Mergers and Acquisitions (M&A) Explained: The Process

Mohammed Aamir ShaikhFounder, Aamir Capital

Updated 5 October 202610 min read

The short answerMergers and acquisitions (M&A) is the buying, selling and combining of companies. A deal normally moves through strategy, preparation, outreach, due diligence, negotiation, closing and integration. Most value is won or lost in preparation, price and integration.

What M&A is

In an acquisition, one company buys another. In a merger, two companies combine into one. In practice the two words are used together. The same skills apply: valuing businesses, checking numbers, negotiating terms and planning what happens afterwards.

Types of deals

Share purchase. The buyer buys the shares and takes the company with all its assets and liabilities.
Asset purchase. The buyer buys selected assets and takes on only the liabilities agreed.
Merger. Two companies combine, often by exchanging shares.
Minority investment. An investor buys part of a company without taking control.
Joint venture. Two or more companies set up a new business together.
Management buyout. The existing managers buy the business, usually with outside funding.

Why companies do deals

To grow faster than they could on their own.
To enter a new market or country.
To add products, technology or people.
To gain scale and save costs (synergies).
To secure supply or customers.
For owner succession, or to exit a business.

The process

Exhibit 1: A typical M&A process

Simplified. Steps and timing vary from deal to deal.

Strategy. Decide why you want to buy or sell, and what a good outcome looks like.
Preparation. Clean up the numbers, set a value range and prepare the materials.
Outreach. Approach counterparties with a short anonymous summary (a teaser), sign confidentiality agreements and share an information memorandum.
First-round offers. Counterparties give non-binding indications of price and terms.
Due diligence. The preferred counterparty checks the business, usually through an online data room.
Negotiation and documents. Price, structure and legal terms are agreed in a term sheet or letter of intent and then in a share purchase agreement.
Signing and closing. The contract is signed, conditions such as approvals are met, and the deal completes.
Integration. The two businesses are combined, or the buyer takes over running the business.

Buy-side and sell-side advice

Sell-side advisers help the seller prepare, set a value range, run the process and negotiate. Buy-side advisers help the buyer define targets, value them, check the numbers and negotiate. Their goals differ, so they advise differently. See our buy-side and sell-side mandates.

Value and price

Price depends on value to the buyer, on competition between buyers and on negotiation. Buyers often pay a control premium. Synergies are the usual reason a buyer can justify a higher price, and also the most overestimated item in most deals. See our business valuation guide.

Deal structure

Cash or shares. Paying in shares shares the risk with the seller but changes who owns the combined company.
Earn-out. Part of the price depends on future performance.
Escrow. Money held back to cover possible claims.
Locked box or completion accounts. Two ways to set the final price.
Warranties and indemnities. The seller's promises about the business and what happens if they are wrong.

Due diligence

Due diligence checks that what the buyer was told is true. It usually covers financial, legal, tax, commercial, operational and technical matters. Financial due diligence tests the quality of earnings, net debt, working capital and the forecast. See our financial due diligence service.

Why deals fail

Overpaying, often because competition pushed the price up.
Overestimating synergies and underestimating the cost of achieving them.
Weak integration planning.
Culture clashes.
Losing key people or customers after the announcement.
Surprises found late in due diligence.

Cross-border deals in the GCC, India and Europe

Deals that cross borders add layers. Some sectors have limits on foreign ownership. Several countries require merger control or competition approval. Accounting standards, tax rules, currencies and negotiating customs differ. Local lawyers and tax advisers are essential, and the numbers need to be presented in a way that both sides can follow.

See our market pages for the GCC, India and Europe.

Questions

How long does an M&A deal take?

A sale process often takes six to twelve months from preparation to closing. Simpler deals can be faster, and complex or regulated deals can take longer.

What is the difference between a merger and an acquisition?

In an acquisition, one company buys another. In a merger, two companies combine, usually on negotiated terms. The words are often used interchangeably.

Do I need an M&A adviser?

It is not required. For a first deal or a large one, experienced support on valuation, process and negotiation can help you avoid costly mistakes. The decision is yours.

What is a letter of intent?

A usually non-binding letter that sets out the main terms a buyer is prepared to offer, such as price and conditions, before detailed work and contracts begin.

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For education only. This page is general information. It is not financial, investment, legal or tax advice, and it does not take your situation into account.

Mergers and acquisitions explained: the process from strategy to integration