Mergers & Acquisitions (M&A)

Jana Lotz
Februar 26, 2021
4 min

Mergers & Acquisitions make sense as soon as a company wants to grow. A company acquisition is then an interesting possibility to enable this growth. After all, taking over a competitor can create new potential on the market, win new customers or benefit from existing know-how. The M&A process takes place in three phases. The phases are the preparation, transaction and integration phase. You can find out here exactly how these three phases work and which mistakes are often made in an M&A transaction.

1. What is meant by Mergers & Acquisitions?

M&A stands for the English term Merges & Acquisitions.

Central motives for Mergers & Acquisitions are: 

  • Development of new markets and customer groups
  • Reduction of competitive pressure
  • acquisition of know-how or patents for new products
  • Expansion of the product range offered in order to provide customers with a more diverse range of products

2. Preparation phase of an Mergers & Acquisitions

During the preparation phase, the strategy, goals and core competencies of the implementing company must first be precisely identified. Existing strengths and weaknesses of the competition should be thought through and taken into account from the first beginning. On this basis, a potential candidate should then be derived. The screening of the market can begin. The preparation phase ends as soon as a potential candidate is found.

3. Transaction phase

The transaction phase begins with the first contact. Sensitive informations are made available to a limited group of people right from the start. However, the participants of this so-called „clean team“ must sign a confidentiality agreement. Any received information may only be used to carry outthis project.

If both companies have an interest in working together, the detailed investigations andnegotiations will begin now. The detailed examination of the company (Due Diligence) is primarily intended to identify possible risks. These are mainly the following risks:

  • legal risks (e.g. current legal proceedings),
  • financial risks (e.g. tax burdens) and
  • technical risks (e.g. obsolete equipment)

However, it is often not possible to identify all the risks involved. Therefore, it can be useful to take out a Warranty & Indemnity insurance(short W&I insurance).

In this context, it is also advisable to take out D&O insurance for executives.

Parallel to the Due Diligence, communication with the owners is also carried out. An agreement is reached on the following points:

  • Valuation of the company
  • Determination of the purchase price
  • possibly the future role of the current owners and management

Once an agreement has been reached, a contract regarding the merger or acquisition is drawn up in detail. The phase ends with the signing of a contract between the parties.

4. Integration phase

Unfortunately, companies often concentrate too much on the transaction phase. However, a successful integration phase is at least as important as the transaction phase itself. During the integration phase, the organizational and cultural organization of the two companies is the focus of attention. Products, processes and technologies as well as employees must be brought together. Without a successful integration, the corporate goals cannot be achieved.

Integration is successful when the change process is perceived as positive by all those who are involved. Only then are the fundamental conditions laid for generating economic success. Success factors of a good integration phase are:

  • „knowing“ that the right partner has been found
  • Knowing the strategic goals of the deal
  • Common further development of objectives, implementation and strategy
  • Knowledge of employees‘ expectations and perceptions
  • Realistic representation of future working conditions
  • Common understanding of roles, processes and products
  • Active communication between all parties concerned
  • Financing of the deal/ integration
  • Critical review after completed integration

5. Mistakes within an Mergers & Acquisitions process

However, mergers and acquisitions are a challenge for every company. Failures of M&A processes are quite likely. After a merger, profitability is negative for approx. 45% of all companies. Although in recent years the failure rate has dropped from 90% to 45%, but the risk of failure is still quite high. Mistakes during the M&A process are the reason for this high negative rate. Already one or two mistakes can lead to failure, which cannot be corrected afterwards.

Wertzuwachs M&A
STC research

Fundamental errors are:

  • No or only incomplete (HR) due diligence
  • Concentration on maintaining corporate structures prior to the takeover instead of focusing on the new, common business model – Lack of a business model and a comprehensible corporate strategy
  • Rivalry for leadership positions
  • Exaggerated expectations of all parties involved in the deal
  • Focus on cost synergies
  • Neglect of employee interests – staff reductions after the takeover should bring rapid economic success to compensate for the additional costs of integration
  • Neglect of the effects on the acquired partner (position in the market, self-image, etc.)
  • Lack of an active risk management
  • Putting your own culture first
  • Duration of the integration process

Due to the high potential for errors, it can therefore make sense to consult an expert during an M&A process. In this way, mistakes can be prevented and an increase in value is more likely to be achieved. Our subsidiary, STC Risk, offers such advice. The main focus here is on risk management. Further information on STC Risk can be found here: STC Risk Gmbh

Do you have any questions or would you also like some advice? The experts at STC will be happy to advise you .

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