22 September, 2024

Before the Decision: 10 Steps to Developing an M&A Strategy

It’s perhaps one of the best methods to address multiple issues in a given business, especially in a fast-growing market such as that of the Middle East; Mergers and Acquisitions (M&A) have gained popularity as a powerful tool to enhance a given company’s stability and market position.

M&As can help corporations scale, stabilize competition, reduce production or distribution costs, expand their reach, diversify their portfolio, acquire technology, and capitalize on synergies. However, the success of any M&A endeavor hinges on a well-crafted strategy, one that’s designed to achieve the company’s long-term vision.

Setting a clear M&A strategy is the first step to a framework that guides decisions throughout the entire process and ensures that each move aligns with set goals.

Programmatic M&As vs large M&As

Larger M&A deals with flashy PRs tend to get the biggest headlines; however, consistent small-scale acquisitions—or Programmatic M&As—are proven to have a stronger impact, according to global research house McKinsey.

Smaller acquisitions, when pursued as part of a deliberate and systematic M&A program, tend to yield higher returns over the long run with comparatively low risk. McKinsey’s research paper show explains, “Companies’ ability to successfully manage these deals can be a central factor in their ability to withstand economic shocks.”

Types of M&As

M&As are best viewed as a spectrum, where one end is a company completely absorbing the other, while on the other end two relatively equal entities joining forces. In reality, however, the latter rarely happens. Usually, one entity has some degree of an upper hand during the M&A negotiation process.

There are four primary types of M&As, which can be categorized based on the nature of the deal negotiated and the relationship between the businesses involved. Each of these categories can be spun off into myriad other types.

M&A strategy framework

These steps are derived from VALUWIT’s M&A strategy consulting projects and represent a condensed overview of its process.

1 – M&A strategy setting

This initial step sets the foundation for the entire M&A process. Given its importance, it involves several layers of steps. The first of which is the definition of objectives and the key reason behind seeking a merger or acquisition.

The second phase focuses on the assessment of the company’s current position. This includes assessing the business’ worth, and conducting financial, legal, IT, and HR due diligence,

Third comes strategy specifics, such as establishing the target company’s details including position, technology, human capital, reach, and range of worth, all of which are aspects that design the target search.

Next comes planning for the implementation, steps include defining an outreach strategy, establishing working groups, agreeing on goals and timelines, identifying stakeholder benefits, and developing an internal communication strategy.

The fifth step involves creating a preliminary business plan including SWOT analysis and risk assessment.

2- Target screening

Once the strategy is in place, the focus shifts to identifying and evaluating potential acquisition targets.

This stage encompasses developing criteria for target selection; identifying potential targets; creating and evaluating a long list of candidates; narrowing down to a short list of the most promising targets.

3- In-depth analysis

This critical phase is divided into two main steps. The first is validation, which involves the assessment of the desirability of the deal through analysis of the market benefit potential, internal valuation, and market context analysis.

Next comes evaluating the M&A’s achievability through conducting market valuation, tactical evaluation, and managing investor relations.

Secondly comes execution, which focuses on market considerations such as deal strategy, organizational structure, market operations, and financing.

This step also addresses technical aspects including strategic due diligence, financial due diligence, legal and regulatory due diligence, documentation, among other aspects.

M&A execution

Once a suitable target company is identified, the execution process begins.

4- Initiate contact and negotiations

Execution starts with approachign the target company with a well-crafted proposal that outlines the potential benefits of the merger or acquisition.

In preparation for the negotiation process, outline internally hard lines and points where concessions are possible. These points will aid as you work towards terms that are favorable for both parties.

5- Conduct due diligence

This is a critical stage in the M&A process. This comprehensive examination of the target company helps verify its financial health, legal standing, and operational capabilities.

Key areas to focus on include strategic fit; financial performance; legal and regulatory compliance; operational efficiency; technology and intellectual property.

Thorough due diligence can uncover potential risks and help you make an informed decision about proceeding with the deal.

6- Determine the deal structure

Based on the results of the due diligence process, determine the most appropriate deal structure for both parties. This could be a full acquisition, a merger of equals, or a partial stake purchase.

Consider factors such as tax implications, regulatory requirements, and integration challenges when deciding on the structure.

7- Secure financing

With the deal structure in place, next comes financing. This may involve a combination of cash reserves, debt financing, and equity issuance.

Work closely with your financial advisors to determine the optimal financing strategy that aligns with your company’s financial position and the deal’s requirements.

8- Execution

Once all the pieces are in place, it’s time for the successful combination of the two entities.

This phase involves finalizing and signing all necessary legal documents, obtaining regulatory approvals, and closing the deal. Ensure all stakeholders are informed and that the process complies with all relevant laws and regulations.

9- Plan for integration

The integration stage kicks in post-deal and covers setting the strategic integration processes; financial and legal integration; operational and technology merger; organizational alignment; identifying and addressing potential limitations; and ensuring talent retention.

10- Monitor and evaluate performance

After the integration, it’s crucial to continuously monitor and evaluate the performance of the newly combined entity. Set clear metrics to measure the success of the M&A initiative and be prepared to make adjustments as needed to ensure you’re realizing the expected benefits.

As a CEO in the Middle East, your ability to adapt this process to your specific market conditions and business environment will be crucial to your success.

By following this roadmap, you can navigate the complex M&A process more effectively, maximizing the chances of a successful strategy, smooth transaction, and streamlined post-merger integration.