Reading: The Takeover Process

7) The Integration Plan

If the takeover is for 100% cash, something dangerous will most likely happen right after signing the deal: The seller has no more incentive to work hard and the buyer has lost most leverage over the seller. That can be a toxic constellation, with most of the downside risk for the buyer.

In many instances, it therefore makes sense to plan the integration of the deal well in advance and to incorporate it in the deal structure. The main purpose is to:

• Make sure that the seller keeps an incentive to work hard for the deal
• Make sure that seller has an incentive to remain involved after the deal if (and often only if) there are important success factors that depend on the seller's involvement.

To achieve these goals, the following deal elements could make sense:

• Postpone parts of the purchasing price and tie them to specific integration milestones
• Define earn-out clauses (i.e., future key performance indicators that will be used to determine the seller's ultimate payout)
• Have key employees sign employment contracts before closing the deal
• Assign clear responsibilities and milestones for the integration.

8) Closing the Deal

With this, the parties should be ready to close the deal:

• Obtain approval from shareholders, regulatory bodies, and other stakeholders
  • In many countries, shareholders have to approve M&A transactions. Therefore, firms have to call a special shareholders' meeting to solicit approval.
  • It is also important so ensure that the deal complies with securities, antitrust, and corporation laws.
  • The firms might have contracts with customers, suppliers, banks, or other stakeholders that cannot be transferred without their consent or that in fact require the explicit consent for a deal (especially in the case of financing).
     
• Execute the acquisition or merger agreement
  • Determine the final price and payment methods
  • Transfer the assets and liabilities
  • Define and monitor the closing conditions outlined in the merger agreement. In particular with respect to potential material adverse change (MAC) clauses that allow the parties to break up the deal.
  • Settle indemnification claims (compensation of the other party for harm, liability, or loss arising from the contract).

9) Integration

So far, the transaction has primarily involved directors, C-level executives, as well as the firms' finance and legal departments.  Now the other stakeholders have to be on-boarded for the transaction, in particular the middle-level managers. This is an extremely important step in the process. If the middle and lower management is not motivated to work on the deal integration (for example because of fear of job loss or loss of identification), it will be hard to make the deal a success. 

Therefore, the firms have to be very careful with respect to:

• Communication of the deal and its rationales
• Employee retention
• Respecting best practices of both companies
• Cultural differences between the firms.

Equally importantly, the firms have to make sure that the structural integration is approached swiftly (e.g., the integration of IT systems, processes, etc.), as many of the expected cost synergies will depend on that.

Finally, they have to be aware of the fact that the cash requirements for merger integration are almost always higher than expected. Therefore, they should keep an eye on the firm's liquidity to make sure it does not run out of cash.

10) Post-Closing Evaluation

Finally, the post-closing evolvement needs to be monitored carefully. It is important that top management remains focused on the deal and does not divert too much of its attention to the next transaction. Typical steps in the post-closing evaluation include:

• Determine whether the transaction meets the formulated expectations. If not, decide how to calibrate the integration to remain on track.
• Stick to the original performance benchmarks and compare the actual development with the projected figures.
• Unavoidably, many unexpected challenges will surface and many difficult questions will be asked surrounding these challenges (shouldn't we have foreseen this…?). It is important to stay open to these questions and to address them with a forward-looking mindset.
• Finally, managers and organizations should learn from their mistakes. Only then, they will be less likely to repeat them in the next deal.