5 Stage Merger Process

5 Stage Merger Process

The five stage model conceptualizes the merger and

acquisition process as being driven by a variety of
impulses.

The five stages of merger and acquisition process under 5-S

model can be divided as below:

• Corporate strategy development

• Organizing and Preparing for merger
• Deal structuring , Negotiation and Consummation
• Post-acquisition integration
• Post acquisition audit and organizational learning
 1. Corporate strategy development

It encompasses both Corporate and Business Strategies

Corporate strategy is concerned with the ways of

optimizing the portfolios of businesses that a firm
currently owns and also deals with how the portfolio can
be changed to serve the interests of the corporation’s stake
holders.

Deals with the below

• How to achieve long term corporate objectives?

• How to gain a distinctive competitive advantage?
• How to create and maintain stake holder value?
 2. Organizing and Preparing for merger

This is the active start of the Merger process

One of the major reasons for the observed failure of many

acquisitions may be that firm lose the organizational resources
and capabilities for making merger/acquisitions.

Thus a pre condition for a successful acquisition is that the

firm organizes itself for effective acquisition.

At this stage the firm lays down the criteria for potential
targets of acquisitions consistent with the strategic objectives
and value creation logic of the firm’s corporate strategy and
business model.
 2. Organizing and Preparing for acquisitions
This stage consists of the below sub stages:
1. Constitution of the M&A Team - It is constituted by knowledgeable
resources who work in an integrated manner and all are trained to
achieved corporate objectives.
2. Appointment of Legal and Financial Advisors –

• Role of the Legal Advisors: Supports the legal aspects of the

transaction, they draft the appointment agreements, advise on the
structure and regulatory issues, Drafts & negotiates Term sheets &
Agreements and Coordinates for consummation of the deal

• Role of the Financial Advisors – They create communication link

between Acquirer and Target, Identifies the merger target, Helps
value the target and fix the price, Helps negotiate the Term Sheet on
financial aspects, Helps structure the transaction, Coordinates to see
the deal through
 2. Organizing and Preparing for acquisitions

3. Appointment of the Due Diligence Teams - Justifies the value paid

for the target, it is generally Legal & Financial Due Diligence and
often Technical & Commercial Due Diligence that is performed, it
identifies risks & exposures of the transaction, enables pursuit
of risk mitigation strategies, Helps justification of the deal price.

The Due Diligence Process

• Request for Documents and Information

• Involves detailed scrutiny of documents
• Also involves personal discussions with target
• Culminates in preparation of detailed reports
 3. Deal structuring , Negotiation and Consummation

Deal Structuring – It deals with the evaluation of the most optimal

structure of the firm, Risk exposure of the target firm is assessed,
Regulatory issues play a important role in deciding the structure

Deal Negotiation - Protection of each party’s respective right. It

commences with the drafting of Agreements, Acquirer’s legal advisor
ends the drafting and are reviewed by the legal counsel

Agreements and Documents involved - Binds the parties firmly into

the deal

Transaction Agreement –Transaction Agreement ensures it

contains Nature of the Transaction and Consideration, Representations,
Warranties & Indemnities, Conditions Precedent and Closing Actions,
Disclosure Schedules and Legal Opinion.
 3. Deal structuring , Negotiation and Consummation

• Shareholder Agreement - Defines the rights inter se between

shareholders. It constitutes Board and Meetings, Affirmative
Voting Rights, Restrictions on Transfer of Shares, Tenure,
Termination and Consequences.

• Other Ancillary Agreements - Captures the supplementary

issues between parties, Employee Agreements, Captures the
supplementary issues between parties, Transitional Services
Agreement, Call and Put Option Agreements, Facilities
Agreement, Brand Name License Agreements.

• Schedules and Exhibits - Forms an integral part of the legal

documentation, Disclosure Schedules, Legal Opinions and
Certifications, Employee Stock Option Plans, Deed of
Adherences, Revised Articles of Association
 3. Deal structuring , Negotiation and Consummation

Deal Consummation - Involves the final consummation of the

deal. It deals with satisfying the Conditions Precedent, Obtaining
the corporate approvals, Governmental Approval, Completing
the closing actions and the post closing obligations
 4. Post Acquisition Integration

At this stage, the objective is to put in place a managed

organization that can deliver the strategic and value expectations that
drove the merger in the first place.

The integration process also has to be viewed as a project and the firm
must have the necessary project management capabilities and
programme with well defined goals, teams, deadlines, performance
benchmarks etc.

Such a methodical process can unearth problems and provide solutions

so that integration achieves the strategic and value creation goals.

One of the major problems in post-merger integration is the

integration of the merging firm’s information systems. This is
particularly important in mergers that seek to leverage each company’s
information on customers, markets or processes with that of the other
company.
 4. Post Acquisition Integration

Essential pre-requisite for any successful deal - Integration of various

elements such as
• Human Resources and Cultural Integration
• Business and Infrastructure Integration
• Financial and MIS Integration
• Operational and Logistical Integration
 5. Post acquisition audit and organizational learning

Post-merger audit by internal auditors can be acquisition specific

as well as being part of an annual audit. Internal auditor has a
significant role in ensuring organizational learning and its
dissemination.
Critical evaluation of the success of the transaction
• Did it achieve the stated objectives?
• Did it provide competitive advantage?
• Did it achieve the required synergies?
• Did it ultimately enhance stakeholder value?
• Is there a periodic monitoring of transaction integration?

Organizational Learning – Increases preparedness for future

transactions. It deals with systematic documentation of the learning
such as things which are done correctly, which were done incorrectly,
which could have been done differently, Pursuit of environmental
management