Mergers and acquisitions (M&A), whether among private or public listed companies, are common corporate exercises in Malaysia. M&As are done for many reasons, as they enable businesses to:
- expand operational capabilities, range of offerings and by increasing their market share, known as “horizontal acquisition”,
- achieve operational or cost efficiencies, secure strategic positions or key assets along the supply chain, known as “vertical acquisition”,
- enter into new or foreign markets at a faster pace and with lower risk, can do so by acquiring a ‘tried and tested’ local business as a going concern with an existing track record,
- acquire businesses or entities that already possess specific regulatory licences and permits that are difficult or time-consuming to obtain,
- acquire entire teams of talent, specific know-how and clientele, known “acqui-hire” (ie, buying the talent only), and
- pass down an existing business to the next generation or to capable and willing members of management, known as “management buy-out”.
Most M&A deals commonly involve the following exercises:
- the purchase of shares of a target company (commonly called share acquisition), OR
- the purchase of different components of the business & team (commonly called asset acquisition, which is also a type of “merger”),
M&A transactions can range from simple, fast and straightforward, to highly complex and lengthy, depending on many factors including the willingness of parties, the deal structure, the nature of assets being acquired, the number of parties involved, the method of financing, the financial, local regulatory requirements and approvals, legal and tax risks involved etc. Due to the sheer number of factors to consider, every M&A scenario is different, which requires experience, careful planning and organized execution to be successful.
The length of time it takes for an M&A to go through can vary depending on several factors and circumstances, and could often involve unanticipated complications along the way. In general, the whole M&A process can take anywhere from weeks to months to complete, so there is no ‘standard timeframe’ per se. Instead, understanding the typical process of an M&A transaction can help companies plan more effectively and minimise the risk of complications or delays for any specific transaction contemplated.
The 10 common steps in a typical M&A transaction will be:
1. Chart Your Course: Strategic analysis sets the M&A compass
The M&A process begins with strategic analysis, determining the “WHY”, where the acquiring company defines its strategic goals and identifies potential targets for acquisition. This stage may involve preliminary research and analysis of target company’s financial performance, market position, and potential for future growth. The acquiring company needs to have a clear understanding of why it wants to undertake the M&A transaction and what it hopes to achieve.
2. Find Your Match: Target identification for the perfect match
Once the acquiring company has defined its strategic goals, the next step is to identify potential targets for acquisition, which may involve research into companies that operate in the same or related industries, or companies that offer complementary products or services. It is important to identify targets that align with the acquirer’s strategic objectives. Understanding and assessing the motivations and willingness of the sellers of the target business, and getting insight on the people that drive the business at this stage will also be useful.
3. Putting a Price Tag: Valuation in M&A
Before entering into negotiations with a target company, the acquiring company will usually conduct a preliminary valuation of the target company based on the financial statements, market data, and other relevant information to determine a rough estimate of the target company’s value. It is common to get the financial, valuation and tax advisors appointed and actively involved at this stage.
4. Due Diligence, Done Right: Uncovering potential risks and opportunities to maximise value
Due diligence is a comprehensive review of the target company’s financial and operational performance and targets, as well as any legal or regulatory, environmental, tax and commercial issues that may impact the transaction. It is a critical stage in the M&A process, as it helps to identify any potential risks or challenges that may need to be addressed before the deal proceeds in earnest OR whether it can be completed. This is also to reduce the chance of encountering negative surprises or roadblocks midway into or even after the acquisition is completed. Some common examples are the local regulatory or policy restrictions against foreign equity ownership, and specific licenses or governmental approvals that need to be obtained for the change of ownership to occur.
Commonly, a light form of due diligence can be done on a preliminary basis upon signing of a Non-Disclosure Agreement, while a more comprehensive due diligence is left for the later stage after the parties are aligned in principle on the price and key terms of the deal. This is a good time to get the legal advisors appointed and actively involved, to advise on the legal aspects of the acquisition, in order to uncover any potential roadblocks, risks or even deal-breakers early on.
5. Seal the Deal: Negotiation and structuring of the deal
Once due diligence (either preliminary or comprehensive) has been completed, the buyer and seller, together with its advisors, will work together to design the terms and conditions of the transaction, including the purchase price, payment structure, and any other conditions or contingencies. The active involvement of legal advisors at this stage to advisor and draft the terms of an offer letter, term sheet or heads of terms carefully is absolutely critical. Even though the documents at this stage are commonly not legally binding, these documents will set the deal structure and framework for more detailed negotiations to follow later.
6. Funding Your Future: Financing and funding in M&A
M&A transactions can be expensive and may require significant financing and funding, so the acquiring company may raise the funds through debt or equity financing, or even a hybrid of both. Ideally, the various financing options at a buyer’s disposal should be considered at an earlier stage, and then the chosen method will depend on the agreed terms of the deal and the deal structure.
7. Dotting the I’s and Crossing the T’s: Navigating the legal complexities of the M&A process
After the deal has been negotiated and structured, the next stage is the preparation of the legal binding documentation. This stage involves drafting and the negotiating of the critical legal clauses such as representations, warranties and indemnities which serve to apportion legal and economic risks between parties, and finalising the key agreements and incidental documents to complete the transaction. The typical legal documents include share sale agreements, shareholders’ agreements, and any other legal documents required, either by law or based on the requirements of the business and parties involved.
8. Regulatory Hurdles: Navigating approvals in M&A
Depending on the nature of the transaction, some M&A deals may require regulatory approval from government agency(ies) or industry regulator(s), which may involve filing paperwork, obtaining permits or meeting other regulatory requirements, even before the purchase price or ownership changes hands. This step can potentially take a lot of time, result friction and uncertainty. Hence, identifying and planning for this from the get go at steps 4 and 5 would be essential.
9. Building Bridges: Integration planning and execution for M&A success
After the deal has been “completed”, which typically involves the payment of the full purchase consideration in exchange for full ownership and control of the target, the next stage is the integration of the target company into the acquiring company’s operations. This may involve a range of activities, such as reorganising the target company’s management structures and consolidating supply chains. Some companies do this in-house or with the professional assistance of business consultants and integration specialists.
10. The Art of Managing: Post-merger integration and management for M&A success
Even after the integration planning and execution are completed, the acquiring company will continue to manage and oversee the operations of the target company, which may involve ongoing efforts to optimise operations, reduce costs, and maximise profitability. Integrating the corporate culture, core values and practices between different teams of people often prove to be challenging.
An M&A transaction is often dynamic and multi-faceted process, which can make it complex and challenging to navigate. It is important to note that the timelines for M&A transactions can vary significantly depending on the complexity of the deal and many other factors, some of which could be unanticipated.
In summary, there is no one-size-fits-all approach to M&A in Malaysia, having the right planning, strategy and proper guidance would ensure a smoother and successful M&A transaction. Hence, both buyers and sellers should seek guidance from experienced local advisors to navigate the M&A process effectively.
***
This article was written by Shawn Ho (Partner) and Toh Jia Yi (Associate). Shawn leads the corporate practice group of Donovan & Ho, and has been recognised as a Notable Practitioner, whilst the firm has been recognised as a Notable Firm for Corporate and M&A by Asialaw Profiles 2020 and 2021. We are also ranked as a Recommended Firm by IFLR1000 2020 and 2021.
Our corporate practice group advises on corporate acquisitions, restructuring exercises, joint venture arrangements, shareholder agreements, employee share options and franchise businesses, Malaysia start-up founders and can assist with venture capital funds in Seed, Series A & B funding rounds. Feel free to contact us if you have any queries.
