Eric Allison Explains How to Execute a Successful Merger & Acquisition Transaction

Mergers and acquisitions (M&A) is an important growth strategy employed by thousands of companies around the globe. In 2018, the United States was the largest M&A market worldwide, with transactions totaling approximately 1.6 trillion U.S. dollars. Although the terms “merger” and “acquisition” are frequently used interchangeably, they represent distinctive approaches to business consolidation. While a merger is the union of two companies to form a new entity, an acquisition is the purchase of one company by another, in which no new entity is formed. In general, acquisitions can produce numerous benefits, including lower cost of capital, economies of scale, access to new products and channels, strategic realignment, diversification of risk, increased market share, and employment opportunities for staff.

“For an M&A to be feasible, the two firms involved must be worth more together than they are apart,” says Eric Allison, a successful businessman and entrepreneur with more than thirty years of experience in his field. Having completed multiple cross-border M&A transactions in the United States and Asia, Eric has a thorough understanding of the prerequisites of buyers and sellers. He is also an active member of several associations, including Staffing Industry Analysts, American Staffing Association, TechServe Alliance and Alliance of Merger & Acquisitions Advisors. “There are many reasons why so few M&As are successful,” explains Eric, “poor negotiation skills, business valuation, and incomplete due diligence—to name a few.” Here, Eric discusses five ways to navigate the sale of a company and how to overcome the issues that may arise during the process.

1. Negotiate a Purchase Price

At the most basic level, companies are evaluated based on their intrinsic value. A firm's intrinsic value is determined by calculating the present value of all expected future cash flows entirely independent of an acquisition. In contrast, the purchase price, which is significantly higher than a company’s intrinsic value, is the amount a bidder predicts they must pay to acquire the targeted firm. The gap that exists between the intrinsic value and the accepted purchase price is called a premium. Without a premium, most shareholders will refuse to sell. Fortunately, acquirers are happy to pay more if the transaction will result in substantial synergies. When determining a fair price, buyers will take into consideration the benefits they will obtain from merging, such as cost savings, revenue enhancements, process improvements, financial engineering, and tax benefits. However, irrational excitement about the importance of the deal combined with a poor understanding of company valuation can cause a firm to overpay for an acquisition, cautions Eric. As stated in the Harvard Business Review, “the key to success in buying another company is knowing the maximum price you can pay and then having the discipline not to pay a penny more.”

2. Perform Due Diligence

In M&A, due diligence involves gathering important information about the seller so that the buyer can make a more informed decision regarding the sale of the company. Firms who complete their due diligence will obtain a detailed understanding of the seller’s finances, long-term customer agreements, debt obligations, leases, litigation risk, warranties, employment contracts, intellectual property issues, and much more. “Due diligence allows buyers to uncover an organization’s weaknesses, and ultimately, prevent unattractive transactions from taking place before it’s too late,” says Eric. Moreover, buyers typically utilize multiple teams, made up of employees and consultants, to carry out their investigative efforts. To make this process easier and more efficient, the seller should create a virtual data room. An online data room should contain all relevant company documents, from partner agreements to insurance documents and patents. This database can also help control the flow of company information, remove the need for frequent company visits by buyers, and help expedite the entire acquisition process.

3. Vet Seller’s Financial Statements

Sellers may be looking to unload their business for a variety of reasons, including diminishing or inconsistent financial performance. Some motivated sellers will even attempt to conceal poor business operations to appear more attractive and inflate the purchase price. Thus, buyers should use a professional vetting company to evaluate a firm’s financial data and ensure transparency between the buyer and seller. During the vetting process, acquirers will usually demand that financial statements are prepared in accordance with generally accepted accounting principles (GAAP), which is a uniform standard for financial reporting. Eric advises purchasers to challenge their gut instincts by studying financial data as much as possible. For example, Eric suggests finding answers to pertinent questions, such as what capital expenditures are needed to continue growing the business? In what condition are the firm’s assets? Are there any accounts receivable issues? Essentially, by developing a full and clear picture of the firm’s financial condition, buyers will be able to act in their best interest and walk away from a potentially detrimental deal.

4. Resolve Intellectual Property Issues

The importance of intellectual property (IP) issues in mergers and acquisitions cannot be emphasized enough. IP is, arguably, an organization’s most crucial asset as it fosters innovation and allows firms to achieve a competitive advantage in their industry. Not to mention, IP can also provide companies with an supplementary revenue stream through licensing agreements, attract new customers, play a key role in marketing efforts, and act as collateral when securing loans.

During an acquisition, the seller must prepare an exhaustive list of all IP (and related documents) that are central to its business so the buyer can review them. Intellectual property rights will encompass registered and unregistered intangible assets, including patents, trademarks, copyrights, industrial designs, proprietary know-how, trade secrets, customer data, and more. “To avoid problems down the road, the two parties must deal with all material aspects of the seller’s intellectual property before the transaction has been completed,” cautions Eric, who has seen a number of M&As fail due to IP issues. Eric also notes that buyers should be most interested in determining whether the target company’s business operations infringe on other parties’ rights, that no other party is violating the selling firm’s IP, and that no litigation claims are pending.

5. Handle Employee & Benefits Concerns

As a staffing expert, Eric urges firms to thoughtfully consider employees during the M&A process. “The purchasing firm must decide what resources, including human capital, will be needed to move the business forward,” says Eric. The structure of the acquisition deal, as a share sale or an asset sale, will have a large impact on the buyer’s responsibility towards existing staff members. With a share sale, the acquirer purchases the shares of the selling company and assumes ownership of all assets and liabilities. Normally, employees will remain with the company and may even receive formal offers of employment from the buyer. However, in an asset sale, a buyer purchases certain assets but not the entire company, which may eliminate the need for certain positions. Finally, “Some companies make the novice mistake of analyzing organizational culture of both sides of the deal after it’s already been finalized,” explains Eric. Most successful M&As focus on company dynamics in the due diligence stage to mitigate risk of failure.

Finalizing an M&A deal is not an easy task, as there is a lot of grunt work in the form of due diligence that must be completed to ensure the transaction is advantageous for both firms involved. For instance, most M&As can take anywhere between 4 to 6 months from the time of inception to closing. To guarantee a positive M&A transaction, companies should use Eric’s tips above to navigate negotiations and potentially reach a mutually beneficial agreement.

This article does not necessarily reflect the opinions of the editors or management of EconoTimes