Merger and Acquisition Process Steps

The merger and acquisition (M&A) process is a well-defined and structured sequence of steps that companies combining or acquiring enterprises follow. This framework is essential, given the M&As can be complex and multifaceted journeys for companies on either side of the situation. There are various legal, financial, and operational elements to plan for, with particular challenges for companies operating on a global scale.

We’ve put together this article to provide clarity on all the major M&A process steps. Whether you’re an entrepreneur, executive, or an investor pursuing business consolidation internationally, this will give you guidance to proceed with confidence.

Initial Strategic Planning

Successful M&As start with strategic planning. Leaders should clearly define the objectives of the merger or acquisition, which might include expanding into new global markets or making operations more efficient through cost synergies. Goals make it more practical to identify the most relevant target sectors and jurisdiction candidates.

Internal stakeholders — executives and other key department staff — then need to align on objectives, building clear decision-making protocols that boost cohesion and streamline the evaluation and approval process. Importantly, they’ll develop preliminary valuations and timelines, guiding activities and maintaining momentum.

Target Identification and Evaluation

After compiling a longlist of potential M&A partners, leaders screen candidates and produce a shortlist. This involves identifying strong strategic fits based on market positioning, complementary product offerings, and operational capacity, among other points. Leaders will then express tentative interest to shortlisted businesses, maintaining necessary confidentiality through non-disclosure agreements (NDAs).

Following this, leaders will assess a combination of publicly available data about the candidates, such as alignment with industry benchmarks and historical performance indicators. It’s also vital to review the organizational culture, leadership framework, and the overall potential for integration. These inform an understanding of the likelihood of post-M&A success and supports M&A risk management.

Preliminary Due Diligence

Before negotiations, companies run down an M&A due diligence checklist. This identifies potential red flags and informs preliminary risk mitigation protocols. Due diligence processes typically include careful examinations of legal, tax, and operational data to better understand anything that might impact the feasibility of the transaction. Often, this is supported by an experienced merger and acquisition lawyer. Among the resources that receive particular scrutiny are intellectual property (IP) portfolios, existing contracts, and areas of regulatory exposure.

Valuation and Deal Structuring

One of the most important steps of any merger or acquisition is conducting formal and accurate valuations. Getting this right involves using multiple methodologies, including discounted cash flow (DCF) analysis, comparable company analysis, and precedent transaction assessments.

From here, leaders will determine the structure of the transaction, considering whether asset or stock purchases are the most appropriate approach and whether payment will take the form of cash or equity exchanges. The terms of the payment are then formalized between the parties, with protocols in relation to earnouts, post-deal governance, and employee retention forming key parts of the deal proposals.

Meanwhile, companies will typically undertake internal financial forecasts to get a clearer view on the likely post-transaction impact and how to strategize accordingly.

Letter of Intent (LOI) and Negotiation

With the terms of the M&A deal formalized, the company will draft and issue a letter of intent (LOI) to the other party. This document officially outlines the basic terms and deal assumptions, alongside setting out important elements such as the valuation, structure, exclusivity periods, confidentiality obligations, and conditions of closing. 

From the point of delivery, formal negotiations will take place. Leaders — alongside legal and financial advisors — will facilitate discussions on the finer details of the deal. During this phase, leaders on both sides will secure board or shareholder preliminary approval of the deal, if relevant.

Full Due Diligence and Risk Assessment

While initial assessments should already have taken place, the next step in a merger or acquisition is a full due diligence and risk assessment. This involves a deep dive into a range of elements, including company financials, legal structures, current customer contract details, human resources (HR) policies, and regulatory compliance. 

On-site visits are a common part of the M&A process, often involving management and staff interviews alongside audits of key internal systems. In some instances, it’s necessary to coordinate third-party assessments with experts in various fields. Environmental safety and IT security are common areas of focus.

The findings of this deep dive will be consolidated into a formal risk report, which may prompt leadership to seek adjustments to the deal terms.

Definitive Agreements and Regulatory Approval

Having performed full M&A due diligence, both parties move closer to closing, drafting the definitive paperwork — including purchasing agreements, shareholder agreements, and ancillary contracts that facilitate the transaction.

While this is being undertaken, businesses will usually seek to obtain any necessary regulatory or antitrust approvals relating to the transaction. The extent and nature of these will depend on the size of the organizations involved and the jurisdictions they operate in. Shareholder and board approvals will then be gained to maintain corporate governance compliance.

From here, executives in collaboration with legal and financial teams will prepare the closing documentation, including escrow arrangements and any necessary transition service agreements to support the handover.

Deal Closing and Legal Execution

Mergers or acquisitions culminate with the formal deal closing. This begins with execution of final contracts and the release of the payment or funding outlined in the agreed terms. This triggers the transfer of legal ownership of all relevant assets, shares, and obligations, which then requires official updates to legal registries and public records. Businesses will also need to arrange for any relevant business licenses, too. Finally, companies will activate communication strategies with employees, customers, and partners, informing them of the closure and the next steps.

Post-Merger Integration

Once the legal closing is complete, the focus for everyone concerned shifts to integration. This involves launching the pre-arranged plans that cover all major areas, including HR, IT systems, supply chains, and overall operations. Paying careful attention to aligning the disparate enterprises’ organisational cultures and internal policies boosts cohesion, while solidifying governance mechanisms that ensure decision-making minimizes disruptions. Finally, gaining reliable data on financial performance of the merger or acquisition and comparing this to projections helps to make adjustments in the future.

FAQs

What are the key steps in merger and acquisition process?

While M&A processes can depend on the situation, they will typically include strategic planning, target evaluation, preliminary and full due diligence, valuation, legal execution, and post-merger integration.

How long does a typical M&A process take?

The timeline depends on complexity, regulatory requirements, and negotiations. However, it usually ranges from several months to more than a year.

What is the role of due diligence in the M&A process?

Due diligence is a deep dive to identify any hidden risks, validate prior valuation assumptions, and shape the structure of the final deal.

Can a merger or acquisition be reversed?

It’s an unusual occurrence, but mergers or acquisitions can be unwound in certain circumstances. This is usually in cases of fraud, non-compliance, or serious material breach of contract terms.

Who is involved in managing an M&A transaction?

M&A transactions are usually handled by executive leadership, specialist M&A lawyers, financial advisors, integration consultants, and regulatory experts.

References

Harroch, R. (2017, October 28). A Guide To Non-Disclosure Agreements For Mergers And Acquisitions. Financier Worldwide. https://www.forbes.com/sites/allbusiness/2017/10/28/non-disclosure-agreements-for-mergers-and-acquisitions/

Fernando, J. (2024, September 20). Discounted Cash Flow (DCF) Explained With Formula and Examples. Investopedia. https://www.investopedia.com/terms/d/dcf.asp

Macy, C, et al. (2018, April 19). M&A Antitrust Compliance—Issues before Signing and Pre-Closing. American Bar Association. (https://businesslawtoday.org/2018/04/ma-antitrust-compliance-issues-signing-pre-closing/