In the process of concluding an M&A transaction the sell-side goes through several stages.
The preparatory phase
Arranging the process of asset sale
A preliminary assessment of the asset for sale
Preparation of analytical materials
Organization of information content of the virtual data room
Making up a list of potential business buyers
Preparation of non-disclosure agreements
Sending a teaser – an invitation to bid
Obtaining confirmations of the interest and participation in the process of selling
Signing of confidentiality agreements
Forwarding the information memorandum to interested parties
Obtaining indicative bids
Identification of the short-list of the tender finalists
Data-room and due-diligence process control (due-diligence)
Making road-shows by the management of the business for sale
Receiving final proposals
Negotiations with the finalists
Signing the basic conditions for M&A transaction with the successful tenderer
Completion of the transaction
Negotiations and signing of the sale agreement
Obtaining permits from regulatory bodies
Provision of the shift of ownership to the buyer of assets
Carrying out settlement payments
Drawing up a list of potential buyers of assets for sale (long-list)
The process of finding a potential buyer starts with investor targeting. In other words, you need to determine which companies would be interested in the asset (business) for sale. The correct target group of interested buyers will affect the productivity of the further process of selling the business. The seller must clearly understand why a particular buyer will be interested in acquiring the asset. It is necessary to answer a few key questions: what is the value of the company for sale to a potential buyer? and what should be done to increase the value of the company for each of the types of investors? The answers to these questions can help to more accurately determine the price range for further negotiations and to identify potential investors. The investor targeting stage is completed by compiling a list of potential buyers (long list) which will be sent a teaser.
The purpose of teaser campaign and the teaser is to draw the buyer’s attention to the proposed asset and to disclose its positive and attractive features without disclosing the exact name of the company (asset) put up for sale. Teaser can be of different types: information sheet, presentation, video clip.
To get success at the teaser campaign stage, three basic rules have to be fulfilled:
The interval between the introduction of the teaser, the collection of applications of interest to participate in the sales process and the signing of confidentiality contracts should not be very long, so that a potential buyer didn’t lose interest in the company
Teaser should be made up in such a way that it was not possible to determine what kind of asset (company) is put up for sale
Teaser should be interesting to as many potential buyers as possible
Teaser campaign is generally performed in two stages:
Stage 1 - the preparation and forwarding of a teaser which should intrigue potential buyers. In the first stage of the teaser campaign a range of interested and potential investors is formed.
Stage 2 - in 2-3 weeks after the introduction of the teaser the previous stage is replaced by a stage of disclosing the information about the sale to interested investors.
Between the two phases of the teaser campaign the applications for participation in the process of selling the business are collected. Before a potential buyer receives the name of the company, a confidentiality agreement is signed in order to prevent the information leakage. At this stage, the participants of the M&A process encounter with the company. The potential buyers find out not only the name of the company, but also the more specific information about the object of sale. Only the principal concern of the parties is discussed and the information is fact-finding and the price is not discussed. The second stage of the teaser campaign includes delivery of an information memorandum.
Unlike the teaser, the information memorandum is more detailed. The information memorandum can be up to 100 pages with a detailed and thorough description of the company put up for sale, the main financial and operational performance, a description of the market position, the competitive environment, the development prospects of the company, the investment needs, etc. In this case, the information memorandum does not reveal a detailed and comprehensive information on the financial activities of the company. This is due to the fact that in case of refusal to participate in the M&A transaction, the buyer may use confidential information to gain competitive advantage in the market. It is almost impossible to resolve such situation. Accordingly, this risk should be considered, especially in the case of a tender among several buyers who, in most cases, are direct competitors.
A process letter is attached to the information memorandum, and in this process letter the representative of the sell-side offers the potential buyer the information about sales and tendering for review. Besides, the process letter asks the buyer to analyze for a certain period of time (e.g. two weeks) the information about their possible participation and to determine whether the asset is interesting for them.
Compilation of short-list
If the buyer decides to continue the struggle for a potentially interesting company, they should provide an indicative bid suggesting the indicative price. Such bid is sometimes called a non-binding bid and is not mandatory for the purchaser and is void. The indicative price may be further revised. On the basis of this bid, the seller makes conclusions about the seriousness of a particular buyer and compiles a short-list of participants for the future M&A transaction.
The next step is the meeting of buyers and the seller to discuss and sign a confidentiality agreement, according to which the buyer agrees not to disclose information about the company put up for sale and not to disclose information obtained in the course of due-diligence.
Also at this stage, the representatives of the sell-side and the buy-side sign a Memorandum of Understanding (may also be referred to as "letter of intent”). The memorandum of understanding contains the basic parameters of the future transaction: the target, the procedure, the conditions of sale, and the principles of price formation are determined. The letter of intent is drawn up and signed, as a rule, in cases with a single buyer. Sometimes the buy-side requires the signing of the "exclusive contract" which guarantees that the seller will not negotiate with other potential buyers.
Virtual data room and preparation for due-diligence
Before potential buyers will consider the potential acquisition targets, the seller’s advisors must prepare the so called "virtual data room”. Previously, the data room was a room where all the necessary documents concerning the activities of the company were collected. If there were a few buyers, they were allowed in the data-room on a specific schedule. Today, the data-room is most commonly virtual, namely a specially created site with limited access which stores the key documents about M&A target.
On average, the due-diligence procedure lasts for more than two weeks. If there is a need for additional clarification, a request for documents not included in the virtual data room, or the interviews with individual employees of the company, the due-diligence process can be significantly dragged on. Presentations with the key managers of the seller are organized to hasten the process.
Road-show is an onsite presentation for investors that is not mandatory but desirable in the process of selling the business. Road-show is usually organized when there are a few buyers. Holding a road-show is a long-standing business practice which includes the meeting of the participants of the M&A transaction and the discussion of a number of issues. Such road-shows are necessary and useful both for one and for the other party of the transaction. For the sell-side it is an opportunity to see the reaction of investors to information about the company and forecasts of its development, as well as to explain the different arguable points. A more detailed, lively explanation can dramatically affect the valuation of the company. For the buy-side holding a road-show gives the opportunity to see and hear those who run the company and on whom their future earnings will probably depend, and to get the forecasts for development and business value.
Beginning of the negotiation process
After successful completion of due-diligence and road-show, as well as the final negotiations with the companies from the short-list, the sell-side collects the final bids. The key point of such a bid is the price, which, as a rule, will differ from the previous indicative price, as it is based on more detailed information obtained during due-diligence. After having analyzed the bids, the seller selects the final winner of the tender with whom the basic terms of the transaction, as well as the settlement agreement will be signed. The settlement agreement is a document governing punitive measures in the event the buyer goes out of the transaction.
Completion of M&A transactions and after-sales commitments
Completion of the M&A transaction (closing) can last from 2 to 12 months before all steps required to finalize the change of the company's owners will be taken. The purchase contract identifies the actions that must be carried out before a transfer of assets to the new owner. These could be the seller's obligations to take some remedial actions, for example, to change the Charter, to settle legal arguments, to restructure the business, if it has not been done earlier, to sell non-core assets, etc. Besides, during the completion of the M&A transaction, the purchased company may be imposed with some operational restrictions, such as not to perform transactions over a certain amount, not to sell assets, not to dismiss top management, not to increase the authorized fund, etc.
Performance of mutual settlements
The last stage of mergers and acquisitions (M&A) transaction is a mutual settlement. It is necessary to take into account a variety of risks which mergers and acquisitions incur. For example, in the period between the signing of the sales contract and gaining control over the company, the asset may be in pledge, under distrainment, etc. Therefore, to minimize the risks, an optimal settlement scheme and a guarantee system are worked out and should be included in the sales contract.
Most settlement schemes are based on four schemes that involve blocking for a certain period of the assets before the contractual terms are met or before the end of the set term.
- blocking of funds (letters of credit, collection of payments)
- blocking of securities or bills
- escrow-account (for calculations according to international law)
- guarantee of third parties (banks or financial holding companies)