In the following articles I shall take you through the different steps involved in a mergers and acquisitions transaction.

1. Introduction
Companies that choose mergers and acquisitions do so because of the following reasons: broadening product lines, increasing market share and financial position, betterment of intellectual capital.

A lot of mergers and acquisitions fail as opposed to those that succeed and the reasons are: bad implementation of post merger integration, acquirer has a weak or no core business, target larger than the acquirer, inadequate due diligence, ROI not justified by the premium, poor technological fit, different corporate cultures.

Developing a corporate strategy that includes a mergers and acquisition strategy and simultaneously developing a sound understanding of your business needs along with the concerned market is normally a good way to vet the requirement of mergers and acquisitions as opposed to other strategic planning for growth.

Once these steps have been performed the next step would be the process of identifying potential targets and screening them. Knowing your target helps in the transactional phases as it allows you to have a better understanding of their business planning and gives you a better insight to secure a win win negotiation.

The actual transaction itself could be done with the help of outside advisors; law firms, investment banks as they have considerable experience in conducting due diligences to evaluate and valuate the SWOT of your target company after the identification and initial screening of potential targets.

The last phase is the most important phase of any M&A transaction; the post merger integration phase. This phase should be planned in advance and should be followed according to a timeline to allow for smooth integration of the three p´s (product, people, profits) into your business processes.

2. Business Plan

As you all know the process of operating a successful company is your business plan. It includes all your processes, your ideas, strategies for growth and contingencies. This plan should be always kept up to date and free from gathering dust. Low risk strategies should be evaluated in case they are better than following a strategy of growth through mergers and acquisitions.  These other alternatives include: joint ventures, franchising, licensing and sales and distribution agreements.

Business plans are management's best friends as it allows them to check when in doubt and to grow in a structured manner.  The business plan helps to set the objectives of the company and set bench marks for the company's performance to measure against.

A business plan should cover the following key issues:

  • Company description - mission, history, "USP", approach to selling its products and services, its value proposition to its customers and how it intends to achieves this. To project the future one must know the present and the past. Weak core businesses should be addressed by management prior to making acquisitions.
  • Management and organization - members of the board and their backgrounds and the required skill set that might be needed in the organization, what is the value of the intellectual capital and whether it can be transferred should also be mentioned.  Acquisitions sometimes transfer the talent that businesses require to grow.
  • Marketing and sales - marketing and sales plan to include distribution, channels, pricing strategies (USD= EUR) partners based on the proposed value of your products and services. Acquisition of a company with a similar products and a strong market brand or sales plan can suitable increase your market sales.
  • Market and competitors - describe in great details the market current and future for your products and services, an appraisal of the industry and its SWOT analysis, along with key industry trends. Competitors and their products historically and present should be analyzed to see if their is any historical data for key technological changes.
  • Products and services - features, processes, production, components, and uniqueness should be addressed in detail. Focus on research and development, production needs, distribution channels. Product costs and availability of material including operational forecasts should be prepared as well. Acquisitions normally provide the missing component to better businesses, markets, products or technology.
  • Financials - Estimate your cash flow requirement, working capital, capital investment requirement, break even ratios, and time to profitability as a stand alone entity. Financial forecasts help you understand whether you have the capability to handle acquisitions.
  • Alternatives to M&A- build internally, form joint ventures, form strategic partnerships, enter into licensing agreements, franchising.

Once you have decided on your growth strategy and your decision includes growth through M&A as it is an appropriate strategy and has well formed and founded grounds then the next step is the search for the acquisition candidates that fit your company profile.

3. Process Description

Before beginning any search process you should set up the guidelines for the search which should include: financial objectives, identification of industry and markets, companies that fit with the preliminary planning included in your business plan. Develop screening criteria for evaluation of target companies that include an information database that can either be obtained through in-house research or through consultancy companies that specialize in such services, listing of companies based on their enterprise value, revenue and cash flows within your acquisition criteria.  Further source of information's include industry trade journals, newspapers, websites, annual reports and my favorite CNBC provide sufficient information to start a preliminary screening process. 

Questions that you should answer in your screening process include:How will the space consolidate? Who will enter the space? What acquisition strategy will maximize your market position? How can you build a "war chest" for acquiring complementary companies that include technologies and services?   How can you broaden your services platform?

4. Financial Objectives

Acquisitions take time to fulfill and it's important to be certain that your acquisition will be successful. Financial objectives are based on deal size and the financial risks involved.  Deals can be too large creating problems in the post merger integration stages or too small where there is a financial risk for not getting a significant return on your investments.

Create an acquisition budget where the following factors should be taken into consideration:Management teams experience in post merger integration issue: turn around experience, funding and skills to manage effectively a consolidated company, comfort in management of a large portfolio of companies. Risk allocation: risk averse or high risk takers, reasons to take over to create a high return or steady returns over a period of time. Affordability: Debt, equity or a mixture to finance the transaction, in case of debt to know what is your borrowing capability before being forced to complete a transaction not because of the transaction value but because of your debt build up. Equity likewise is not unlimited. Investors that have equity interests are clearly concerned about ownership dilution and financial measures like ROI, effect on cash flows and EPS.

Financial screening varies from industry to industry, market to market (premiums and discounts that may be available should be taken into consideration). Financial projections are very important measures to be certain that in the case of debt financing the ability to meet the debt requirements are fulfilled. Issues that revolve under debt financing like restrictions on taking on new debt or limits on equity used on financing should be considered earlier on as it might restrict future investments.

5. Screening Criteria

Based on your screening criteria you will have an overall picture of the potential target companies even thought, seldom, a company is found that fits all your criteria.  The screening process allows you to choose the most important business based on your composed criteria's for best business. 

Looking at industries where you have business experience or looking at new industries where you can contribute to grow the new business with your business experience should be the starting point of the screening process.

Important issues are:Understanding the target industry: knowing its "USP" to overcome paying a premium in case of a shake out where similar companies are up for sale. Match your characteristics and experience with the target industry: comparison of SWOT to see where you can compliment each other business. Minimum and maximum price for Target Company: use of options to increase your ownership interests, not waste your time on targets that are after careful study beyond your budget. What are your financing objectives and how you intend to carry out the financing? Revisiting your marketing criteria: market share, potential customer base, type of new customers, and integration of your marketing and sales strategy, brand name investment, reputation, and distribution channels of the target company. Revisiting management criteria: what is the role of the acquired company's management, compatibility of managers in target and your company, skill level and corporate culture comparison? 

6. Finding Candidates

Identify how you would like to implement your screening criteria; using in-house personnel who play a very important role or by using external advisors like investment bankers, business brokers, lawyers, accountants, specialized consultants.

In case M&A plays an important role in your growth strategy then usually companies have an in-house M&A department that usually knows the company and its strategy and how acquisitions can be integrated successfully.  These professional should do deals because it is the right deal and brings value to the company and can coordinate work and work well with external advisors.

External advisors on the other hand are professionals who know the markets and normally bring a lot of insight into M&A transactions as they are not dedicated to deal flow ex. lawyers and consultants help in structuring, legal, tax and specialized advice.

Investment bankers and business brokers are normally concerned with deal size and usually help in creating deals by buying and selling businesses for a fee. These companies also include a fee structure that cover screening targets, evaluating targets, preparing financial information, pricing the deal and even sometimes helping in the negotiations.  These intermediaries are an important source for growth of the M&A markets as many business owners who consider selling their business use them to facilitate the transaction.

Deal size usually is the most important criteria in searching for a potential candidate as it normally takes a while to find the strategic fit, according to your business needs, that is fairly priced.   

Who are the business owners of companies that you are interested in? Look at their financial: past and present. High debt or low working capital could mean that they are interesting in selling to avoid future trouble or highly profitable company with lots of cash could be interested in selling to get cash out of the business. Look at the companies management history it could give you invaluable information regarding the status of the business ownership. Compile a list with all your information and start refining it and refreshing it with new information regarding potential business targets. Include companies where there is a possibility to acquire and mark those out that are not interested in current acquisition; keep them all on your radar. 

Evaluation of Candidates

After identifying candidates that meet your criteria as potential targets and after answering questions like: Does the initial valuation of the company meet your previously defined pricing criteria?Does the company meet your acquisition criteria?

How much is always a question that is important and the determination of such value is one of the most difficult asks involved as businesses are unique. 

Market value is normally established by using figures like historical earnings, cash flows, assets and the liabilities. What is at times more important and difficult to ascertain are the value of intangibles (know-how, brands, trade marks, patents, intellectual capital, management quality, leases?) Other factors like current market condition, industry performance, number of buyers and sellers, acquisition structure and tax issues makes valuation an estimate of numbers. 
Value of a company does not have an exact relation to the selling price as the selling price of companies is the estimate of value plus minus premium, eagerness, accounting issues, tax issues, consideration in question, negotiations.  

It is a commonly known fact that valuation of a company can always produce the valuation as determined and justified by the buyer and the seller. Using different methods different valuations are obtained according to the purpose of the valuation. 

 In the case of valuing privately held companies, a very informative book "Valuing a Business: The analysis and appraisal of closely held companies" sets out the following points that one should keep in mind: The value of a business is the sum of the expected future economic benefits to its owners, each discounted back to a present value at an appropriate  discount rate,The discount rate is dependant on the market for capital and is the expected rate of return that would be required to attract capital to the investment as compared to the rate of return available on investments with comparable risks,To project economic benefits and the discount rate is difficult. There are accepted methods of estimating value by using current or historical financial data. Normally adjustments are made to reflect impact of future expectation,Financial variables used in valuation should be defined on a consistent basis between the guidelines and subject companies,Value of a share of stock can be more or less than a proportionate share of the underlying net asset value and sometimes bears little relationship to the underlying net asset value,

Valuation processes involves four key elements:

·         Gathering information about the target company and its industry,

·         Analyzing and recasting the historical financial statements,

·         Preparing prospective financial statements,  and

·         Applying the appropriate valuation technology.  

1. Gathering Company Information

From the 5 year financial statements with detailed notes as to the accounting methods and adjustments made, revenues, expenses, cash flows, off book liabilities if any,Meetings with the management of the company, Initial due diligence report about the company, its history, growth, operations, markets, andAnnual reports and other internal documents: management accounting reports and tools.

2. Gathering Industry Data

 General economic outlook in the target location, Specific industry information to understand market trends, strategies, andInformation about competitors, the same size as the target.

3. Recasting Historical Financial Statements

The objective of this exercise is to create a set of financial statements that allow for a clearer comparison between the target and its competitors in the market based on a common parameter. For example a company wanting to maximize current tax deductions in order to minimize corporate income taxes may have taken steps to mask its true earning power. Recasting historical financial statements is the process of normalizing such steps taken by companies. 

To normalize operating results (EBIT, EBITDA, net income, or other measures of operating results) for business valuations the following recast adjustments could be made:Excessive management salary, bonuses, Excessive salaries paid to individuals that can be replaced for lower salaries, Excessive retirement and health packages, Excessive perquisites; company car, club memberships,Last in first out inventory adjustments, Legal expenses and other non recurring expenses, Accelerated depreciation charges used to reduce taxable income, etc

To normalize a balance sheet for business valuations the following recast adjustments could be made:Excess cashBeneficial leases, contingent liabilities, Fixed assets that have appreciated in value, Intangible assets that are not recorded in the financial statements,Last in first out reserves to adjust the inventory to current cost, etc

4. Evaluating Recast Financial Statements

So far so good now the analysis of the recast statements can be done. Finding absolute change in numbers, percentage change in key variables and financial ratios are techniques that help in spotting the strengths and weaknesses of the target company.  It also gives you an idea of what is normal performance and allows you analyze budgets and forecasts made by the company.  It is important to combine the financial results of the target with your own business as this gives you an absolute amount of the target size of business and the combined business size to understand the money value. To understand the components of operations the percentage changes in key variables year to year should be thoroughly examined to see the cost relates to change in revenue.  Calculating the compound growth rates for key financial variables like revenue, EBIT, EBITDA, operating cash flows to understand the growth patterns of the target. 

5. Ratios: 5

1. Return on equity: ROE; Dividing the annual net income by stockholders equity. ROE should be compared with industry wide averages and with investment alternatives. Other ratios like profit margin, asset turnover and financial leverage can be directly linked to ROE.

ROE = Profit margins (net income/sales)* Asset turnover (sales/Assets)* Financial leverage (assets/shareholders equity)

Return on Investment: ROI; Profit for a period divided by the amount of capital invested to earn that profit. Total invested capital includes only long term debt the interest on that debt should be included.

2. Profitability Ratios

Profit Margin = Net income/Sales

Gross Margin = Gross profit/ sales

3. Asset Turnover Ratios

Short term liquidity measures include:

Current Ratio = Current assets/current liabilities

Quick ratio or acid test = (cash + cash equivalents + marketable investments+ receivables)/current liabilities

Activity Ratios measures how companies use their assets effectively. These include ratios for the calculation of accounts receivables turnover, sales to net working capital and inventory turnover.

Sales to fixed assets (Sales/ fixed assets) and total assets (Sales/ total assets) show us how efficient a companies assets are at generating sales. Can be used to check the measure of productivity and care should be taken as when completely depreciated can make a company look more efficient when it should have been increasing its investments to improve productivity.

4. Financial Leverage Ratios measure long time solvency of the business and its ability to deal with opportunities and challenges that can arise in the future.  Total liabilities/ total assets give us the debt to assets ratio that allows us to measure the long term adequacy of the company's capital structure.   Other ratios here are Equity to total assets, long term debt to total capital, equity to total capital and fixed assets to equity.

5. Risk Ratios are used to measure the degree of uncertainty in net income. 

Comparison with the Industry

Using the financial tools mentioned above a comparison should be made with the target company's operating results with other results of companies in the industry. There are some industries where specific industry related statistics are used.  What are the statistics of the target company with its industry? Does it under perform or outperform its industry average? Is it gaining or losing market share? This analysis will give you an idea of whether you would have to pay a premium of negotiate a discount over the value of comparable companies. 

Projecting Financial Objectives

Revenue is generally projected in one of three ways: Taking an average annual growth rate derived from the past three to five years reported revenues as an estimate of future annual revenues. The assumption here is that the revenue trend will remain essentially unchanged; therefore, those historical revenues are a valid indicator of future performance. But as we don't know if the past conditions will remain in the future it is hard to average the historical growth rates.  Adjustments should be made for known and anticipated changes as it is impossible to forecast signal events such as a significant change in competitor behavior or a product innovation.

 Use an estimate of future revenues under the current owners' management, adjusting for inflation and industry trends. This method of defining future revenues assumes that, after the sale, management will continue to operate the company in the same manner as past management and with the same degree of success. Use an estimate of future revenues under the new owners' management, adjusting for inflation and industry trends. This method is probably more useful to you than to the seller. It analyzes the effect that new management or strategies will have on future revenues. These effects include changes in marketing strategy, manufacturing technology, and management philosophy.

Prospective financial information should be prepared for the next three to five years. You may want to do a less detailed projection for years six through 10 to use in your valuation. The seller will probably have already prepared this information for his or her own purposes and included portions of it in the selling memorandum. As the buyer, however, you will want to do your own analysis. After you have completed the forecast of revenues, you will proceed to forecast other components of the income statement, the balance sheet, and the cash flow statement.

Combining Financial Projections

You should now combine the projections that you have made for the target (including the impact of purchase accounting) with those that you have for your own business. This will give you a look at what the combined businesses would look like from a financial perspective. You can also try a number of different purchase price and financing assumptions with your projections.

You should then begin to estimate what types of cost cutting and synergies may be possible and factor them into a combined forecast. Estimating synergies is a critical part of your analysis. As noted in the introduction, one of the primary reasons for poor results from mergers and acquisitions is that the acquirer often overestimates synergies and the ability to cut costs. Do not be tempted to try to make the numbers "work" to meet your financial goals by being aggressive in this area. Remember also that you should be preparing a number of different scenarios. Since the future is hard to predict, you should have at a minimum the optimistic, pessimistic, and base (best estimate) case.

Valuation Methods

The valuation method you select will be determined by your objectives for the valuation. 

The seller's objective is fairly clear-to maximize after tax proceeds from the sale of the company. For you as buyer, however, the objective may not be as straightforward. It is important that you understand what you are buying and why you are buying it. The price you pay for an ongoing business may be quite different from the price you pay for a business that you intend to leverage for access to certain product lines or markets. For each purchase, a different valuation method may be appropriate.

Two approaches are commonly used in valuing a non-public business. The first approach uses the projected future cash flows or income of the company and the second uses market comparables. Combinations of these approaches may be used as well. 

Discounted Cash Flow Methods

The most commonly accepted methods of valuation use techniques of discounting (or capitalizing) expected economic income or cash flow. Remember that economic income is not the same as net income computed using generally accepted accounting principles. Various approaches are used to value future earnings power. Two of the more common approaches are discounted cash flow and discounted future net income (after taxes). Both of these are used as means of estimating future earnings, but the same fundamental formula is used in each case. This technique requires you to use a market-driven discount rate often referred to as the weighted average cost of capital or WAC.

The discounted cash flow or net income method requires an estimate of cash flow or after-tax income for future years (generally five and possibly up to ten years), an estimate of value at the end of this future period (residual value), and the appropriate rate of return. Each year's income and the residual value are then discounted by the rate of return. The advantage of the discounted cash flow approach is that future cash flow potential becomes the investment criterion, thus taking into account the time value of money. Disadvantages include the fact that, like any estimate, future cash flow cannot be projected with certainty. Residual value (which may be affected by industry and economic uncertainties, the buyer's intent, and other factors) is similarly difficult to project.

The discounted net income method uses the same formula but uses earnings rather than net income as the measure of economic income. This method is essentially the same as the discounted cash flow method, except that earnings rather than income are projected for each future year.

Guideline Company or Market Comparable Methods

This method determines a company's value by comparing the company with similar public companies. This method can be difficult to apply to many businesses because of the difficulty of finding comparable businesses. However, given the size of the public equity market in the United States and the active trading done daily, there is considerable information available to use this method of valuation.

The first step is to select some guideline companies that are similar to the target. Some of the factors to consider are similar industry, products, markets, management, capital structure, and competitive status. The number of guideline companies used depends on the similarity of the businesses. If you can find some businesses that are very similar to the target you don't need to find as many guideline companies. Even if you can't find perfect comparables, a proxy for your industry may allow you to estimate a value.

The next step is to obtain financial statement data that can be used as "value measures" to extrapolate value by applying industry multiples. Typical financial statement variables that can be used as value measures are: Net Revenues Earnings Before Interest and Taxes (EBIT) Net Income Shareholders' Equity Cash Flow (Net or Gross)

Next convert these financial statement variables into "value measures" by dividing the price of the guideline companies stock as of the valuation date by the financial variable. You will want to calculate these benchmarks based on: Most recent 12 months. Most recent fiscal year. Average for the last three or five years.

You can then apply these value measures to the target company's financial information to develop a range of possible values. As noted previously, you might need to make adjustments to the target's historical financial statements to make them more comparable. You may need to do the same when using the guideline company method since non-recurring items or different accounting methods for calculating items, such as inventory, could distort results.

Some of the most commonly used guideline company methods used are multiples of EBIT, EBITDA, revenue, and price/book value multiples. If the company is smaller than the average company in the industry, the buyer should use a price multiple for the company that is lower than the price multiples applicable to the market leader and other companies in the industry. This adjustment could reduce the value by as much as 30 to 50 percent. An additional adjustment to be considered is an upward adjustment for the "control premium" not inherent in the valuation of the guideline company. In some valuations, the control premium can increase the value by 30 to 50 percent or more.

The guideline company method relies on the day-to-day trading of securities for valuation. However, in many industries there is a great deal of merger and acquisition activity and the terms of the transactions are well known. You can therefore think of the merger and acquisition transaction prices as representative of market value. But remember the caveat at the beginning of this chapter that fair value for a company is not the same as the price paid in the transaction. Different buyers have different reasons for buying a company so you should not rely on this method alone in evaluating targets.

The merger and acquisition method uses prices for comparable companies and calculates multiples of certain financial variables such as revenues, EBIT, EBITDA or tangible book value. These deal multiples are then applied to the target company.

The Balance sheet method is based on the concept that a buyer basically purchases the net assets of the target company. Book value is the calculation of the assets value by subtracting the total liabilities from total assets. Book value does not reflect the fair market value of the assets and liabilities.   The balance sheet method is also not so popular as it does not answer questions relating to the value of goodwill, intellectual property.  Liquidation value is a part of the balance sheet method of valuing a company. It basically deals with the cash remaining after the company has sold all its assets and paid off all its liabilities. 

Transaction Methods

You have now found an interesting company that is interested in discussing possible acquisition.  Simply put a buyer agrees to pay a certain amount to the seller and the seller agrees to transfer ownership to the buyer.  To understand what the above entails we would have to consider the following and many other points such as structure of deal, payment factors, management stays or is replaced, warranties, representations, indemnifications, guarantees, escrow accounts, fulfillment of contingencies, legal tax and accounting structure, jurisdiction, new company structure, amalgamation spin offs of business units not considered as core business by the acquirer prior to acquisition.

Before all of this happens we would have to initial meeting between management teams without their advisors as this could hamper the talks between the two parties. Confidentiality is a very important factor and normally a confidentiality agreement should be drafted between the parties prior to entering into any negotiations. 

Price should not be a subject at this time as due diligence should be conducted before any offers are made by either party as these offers may be too little or too much, this could undermine the negotiations. 

Once we have a confidentiality agreement and the initial meeting was successful then both parties should conduct a due diligence exercise about each others companies.  A time line should be drawn up and an initial letter of intent should be signed between the parties. 

This letter of intent is a letter showing good faith between the parties and also underlining the structure, timeline, non compete, exclusivity, confidentiality, purchase prices (ranges), consideration in cash or equity or a mix, break fees, interim application, new management structure, escrow accounts,   normally a lot of these points would be subject to the results of the due diligence and also governmental regulatory approval. 

Letter of intents are normally non binding but are very serious documents that various courts have upheld in cases of breach or misrepresentation. 

Negotiations play an important role and are based around the due diligence and other factors that shall be addressed in a separate article. 

Due Diligence

Due diligence should be done by your lawyers (legal) your accountants (audit) to understand the complete mechanism of the target company. Interviews should be held with the management team, customers and suppliers and a personal reference check should be done on all key personnel.  Legal and audit opinions should be carefully scrutinized to check that the business as an on going concern is as described by the sellers management team. 

In structuring transactions, one should be aware of two different mind sets, the sellers and the buyers.

Sellers consider:

The form of consideration that is desirable? Cash, stock, mixed,

Sales of stocks or assets?

Taxation issues that the seller would have after the sale?

The future role of management after the transaction?

Compensation for the Sellers management team and role after the transaction?
Stock Acquisition     


·        Conserves cash for other uses

·        Tax-free to Target shareholders

·        Maintains financial flexibility; can be achieved with limited external financing requirements

·        Does not leverage balance sheet (except for Target debt assumed)

·        Target shareholders can participate in upside. 

.   Disadvantages

    Requires shareholder approvals

·        Dilutes ownership position of current shareholders

·        “Merger of equals” management and board issues  

Cash Acquisition


·        Maintains current shareholder ownership interests

·        Eliminates managerial and board issues

·        Utilizes excess cash


·        Increases balance sheet leverage (coverage ratios/credit ratings)

·        Taxable transaction

·        Target has fiduciary duty to obtain   highest consideration offer

·        May reduce financial flexibility  

Mix of Cash and Stock


·        Flexibility in customizing transaction structure and pro forma financial profile


·        Increases balance sheet leverage (coverage ratios/credit ratings)

·        Taxable transaction

·        Dilutes ownership position of current shareholders

Legal Structure
In the broadest sense there are two main structures to consider – stock purchase agreements and asset purchase agreements.

Stock purchase agreements are agreements where the buyers purchases the sellers companies stock from the selling shareholders. Only the ownership structure changes from one group of shareholders to another. In this case all liabilities are transferred. The due diligence is significantly less than that involved in an asset purchase agreement.  Sellers prefer to sell stock as liabilities are transferred even from unknown contingencies so long as they are not covered by any representations and warranties.
Asset purchase agreements cover the sale of particular assets of the sellers company.  Here specific liabilities related to the assets are transferred to the buyer. The buyer uses these particular assets to either establish a newco or transfer them to an existing company. More due diligence is required. Buyers like to structure transactions whereby they can buy the assets of a target company without inheriting all the companies’ liabilities or trying to spin off units that they consider not in line with their business plan. 

 Irrespective of the legal structure a normal business standard is to incorporate a subsidiary which would be the acquisition vehicle and this vehicle would then either purchase the assets or the companies stock or merge itself into the acquired company. The purpose is to maintain the independence of the target company after the acquisition is completed. Mergers include the transfer of stock between the companies subject to the national laws and the jurisdiction where the transaction takes place. 

Financing the Transaction

There are different methods for buyers to finance a transaction. Common methods include:

  • Determine the maximum amount of equity that can be raised.
  • Determine the purchase price.
  • Calculate the additional capital, if any, required.
  • Evaluate your borrowing capacity based on the company’s assets and cash flow.
  • Determine the financial gap to be filled by additional debt or equity.
  • Test your financial projections on the structure that is devised. 

The definitive Purchase Agreement
Simultaneously during the due diligence the buyer’s lawyers should start drafting the final purchase agreement based on the letter of intent. Representations and warranties have to be drafted based on the outcome of the due diligence exercise to protect the buyer from any known liabilities or contingencies arising out of the sale. The indemnities, representations and warranties section is a lengthy process to draft and normally a lot of negotiations are held over these points. These actually help the buyer to understand and receive full disclosure from the seller as without full disclosure the buyer might not be obliged to close the deal and could also instigate an indemnities claim against the seller. Normally as the seller is also unaware of a lot of points common language such as “to the best of the seller’s knowledge” is used to provide limited protection to the seller.

Once all the agreements are drawn up, due diligence is concluded the parties can close the deal. Closing a deal would mean that the parties sign the final agreements, consideration is paid and the transfer of shares or assets is made. Sometimes a deal is not closed due to a list of conditions that have to fulfilled ex. Regulatory approval, issue of new shares, receipt of financing commitment, execution of key employee contracts. During this phase it is very important to maintain the time line and not allow for any time that is not mentioned in the agreements to occur. The consideration can be transferred into a escrow account and upon fulfillment of the conditions it can be released. 

Post Merger Integration

Issues that should be included in the plan are: key customers retention, inventory and forecasting system, human resources, tangible and intangible assets and business processes.

Normally the key members of the buyer’s management team develop the integration plan. This integration plan would require additional input from the seller’s management team to complete a successful integration.  Integration of corporate cultures and creation of a constant brand value have to be tested and tried before final implementation. To prevent culture shock between the buyers and sellers employees gradual phasing in of the final integration plan is required. Different corporate cultures reflected in the operating style of the companies have to be standardized depending on the organizational structure of the merged entity: is it centralized or decentralized? The structure irrespective of being centralized or decentralized should have: Clear authoritative levels of responsibility, reporting standards and adequate staffing.

A plan for communicating the acquisition to the staff of the buyers and sellers employees should be made in order to be effective and negate any rumors and anxieties of the employees. Disclosure is important as employees play a key role to the success of any well run business. The communication plan should also include the flow of information to key customers, suppliers and distributors of the companies addressing their concerns regarding future business processes. 

Short term and long term goals should be carefully considered for successful integration of the target company into the buyers company. Timetables are a helpful method of listing responsibilities and timelines for completion of key task required. Cost structures (include financial and human resources) for the integration plan should be made and always updated according to the time table.

Human Resources
Employees are capital; they possess intellectual capital and bring intrinsic value to a company. Leaders and managers in the merged entity should have clear responsibilities and guidelines for them to lay out for their employees.  Management selection based on integration capabilities is a good guideline in placing such people in management roles. During the due diligence exercise significant differences between compensation and other human resource policies and practices should be carefully noted and then acted upon to bring about a uniform change subject to the nature of the acquisition. Base compensation, incentive compensation and benefits should be carefully studied in order to develop an overall compensation plan for the new allowance “bringing the best of both worlds” together. Communication is important to implement change philosophy. During negotiations issues such as non compete, retention agreements and severance agreements send important signals to employees in regards to the new structure.

Tangible Assets

Cash and other tangible assets (property, inventory and account receivable) should be integrated quickly and bank relationships streamlined to cut over head costs and allow for a centralized process for administration and controlling processes to become more effective.  Financial objectives that played an important part during negotiations should be implemented following the guidelines drawn up earlier during negotiations. 

Intangible Assets

Brands, trademarks, patents, copyrights, etc are critical to the combined company’s success. Depending on the strategy that has to be implemented and also on the value of the intellectual property the management team should decide on retention of brand names and other intellectual property. These factors are purely dependent on market forces and normally the parent company will have its name as umbrella protection and a bunch of different brand products that are easily identifiable in the markets in which it operates. In order to maximize value intellectual property strategy should be carefully analyzed and implemented in the post merger phase to bring about maximum value for the companies.

Business Processes

Key business processes should be carefully defined for the purposes of integration in the new organization.  Processes such as sales, manufacturing, distribution, channel marketing and supply chain management, processes that are normally supported by information systems should be integrated to have a common business process. This is cost efficient but a time consuming factor as IT consolidation from different IT management systems into one consistent management system is time consuming. (Data migration addressed in separate article) Pricing strategies regarding products or services might have to be revised as the acquisition might allow products to be produced cheaper and thereby allowing the company to share its savings with its customers; customer retention program.  Billing issues, EDI, process for customer complaints, customer queries are other factors that should be considered in stream lining business process so that existing and new customers have easy access to information on products and the company. 

Improvement of production processes, improvement of supply chain processes, improvement of customer relationship management, improvement of product pricing and distribution should be addressed in the post merger integration process.

Final Thoughts

Mergers and acquisitions is a business method whereby companies have external growth and are not dependent on internal growth. Many mergers and acquisitions do not create any value and are considered failures. 

Create bigger value: buyers can increase value in the acquisitions if there is significant value creation in the whole deal.

Lower Premium paid: Buyers who pay sell than 10% are more likely to see their stock prices positively affected after the deal. Moreover companies that buy specific assets as opposed to companies are seen more favorably as value creators.

Better run buyers: Buyers that have performed above their industry averages for the prevailing couple of years tend to create value through mergers and acquisitions.


Intellectual capital that comprises of intangible assets (knowledge, ideas and work that can be used for their commercial value) is intellectual property.

Its function: Establish and protect the ownership of these assets: through copyright, trade marks, design rights and patents. 

Copyright protects creations such as works of art, literature, music, and broadcasts against copying and certain other uses. 

Trademarks are words, slogans, designs or a symbol used by a business to identify its products and distinguish them from those of other businesses.
Designs refer to the visual appearance, such as the shape or pattern, of a finished product.

Patents – protection for inventions- To be patentable, it must be inventive ie must have technical teachings; it must be of technical character.  Further more Patents offer revenue streams: IBM licensing revenue USD 1.4 bill/year. Texas Instruments licensing revenue 800 mill/year, and patents offer protection: Digitas received 1.5 bill to drop a patent infringement lawsuit against intel, lastly not having a patent can help you lose money: Xerox lost 500mill for not patenting its GUI tech.

The EPC –was signed in Munich in 1973 to obtain patent protection in up to 27 European countries AND 4 extension countries via a single application.

Nature and Purpose: protection of inventions in the Contracting States easier, cheaper and more reliable by creating a single European procedure for the grant of patents on the basis of a uniform body of substantive patent law.

European patent allow the applicant the same rights in each Contracting State as they would have received with a national patent granted in that State. In case of infringement then national laws prevail!

The term is normally of twenty years as from the date of filing of the application; for pharmaceutical compositions up to twenty five years i.e. plus five year extension

European patents are granted by the European Patent Office (EPO) using a centralized procedure.

Anybody can file a European patent application regardless of nationality or place of residence or business. Applications must be filed in writing, in requisite form sent via post, facsimile.  European patent applications may be filed: at the EPO in Munich, its branch at The Hague or its sub-office in Berlin.

Contracting States: The EP applicant must indicate the Contracting States in which he wishes to be protected. Currently 27 states: Austria, Belgium, Bulgaria, Cyprus, Czech Republic, Denmark, Estonia, Finland, France, Germany, Greece, Hungary, Ireland, Italy, Liechtenstein & Switzerland, Luxembourg, Monaco, Netherlands, Portugal, Romania, Slovakia, Slovenia, Spain, Sweden, Turkey and the United Kingdom. 4 Extension states based on the European substantive law: Albania, Latvia, Lithuania and the Former Yugoslav Republic of Macedonia. 

Language of the European patent application: The official languages of the EPO are English, French and German.

A European patent application begins to make sense when protection is to be sought in three or more European countries.

Routes to a Patent
It all depends on your IP strategy and your companies business plan example HP has 21,000 patents worldwide in 2003, in 2002 the number was 17,000; they give significant emphasis in value generation from intangible assets, namely IP.  Once you have devised your strategy then the following options are open:

National: All the contracting states offer the possibility, as a first step, of applying for a national patent.  If the applicant decides that they also need protection in other countries, they then have 12 months to file applications elsewhere and claim the benefit of the first application filing date (“priority claim”).  India can file directly in a EPC state as it’s a member of the Paris convention.

Regional: A European patent can be granted on the basis of a direct European patent application, which may be a first filing or, more commonly, one claiming the priority of a national application filed within the previous 12 months. This works when the priority claim is made in a State that belongs to the Paris convention. India belongs to the Paris convention and the PCT since 1998 and therefore can make use of this method.

Patent Cooperation Treaty-The Patent Cooperation Treaty (PCT) administered by WIPO offers a simplified patent application procedure for up to 121 countries. It enables inventors to file a single international application designating many countries, instead of having to file separately for national or regional patents. Also known as the EURO PCT application and takes approximately 31 months longer than the EP application. 

Alternatives to patent protection

Keeping business information secret can be an effective way of protecting intellectual property, particularly for things that come under the heading of “know-how”. For manufacturing processes where it might be difficult or impossible to reverse-engineer the results, secrecy provides a useful alternative to patenting. Trade secrets need to be backed up by confidentiality agreements with employees and business partners. 

An “invention” may be defined as technical teaching i.e. a proposal for the practical implementation of an idea for solving a technical problem.  An invention is said to be new if, prior to the date of filing it was not already known to the public in any form. An invention is said to involve an inventive step if, in the light of what is already known to the public, it is not obvious to a so-called skilled person. An invention is of a technical nature when it is technical in character.

What is not patentable? Art 52 of the EPC

Under the EPC the list of non patentable items is exhaustive; I have only mentioned a couple of points here: Discoveries, mathematical methods, methods of medical treatment or diagnosis, new plant or animal varieties and computer programs “as such”.

US supreme court judge said  in the case of Diamond v. Chakrobarty (1980) said everything under the sun is patentable; In Europe it all depends on  how we base our claims as the scope of protection of a patent is determined exclusively by the claims which means how we define the technical character, the novelty, the inventive step and lastly the further technical effect!

SOFTWARE;  Software “as such” as pure source code is not patentable” and only “computer-implemented inventions” and “computer program products “ are patentable. “computer-implemented invention” and “computer program products “  through various case law  mean any invention the performance of which involves the use of a computer, computer network or other programmable apparatus and having one or more prima facie novel features which are realized wholly or partly by means of a computer program; examples of European software patents: track changes found on word documents is a patented technology owned by IBM, Samsung has a patent on the menu display on cell phones, the MP3 audio compression standard, Amazon 1 click, Amazon gift ordering; SUN Microsystems stateless shopping cart technology for the web. 

In all these cases the subject-matter claimed added a contribution of a technical character to the known art. 

Important case law
Case imaging processing- VICOM- mathematical methods:

In the VICOM case, image processing was considered to lead to a result sufficiently technical to qualify for patentability, even though it is based on a mathematical method.

Controlling X ray equipment- Koch and Sterzel: In the Koch & Sterzel decision likewise a computer program was considered to be used for a technical purpose, in this case controlling X-ray equipment.

Computer program “as such” causes a further technical effect apart from normal interaction between software and the hardware on which it is run- IBM

The Board’s decisions in the IBM cases indicate that patents may be obtained for computer program products as there is a further technical effect apart from the technical effect caused by computer programs “as such” i.e when run on a computer in the form of electrical currents in the electronic circuits of the computer’s processor.

Business processes- SOHEI- technical character: In the SOHEI CASE which involved a general management computer office system. The claims were upheld on appeal because the EPO considered that the invention solved the problem technically in that it provided for the processing of data relating to different management types in a single system ie technical character of the business method.

A method for abstracting and storing documents in an information retrieval system and a method for retrieving a document from the system -Decision T22/85: [1990] OJ EPO-12/1990-12

A spell checking system for use in word processing-Decision T121/85 (unreported March 14,1989).

In these last cases there was no technical effect but only mental acts for the purpose of data processing, not patentable. Ideology

 In Summary

Software is patentable in Europe if it produces a further technical effect, has technical character, and creates, furthermore, a technical process beyond the electrical currents in the computer circuitry. What is funny is “Technical” “as such” “invention” are not defined and it all depends on the drafting of the claims.

EP granted for software in 2003 based on companies.

Total number of software patents granted per year from 1998- 2003

India- 24 applications from India between 1978-2003 and inventors who were Indian filed 59 applications

SOFTWARE PATENTS granted: over 30,000  from 170,000

Total  Number % Country Code  Total  Number %      Country Code

12550          32.96      US               11666         30.64             JP

4831            12.69      DE                2710           7.11             FR

1518              3.98      GB               1201           3.15              NL

770                2.02      IT                 651           1.71              CH

439               1.15       SE                173          04.32     Rest ( < 1% ) 

India is one of the fastest growing economies today.  We have grown without a break in the last ten years at a sustained pace of over 5-6 %. In the current year wehave grown at 10.04%. we have 62 SEI/CMM (Software Engineering Institute-Capability Maturity Model) level 5 companies, which is two thirds of total SEI/CMM level 5 companies in the world. –(WIPRO FIRST)  We also have over 200 IT companies having ISO-9000 certification. In 2000 -2001 our IT REVENUES REACHed 12 billion USD.  We are an amazing country but the question to ask is why do Indian software companies not patent their software products and inventions worldwide if it is not allowed to be patented in India? Patents provide for (1) keeping competitors at bay (2) developing and maintaining business relationships and lastly (3) obtaining revenue and in some cases funding. 

Do you Know: 

What IP assets do you own? Is it a part of your business plan?

How do you plan to protect your IP assets? Have you taken actions to protect it?

How important are IP assets to the success of your business? 

Are you sure you are not infringing IP rights of someone else? 

Is your software patentable? 


A value chain in a business is defined by its business opportunities, technologies, challenges, and solutions that enable the business to change its way of doing business internally and with its customers and suppliers –in short, it is the value adding process to derive greater value from every step in the business process. It can be innovative and create new markets where new value can be sought and distinguishes the creator from its competitors.

Today’s managers and employees are faced with tremendous complexity in their daily business processes. Confronted with a profusion of information, managers are finding it increasingly difficult to keep abreast of information.  We could say a fair portion of the day seems to be increasingly dedicated to filtering important from unimportant information. In fact, more and more time is spent on finding and aggregating information that is needed to make decisions. 

As we are all not perfect we constantly set out to achieve the unachievable. We err and we find solutions. Knowledge is power and the right combination of information provides us that knowledge. Most of the world’s major inventions have had their first mover advantages and created value.  This applies to the steam engine as well as to the automobile. In addition, the same is true of computers and networks. Industries became digitalised to improve the value chain and reap the benefits of acquiring the right information, which indirectly lead to the advent of surplus information becoming available. According to a study conducted by the University of California, Berkeley, every year sees an increase for information made available via the Internet an extra two billion gigabytes to be precise. Indeed, it generally only takes six to eight months for a company to double its repository of data. Moreover, many companies, it seems, have yet to master the intricacies of processing this electronic data: time-consuming compilation of data and laborious categorisation of information are gnawing away at the efficiency gains achieved through automated structures and decision-making processes. 

The digitalised value chain has an infrastructure that connects different applications like ERP, SCM, CRM and knowledge management systems to induce value to the value chain and speed up processes. The true challenge lies in the technology recognising information that is needed and is not needed, and to identify specific relationships between structured and unstructured data. For example, when searching in a document management system, it takes some time to find the right information from the structured metadata or from the unstructured text. When you are searching for information, the last thing you want is to truly search through the retrieved information. In fact, two or three indexed, ranked and qualified results are far more helpful. Only when we have reached this stage will we be able to accelerate and enhance decision-making processes. Search technologies are all about ‘qualifying’ information: research scientists and software specialists cooperate closely, with the express purpose of developing intelligent machines that are able to process, qualify and distribute information. A number of proven solutions have already emerged, aimed at identifying data relationships quickly and cost-effectively even when it comes to unstructured data such as text-based documents, pdf, presentations and e-mails. This information, which is stored as unstructured data currently, accounts for more than 80 per cent of a company’s information stock. There is a clear objective within the new technology providers: users are to receive information easily and quickly – the right information, at the right time, at the right place and in the requested format. Savings: cost cutting in time, money, and the removal of duplication of existing information. Benefit: more productive internal process. These new cognitive systems use mathematical similarity measures to structure data in an intelligent manner. Special search algorithms are able to find the required documents within a split second, even when a user’s search query is incomplete or contains errors.

Technology experts are mainly interested in developing software solutions that can find the right information by learning: Where the user is? What kind of information is the user interested in? Which information does he or she currently require? How to retrieve this information? This allows the development of new value innovative technology systems that encompass a vast array of data sources from ERP applications, databases to file systems containing various document formats like PDF, Power point, to e-mail systems, as well as numerous end devices from PCs to Internet-enabled mobile phones. 

 A system that allows for the integration of data from all unstructured sources by replacing manual operations by an automatic indexing system. 

There is a plethora of choice when it comes to applying these cost effective intelligent solutions. In England, an economy that is more than 90% digitalised, where the amount of information being processed is doubling every year and 3/4 of the SME use email that leads to approximately 300 million files being created everyday. Email alone is responsible for a 41% increase in the volume of data circulating around networks. In the whole world email usage has replaced paper, leading to approximately 6 billion emails being sent daily. What does all this mean for the Managers/employees? How will they orient themselves? The new innovative technology has its benefits: thanks to error-tolerant technology, even the most rudimentary search query will produce a pertinent result. Instead of “Service Unknown”, world citizens using the information superhighway will be presented with a selection of search results that include the right information and the related information. An example could be an online store using innovative and progressive search technology that would:

• accepts natural language search,

• allows customers to enter product codes and product brand names as well as generic topics,

• ranks based on brand, price, relevance and in stock,

• returns with synonyms of search,

• offers what’s related products,

• automatically index’s product information from database, and

• always finds the right information or the closest ranked information.

Another example would be banks; a business that revolves around information. Many banks are still faced with huge problems – in terms of time and money spent – when it comes to automatically processing handwritten transfer forms. Machine reading errors are the bane of a banker's life, necessitating high-cost manual processing – or turning paupers into millionaires if a mistake goes unnoticed. These innovative technology solutions would help in reducing such errors by a substantial margin. Bank and account details that have only been deciphered partially are checked against the customer details stored in the bank’s systems, thus producing a unique identification. Furthermore, the use of fuzzy operators and the error tolerant analysis that can be controlled to analyse the numeric field values used in the query help in retrieving the correct information for example OCR results, postal codes based on geographical references. In today’s economy the value chain is fed on information; effectiveness is measured by the ROI and the ROI is achieved by having the right information at all times on your fingertips.

The American futurist John Naisbitt said: “We are drowning in information and starved for knowledge.” Maybe with right player with the right value innovation strategy can change that.