Reflection Paper on M&a: Transaction Stage

Mastering art of M&A: transaction stage

This reflection paper gives overview of the steps taken during the transaction process of M&A. Lecture notes, Weber’s book contents and articles were analyzed to make an overview of important parts of transaction phase, as well as personal remarks were included in the reflection paper.

The whole process of M&A can be divided into a set of particular steps: selection of a target, transaction, integration and realization. While the first stage is dedicated to evaluating the appropriateness of M&A as a tool to achieve strategic goals of a company and search of potential candidates, the transaction part starts when the target is approached with a particular proposal.

Following the Weber classification of stages in negotiation process the bidder first need to get acquainted with the target company and create basis for a deal. He points out at importance of creating chemistry between management of two companies. Achieving this chemistry would accelerate the process of reaching an agreement and will smoothen the implementation process. The importance of negotiation stage is also highlighted by Michael A Hitt (1998). Careful and deliberate conduct of negotiations was identified as one of 8 attributes of successful acquisitions. This might potentially allow to avoid overpayment as some of the guest speakers pointed out: “The target company agreed on a smaller price because it felt better goal alignment with a bidder during the negotiation process.”

The negotiations stage is critical for further success or failure of the acquisition as this is the first time when companies’ representatives meet, make impressions about each other. This is the first moment when trust is fostered or damaged. Melissa E. Graebner (2009) raised the questions of trust asymmetry between buyer and seller. She points out that sellers favor the buyers they trust. Trust can emerge due to prior direct relationships or shared network, reputation of a company or referrals.

In her study she analyses interactions of buyers and sellers through the lens of both parties. Surprisingly, informal interactions at the first stage between companies was viewed very differently: “sellers perceived social interaction as a way of building deeper relationships through honest exchange of information, while buyers viewed the same events through the lens of bargaining and saw social interaction as a way to gain influence over sellers.”

Weber looks at the negotiation process from a formal standpoint suggesting a negotiation plan that would embrace a list of topics for discussion together with identifying opening, compromise and call-off positions of the bidder. Melissa E. Graebner (2009), on the other hand, reveals the “inside kitchen” of the M&A negotiations where “bear hugging” is viewed by vice-presidents as excellent persuasion tool. Another major factor that can destroy trust is opportunistic behavior demonstrated by partner. As Hitt (1998) highlights in his article “ethical concerns and/or opportunism may affect the reputation of the firms involved and thus could have, at least, an indirect effect on the success or failure of the acquisition.”

However, none of the guest lecturers as well as professors pointed out at the importance of involving HR specialists into the planning and negotiation stages as Weber mentions in his book. HR professionals from both sides can contribute to the negotiations process as they can substantially resolve cultural differences and staffing issues while planning the transaction. Furthermore, Weber is very clear in his recommendations to include cultural similarity as a screening criterion as this would allow to evade cultural clashes in subsequent stages of M&A. At the same time as Weber(2015) mentions in his article about the influence of culture on integration approaches, cultural clashes can also work as sources of value creation.

Upon the reaching agreement, parties should sign initial written agreement (Letter of Intention) and then initial due diligence is conducted. Guest speaker from Valentum gave a comprehensive overview of due diligence process. He stated that there are three primary due diligence streams: commercial DD conducted by management consultant firm, financial DD by audit advisory firm and legal DD by legal advisory firm. At the same time he mentioned that CSR, intellectual property and IT due diligence also become increasingly important parts of the check process. There are many potential risks that might be addressed during this phase. Frequently, important areas are neglected or omitted, though they may affect the purchase price, for example, agreements with key customers and suppliers, remaining life period of key patents and licenses, bad debts, pension plans, identification of key employees and making them stay.