Merger negotiations and mergers, similar to marriages, often fail. Therefore, it is very important to plan and execute merger negotiations properly to improve a merger’s chances for success.
Acquiring firms need to understand the deal very well before approaching the target company. Space for bargaining should be considered. For example, acquiring firm could initially offer somewhere between 75-90% of what it believes the target company is worth. However, it is also important to be reasonable when the initial offer is made. If the price will be too low then the relationship between parties may be severely damaged.
Good atmosphere and a respectful and positive tone of negotiations should be created. A Win-win mindset in negotiation should be maintained, not a win-lose mindset.
It is also important for the acquiring firm not to show its eagerness as this will decrease its bargaining power. Another essential point is the vital importance of being completely ethical and honest in conducting negotiations. Conflicts of interest also should be carefully avoided.
Negotiations should also be seen as an extension of the due diligence. It should be used to find explanations to unclear issues. It is important to remain sceptical and to check the information provided by the other party.
It is also recommended to engage competent advisors to attend to various important areas associated with merger negotiations. Such areas include, but are not limited to, due-diligence, tax, legal, regulatory matters and the valuation of the company.
Investment bankers are often hired to manage merger negotiations. Investment bankers may be hired by the acquiring company and/or target company and assists either party from the very beginning of the process by finding a target or a buyer all the way throughout assisting in merger negotiations, use of tender offers and in the execution of hostile merger defence strategies. The compensation of investment bankers may be commission-based, fixed fee or a combination of both.
In terms of personnel issues, it is imperative to be aware of the sensitivity with which employees of the target company are likely to approach possible relocation, changes in management, changes in the way operations are conducted and titles.
A good way for the target company to secure a good price is to follow a closed auction strategy. According to a closed auction strategy, the target company invites all interested parties to submit their sealed bids before the deadline. This is in comparison to open auction where all parties are aware of the previous bids submitted by other interested parties.
Prior to the submission of bids, all interested parties should receive a memorandum and an ability to undertake a limited due diligence. A closed auction strategy usually involves few rounds and concurrent negotiations with various interested parties.
The target company may even follow this strategy if there is only one company interested in the acquisition. This is possible because interested parties have no access to information regarding how many organizations are involved in a closed auction.
If a friendly takeover is not welcomed by the target company, the acquiring company may undertake a hostile takeover (hostile merger). The acquiring company will do so by using a tender offer. Tender offers refer to a formal offer made to the shareholders in the market place to obtain certain amount of shares at a given price which is above the current market price.