What Does MA Mean?
The term MA is an abbreviation – or more precisely, an acronym. It is based on the two English words ‘(to) merge’ (meaning roughly ‘to mix’, ‘to blend into each other’) and ‘acquisition’. The latter expression exists almost identically in German and means approximately ‘new acquisition through purchase’. In the context of companies, MA thus means that two companies merge to pursue a common goal. This merger can be structured very differently, but the basic idea always remains the same. One of the main forms of MA is the fusion, where two (or more) companies merge into a new company. Company purchases and sales are also included, as well as company cooperations.
The term ‘Add-on Acquisitions’ refers to the acquisition of additional companies or shareholdings by an investor following an initial investment. An add-on transaction aims to achieve additional value growth through synergies between the investments.
MA thus stands for transactions in the corporate sector where companies or parts of companies merge with others, split off, or change owners. There are two main forms: merger and company acquisition (or sale). However, the term also includes special forms such as leveraged buyouts or carve-outs.
In specialist literature, MA is sometimes defined even more narrowly. Here, the focus is on the merger, i.e., the fusion of two companies, where (at least) one of the companies involved loses its legal independence. This is not the case, for example, when purchasing company shares.
Usually, the companies involved do not carry out MA transactions themselves, but commission specialized firms to do so. These can be lawyers and tax advisors, but also auditors, IT consultants, and investment banks. Especially for large mergers, it is common (and advisable) to secure the expertise of professional consulting companies like digatus.
The Goals of MA
Continuous growth is one of the most important goals for companies. A company that doesn’t grow is, strictly speaking, taking steps backward – at least that’s the general view. Particularly newly founded companies should show strong growth at the beginning to assert themselves in the market. At the same time, this growth is often not possible ‘on their own’. MA offers a solution for this by externally acquiring growth and value enhancement.
Basically, the respective goals of each MA project naturally depend on the companies involved. In detail, individual factors can also differ significantly from each other. But usually, companies are primarily concerned with improving their own market position and value. Through MA, for example, they aim to strengthen their own market power, weaken the competition, or increase turnover.
Another possible goal of MA is the ‘purchase’ of established processes or experienced employees. After all, it usually takes several years for new companies to build up a certain expertise. This time can be reduced to a necessary minimum if the required know-how is, in a sense, bought through MA.
Finally, synergy effects are repeatedly mentioned in connection with the goals to be achieved through MA. Existing costs can be used even more efficiently through the integration of other companies, resulting in a positive effect on one’s own profitability. Cost-intensive structures can often contribute more to company profits than before through consolidation – and this without causing additional costs.
The Phases of the MA Process
The complete M process can usually be broken down into five individual steps.
1. Preparation and Contract Initiation
In every M process, thorough preparation lays the foundation for a satisfactory outcome. Initially, numerous strategic decisions need to be made, especially on the seller’s side. At the very beginning, there’s the fundamental question of whether the managers and shareholders of the target company want to sell at all, and how this should happen. For example, in a ‘Share Deal’, significant business shares are sold directly by the target company. In a so-called ‘Asset Deal’, only individual, explicitly defined assets are transferred.
2. Company Audit
After the initial preparations have been made and contracts have been initiated, a detailed examination and analysis of the company follows. This phase is also known as ‘Due Diligence’. The aim of this audit is to identify potential risks that could be harmful to the merger. Here, the buyer and their advisors examine the target company very closely. Even small and medium-sized enterprises should not underestimate this step – even if the companies appear ‘healthy’ from the outside. Specialized experts can provide necessary assistance here.
3. Negotiation and Contract Signing
If it becomes apparent during this examination that the deal is viable for the buyer, negotiations on the company purchase agreement (SPA: ‘Seller Purchaser Agreement’) begin. Legal and tax aspects are considered, as well as individual agreements. If necessary, individual contract components must be described and documented in detail. This may also include detailed inventory lists and other records that form the contract appendix. Once the contract is finally drafted, the big signing takes place, also known as the ‘Signing’.
4. The Execution
After the contract is signed, the individual points from it must be implemented accordingly. This process is also referred to as execution (‘Closing’). Usually, the contract lists conditions of execution that must be fulfilled by the specified execution date. In some cases, mergers still need to be approved by the antitrust authority or by supervisory or advisory boards, which can occasionally delay the execution.
5. Integration and Post-Closing
Integration occurs in mergers and add-on acquisitions or a strategic purchase.
The integration of the new company can be a lengthy process. At the same time, many managers shy away from this phase of M as it requires significant resources. Problems can arise especially when the target company continues to work ‘as usual’ for a long time after the sale. Instead, those involved should adapt to the new situation and implement the necessary changes immediately. A joint press release, for example, is an important signal for the workforce, as is a notification to suppliers and customers. Particularly the integration of the target company’s IT should happen as quickly as possible. Here, a common roadmap for a future-proof IT organization and IT architecture is of utmost importance. Synergy potentials must be recognized and realized. The economic success of the entire M project depends to a significant extent on this phase.
In many MA processes, instead of an integration, there is initially or exclusively a so-called ‘Carve-Out’.
This refers to the separation and independence of companies with the aim of increasing company value and market positioning. Carve-outs have gained significant popularity in recent years but are indeed very complex projects that pose great challenges for companies. Above all, they are also a very cost-intensive process, where IT is one of the main drivers. To avoid unpleasant new costs in the final phase due to misjudgments made at the beginning, IT experts as part of the consulting team – as with digatus – are indispensable from the first step. The IT Carve-Out is one of the most complicated and long-lasting processes, where hidden costs often only come to light during the separation.
An Important Component of Mergers Acquisitions: IT M
IT has long been an integral and widely branched component of every company and is thus indispensable, especially in the IT M process.
Due to increasing digitalization and technological advancement, companies face the growing challenge of remaining competitive in the market, especially in the IT sector, and keeping themselves up to date. During mergers acquisitions, IT is often the great unknown – sometimes even proving to be a dealbreaker. This is precisely why IT consulting – as provided by digatus – is indispensable and should be an integral part of all processes from the very beginning. Those responsible face a mammoth task: the seamless integration of IT infrastructures during company takeovers or mergers.
As an IT expert, digatus offers solutions for known problems. IT M should be part of every deal.
During an M, IT experts and consultants – such as those at digatus – take care of the entire IT process of the transaction. This covers the entire transaction process from an IT perspective across all areas. This scope of tasks covers the initial identification and assessment of existing opportunities and risks, support with contract and license management, and sets the course for stable (ongoing) operations. IT consultants accompany M processes through all phases: Due Diligence, Contract License Management, Carve-Out, Integration, and IT Operations.
As part of the due diligence process, target companies are comprehensively examined and evaluated for financial, legal, tax, and economic conditions. This examination provides insights into strategic, financial, and operational opportunities and risks of IT. The information serves as a basis for the purchase decision, price negotiation, and post-merger integration.
IT consultants at digatus additionally support companies with their services for optimizing contract and license management (Contract License Management) to guarantee long-term cost efficiency.
Should a carve-out be an option, IT consultants are also and especially an important component in designing the spin-off or separation of the IT area from parts of the company. The focus should be on uninterrupted ongoing business operations throughout the entire process. (Change Management)
Common Problems and Mistakes in M Processes
It’s no secret that many planned M transactions fail. As the example of the merger between ‘Siemens Mobility’ and ‘Alstom’ clearly shows: Even the most promising mergers have failed. In this case, the European Commission prohibited the planned merger of Siemens and Alstom’s mobility divisions – despite good preparation. It repeatedly becomes apparent that the focus in M is often too strongly on the products of the target company. Tax or legal questions are also clarified promptly and are part of the planning. But it is rarely considered how well the corporate cultures of both companies match. After all, the companies must also ‘merge’ and find common ground on this level. If too little attention is paid to this aspect in the run-up to the M, it may not lead to the failure of the entire process itself, but it can have a significant negative impact on the efficiency of the outcome. Set goals may only be achieved much later than planned. In rare cases, an M even damages the brand value of both companies.
Further problems can arise from the ‘sloppy’ execution of the above-mentioned phases. If these are not properly structured, problems can occur. In the worst case, the originally hoped-for ‘positive momentum’ is not carried forward because goals were not defined precisely enough. This affects efficiency. Another problem can always arise when emotions are involved. After all, while M itself is characterized by a lot of objectivity, some company acquisitions can also become an emotional matter. Especially when a buyer wants to ‘absolutely have’ the target company for personal reasons, the purchase price can rise irrationally (and thus unnecessarily).
Lastly, there’s the possibility that the parties involved lose sight of the original goal of the M, potentially making strategic objectives no longer achievable. The effects of this are particularly noticeable during the integration phase. If the two companies become entangled in organizational and commercial trivialities, the big picture – the originally set goals such as company growth – can quickly disappear from view.
Overall, however, it can be stated: The more precisely the goals are defined and the more closely one adheres to the phases of M, the more likely the success of the entire project becomes. For this reason too, it is strongly recommended to secure professional expertise. A professional keeps an overview here and usually recognizes deviations more quickly. Moreover, they know the necessary measures to steer the M back in the right direction if needed.
Conclusion
MA is and remains an important part of economic life. In the future, the merging of companies will become increasingly important, as expertise and knowledge cannot always be developed ‘internally’. At the same time, there are many factors to consider in MA processes, which is why participating companies should closely adhere to a previously created plan. A specialized firm like digatus can not only provide necessary support but also save time and costs in the end – benefiting all parties involved. Consultants from digatus ensure that transactions are successfully implemented by taking care of all IT-related matters.
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.
