Five Steps to Take for a Successful Merger

Like any other business transaction, a merger is a structured process with a series of steps necessary for its completion. As an investment banker to the printing and packaging industries, New Direction Partners has participated in scores of such transactions. While no two mergers were exactly alike, all of them followed a five-part sequence of events that we recommend as a model to all of our clients seeking to merge with other companies.

A merger is different from an acquisition, a transaction in which the buyer absorbs the assets of the seller. In a merger, shareholders in both of the now-combined parent companies still own a portion of the business going forward. This is why the first and by far the most important step is to define a strategy supporting the merger.

This is where you must begin, by being absolutely clear about the reasons why you are putting the two companies together. The most important item here is examining the potential benefits to customers and shareholders. If benefits do not exist, there is no reason to move forward with the merger.

Will the merger enable you to service your customers differently? What resources will you need? Determining what you want the merged entity to be is very much like putting together a strategic plan for either of the parent companies.

The second step, to be taken only after the strategy is in place, is setting the terms of the merger: the nuts and bolts of how the two merging companies are going to share in the benefits of the new business going forward.

It starts with an evaluation of the relative value of the two companies, and there are a number of ways to do this. Valuation can be based on sales, either historical or future. The most common way to do a relative evaluation of a company is by EBITDA (earnings before interest, taxes, depreciation, and amortization). Or, the basis could even be future EBITDA or a combination of all of the above. Needless to say, it can get complicated.

Step three: dealing with social issues. Unfortunately, too many people start with social issues, and that is a mistake. Our definition of dealing with social issues is deciding how to allocate things like titles, compensation, executive management responsibilities, and seats on the board of directors. These are difficult issues to deal with, and if you haven’t taken the first step of defining the benefits of putting the two companies together, you will never get through the third step.

The fourth is making sure that the corporate documents for each of the two companies are in place: for example, by-laws and minutes. You will need to document the equity and option ownership of both companies and determine whether any internal or external parties must approve the merger. You may also want to get your customers involved as a way to make sure that they will be comfortable with the merger.

You now should be ready for the fifth and final step of putting together an integration strategy—an agenda of actions required to execute the merger. The integration plan covers things like HR, accounting, administrative systems, the services of CPAs and lawyers, and the marketing and brand strategy of the new business going forward. All of this should come together in a cohesive plan for explaining to the world why the merger is a good thing, particularly for your customers.

Congratulations! Your diligent attention to the five steps has brought you to the point of issuing an external press release announcing the merger. The rest is history—or will be, just as soon as the merged company goes out there and makes it.