By Clarence Anthony (Partner) and Pratibha Sharma (Senior Executive)
The recent news on a large merger and acquisition (M&A) deal involving a prominent business leader and a powerful media brand going awry has highlighted how challenging it can be to successfully conclude negotiations.
Research shows that most M&A deals tend to fail due to a variety of reasons. While deeper issues such as cultural synergies can be challenging to address in an M&A deal, there are other aspects that can be better addressed in the initial stages itself, thereby improving the chances of success.
Below are a few key aspects to consider during the due diligence phase.
Due diligence checklist for pre-merger negotiations
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- Ensure adequate and relevant legal documentation is available – Legal documentation during pre-merger negotiation is a two-step process that involves drafting a Term Sheet/MoU and the due diligence process to guide negotiations. The legal framework lays down the foundation of the negotiation process and helps both parties to frame a detailed business understanding and clearly define the ramifications for each party upon the violation of the agreement. The process is an imperative risk allocation in the subsequent process of drafting definitive contracts.
- Draft an appropriately tailored term sheet – Any potential M&A transaction includes signing a non-binding agreement that stipulates the key terms of the intended merger or acquisition between the parties involved. A well-defined term sheet enables stakeholders to identify major deal breakers early in the process before deploying significant resources in the deal. Some of the indispensable components of a term sheet include value or purchase price, indicative structure of the M&A transaction, key responsibilities of the outgoing founders, employee matters, exclusivity (only binding clause), confidentiality and break-fees (if any).
- Consider key issues – Often, matters such as transition of the employees of the target business tend to take a backseat during negotiations and the focus remains on the financial parameters of the deal. However, in our experience, it is important to prioritise such issues. Most of the time, cultural incompatibilities can render even the most financially sound deals unsuccessful. Therefore, the term sheet should ideally contain provisions on handling employees post the transition. Questions like how the acquirer plans to retain employees and ensure they stay motivated, and how the company will deal with stock options often assigned to employees should be proactively addressed.