All About M&A: Navigating the Life of a Deal

Mergers and acquisitions (M&A) can be a giant leap on the path to growth, not just for an organization but for the career of an accounting, finance, or legal professional. As M&A activity picks up, we're breaking down the life cycle of a deal and offering practical insights of what to know.

What is M&A?

M&A stands for mergers and acquisitions, a general term used to describe the consolidation of companies or assets through various types of financial transactions. The primary goals of M&A activities include growth, diversification, increased market share, and achieving economies of scale.

What's the purpose of a merger or acquisition?

Mergers and acquisitions are often a vital part of the growth cycle of companies and are widely recognized as a standard practice for any organization aiming to expand.

M&A deals can provide a number of benefits. Engaging in an M&A deal can help companies:

• Share best practices: Apply effective strategies and successes
• Eliminate operational redundancies: Streamline processes and increase overall efficiency
• Gain tax benefits: Secure financial advantages through tax-related benefits
• Enhance buying power: Negotiate better deals with suppliers and secure favorable terms
• Leverage production capacity: Increase output and improve market competitiveness
• Grow strategically: Enable companies to achieve growth and maximize presence in the market

What makes a good M&A target?

When considering a company for a merger or acquisition, several critical factors can determine if it is a good target. Here's what to evaluate:

• Strategic fit: Consider the target's market position and its alignment with your company's goals while looking at a company's services, products, and market conditions as a whole
• Financial health: Evaluate the target's profit margins, revenue streams, financial performance, capital structure, debt levels, and consistency of profitability
• Operational efficiency: Analyze the company's cost structure and supply chain
• Cultural fit: Consider the compatibility of the corporate culture and experience of the leadership team
• Legal and regulatory considerations: Ensure the target's compliance with regulations and likelihood of obtaining necessary regulatory approvals for a deal

What is the state of the M&A market in 2024?

The M&A market is experiencing a positive outlook after bottoming out during 2023. That's thanks to persistent business needs despite less-than-ideal interest rates. Dealmakers are increasingly taking action, acknowledging that the incredibly low rates that characterized the last 15 years are unlikely to return soon.

In PwC's 27th Annual Global CEO Survey, 64% of chief executives surveyed reported not making a major acquisition in the past three years. However, 60% of these leaders plan to make significant acquisitions within the next three years.

Businesses that capitalize on opportunities for growth and transformation through strategic acquisitions will likely be better positioned for long-term success, while those that hesitate may struggle to keep pace.

Potential future factors in the M&A market:

• Lingering effects of 2024 elections: Globally, uncertainty around policy changes can either stymie or stimulate M&A activity, depending on the anticipated regulatory environment, which adds layers of complexity to deal-making
• AI and technology: Technological advancements are expected to be major catalysts for M&A activities. As companies reevaluate their strategies, business models, and markets in light of AI's disruptive potential, those that strategically leverage AI in their M&A activities can be better positioned to achieve competitive advantages

How do you evaluate a company for acquisition or merger?

• Due diligence: Conduct M&A due diligence to uncover potential risks and liabilities-this includes reviewing financial statements, legal documents, regulations, contracts, and operational processes
• Risk assessment: Identify and complete a potential risk assessment associated with the acquisition-this includes financial, operational, legal, and market risks
• Ease of integration: How easy would it be to integrate the target's systems, processes, employees, and cultures into your organization
• Pricing: Define a negotiation strategy to ensure favorable terms-this includes determining your maximum offer price, key deal terms, and potential concessions

What types of M&A strategies are being executed in the market and why?

In today's dynamic market, various M&A strategies are being executed to meet diverse corporate objectives. Here's a breakdown:

Additional M&A strategies include:

• Strategic acquisitions: Driven by the need for a strategic fit, these acquisitions enable companies to acquire specific capabilities, technologies, or market access that align with their long-term goals
• Capital raise needs: Companies may merge to access new funding sources to improve financial stability or leverage synergies for better use of capital

What is the M&A process?

The M&A process involves several critical steps that require thorough planning and execution to ensure a successful transaction.

1. Identify target: Identify potential companies that align with your firm's strategic goals. Include extensive market research and analysis to find businesses that offer the desired synergies, market position, or capabilities
2. Perform due diligence: Once a target is identified, due diligence is conducted to assess the financial health, operational efficiency, legal standing, and overall viability of the target company. This step is crucial to uncover any potential risks or liabilities that could affect the success of the merger or acquisition
3. Draft and execute purchase agreement: Draft an agreement that outlines the terms and conditions of the transaction. This legal document is negotiated and finalized by both parties, ensuring that all aspects of the deal are clearly defined and agreed upon
4. Account for the transaction: Proper accounting for the transaction is essential to reflect the new structure accurately in the financial statements of the acquiring company. This includes recording the acquisition costs, valuing the acquired assets and liabilities, and ensuring compliance with relevant accounting standards
5. Implementing the new company: Integrate the acquired company into the existing operations of the acquiring firm. This involves aligning processes, systems, and cultures to achieve the desired synergies and operational efficiencies. Effective integration is key to realizing the full value of the merger or acquisition

What are the biggest challenges of M&A?

One of the biggest challenges of M&A deals is getting the valuation right-and then evaluating if a transaction value gap happened and how to correct it when values fall short. There are a variety of elements that can impact the actual value received.

• Defined strategy and sources of value: If the M&A strategy and sources of value are not clearly identified, it can lead to confusion and misaligned objectives
• Efficient mobilization: Too often, integration teams come into play late in the process, resulting in slow mobilization and lack of clear leadership, and direction
• Talent retention: High-powered, talented individuals are often the first to leave, as they have more options and are frequently poached by competitors. Having strong leadership and talent is vital to the transaction's success
• Cultural integration: Corporate cultural clashes can cause significant disruptions, making it essential to include cultural integration in the due diligence process
• Holistic due diligence: Beyond financial aspects, M&A due diligence now encompasses IT, legal, environmental, commercial, and operational factors, requiring a comprehensive approach to avoid missing critical risks
• Regulatory compliance: Navigating through various legal and compliance requirements can be both time-consuming and costly
• System and process integration: The logistical difficulties of integrating different systems, processes, and technologies can pose significant operational challenges

Addressing these challenges requires meticulous planning, early integration efforts, and a robust strategy to ensure a smooth and successful M&A process.

What is the accounting team's role in M&A?

The accounting team plays a crucial role throughout the M&A process. From conducting due diligence to ensuring compliance with the acquisition method in ASC 805, Business Combinations, and facilitating seamless integration, the accounting team's expertise is indispensable. Their involvement spans a wide range of responsibilities, including financial analysis, due diligence, risk assessment, and post-merger integration. By leveraging their knowledge and skills, the accounting team contributes to the success of M&A transactions.

What is the role of ASC 805 in M&A?

Accounting Standards Codification Topic 805, Business Combinations, (ASC 805) establishes a framework to distinguish between a business combination and an acquisition of assets. What you need to know:

• Guidance on separable assets: ASC 805 provides guidance on what constitutes a separable asset in a business combination-this includes determining what is separable from goodwill
• Valuation and allocation: The standard helps in the valuation and allocation of fair value to different categories of assets, such as tangible and intangible assets and goodwill
• Basis for cash flows: The deal model, which should be the basis of cash flows, starts the ASC 805 analysis, which is crucial for understanding the value drivers in an acquisition, whether they are technology or customer relationships
• Goodwill and bargain purchases: ASC 805 addresses the concept of goodwill, which is the excess of the purchase price over the identifiable net assets acquired. It also covers the rare scenario of a bargain purchase, where the purchase price is less than the fair value of the net assets acquired
• Cross-functional team involvement: The standard implies the need for cross-functional teams to prepare due diligence reports and understand the value drivers in an acquisition, which involves various departments like operations and technology teams to provide necessary inputs for valuations
• Management responsibility: Even if external valuation specialists are involved, management is ultimately responsible for the valuation output. They need to understand and support the assumptions used in the valuation techniques

What are the most important factors to consider when accounting for an M&A transaction?

There are a number of factors that can impact the accounting for an M&A transaction including:

1. The identification of the acquirer
2. The determination of the acquisition date
3. The identification and valuation of all assets and liabilities assumed
4. The measurement of the consideration transferred
5. An assessment of what is part of the M&A transactions

Each of these factors needs to be carefully considered as they can ultimately impact the valuation of the transaction.

What is quality of earnings (QoE) report?

A QoE report is a crucial document used in the evaluation of a target company's financial health, particularly during M&As. It provides an in-depth analysis of a company's revenue and earnings, offering insights that go beyond the standard financial statements. By focusing on the sustainability and quality of earnings, it helps buyers make more informed decisions and mitigate potential risks.

What you need to know about a QoE report:

Purpose and importance of a quality of earnings report

• Validation of earnings: Verify the earnings reported by the target company. Ensuring the earnings are sustainable and accurately reflect the company's financial performance, leading to fair pricing
• Identification of one-time events: Identifies one-time events, non-recurring income or expenses, and other anomalies that can distort the true earnings picture
• Assessment of revenue quality: Analyzes the consistency and sustainability of revenue streams, including evaluating the customer base, pricing strategies, and revenue recognition policies
• Informed decision-making: Provides buyers with a clear understanding of the target's financial health, aiding in making informed investment decisions
• Risk mitigation: Helps identify potential financial risks and areas of concern that might not be evident from standard financial statements
• Negotiation leverage: Equips buyers with detailed financial insights that can be used to negotiate better deal terms

Key components of a quality of earnings report

1. Revenue analysis
2. Expense review
3. Earnings adjustments
4. Cash flow analysis
5. Balance sheet review

What are M&A best practices?

Ensuring successful M&A transactions involves several best practices. Thorough due diligence is essential to uncover risks and validate the strategic fit of the target company. Clear communication and transparency build trust and align expectations. A well-defined integration plan helps merge operations, cultures, and systems to achieve synergies. Engaging experienced advisors ensures compliance and mitigates risks. Focusing on long-term goals drives sustainable growth and shareholder value.

By leveraging technology, like the Workiva platform, companies can navigate the M&A process with greater confidence by centralizing and automating data collection making due diligence more efficient.

Navigating the intricate world of mergers and acquisitions requires a well-rounded understanding of the various stages and challenges involved. From identifying strategic targets to ensuring seamless integration post-acquisition, each phase demands your attention and expertise.

By leveraging the insights and strategies outlined in SEC Professionals Group's "The Life of a Deal" event, your accounting, finance, financial reporting, or legal teams can streamline M&A processes, mitigate risks, and maximize deal value.

Don't miss the opportunity to enhance your skills and streamline your reporting processes. Join the SEC Professionals Group today and watch the full "The Life of a Deal" webinar on demand. It's free and packed with valuable information that can help you succeed in M&A deals.

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