Assessing business value merger or acquisition in a Virtual data room M&A

How often have you had to sell a business or attract a financial partner? For many sellers, this is a one-off transaction, the main one in his life. Therefore, it is necessary to treat this especially, trying not to make mistakes. Each mistake in an M&A transaction can cost anywhere from a million to tens of millions of dollars. By competently preparing for the deal, you can increase the value of the company and prevent price discounting. All the mistakes cannot be described and each transaction is unique, but we will consider the main ones that we often encounter.

Motives for Conducting Mergers and Acquisitions

From an economic point of view, the strategy of mergers and acquisitions acts as a tool to ensure the competitive advantages of the combined company by increasing its capital and more efficient and rational use of its opportunities in the market. There are several target settings that characterize, in one combination or another, the economic feasibility of conducting mergers and acquisitions: operational, financial, investment, strategic, and others. All of them are based on the need to ensure the interests of the owners. However, as the main reason for the implementation of integration processes the desire of companies to obtain a synergistic effect stands out: an integrated business creates more value for shareholders than each of its divisions separately. For corporate governance purposes, two main types of synergy are considered – operational and financial.

The volume effect implies the use of a specific set of skills, or assets, in the production of certain types of products, when the combination of multi-product lines in one corporation is more profitable than their separate production at different enterprises. Financial synergy reflects changes in the value of capital of an integrated company resulting from a merger and acquisition transaction. The cost of capital is the minimum level of return that could attract the attention of investors and lenders to buy shares or provide loans

5 Common Mistakes Assessing Business Value in M&A deals

  1. Unpreparedness for the deal. Any project, and even more so as complex as an M&A deal, in which many parties are involved, requires preliminary preparation and elaboration. A high-quality preparation of a deal takes time. 
  2. Lack of high-quality communication between the participants of the project (transaction). All M&A negotiations require a series of compromises from both sides. It is extremely important to understand which party is leading in the negotiations, who is more interested in the deal – the buyer or the seller?
  3. An illiterate NDA, disclosure plan, and letter of intent. The non-disclosure agreement (NDA) is a confidentiality agreement. When entering into negotiations, the investor requests information about the business, electronic data room, the disclosure of which without an NDA could lead to a loss of competitive advantage or lead to losses.
  4. Lack of a virtual database or incomplete list of documents. All key information required to conclude a transaction must be in the online storage.
  5. Wrong attitude to personnel issues. Even rumors about an upcoming sale can provoke the dismissal of top employees. But it is they who create the value of the asset. Staff losses can lead to a decrease in productivity, a decline in financial indicators (which are already included in the company’s forecast), loss of loyalty of regular customers, etc.