The Process

When a company is considering a sale, it often relies on its investors, regular consultants, investment bankers, or other strategic advisors who are hired to examine the best route for the company's continued development. If a decision is made to follow a sale route, such advisors assist in finding and negotiating with potential buyers. Existing business partners are often possible acquirers themselves or can be intermediaries for finding potential buyers. The pace of the process is affected by the financial condition of the company seeking an acquirer.

Companies rarely declare initially that they aim to be acquired, and the negotiations often begin as various forms of cooperation, such as distribution and marketing agreements, or the granting of licenses to use a technology.

As mentioned above, companies often choose to rely on external advisors to examine sale options. The choice of the intermediary has a dramatic impact on the manner in which the solicitation is depicted in the eyes of target companies. Historically, for instance, making contact through an investment bank was usually interpreted by target companies as a solicitation of an investment, whereas an approach through strategy consultants was usually interpreted as a solicitation of business-development cooperation. However, as combinations of strategic investments and business contracts became increasingly common, the boundaries between them became obscure. Reputable intermediaries provide high added value to the parties to the transaction by assisting in the examination of the various routes for cooperation and recommending the better ones among them.

If the chosen path is to examine possibilities of a sale to or merger with business partners, then the negotiations for the business cooperation turn into a process of studying the other party. After the required confidentiality agreements are signed, the companies exchange financial information and consider the worthwhileness of the transaction. If the parties reach an understanding, the companies usually sign a letter of intent (LOI) which summarizes the principles of the proposed transaction. Although the price is an important component of this document, other important parameters are the payment method (stock, cash, or a combination of the two) and restrictions after the sale (such as the period in which the shares will be locked-up).

At this stage the due diligence process begins in which the attorneys, CPAs, and bankers play an active part. It is important to state that even at this stage, the chances of closing the deal are still unclear and about one half of all transactions are never consummated. This is one of the reasons that many agreements stipulate conditions for the termination of the negotiations and the implications of such termination. For instance, agreements often stipulate an amount which the company interested in the purchase will pay if the negotiations run aground. Obviously, various amounts may be paid in different scenarios. If the process ends well, the final agreement is signed.

Within the merger process, the target and the surviving entity prepare operating plans for the execution of the merger. These plans determine timetables and operating projections for the merger process, and typically correspond to the projections made by the parties in the process of determining the price to be paid in the transaction.

Within the acts taken after the merger or the acquisition, issues such as the replacement of officers, the division of authorities between duplicative officers whose double positions are not eliminated, or the choice of employees who will be terminated, should be handled very cautiously, in order not to undermine the internal morale of the employees of both companies. Such tender treatment is particularly crucial in companies which are based on human capital more than anything else, and is often more important than any cost-savings which the merger may generate.