The letter of intent (LOI) is a paper that is key during the M&A Process, it is formed by the main points of the first agreement made by the Buyer and the Seller. It will be the base of the Sale and Purchase Agreement (SPA).
It is significant that all important aspects of the agreement are written down since thereafter, the Buyer will invest in auditors and legal advisors. In the case in which the most important and relevant points were not addressed in the LOI, then it could be possible that the process can fall apart and everyone involved wasted their time and, in the purchaser case, a lot of money.
Furthermore, the LOI is what the buyer will have to expose to the banks so that they can start financing what was agreed.
Abstract: This is the introduction with the fundamental aims of the LOI.
Transactions: Simple description of the Transaction.
Timeframe for the transaction process: This point can include deadlines to keep process moving along, according to the arrangement.
Assumptions: It includes any representations made before the Closing of the Transaction which have been discussed between the Buyer and the Seller.
Conditions precedent: Detailed description of conditions for the closing.
Due Diligence: It is wise to describe in detail the areas of the company that will undergo the process.
Financing: In this part you should incorporate the type of financing that the Buyer will use to fund it.
Confidentiality: it is important to include a confidentiality clause due to the possibility that your document contains new sensitive information.
Exclusivity period: This point should be as detailed as possible.
Disclaimer of Liabilities: A brief pulled apart should be made to limit the liabilities of the Parties in the event that negotiations fall through after LOI.
Termination of LOI & Break up Fees.
In collaboration with the Legal Department we have made two E-Books in which you can find the key points that should be included in the LOI (Letter Of Intent) and in the SPA (Sale and Purchase Agreement). If You want to know more, you can download our E-Book that provides detailed information about this document:
If you are looking to optimize the value of your investment within an operation, I encourage you to evaluate ONEtoONE Corporate Finance: a firm dedicated to provide the highest value services to their clients through transparency and professionalism. For more information click the button below.
Confidentiality during an M&A process is vital for the success of an operation. One of the Corporate Finance Industry success metric is the levels of transparency between buyers and sellers, making confidentiality a crucial in any operation. A good M&A advisor also supports the transparency and confidentiality of the process.
Confidentiality and transparency have their protagonism during many phases of the process; in this article, we will refer specifically to the Virtual Data Room.
Managing confidentiality during an M&A Operation:
Managing confidentiality during this process is a crucial aspect within an operation. Usually the sellers seeks for higher levels of confidentiality but this metric may vary depending on many factors.
For example, if the seller wants a high level of confidentiality he must reduce the amount of potential buyers he reaches, but this will slow down the selling process. Vise versa, if the seller seeks faster results he must amplify his selection of possible buyers, making it more difficult to control the confidentiality factor.
This may seem like a conflicting paradox for any seller because many business owners do not posses knowledge of the different techniques that can be applied to increase confidentiality during the M&A process.
What are some techniques we can refer to regarding confidentiality during an operation?
Creating a blind teaser: This document is designed to protect the identity of the company being sold when presented to potential investors. The teaser uncovers the situation of the company but not its name. If buyers show interest a confidentiality agreement is signed to protect such identity.
Signing an NDA: Confidentiality is crucial since day one. There will be a lot of agents involved in the process everyone that is exposed to this information must sign an NDA so the idea and intention is protected and safe.
Confidentiality Agreement: This document serves two purposes. The first one is to protect the selling company’s intentions regarding potential investors once they showed interest. The second one is that the signing of this document represent a clear intention of the buyer to proceed with a possible deal.
A virtual data room (VDR) is a virtual space where the seller uploads all the necessary documentation of the company so the buyer can have access to it and advance in the process. This transaction of information is extremely delicate and must be made only when there is a trust-worthy and robust relationship between both parties, meaning that there is already the will to invest and close a deal.
The transaction of this information is made through unique online software design to prevent any disclosure of the documentation and keep-safe all the uploaded data. The software must be a high-quality product that provides confidence, security, and safety to both parties involved in the operation.
Imagine how hard it can be for a business owner to expose the essence of their company to someone. Leaving aside the emotional factors that make this operation hard, this part of the process must have all the requirements to ensure safety within the parties.
In every scenario, work-ethic and professionalism must be applied, but when referring to VDR’s we can assure that one of the best options in the market is EthosData. We invite you to take a look at their high-end Service that guarantees safety when taking care of your documentation.
In ONEtoONE we are characterized by the level of transparency, confidentiality, and professionalism with which we handle our clients’ operations. One of our best allies is the trust we generate through our work. Therefore, we encourage you to contact us if you are looking for advisory on buying or selling your company.
Traditionally, information technology or IT has represented a significant part of global transactions in the consulting sector. The IT consulting industry requires low capital investment, together with the high level of innovation and the impact that new digital technologies offer in all sectors of the global economy, are the key factors explaining an upward trend in this sector. The advantages of this industry are driving the interest and continuous need of companies to acquire new capabilities that allow them to enter these new and innovative markets. Since 2013, the rapidly expanding technological trends towards cloud computing and Big Data analytics caused larger competitors to enter the market through acquisitions of the smaller industry counterparts with developed technology and supporting infrastructure.
What is the IT Consulting Service?
IT Consulting is understood as the field of activity that focuses on advising organizations on the best way to use information technology (IT) in order to achieve their business objectives. IT Consulting industry is comprised of companies that offer business design and implement information technology systems and infrastructure. These IT consulting services provide expertise, experience, and industry intelligence to enterprises, helping to obtain better design, architecture, optimization, and implementation of security software, people, and processes. Industry giants like Accenture PLC and International Business Machines Corp. (IBM) have allocated millions in acquisition sprees in the past years, purchasing leading digital consulting firms like OCTO Technology and even institution-based projects like the MIT-run laboratory focused on the development of computer systems. The IT Consulting industry is known for the low capital requirements, thus it is also attractive for small to medium-sized businesses.
The IT Consulting industry is known for the low capital requirements and is therefore attractive for small to medium-sized businesses.
According to IDC, the global IT industry surpassed $4.5 trillion mark in 2017. A large amount that is more widespread and established in mature technology markets such as the U.S., Europe and the Asia Pacific, where the robust infrastructure and a large installed base of users equipped with hardware provide the demand.
Trends in the market
Artificial intelligence & Automation, Cybersecurity and Cloud-based solutions are the most popular sub-sectors of the IT consulting industry. Here are some highlights of these three advanced technologies:
Artificial Intelligence and Automation add an additional layer of intelligence to the existing technical solutions that companies are building, and provide a more extensive IT architecture to tackle a broader range of problems. The main advantages of automation are cost reductions, improving customer services and allowing for more precise oversight of trends impacting the clients’ business. Consulting service providers are also actively implementing automated back-office functions in order to optimize the invested time and effort of employees accomplishing laborious back-office tasks.
Cloud-based solutions refer to the array of resources, on-demand services, networks, applications that can be accessed through a shared cloud infrastructure. The cloud’s value proposition solution facilitates faster and easier experimentation and innovation in the business context.
Cybersecurity is the technology designed to protect systems, networks and data from cyber attacks and data protection infractions. The latest disruptive impacts of new cloud-based solutions on the company’s business and operating models make cybersecurity a critical investment priority. The consequences of suffering a cyber attack range from loss of reputation and business assets to the costs of solving damages.
During 2018 the average value deal in M&A Activity in the IT consulting sector accounted for 46% in North America and 38% in Europe, which represented eight out of ten transactions while Asia represented a smaller chunk with 11%. Furthermore, the average price deal of the United States is practically 3 times higher than in Europe, which shows a significant difference in the IT services companies in these geographies.
According to the data collected for the present report, Artificial Intelligence is being aggressively adopted by forward-looking businesses, particularly in the banking, retail and automotive sectors and rising buyer demand for AI players. The demand for business with Cloud-based services remains robust but in line with previous years. Finally, Cybersecurity continues the growth as a consequence of the high demand for cloud solutions and connected device.
Overall, if the expected growth materializes in the years ahead, the spending will overlap the $5 trillion mark by the end of 2019 compared to the results from previous years. Disruptive IT services will be the catalyst for a large part of M&A transactions worldwide, increasing the interest of the consulting industry in transactions within this area.
If the expected growth materializes in the years ahead, the spending will overlap the $5 trillion mark by the end of 2019.
The full report “IT CONSULTING INDUSTRY OUTLOOK 2019” offers more information about services provided by IT consulting firms, geographical segmentation, and a detailed overview of the M&A transactions carried out by the leading companies in the IT consulting sector. Download it here in order to have a deeper understanding of today´s M&A landscape within the sector.
Will the next member of your M&A team be a robot? One of the world’s most potentially disruptive technologies is Artificial Intelligence (AI). Given AI developments in the areas of big data and pattern recognition, it is very likely that AI will increasingly be used in connection with a wide variety of M&A tasks. This will have a major impact on how mergers and acquisitions deals are done.
Overview of Artificial Intelligence (AI)
The term Artificial Intelligence (AI) is a broad concept that refers to technology that allows machines to carry out tasks that are ordinarily performed by humans. In order to perform these tasks, AI requires the development of software that allows machines to replicate different elements of the complicated human thinking process.
There are two general types of AI, Narrow AI and General AI.
Narrow AI refers to the ability of a machine to apply a limited artificial cognitive function to carry out a narrowly defined task. An example of Narrow AI is the virtual assistant Siri, which is capable of speech recognition and searching for information on the Internet in response to queries. Other examples of Narrow AI are machines that play chess or Go, which select optimal game decisions from a wide set of mathematically calculated move possibilities.
General AI refers to the ability of machines to carry out more sophisticated reasoning processes and draw conclusions about courses of action which are different from possibilities that have been programmed into their database. In other words, General AI allows machines to not only perform pre-determined responses to a defined set of response triggers but rather to engage in higher-order thinking that involves creativity, innovation and improvisation.
To provide an example of the difference between Narrow AI and General AI, with Narrow AI, an autonomous car with a driving scenario database that contains examples of cars stopping at stop signs would stop the next time a stop sign was encountered. With General AI, an autonomous car would be able to reason that it should not stop at a stop sign if conditions made stopping particularly hazardous. Machines are still far away from exhibiting General AI.
AI and Mergers & Acquisitions
AI will very likely soon have a significant impact on M&A. To begin with, the preliminary application of AI will likely be to assist companies and financial analysts with gathering and processing information that can be used to make different types of M&A-related decisions. While humans can, of course, execute these tasks, AI-supported machines will be able to carry out these activities continuously, much faster and have far better recollections of search results.
Focusing on specific areas of the M&A process, AI can transform the activity as follows:
1. Market and Sector Data Extraction. To provide one type of example, machines could extract economic or sector data in real time which would allow firms to have a much more detailed and nuanced view of the business realities within a country or sector. This will be advantageous because companies often make investment decisions based on market perceptions or biases that do not reflect actual market realities which causes them to miss opportunities or assume unwanted risks.
Armed with this knowledge a company could develop stronger M&A strategies and more sensible transaction timetables. In addition to obtaining information regarding one country, machines could gather information about multiple markets and sectors and compare them to identify acquisition opportunities that likely offer the best ROI or risk-adjusted returns.
“ AI could gather information about multiple markets and sectors and compare them to identify acquisition opportunities that likely offer the best ROI.
2. Company Selection. Once a general M&A strategy has been developed, AI could be used to identify potential M&A targets and track information about them or information that affects their business models. For example, for an acquirer that was targeting the acquisition of a real estate company, AI could be used to gather several types of data which would allow the attractiveness of the acquisition opportunity to be analyzed, such as macroeconomic data, interest rates, property prices and company information. This would allow for a more sophisticated, multi-dimensional view of targets and how they react to surrounding business and economic conditions.
3. Due Diligence. The evaluation of M&A opportunities is often accompanied by extensive due diligence regarding the business environment in which a company operates in, the company and its competitors. AI will allow acquirers to develop increasingly sophisticated models of due diligence where the work of advisors such as bankers, lawyers and accountants is accompanied by various types of AI-assisted search queries. Machines will also likely be able to detect discrepancies between target narratives of either past of probable future event and past or likely future realities which can become the basis for further due diligence questions and analysis.
4. Business Valuation. Another way in which AI could be used to support the M&A activity is in the area of valuation. With the market method of valuation, different types of multiples, such as an EBITDA multiple, are extracted from the market and then applied to the financial performance of the target company to arrive at a company valuation.
In connection with the market valuation method, AI could be used, first of all, to extract in real time EBITDA and public share price data to create a live database of EBITDA multiples. In addition to this baseline EBITDA multiple information, AI could also be used to create individualized valuation adjustment formulas that were based on certain criteria, such as the size of the company or larger company sector trends to arrive at better valuation calculations.
A second valuation approach is DCF analysis, in which the future free cash flows of a company are calculated and then discounted by a discount factor which in theory reflects the risks that are related to those cash flows. AI could assist with this type of analysis by gathering information on discount factors and risks to a company’s cash flows.
5. Add-On Transactions and Exit Strategies. Most M&A strategies involve the contemplation of helping targets to grow or planning for an investment exit. Because of its ability to monitor and calibrate company performance, competitor performance and larger market conditions, AI will be able to help companies better plan post-acquisition steps. The application of General AI to M&A is much farther off, but if machines are able to learn higher forms of human reasoning they likely will be able to play a major role in developing M&A strategy, forming due diligence queries based on factual analysis and even in the psychological analysis of management teams.
Advances in AI will allow machines to access and analyze exponentially increasing data about economies, markets, companies and companies’ consumers. This ability will assist companies and financial analysts with gathering and processing information that can be used to make different types of M&A related decisions, making core business processes faster, more efficient and accurate. Some of the most impactful foreseen areas of improvement will be in market and sector data extraction, company selection, due diligence, business valuation, add-on transactions and exit strategies. As the depth and complexity of AI grow, so does the range of its application use in vital business processes.
The photo for this article was taken by Franck V on Unsplash.
One consequence of the world’s increasing computing power, expanding computer use and the ability of computers to capture and share different types of information is the generation of big data. It is data that because of its core properties is difficult to analyze with traditional data analysis techniques and software.
Despite the analytical processing challenges it poses, new techniques are being developed which make it possible to analyze this kind of data more effectively and allow it be used by individuals, companies and governments in many different business and scientific fields. This will likely have an important impact on many areas of M&A, such as in the definition of M&A strategy, business model validation and valuation.
This article will provide an overview on the matter by looking at a few types of analytical techniques and consider the potential impact of this kind of data analysis on M&A.
Overview and Big Data Analysis
While it can have many different qualities, its key attributes are:
Volume. it is characterized by large volumes. According to one general estimate that was published in October 2017 – the distant past in terms of global data growth – there were 2.7 zettabytes of data in the digital universe. This unimaginably large number is the equivalent of 1 trillion gigabytes.
Velocity. it is characterized by the extremely rapid pace at which it is generated. According to one report, 2.5 billion gigabytes of data were generated every day in 2012. With more than 3 billion people on line, millions of Google searches are now generated and hundreds of hours of videos are uploaded every minute.
Variety. it is also characterized by its great variety. In addition to text, this big amounts of data are also comprised of audio, video and changing combinations of data transmission methods.
Data with these properties are often very difficult to process with traditional data analysis techniques. This means that a great deal of the potential ability to use this data is lost.
Due to the challenges of processing data, various techniques are being developed to process big data. One example of this is the Apache Hadoop system, a set of open source programs which includes a component called MapReduce which reads large amounts of data, reduces it in a form that makes it suitable for analysis and then runs mathematical functions on the data.
Apache Spark is another open source data framework for data analysis. Apache Spark can perform some data analysis techniques 100 times faster than MapReduce.
A program used in statistics is R. R is very useful for data mining and for data visualization.
Big Data and M&A
It will very likely it will soon have a large impact on M&A. The following are some key ways it may change how M&A deals are identified and executed.
Strategy development. There are numerous potential M&A strategies, ranging from realizing operational synergies, creating long-term value, turnarounds of poorly performing companies and risk arbitrage. While strategy selection is defined by the particular goals of the company executing an M&A strategy and the skill sets of the M&A team members, it is also heavily influenced by numerous market factors that determine if a strategy should be launched, when it should be launched and how likely it is that it will be successful if it is launched. These factors will increasingly be able to be reduced to data points that companies can use to make strategic choices.
Acquisition targets. Finding targets to carry out an M&A strategy is often a very time consuming process which fails to identify suitable targets and closed deals. Low M&A execution rates are due to various factors, including limited search parameters, search biases, due diligence challenges and buyer/seller price expectation mismatches. With big data it will be possible to drastically improve M&A target searches and pre-screen targets more effectively, which should improve successful deal close percentages.
Business model validation. A significant challenge in analyzing a potential acquisition target is validating a company’s core business model. Particularly for acquirers who are not located in the same market as the target company, it can be very difficult to obtain real time market information and predict what that means for a company’s business prospects. With big quantities of data data, it will be possible to obtain far more detailed analyses of factors such as how fast a target company’s market is growing or shrinking, how cyclical market patterns compare with historical patterns, the amount of customers that are in a market or positioned to enter a market and their preferences and how the market is reacting to the target’s or competitor’s products.
Valuation. Often a major roadblock to executing M&A deals is valuation. Even setting side common biases for buyers to discount firm and asset values and sellers to inflate them, valuation is very challenging due to the fact that it often involves trying to forecast the future. Using big data in connection with market-based valuation techniques, such as EBITDA multiples, it will be possible not only to extract multiples from much wider market data bases, but more quickly and reliably perform comparisons between a target company and the company’s valuation reference set to make appropriate EBITDA adjustments. For valuation models that are based on discounted cash flow analyses, it will become easier to prepare cash flows, identify risks to those cash flows based on existing market information and prepare stronger assumptions about how those risks will affect those cash flows.
Shareholder activism. The existence of data in real time about a company, the execution of company’s business model and a company’s competitors will likely significantly change the relationship between a company’s founders, executives and outside investors. Rather than shareholder activism that is driven by periodic financial reporting, it is likely that increasingly available information will significant shorten the intervals between market events, company actions and shareholder attempts to influence what steps in the market a company is taking or plans to take.
As the amount of data in the world grows, technology will attempt to store the data, break it into intelligible pieces and use the data for different purposes. It is likely that the aforementioned data analytical techniques will have a large impact on M&A given that it is heavily impacted by data points that can be extracted from the market. In light of this, companies as well as investors should try to stay informed about data analysis developments so they can incorporate them into their M&A strategies and increase the likelihood that M&A deals will create lasting shareholder value.
On face value, the concept of individual relationships within a company can seem rather trivial, but the reality is quite the opposite. Just like any functional group, success will largely be derived from how well the team is able to work together, and naturally, this will significantly depend on relationships within this group. In turn, the concept of fostering relationships must be taken extremely seriously within any business, and this is never more relevant in the context of a newly merged company post-acquisition.
The Importance of Company Relationships
With this in mind, a company must consciously and actively prioritise the promotion of positive relationships internally, to the extent that it can be considered a part of the company’s corporate culture. As we have alluded to in our previous article, the advantage of having a strong and balanced corporate culture cannot be overstated, and resultantly, the companies that dedicate the most time to developing it will often rise above those that fail to do so.
As such, the task of fostering company relationships is not just a job for top management and human resources, rather it is for each and every employee to truly embrace. Alas naturally, we as human beings will not always enjoy the company of absolutely everyone, but it is essential in a business context to put any differences with particular individuals aside for the sake of the firm’s success. As it were, a solid foundation of strong working relationships internally will exact a high degree of confidence within a team to deliver fruitful results, in a genuinely supporting environment.
How to Ensure That an Acquisition Is Successful
This latter point in particular, the maintaining of a supportive workplace, is absolutely essential for company morale. As a direct result of being apart of such an environment, incoming employees post an acquisition will be able to transition into the team much more comfortably in the knowledge that their colleagues will have their back from the very first moment. One of the crucial aspects of ensuring this is the case is creating a workplace that promotes open dialogue amongst its workers, in which employees can feel comfortable in discussing their feelings, ideas and perspectives regarding business operations.
One of the major benefits of an acquisition is exactly the fact that you will obtain individuals with varying opinions, and so to supress anyone with a difference of perspective is to truly waste an opportunity to improve the company. As a whole, this notion derives from the concept of trust. The sooner a company can generate a genuine level of trust amongst its employees, the sooner it will truly be able to promote the comparative advantages of individuals within the firm so to increase input overall.
Be Careful: Do Not Neglect Internal Company Relations
What is vital to consider that in this disruptive moment in time for the world of business, arguably the most differentiating factors of a firm are related to innately human-oriented skills and capacities. Be it personalised customer service, corporate communication or negotiation skills, these are all linked to interpersonal and emotional capacities, and it is unsurprising to see that the companies who most effectively maintain strong internal relations are the ones that will most effectively execute these differentiating external operations.
The other thing to recognize is that neglecting internal relationships can be as damaging and harmful to a company, as maintaining well-established internal relationships is beneficial. Resultantly, to set this in a sporting analogy, if your company fails to address internal relations whilst your competition does, it is the equivalent of losing two games in one as you see your competition climb the proverbial ladder above you.
The Acquisition Process Should Not Substitute Personal Communications
After all, employees just like any human, are emotional beings and shouldn’t be treated in a mechanical or rigid manner. Overall, it is always in everyone’s interest to promote genuinely warm and open working relationships in any company.
Last Monday, I had the pleasure of presenting a “buy your own” company workshop to the young entrepreneurs and enthusiasts of “Cercle Dynamique” in Brussels.
Just like you, some of those young men and women did while some did not have a background in economics, negotiation, or M&A. The idea was to create eight guidelines to focus on when looking to buy a company which are easily understandable for professionals as well as for complete newbies.
M&A is like marriage, you are bound for life with no option on a free divorce. Pick the right partner, and write stuff down. Here are the top 8 takeaways on buying a company:
1) Decide what you are looking for
Decide what you want in terms of location, size, industry, etc. Think about your budget as well – do you even have one?
2) Do your research
Visit companies close to home, check online, and know that there is NO harm in asking. Be careful: online, you will find one good opportunity for ten bad ones.
3) Consider getting help
Professionals will safeguard you from financial, legal, and emotional pitfalls. A sparring with a deal-making attitude will only help you move faster.
4) Understand the counterpart’s motivation
“For sale” does not mean that something is wrong; remember that. People have a variety of reasons to sell a company. What is of utmost importance is to understand why a seller sells. If you understand the motive of the counterpart, it will ease negotiations. The same goes for you – be clear about your buying motivation.
5) Complete Due Diligence
As your mom used to say: Do your homework! We mean, do the research. Team up with experts and do not leave anything up to change, be diligent.
6) Acquire the necessary funding
Funding knows many forms. You can use seller financing (vendor loan, etc.), business angels, venture capitalists, FFF’s (fools, friends and family) or just go knocking at the bank’s door. Whatever you decide to use in your financing cocktail do not overstretch and calculate an error margin.
7) Draft a sales agreement
Protect yourself with a waterproof Sales and Purchase Agreement. The SPA should define the scope of transaction, financial metrics, and formulas in detail. Once all is written down, make sure you understand and agree with every single word on that paper.
8) Keep your communication clear and transparent at all time
Communication is key in any business transaction, especially in one as important as a business purchase. Make sure all parties involved are constantly aware of what is going on.
Eager to learn more on valuation, the acquisition process and our conclusions? Check out the full slideshow here.
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