also occur. This refers to the spin-off of a part of the company into a legally independent unit. Usually, the parent company initially remains the sole shareholder of the spun-off business unit. A carve-out is often preparation for a sale or an initial public offering.
In the post-closing phase, all measures related to integrating the acquired company into another take place. The integration of all IT areas is an important and essential part of this process. Such integration usually takes several months. For more complex integrations, the post-closing phase can last several years.
The Duration of an MA Process
It is hardly possible to give a general indication of the duration of an MA process, as MA transactions in practice are too different in terms of their size and complexity. In principle, the duration of an MA process increases with the number of interested buyers involved. An exclusive process with a single party is usually somewhat shorter.
Moreover, the duration of an MA process also depends on the quality of the MA advisor. The better the MA advisor prepares the company for sale and the more precisely they identify potential interested buyers, the faster the MA process can usually be completed.
Between the initial contact with interested buyers and the signing of a purchase agreement, it usually takes about three to four months. For small companies with few interested buyers, shorter periods are also possible.
Christoph Pscherer
He has been working in the IT environment for almost 30 years, gaining experience in various roles and areas. Through his years of experience as a Service Manager, he knows the challenges and needs on the customer side. He has been applying this deep understanding and knowledge at digatus for more than eight years. As Head of BU IT M&A and Transformation, he and his team support all IT topics along the value chain of M&A projects. This includes due diligence, carve-out, and integration projects.
