During a crisis, the number of M&A transactions increases significantly. Those who stand strong are tempted to buy a weakening competitor. Yes, this is a great chance to increase the scale of your business, despite the general decline in the market. But such transactions must be approached very carefully. Here are some tips to help you avoid common mistakes.
There is nothing complicated in everything related to the legal aspects of the transaction. Your specialists will analyze the accounting statements of the acquired company and check whether claims are being made against it. It is also advisable to sign an agreement with current shareholders in which they will assume responsibility for all possible obligations to third parties that were not previously known. This is all described in detail in books on M&A. I want to talk about something else. About something that belongs rather to the sphere of psychology of managerial decision-making.
Understand how the business you are buying operates
M&A transactions vary in complexity. You can buy a beauty salon, or you can buy a chain of several dozen retail outlets. The buyer is required to have a serious level of knowledge and understanding of how the industry works. Otherwise, how will you assess how strong the brand and team of the acquired company are, and will there be a synergistic effect from the business combination?
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The most important thing is to understand the business you are buying. Moreover, you must understand how it functions separately and how it will work in conjunction with your company. You want to enlarge your business, increase your market share, change your competitive field. And you need to insure yourself as much as possible against the risk that you have overvalued the new asset as a business.
Prepare for the team's departure
The main risk is the loss of the acquired company's team of employees. Psychological characteristics have not been canceled - you may simply not work well with new people.
Therefore, you must ask yourself in advance: “What, will the old team leave? Can I handle this company? Will I be able to develop a new asset as effectively as those who did it before me?” After the deal with Rossita (a large shoe chain in the Ural-Siberian region, acquired in the fall of 2014 - Forbes ), we lost part of the team of the acquired company. The reasons were different: some did not agree with the demotion, which in some cases was inevitable when integrating into the structure of the parent company; others were uncomfortable working in a large holding company. Also, a number of functions were duplicated - first of all, we are talking about service departments, such as accounting and the legal department. But we were preparing for such a turn of events even before the deal - we strengthened our departments and expanded functionality in some areas. Therefore, we survived the departure of part of the previous team relatively painlessly. The integration process itself took at least six months.
In the deal with the shoe factory S-TEP (an enterprise in the Novosibirsk region, acquired in November 2015 - Forbes ), our task was to retain the specialists of the acquired company, since the team has unique competencies and knowledge of more complex production technologies. The opposite situation has arisen: we do not integrate new employees into our team, but we ourselves act as those being integrated into the team of the acquired enterprise. We used various tools: we raised the status of these specialists and the production department as a whole in our company, revised the salary level, and showed new employees the prospects of working as part of a large holding company that is growing dynamically. We jointly developed a production development strategy, began investing in the purchase of new equipment, increasing shoe production volumes, and recruiting new personnel to the factory.
Stages of M&A reorganization
Mergers and acquisitions transactions are concluded between LLC and LLC, CJSC and LLC. Approach the issue of reorganization responsibly. Both buying and selling a company have their own nuances. After concluding a merger and acquisition deal, you will have to take measures to organize the work of the new company. You can't do it without involving a lawyer. Only a specialist who is thoroughly familiar with legislative norms and requirements, works for results, analyzes the data provided and draws the right conclusions based on them, will provide competent legal support for a merger of organizations. When merging companies, stage 1 is an agreement with a lawyer.
Feasibility analysis
Before starting the process of merging legal entities, evaluate the prospects of the transaction. An acquired company can bring benefits to the organization, stimulate its development or reach a new level, or become a dead weight. A foreign business organism does not always take root. The acquiring company must be prepared for additional costs, and the acquired company must be prepared for a change in management, loss of independence, and reorganization of the company. Carefully analyze the state of both organizations, predict the result of the merger of the two companies, and only then proceed to the next stage.
Search for partners
When the decision to merge companies is made, the process of searching for partners begins. The buyer defines goals and objectives, and representatives of the target company nominate candidates and determine the value of the company. At this stage, it is important to find ways for the most effective and painless integration. It is necessary to study the prospects for reorganization in the form of a merger of an LLC, conduct an analysis of the sales market, product range, and determine an algorithm for performing actions immediately after signing the documents.
Negotiation stage
Regardless of whether mergers of legal entities are horizontal or vertical, you need to act carefully and thoughtfully. The transaction involves risks for both the seller and the buyer. Understand what a takeover of companies is, what the procedure for concluding a deal is, what documents are needed. Stage 3 – a thorough check of assets, calculating the costs of joining the organization.
After the organizational issues are resolved, negotiations begin. The procedure for merging companies develops according to two scenarios.
- Signing documents after negotiations is an option that is suitable if the target organization agrees to enter into a merger and acquisition transaction of legal entities.
- First, the merger proposal is sent to the target firm, and in case of refusal, other leverage is applied. Purchase of assets and shares of the target organization - if the latter does not agree to enter into consolidation.
When planning the negotiation process, you need to think through everything to the smallest detail: choose a neutral territory, prepare a package of documents, find arguments to convince your competitor.
Integration process
When legal entities merge, integration occurs. This is the procedure by which the formation of a new society is carried out. After signing the documents, the LLC participants announce a change in the organizational and legal form and send reports to the tax authority. The complexity of vertical integration depends on:
- areas of activity of companies;
- state of organizations;
- goals and objectives.
Horizontal and vertical mergers of society have features that must be taken into account when carrying out integration.
Buy only what fits into the logic of your business
In the 90s, every major holding had a wide range of companies: from a bank to a coal mine. Times have changed. Nowadays, most successful companies still specialize in a certain type of activity. Therefore, when you decide to purchase a particular asset, use common sense and business strategy and choose only a core business.
Of course, there is such a category of buyers as financial investors. They acquire undervalued assets, bring them to an investment-attractive state and sell them. But now we are still talking about a different group of buyers.
Buy those assets with which you can expand your business
All M&A transactions should be viewed through the prism of increasing efficiency, consolidating the current business, increasing your company’s market share, and obtaining unique technologies. Thus, as a result of the transaction with, we increased the capacity of the footwear market for our company by another 1000 stores. As a result of the merger, in some cities we became leaders in the number of retail outlets, for example, in Krasnoyarsk, Novosibirsk, Omsk, Tyumen we now have 20-30 stores for all our brands.
M&A transactions vary in typology. There are very simple ones, when, in fact, good trading places are bought. In our practice, there were many such transactions - we bought mini-chains of 3-4 stores in the regions.
At one time, Euroset actively developed according to this principle: it bought up local chains, changed signs, retail equipment and personnel. I worked on ready-made traffic. A huge advantage of this development option is that you do not fight with anyone for market share, but take away the market share owned by the existing company. You do not overload the market with excess goods, but replace someone else’s goods with your own.
The market volume is falling, there are not enough buyers for everyone. Some companies, especially local and city networks, were not very efficient even before the crisis, and now the situation has worsened. Therefore, the owners are forced to put the business up for sale.
Pros and cons of M&A
When signing this merger agreement, LLC can act as a buyer and a seller. It turns out that selling a company is more profitable than buying it. In 76% of cases, sellers are in a winning position, and buyers only in 35%. In 2014, Microsoft bought Nokia for $8 billion. The decision to merge did not bring anything positive: thousands of employees were fired, production volumes were reduced, and the desired result was not achieved, because Microsoft finds it difficult to compete with well-known smartphone manufacturers.
All types of reorganization have their pros and cons. The absorption and merger of legal entities is accompanied by various troubles and nuances that are important to consider when agreeing to such a business optimization scenario. Mergers and acquisitions have the following advantages:
- expanding the sales market, establishing sales through common channels;
- elimination of a competitor through the merger of an LLC into an LLC;
- synergy between organizations;
- for the seller: receiving money that is used to invest in other projects.
To get a positive result, follow the protocol when preparing documents.
Reorganization of an LLC is a complex, multi-stage process that requires the involvement of professional lawyers.
The decision to conclude a transaction is made at a meeting of joint stock companies of the participating companies. Merging an LLC and LLC is a risk.
Disadvantages of joining a legal entity in the form of a merger:
- the ideologies of the companies may not coincide, it will be difficult to interact;
- when considering important issues, the decision of all participants in the process may be required, but not everyone may agree;
- What is often underestimated is that enterprise cultures differ;
- one party imposes its point of view on the other, and this negatively affects the efficiency of business processes.
Before starting the reorganization, it is worth studying what types of company mergers there are. An important document is the application. It contains important data: the form of reorganization of companies, the order on the basis of which the procedure is allowed to begin, the terms of the agreement between the buyer and the selected company.
Decide in advance whether you will keep the brand you are purchasing.
More complex M&A transactions, which are considered classic, involve the purchase of not just successful locations, but an entire asset with a brand and team. In our practice, this is the purchase of the Rossita retail chain: we bought a ready-made business with a twenty-year history. Over the years, the owners have created a format that can be replicated and created a successful brand.
We bought Rossita precisely in order to develop the brand throughout the country. It made no sense to acquire such a large company with a long history, strong brands and then just destroy it all. We retained the brand and concept of the stores, although, of course, we brought a lot of new things to the acquired business - our services, a number of technologies. But we kept the main thing - the idea of the brand.
Thanks to the deal with Rossita, we added two new brands to our portfolio of brands (Rossita and Lisette) and received formats that enriched our retail. We didn't have these types of stores. The alternative is to create a brand from scratch. But this would take years and the result was not very predictable.
We need to understand who bought whom
Companies that merge as a result of a transaction may have different business cultures, even the pace of work may differ. When merging, you need to clearly understand who bought whom, so as not to lose your own. Because not only the team of the acquired company is afraid that the new management will fire everyone. Employees of the acquiring company have exactly the same concerns. And here it is important to say that priority is given to your team.
The adaptation process is quite complicated, including in technical aspects. Connection of IT platforms and accounting systems is required. In the acquired company, business processes may be streamlined differently. It is very important to correctly integrate them, because the acquired business has its own logic. If you start to ruin everything, you may simply lose this brand and this business. Thus, as a result of the transaction with Rossita, we optimized management costs for both parties by combining a number of business processes - logistics, IT, HR - and increased operational efficiency. We have achieved a tangible synergistic effect: on the one hand, we have expanded the customer base of our wholesale customers and the list of suppliers; on the other hand, Rossita received new high-tech services that work in our company, such as installment plans and loans.
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For companies that have managed to adapt to current conditions and are developing no matter what, the market opens up many opportunities to strengthen their positions and increase their own share, including through M&A transactions. However, before making a decision to buy a particular business, you need to carefully analyze everything: what you are acquiring, what contribution the new asset will make to the expansion of your business and whether it will help you increase your competitiveness not only at the moment, but also in the long term .
Merger or acquisition: which is better for business?
Managers of successfully developing companies sooner or later come to the idea of the need to expand their business. In this sense, mergers and acquisitions are the most effective assistants in achieving such large-scale goals.
True, as practice shows, such a strategic move must be properly developed. Otherwise, its initiators may end up broke.
Subject of conversation
Let’s imagine that the head of a successfully developing company came up with the idea of expanding the business. He can take advantage of a market mechanism called “mergers and acquisitions”, or M&A (abbreviated from English “Mergers and Acquisitions”). So, let's take a closer look at the concepts. A merger is the combination of two or more companies to form one new organization. In this case, the merged companies cease to exist. The new company takes control and management of all assets and liabilities to clients of the companies - its constituent parts, after which the latter are dissolved.
Here it is worth mentioning another type of merger - annexation. This process differs from a merger in that as a result of the transaction, one of the merging companies survives, while the rest lose their independence and cease to exist. In this case, the surviving company receives all the rights and obligations of the liquidated companies.
By absorption we mean the merger of two or more entities, in which smaller participants in the transaction cease their autonomous existence as taxpayers and become structural divisions of the larger participant. The takeover of a company is often carried out by purchasing all or a controlling stake in the enterprise on the stock exchange, which means the acquisition of this enterprise.
When people talk about the M&A market in Russia, they often talk about simply a change of owners. For example, when a holding group acquires an asset, but no actual restructuring of the company occurs. Perhaps, it is precisely such transactions that prevail in the domestic market. In world practice, mergers and acquisitions mean not only a change of owners, but also a large-scale restructuring of the entire business.
Growth by affiliation
In some cases, it is more expedient for a company to develop through the acquisition of new companies. Firstly, when the organization is faced with the task of entering the regional market. Obviously, it is more difficult for a foreign or large federal company to do this, because the regional niche has long been occupied by local players. The acquisition of a large significant market participant will help get out of the situation. With its help it is much more convenient to develop your business.
Secondly, M&A transactions are also good for expanding an existing organization. As a rule, such a mechanism becomes most advantageous in conditions of a growing market or fairly fierce competition. For each enterprise there is a limit to which it can finance itself independently. At some point, the company realizes that due to favorable market conditions it can grow and develop faster, but it does not have enough funds, and it is difficult to obtain borrowed funds. To solve the problem, the organization can at least attract a partner or join another company.
Thirdly, it is time to think about joining new companies when a company is trying to strengthen its vertical structure. It happens that a mining company buys a company whose main activity is processing of raw materials. As a result, the former manages to sell products with higher added value.
In general, the benefits of mergers for companies are different in each case. Let's say one organization does not have a specific license, but another does. At the same time, the first company has the necessary capacity and investments, while the second does not have enough of them.
In some cases, mergers and acquisitions can achieve economies of scale. For example, if a supplier offers higher discounts for large orders, you can join forces with another organization and purchase goods from them in larger quantities and cheaper. There are a lot of factors that force companies to pay attention to the M&A market: expanding the sales channel and product line, solving logistics issues, etc.
Let’s say one of the situations described above is, as they say, “your case,” and the manager has decided to merge with other enterprises. The decision is fateful, so it is important to determine evaluation criteria for the future transaction partner. In a supermarket, everything is extremely simple and clear: you can come, choose and buy a product. And in the mergers and acquisitions market, the buyer’s desire to buy and the seller’s willingness to part with his asset collide. The owner of an organization does not always agree to sell it for the offered price.
It is important for the buyer to determine in advance the limit of the amount he is willing to pay. It is necessary to analyze what the asset in question can give him. Especially if borrowed funds are used for the purchase.
Procedure
Determining the “tasty” object of purchase is half the battle. The most important thing is to be able to interest a potential seller in your offer. If the owners do not want to part with their brainchild, this is a reason to postpone negotiations, say, for a year. When the owner is finally “ripe” for a deal, it is important to calculate which conditions will be the most attractive for him. Then negotiations can be conducted in a way that is interesting to the counterparty.
In parallel with clarifying mutually acceptable positions, it would also be a good idea to organize a financial and legal review of the asset. This will make the risks you face more clear.
Please note: it is extremely important to maintain good relations between the parties at all stages of negotiations. We should strive to reach mutual understanding on most key issues, especially if the companies plan to remain partners for some time after the transaction.
In order for the new business unit to be safely included in the overall strategy and current work of the company, an appropriate springboard is prepared for it, namely: several preparatory activities are carried out within the company making the M&A transaction. To begin with, the buyer weighs his strengths: administrative, information and labor resources. After all, if the deal is completed, the integration will be carried out by the enterprise’s personnel.
Next, you have to choose one of two ways of unification: immediately “merge” the newly formed company into the existing structure and part with it as a legal entity, or allow it to retain its original form for some time. In the first case, you must own at least 100% of the shares of the acquired company or obtain the consent of the shareholders, and the owners will have to give up a share of their shares in exchange. The parent organization cannot always agree to this.
Then the second option is more preferable. Top managers have a time reserve in their hands, which means they can not rush, but gradually bring the internal organizational structure of the purchased company into line with that implemented in the parent company. That is, to the form in which it will be most convenient to attach it.
The same applies to corporate culture. There can be a lot of differences between the parent and controlled companies in this area, including in the motivation system. And this circumstance can also be used to gradually bring teams closer together. In general, the merger of organizations requires maximum correctness; in no case should anyone be forced, especially management and shareholders who were at the helm of the company before the transaction was concluded. Sometimes it makes sense to keep these people in the company for a while, since their presence can greatly help during the integration process.
It is worth noting that if the acquired company is a strong brand, then “killing” or replacing this brand is dangerous, because you can easily lose customers. In this case, it is also better to incorporate the company gradually.
Cost side of the deal
The effectiveness of a merger or acquisition procedure can be assessed using the following criteria. If the company is public, then you can see how the market reacted to the deal. Typically, when one company acquires another, its shares fall, but then begin to rise.
Among the most common mistakes made by companies organizing an M&A transaction, illiterate integration tops the list. The acquired asset may be quite profitable, but it happens that the merger plan itself was poorly developed or did not take into account certain specifics of the business.
The most expensive elements on which it is better not to skimp are the services of lawyers. Otherwise, serious problems may arise later. After all, the parties to the transaction do not always turn out to be in good faith: if an inexperienced lawyer misses some detail during registration, then a cunning counterparty can take advantage of this mistake and try to return his asset. Endless litigation will then slow down business development.
Another expense item, in addition to the actual costs of purchasing a company, is compensation for the labor of workers who will lead the project.
There is also an integration budget. It is formed at the stage of negotiations and verification of the acquired asset. The company calculates what the “repairs” will entail after the transaction - conducting an audit, restructuring the structure, introducing information systems. The most important object of attention is the financial block. The acquired asset can have anything: incorrect accounting, “black” cash registers. It may take a lot of effort from the company to get everything in order. The identified nuances are taken into account when determining the price of the acquired organization. As a rule, the costs included in the integration budget are not as high as the transaction price. Of course, you need to invest wisely, but you should understand that sometimes it is better to spend more money, for example, on a new IT system, rather than “patch holes” in the old one.
Legislative thorns
The domestic legislative framework does not spoil entrepreneurs with regard to mergers and acquisitions. In other words, it does not have the necessary flexibility to regulate this type of agreement. Some agreements between shareholders even have to be concluded outside of Russian jurisdiction. In addition, if a company is planning a transaction that could result in significant changes in the market, the antimonopoly service will oblige it to obtain a license. For foreign players there are also some barriers and limits on the presence of capital. Thus, we can say that there are many nuances that can delay the project. It also happens that the parties have already agreed on everything, but the deal can be concluded only after three months - due to the registration of additional permits.
According to the forecasts of experts from the Consultant magazine, the Russian M&A market will gain momentum in the next three to five years. There will be an increase in the number of transactions for business expansion, restructuring of holding companies that are getting rid of non-core assets and intend to develop more narrowly, including consolidation in industries. There are already a number of large holding companies in the metallurgy that are merging their businesses. Foreign players will come in and tend to show interest as political and currency risks decline. The legislative framework will gradually become more convenient for work. The very essence of M&A transactions will change. After all, now, for the most part, the acquired company is integrated only at the operational level - dual functions are eliminated, costs are optimized, departments are combined, etc. But in the near future, transactions should appear that will result in a structural merger.
Source: Federal Financial Information Agency
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