The negotiation process of merger and acquisition

In the negotiation process for a typical merger, we're going to go through each one of the steps one by one. So let's start with:

The Initial Approach

It could be initiated by either the buyer or the seller. For the buyers, you've got some companies that are interested in acquiring another company. So the buyer's management would contact the target companies management and let them know that hey we're interested in buying that company. 

Now it doesn't have to be that a buyer approaches the seller, it could be that there's a seller that says "We'd really like some other firm to acquire us and so we're gonna hire an investment banking firm, maybe we hire Goldman Sachs to identify some companies that might be interested in buying us."

Now when the seller is trying to get sold they could attract interest from a whole bunch of bidders and we're gonna have an auction. We'd have an auction to see if we can get the best price. Sometimes when you have this initial approach process it's really just one buyer that the seller is negotiating with, so it could go a number of different ways.

The initial approach could be:
  • Friendly
  • Hostile 
Hostile: If you ever hear about "This company tried to do a hostile takeover." What they're talking about when they say hostile is that the management of the target company does not want the takeover to take place. For whatever reason, they don't want that buying company to be the one that does the takeover, maybe they want some other company or maybe they don't want to be taken over at all but for whatever reason targets management is trying to oppose this. It doesn't mean that the deal isn't going to go through because ultimately it's up to the shareholders of the target company as they're the true owners of the firm.

Non-Disclosure Agreement

Now after we've got this initial approach, what you typically have happened is some kind of NDA (non-disclosure agreement) is signed because the buying company wants as much information about the target company as they can get, so they're gonna want some information that might not be public. So the target is in a vulnerable position, so they want to make sure that once the buyer has this information they don't go and somehow disclose that, or do something that would harm the target company.


Then the buying company would be conducting their due diligence looking at the financials of this target company and all these disclosures that they're getting. They're going to look and tell if there is everything okay. So they're going to do their due diligence process and then if they're happy with what they find then there's going to be an offer.

Offer/Term Sheet

Now, typically you have this thing called a term sheet. The term sheet is basically setting out the terms of the deal. You can say about the terms of the purchase price, or how much are we going to be paying for this company and then the type of consideration has to do. Is this going to be a stock deal? Is the buyer offering shares of its own stock for the target to acquire the target company? Are they offering all cash or it is a combination of cash and stock? All these questions are mentioned in the term sheet.

Letter of Intent: After the term sheet, you sometimes have this thing called a letter of intent. That lays out additional details but that's not mandatory though sometimes the buyer would issue this letter of intent.

Fairness Opinion: Now the company that is going to be acquired potentially their board will sometimes hire this company to do what's called a fairness opinion. The fairness opinion is it basically looks and says "This buyer is offering 8 billion dollars of cash." and they will go and say "Does that seem like a fair price to the shareholders of the target company or not." If they're getting this 8 billion does that seem like a fair price for this company to basically make it out like the target shareholders aren't getting screwed? Why would the targets board want to do this well maybe the board is worried if the offer isn't that good they might get sued or something like that. So it's common to sometimes have this Fairness Opinion.

Merger Agreement

Now we can have a formal merger agreement assuming things have not broken down by these previous points. In terms of everything's good at this point and things are progressing now we have basically the legal team for each of the different companies, the buyer, and the target, they're going to go back and basically hammer out the terms of the agreement. Maybe they make some changes to what was in the initial offer and typically there'll be this thing called material adverse event clause.

Material Adverse Event: What that is? It says the buyers entering this agreement to take over the target but it's not like this is going to happen today. It's going to take months, they're going to get to that regulatory approval all that and so if something happens, something bad there's some kind of bad event that happens before the deal completely closes, it gives the buyer the chance to just back out. 

Shareholders Approval

Now once we've got all that done we've hammered out the terms and the merger agreement, now we need approval from the shareholders of the target company. Because if that company is being acquired the shareholders are ultimately the ones that are going to get the cash or stock of the acquiring firm. So the shareholders of the target, are the owners of that target. So the shareholders are going to get to vote on whether they want the deal to go through, and then the government might have a say in terms of maybe they think that what if these two companies merged? Maybe we'd have some anti-trust concerns or maybe we think that it would reduce competition way too much. Maybe the two companies are competitors and they say if they were to merge it would reduce competition and make it unfair for consumers, as prices might go up too high.

So sometimes the government will actually come in and block a deal and say "Listen we're not approving this." In the U.S. the department of justice or federal trade commission might get involved and block the deal. So once this is all happening we've got approval from the government shareholders all this stuff has been hammered out then you've got a merger.

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