Audit to Mergers & Acquisitions Blueprint

Mergers and acquisitions (M&A) aim to achieve strategic growth, enhance competitive advantage, and create value by combining companies or assets. Each M&A opportunity is unique, and its value can differ greatly between companies. What might seem like an "expensive" deal for one company could be a strategic bargain for another, depending on their specific goals and rationales.

The true power of M&A lies in the ability to unlock value beyond the existing business. By effectively integrating and leveraging new assets or capabilities, companies can drive growth and strengthen their market position.

Different Types Of M&A Strategies

M&A investment theses generally revolve around four overarching strategies: Horizontal (or Roll-Up), Vertical, Strategic, and Reverse Merger.

In this section we will look at each of these strategies, the situations where this strategy will be successful and then we will walk through a real-life example.

First up we have the horizontal investment strategy, also known as a roll-up strategy. This involves the merger of two companies that operate in the same industry and are usually direct competitors. The primary goal is to achieve economies of scale, increase market share and reduce competition.

The combination of two companies in the same industry allows for synergies, through greater operational efficiency and reduced overhead costs. It can also lead to revenue growth through opportunities for cross-selling products and services to a larger customer base as well as the increased pricing power that comes with holding a larger share of the market.

In 2020 Asahi Group Holdings acquired Carlton & United Breweries (CUB) in a horizontal M&A strategy. The merger enabled the combined entity to achieve economies of scale, reducing production and distribution costs. This was particularly beneficial in streamlining operations and optimising the supply chain. It also strengthened Asahi’s competitive position in the Australian market, allowing it to compete more effectively with other major players such as Lion, which owns brands like XXXX and Tooheys.

Next, we have the vertical investment strategy, which involves the acquisition of a company that operates within the supply chain of the acquirer. This can be split into forward integration, acquiring a distributor or retailer, and backward integration, acquiring a supplier or manufacturer. The primary goal of vertical M&A is to gain greater control over the supply chain, leading to various strategic and operational benefits.

Acquiring a supplier can ensure a stable and reliable supply of essential raw materials or components, reducing dependency on external suppliers and mitigating supply chain disruptions. On the other hand, acquiring a distributor or retailer can provide better control over the distribution and sales process, ensuring that products reach end customers more efficiently.

In 2007 Wesfarmers, a diversified conglomerate with interests in retail, acquired Coles Group. By acquiring Coles, Wesfarmers integrated its existing supply chain capabilities with Coles' extensive retail network. This vertical integration aimed to streamline operations, improve logistics, and enhance overall efficiency. It also provided greater control over the quality and consistency of Wesfarmer products sold in Coles stores.

This is a unique situation where both the benefits of a forward integration (control over quality) and of a backward integration (improved distribution) were achieved in the one acquisition.

The strategic investment strategy involves acquisitions driven by a clear strategic rationale, such as entering new markets, acquiring new technologies, or enhancing product positioning.

Entering a new market through M&A allows companies to capture new geographic markets or customer segments more quickly and effectively than organic growth would permit. This can result in significant revenue growth and diversification. Additionally, acquiring companies with advanced technologies or innovative capabilities can accelerate the acquirer's own innovation efforts, leading to the development of new products, improved processes, and a stronger overall competitive edge. A strategic acquisition can also strengthen the company's position in the market by eliminating a competitor, expanding market share, or increasing bargaining power with suppliers and customers.

In 2012, Australia Post acquired StarTrack, another logistics provider in Australia. The acquisition allowed Australia Post to strengthen its position in the logistics and parcel delivery market, making it a more formidable competitor against other logistics companies like Toll Group and DHL. StarTrack brought advanced logistics technology and expertise that enhanced Australia Post’s capabilities in tracking, delivery management, and customer service. Additionally, Australia Post gained access to StarTrack's extensive customer base, including major retailers and e-commerce businesses, significantly expanding its market reach and customer base. This is an excellent example of a strategic acquisition that brought new technologies, enhanced their product offering, and eliminated a strong competitor.

Lastly, we have a Reverse Merger, where a private company acquires a publicly traded company, often a shell company, effectively bypassing many of the regulatory and logistical hurdles associated with an IPO. The strategic rationale behind a reverse merger includes the need for rapid access to public markets, cost savings, and a more streamlined process compared to a traditional IPO. In 2024, Trump’s social media platform, Truth Social, went public through a reverse merger with Digital World Acquisition Corp (DWAC). DWAC was a special-purpose acquisition company (SPAC) set up for the sole purpose of Truth Social’s eventual public listing and was a shell company until the transaction was complete.

To summarise, the different investment strategies include:

• Horizontal: between companies operating in the same industry, aiming to increase market share, achieve economies of scale, and reduce competition,

• Vertical: between companies at different stages of the same supply chain, intended to enhance supply chain efficiency, control, and integration,

• Strategic: driven by the strategic goals of the acquiring company, such as entering new markets, acquiring new technologies, or enhancing competitive positioning,

• Reverse: a process where a private company acquires a publicly traded shell company to quickly become publicly traded, bypassing the traditional IPO process.

The M&A Process

As you can imagine, in the M&A process, there are two sides: the sell-side and the buy-side. The process varies slightly between each side. For example, ‘Target Identification’ for the sell-side means finding potential buyers for the business, whereas on the buy-side, it involves finding appropriate businesses to acquire.

In this section, we will discuss the process in as general terms as possible. Please consider the involvement of the team on each side of the transaction.

The investment thesis stage involves defining the strategic rationale for the acquisition, including growth objectives, synergies, and market expansion goals. The next step is to identify potential target companies that align with the strategic goals. This involves market research, analysis of financial performance, and consideration of the strategic fit of potential targets.

Once an appropriate target has been identified and a non-binding agreement, stating the high-level deal terms, has been agreed then the deal is “live” and the teams move into due diligence. This involves a deep dive into the vendor’s financial records, legal issues, operational systems, and strategic positions. The goal is to uncover any potential risks or liabilities. Based on the due diligence findings, both sides will develop a valuation. This stage involves complex financial modeling to determine how much the business is worth. Additionally, the deal structure is further refined during this phase.

After due diligence and structuring the deal, we then move into the pointy end of the process. This involves discussions around price, terms of the acquisition, post-merger integration plans, and other key contractual elements. The acquiring company may also need to secure financing to complete the transaction. This could involve raising debt, equity financing, or using existing cash reserves. Once terms are agreed upon, the deal moves to closing, where legal documents are signed, and the transaction is officially complete. Following closing, the challenging process of integrating the acquired company begins. This includes merging operations, cultures, and systems to achieve the strategic goals set out at the beginning of the process.

The entire M&A process typically takes anywhere between 6 to 18 months, with a significant portion of that time dependent on due diligence and negotiations, and the necessary regulatory approvals that occur during closing.

To summarise, the different stages include:

• Investment Thesis: defining the strategic rationale for the acquisition,

• Target Identification: market research and consideration of the strategic fit of potential targets,

• Due Diligence: a deep dive into the target’s financial records, legal issues, operational systems, and strategic positions,

• Valuation & Structure: complex financial modeling to determine how much the acquisition target is worth,

• Negotiation & Financing: discussions around price, terms of the acquisition and post-merger integration plans,

• Closing: legal documents are signed, conditions precedent are met and the transaction is officially completed,

• Post-Merger Integration (PMI): merging operations, cultures, and systems to achieve the strategic goals set out

The Different M&A Teams

In discussing the different teams involved in M&A, we will split it into buy-side and sell-side. On the buy-side, there are Corporate Development and Private Equity teams. On the sell-side, there are Investment Banking and Transaction Services teams. It is important to note that each of these teams can be on the other side of a deal. For example, Private Equity may be selling off a portfolio company, or Transaction Services may be advising a Private Equity firm on the buy-side. However, this is less common.

The Corporate Development team is an in-house M&A team, typically within a large corporate that is highly acquisitive. These teams focus on the strategies of their company and how they can be achieved through M&A activity. For example, Wesfarmers has a highly effective corporate development team with a strategy of diversifying the conglomerate’s portfolio. A notable transaction was their acquisition of Coles in 2007.

Private Equity is similar to Corporate Development in that it is in-house. However, Private Equity focuses on investing in and improving companies to achieve high financial returns for investors. They typically have an investment period of 3-7 years, during which they streamline operations, reduce inefficiencies, and enhance sales strategies to drive growth before looking to exit the investment through either M&A or an IPO.

Investment Banking involves advising clients on strategic transactions. Investment bankers play a critical role in deal structuring, valuation, and negotiation, providing insights into market conditions and industry trends. They assist clients throughout the entire M&A process, from initial discussions and due diligence to finalising terms and securing financing.

The Transaction Services team is similar to Investment Banking but with a greater focus on financial analysis and due diligence. This includes evaluating financial statements, identifying

potential liabilities, and ensuring compliance with regulatory requirements. Transaction Services teams also assist in structuring deals, optimising tax outcomes, and planning for post- merger integration. Their goal is to ensure that clients make informed decisions and achieve successful transaction outcomes.

Section Two: How To Break Into Mergers & Acquisitions?

Onto the juicy part, how do we make the move into Mergers & Acquisitions from Audit???

To be very clear, moving into M&A from audit is not an easy path to follow but it is extremely rewarding and by following the steps laid out below you can maximise your chances. We will split this section into ‘How To Land An Interview’ and ‘Interview Preparation’.