Mergers and acquisitions are often used synonymously to describe a union (merger) between two companies. In this situation, one company buys part of or entire shares of another company. Oil and gas mergers and acquisitions are a tactic used by companies pursuing specific strategies that include expansion, growth, or competitive advantage.
Both parties getting into a merger are typically working towards their strategies. This process is usually complex and involves financial experts, lawyers, and business advisors who help to manage risks and failures.
M&A Benefits Vs. Risk
Depending on several factors, oil and gas mergers and acquisitions can either be successful or fail. In scenarios where it is successful, it can benefit the buyer by removing competition and getting an optimum supply chain. The seller, on the other hand, will enjoy the cost savings that come with the improved infrastructure and will cut down on redundant jobs.
The buyer’s value is hurt and especially destroyed if the transaction fails. Common causes of unsuccessful mergers include cost-saving overestimation and poor due diligence.
Stages of a Merger and Acquisitions Transaction
Every oil and gas merger acquisition must pass through the following key stages:
1. Transaction Shopping
When a company decides to explore acquisition as a growth opportunity, it will create a team that will research the market and analyzes available opportunities. They will look at potential target businesses, evaluate them, and eventually pick finalists from the list.
2. Letter of Intent
The buyer will then draft this legal document that highlights the due diligence, timing, and exclusivity terms of the transaction. During this period, the seller can’t sell their shares to another company.
3. Due Diligence
The buyer will evaluate the value propositions and risks. They will also confirm if the purchase price and transaction terms are reasonable. Under due diligence is the Quality of Earnings (QoE) evaluation regarding what is considered a negative or positive measure of quality earnings.
4. Negotiation and Transaction Documentation
This phase often happens simultaneously with diligence. Information collected during due diligence is used to negotiate details of the letter of intent and final purchase agreement. Deal terms consist of details like buying price, closing date, warranties, and payment terms, among other things.
5. Merger Planning and Implementation
Planning and execution after a successful transaction is an integral part of all oil and gas mergers and acquisitions. Effective execution will ensure both parties benefit from revenue enhancement, synergies, and improved infrastructure.
Critical things to discuss in post-transaction planning and execution include:
- Revenue contracts
- Ways of communicating to the existing customers for retention
- Employee communications and compensation
- Company culture differences
- Organizational structure
- Staff Transition
- Risk mitigation
Mergers and acquisitions are excellent ways for the buying company to grow organically by buying into an existing company. On the other hand, the selling company can cash out of the business or share in the reward and risks of a new business. To achieve a successful merger, it is essential to do due diligence with the right team.