Negotiating Mergers & Acquisitions: Definition & Strategy

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  • 0:03 Defining Mergers &…
  • 0:40 Stages of a Merger
  • 2:31 Players in a Negotiation
  • 3:36 Other Options
  • 4:55 Lesson Summary
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Lesson Transcript
Instructor: Nick Chandler
When two companies join together, it can make or break them. This lesson looks at the negotiation process of mergers and acquisitions, which is key to the long-term success of the merged organization.

Defining Mergers & Acquisitions

A merger is when two or more companies agree to join together on roughly equal terms. An acquisition, on the other hand, is when one company buys another, and they both remain separate entities. This is often known as 'the big fish eating the small fish.'

A merger or acquisition can have many benefits and is often part of a corporate growth strategy. However, a large number of mergers fail. There are defined steps to negotiate a merger or acquisition, and handling them delicately can maximize the chances of success.

Stages of a Merger

There are three main stages to mergers:

1. Planning

First is planning. One of the most complex parts of the merger process is finding a suitable buyer or seller. This involves a lot of analysis and can take some time, even years. To find the right match, consultants and advisors perform an evaluation of the target company by looking at strengths, weaknesses, opportunities, and threats of the merger. Experts also might look at the share exchange ratio, which evaluates share value, to determine if the merger will result in increased value for the company.

Once this is done, an action plan is drawn up for the negotiations to take place, accompanied by deadlines of what needs to be achieved and by when. At this stage, a letter of intent might be signed by both sides, which signals that negotiations can commence.

2. Resolution

The second stage of a merger is resolution. A letter of intent indicates plans for a merger, but this also needs approval. The resolution involves the management approving of the merger and then putting this proposal to the shareholders, who must also consider approval of the merger. This occurs at an extraordinary shareholders' meeting.

The company must then get final approval from the relevant governmental antitrust authority, which considers how the merger or acquisition will affect the industry, customers, the community, and so on. For example, the authority might reject the proposal for a merger if the merged company will have complete control of a particular industry, therefore becoming a monopoly.

3. Implementation

The third and final stage of a merger is implementation. In this stage, the newly formed company will need to be registered. For many large companies, the process from negotiations to reaching this final stage might take as long as a year or more.

Players in a Negotiation

When the negotiation for a merger or acquisition is being planned, there are a number of key players, including:

Lawyers: It's important for both companies to have a full-time mergers and acquisitions (or M&A) lawyer. Although companies often have a legal department, they need a lawyer specialized in M&A with knowledge and experience of negotiations in this area.

M&A committee of the board: The CEO is often seen as the person who directs a company and so should have a key role to play in negotiations. However, the CEO has a conflict of interest, since the merger could result in the CEO having to stand down. A merged company can't have two CEOs! Therefore, an M&A committee of the board is set up to undertake the negotiations.

Investment bankers. Companies going through a merger or acquisition often hire an investment banker for the process. These bankers can help in M&A negotiations. They can also assist in finding prospective buyers and acting as a go-between, or intermediary, in negotiations.

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