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Prepare and execute the deal: Pricing and offer

Understanding the M&A lifecycle

Closing the deal - getting signatures on the dotted line - is often celebrated as the defining milestone in an acquisition. It is the result of months of effort, and for good reason: it is a moment worthy of recognition. But this is merely one step in a bigger scheme: the M&A lifecycle. A successful acquisition hinges on the many steps and decisions made both before and after signing. This article is all about the first step of preparing and executing the deal: pricing and offer.

Highlights

  • A trustworthy reputation as a bidder or buyer is key in any market, but it ’is even more essential in the volatile world of TMT. A non-binding offer must be taken seriously, since a lack of commitment can damage your reputation and cost you future opportunities.
  • Crafting a multi-year forecast to substantiate your bid requires coordination across various departments and expertise in due diligence, taxation, and market analysis. Appointing dedicated professionals or external project managers ensures efficient handling of information and confidentiality.
  • An offer should go beyond quoting a price - it must encompass a competitive valuation, suitable transaction structure, and clear terms that appeal to stakeholders and decision-makers, and a vision for the company that is up for sale.
  • Establishing trust with key decision-makers (on the vendor’s side), through meetings and shared insights, strengthens your position as a serious contender and facilitates progress towards the due diligence phase.
  • Aligning the transaction team with the delivery team ensures smoother execution. Documenting processes behind forecasts and valuations strengthens corporate governance and enhances transparency for long-term success.
Mergers & Acquisitions
Mind your reputation

At this pivotal stage, you’ve identified the perfect M&A target, or perhaps a promising technology company has approached you with a match for your ambitions. Now it is time to make an indicative (non-binding) offer. But be careful - while “non-binding” may sound informal, its implications are far-reaching. In the TMT market, which is a typical multiple-deal-doer market, reputation is everything. Being recognised as a trustworthy bidder or buyer is crucial. A lack of seriousness in your offer could cost you this opportunity and future ones. However, overpaying is equally unwise. So let’s delve deeper into the pricing and offer phase of the M&A cycle to better understand how to navigate the challenges and set the foundation for success.

Case study: Acquiring a foreign technology company

Imagine you aim to acquire a foreign technology company identified as a strategic fit for diversifying and expanding into new markets. Setting the right initial price requires answering several critical questions. For instance, are your initial assumptions about the strategic fit accurate? What challenges might arise when separating the target from its current structure and integrating it into your business? What synergies and future profitability will the acquisition bring? Which legal and tax structure will best support the transaction?

When information is scarce

In this scenario, you face limited (geographical) market knowledge and uncertainty about the target’s management. The vendor has narrowed the field to a select group of potential buyers, granting them access to a virtual data room, but the data is sparse. Beyond the organisational structure, recent annual reports (from the last three years), and next year’s budget, there’s no multi-year financial forecast available, which you need for initial pricing. This is not uncommon in the TMT sector, where valuing emerging technologies can be particularly challenging.

Effective project management is key

Therefore, your organisation must develop its own multi-year financial forecast. This involves gathering insights from various work streams, such as HR, IT, Tax, and business owners, as well as leveraging (foreign) market expertise and expertise from due diligence, tax, pensions, and valuation specialists. External advisors are often essential, especially when navigating foreign markets. However, managing this process while maintaining confidentiality until the deal is finalised can be challenging. On the one hand, a large, diverse team may generate comprehensive information, but it risks inefficiency. On the other hand, a smaller team might struggle to handle the volume of data required.

Dedicated professionals

What you need is a team of dedicated professionals - efficiently gathering relevant insights, setting priorities, and ensuring no critical information is overlooked. This precision is vital for your valuation model. Missing synergy data, for example, could result in an undervalued offer, leading to elimination from the bidding process. External specialists can streamline operations, but ultimate decision-making must remain internal - and decisions will often need to be made quickly.

Strategic insights: Navigating valuation trends and multiples in software

Determining the right initial offer price is a nuanced and critical step in the M&A process. As Warren Buffet stated: "Price is what you pay, value is what
you get." This distinction between price and value becomes especially
challenging in diverse markets and sectors, where perceived value can fluctuate significantly. Both macroeconomic and industry-specific factors, as well as company-specific factors, such as the strategic fit of the target company or potential synergies, can influence your valuation. This underscores the need
for a detailed analysis to ensure that the price offered reflects not only the
current market dynamics but also the long-term benefits of the acquisition.
Download our report to unlock comprehensive insights into valuation trends and multiples in software companies.

Making an offer: more than numbers

Evaluating an opportunity does not end with a valuation analysis; crafting an offer goes beyond simply quoting a number. A strong bid combines a competitive price with an appropriate transaction structure - for all stakeholders, shareholders, and managers - as well as insight into the bidder’s intentions for the future of this business. Building relationships with key decision-makers (on the vendor’s side) and highlighting your advisors’ credibility, can strengthen your position as a serious contender. This approach paves the way for the due diligence phase, where deeper insights confirm your assumptions and may uncover unexpected revenues and cost synergies as well as non-debt stand-alone potential that enhance value creation.

In the M&A world, preparation, reputation, and clarity are essential. Navigating the pricing and offer stage effectively lays the groundwork for long-term success. By making informed decisions and maintaining integrity throughout the cycle, you position your organisation as a credible and competent player in a competitive landscape.

The M&A cycle in a nutshell

Viewing an acquisition as a series of interconnected phases rather than a one-off transaction is key. From identifying the right deal to integrating the new business into your company. Each decision you make along the way shapes the outcome. Below we have embedded a picture of the M&A lifecycle and a short description of each phase. In a series of articles we delve into each step of the M&A lifecycle, sharing stories and thoughts about each of these phases. 

Explore and define an M&A strategy that evaluates the
changing TMT landscape. Identify opportunities and targets for growth that are aligned to your corporate strategy.

Make fully informed transaction decisions and successfully navigate the complexities throughout the deal process to closure. This stage includes:

Pricing and offer. The initial pricing phase assesses the value of the target company while considering the complexity of its integration or separation. Legal and tax structures are also reviewed, as well as regulatory issues, since they can impact both pricing and feasibility.

Due Diligence. This step answers the all-important question: What exactly are we buying? A thorough evaluation of the target’s value and potential lays the groundwork for the next step: execution.

Execution. Drawing up the Share Purchase Agreement (SPA), including financial terms (locked box or completion accounts), and final closing procedures.

Post-transaction, aligning the acquired company’s financial statements with the buyer’s accounting principes can be challenging. A pre-PPA analysis identifies assets, synergies, and financial impacts beforehand, avoiding post-transaction surprises.

Post-Merger Integration (PMI) should start well before closing the deal. Establish an Integration Management Office (IMO), drive and deliver your Day 1, end-state planning and integration needs.

Evolve for the future by assessing potential disruptors and transformational opportunities. From here, the cycle moves back to the first stage again.

How Deloitte helps TMT companies

Our team can provide independent financial, M&A and debt/equity advice - whether you are seeking to expand organically or via a strategic acquisition. The team offers extensive experience, global reach, and cross-functional capabilities. We support a range of clients in Technology, Media and Telecom from across the globe, with a view to realise strategic objectives, shape your vision and unlock value at every stage of the deal. 

Would you like to learn more? Get in touch with us using the contact details below.

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