The world of mergers and acquisitions (M&A) has been instrumental in giving rise to companies whose value surpasses the entire gross domestic product of some nations. Spanning from pharmaceutical titan Pfizer to the expansive sphere of universal banks like CIMB Group, M&A has left an indelible mark. While M&A has the potential to usher in unprecedented success, it’s important to recognize that not all endeavours meet their intended goals. Instances like the merger mismatch between Google and Motorola in 2012, valued at a staggering US$12.5 billion, and the ill-fated RM20 billion proposed merger between CIMB and RHB Bank in 2015 serve as poignant reminders that success is not guaranteed. In the Malaysian context, the landscape of M&A activities is intricately tied to the market’s dynamics, primarily driven by commercial and business considerations.
For prospective buyers, sellers, and partners involved in mergers and acquisitions, grasping the core stages of the deal is essential. A clear understanding of these stages will empower stakeholders to navigate the complexities of M&A with confidence and effectiveness. Let’s delve into the crucial stages of the process.
KEY STAGES OF M&A
FIRST STAGE – PRELIMINARY AGREEMENTS
In the initial stage, a series of preliminary agreements are entered into by the involved parties. These agreements encompass the following components:
a)Non-disclosure agreements
These agreements safeguard confidential information related to the companies involved in the merger and/or acquisition. Trade secrets, business plans, strategies, and patents are treated as confidential to prevent third parties from exploiting them. These agreements continue to be significant even if the deal falls through, ensuring the confidentiality and integrity of information.
b)Term Sheet
Also known as a Memorandum of Understanding (MOU), Head of Terms, or Letter of Intent, the Term Sheet outlines primary terms for the eventual merger and/or acquisition agreement, referred to as the “Definitive Agreement.” It establishes an understanding of interests, risk management, conditions for deal termination, and exclusivity clauses that ensure transparency in the negotiation process.
SECOND STAGE – DUE DILIGENCE
Before committing substantial investments, a prudent approach involves thorough due diligence, including fact-finding and risk assessment. Conducting background checks on the target company, accessing publicly available information from sources like the Companies Commission of Malaysia, and understanding the relevant industry and regulations are crucial steps. Collaborating with professionals from various fields, such as tax advisers and business consultants, enhances the quality of due diligence reports, shedding light on financial implications, tax considerations, and feasibility.
THIRD STAGE – PRINCIPAL DOCUMENTATION
This stage involves creating principal documentation that solidifies the terms of the merger or acquisition. Depending on the nature of the deal, the Definitive Agreement may comprise different agreements and documents. For instance, an acquisition via share sale involves a Share Sale Agreement and a Disclosure Letter, outlining limitations and disclaimers. The Definitive Agreement is a comprehensive collection of clauses, including pricing, dispute resolution, remedies, and termination provisions.
FOURTH STAGE – CONDITION PRECEDENT PERIOD
This phase is crucial as it determines the success or failure of the venture. The Definitive Agreement contains Conditions Precedent clauses that outline obligations to be fulfilled during a Conditional Period. This period spans between the signing of the agreement and the Unconditional Date, marking the deal’s finalization. These conditions regulate obligations such as obtaining licenses or approvals. If obligations cannot be met, the provision allows parties to exit the deal, protecting both sides.
FIFTH STAGE – COMPLETION
Lastly, we come to the stage that is eagerly anticipated, COMPLETION!. This is the moment when parties celebrate with bright smiles and handshakes. While celebratory, this stage demands diligence in handling paperwork and formalities. It marks the transition to the new phase of the venture and requires meticulous execution for a seamless continuation of the business relationship.
CONCLUSION
As Michael Jordan wisely said, “Get the fundamentals down, and the level of everything you do will rise.” This maxim holds true for the world of M&A. Success in mergers and acquisitions is attainable by adhering to the basic stages of the process. By focusing on these stages and establishing a strong foundation, the quality and outcome of M&A endeavours can be elevated, ultimately paving the way for a prosperous future.
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The contents are provided for information purposes only and not intended to constitute legal advice. Specific legal advice should be sought separately about your specific circumstances before taking any actions.
