When a merger or acquisition is announced, what reaches the market is usually a number. The price paid, the premium, the expected synergies. What rarely appears is the process that led to that headline. Months of conversations, revisions, doubts, negotiations and unexpected complications are compressed into a few lines in a press release.
If you want a case-style analysis of a potential transaction, you can also read my earlier post on a hypothetical Adyen and Nexi deal. This article is different. It focuses on what happens inside the process.
An M&A deal is not just a valuation exercise. It is a gradual process in which information is uncovered step by step, risks are reassessed, and positions are renegotiated. From the outside it looks analytical. From the inside it feels closer to controlled uncertainty.
Understanding how a transaction actually unfolds is important because the hardest parts are often not the ones that appear in textbooks.
It starts before it officially starts
Most acquisitions do not begin with a formal offer. They begin with strategy. A company identifies a capability it lacks, a geography it wants to enter, or a competitor that could be consolidated. In private equity, it often begins with an investment thesis. A fragmented sector. A recurring revenue model. An operational improvement opportunity.
The first real step is usually informal. A banker makes a call. A CEO signals interest. There is no commitment yet. Valuation ranges are discussed cautiously and based on limited information.
At this stage, the technical work is relatively structured. Screening potential targets, preparing a preliminary model, analyzing public data. These are repeatable exercises. They follow known frameworks. What is not structured is alignment.
Sellers tend to anchor to optimistic expectations. Buyers build in buffers. Information is incomplete and narratives matter. Many deals end quietly here because expectations never converge.
The non binding offer and the importance of structure
If discussions progress, the buyer presents a non binding offer or letter of intent. This is where the deal begins to take shape. Valuation models are shared. Assumptions are outlined. But price alone does not define the transaction. The way the deal is structured often matters just as much.
A few structures show up again and again:
- All cash acquisition
- Share for share exchange
- Partial rollover where existing shareholders keep a stake
- Earn out linked to future performance
Each structure creates different incentives and different risks. An earn out, for example, may help bridge a valuation gap. The seller believes in future growth and agrees to receive part of the price later. In theory it aligns interests. In practice it can create disputes. How is performance measured. Who controls key decisions after closing. What accounting policies apply.
The same applies to the choice between a locked box mechanism and completion accounts. It determines who bears economic risk between signing and closing. These are technical details, but they have real economic consequences. At this point the spreadsheet is not the main difficulty. Designing mechanisms that prevent future conflict is.
Due diligence, where time disappears
Once exclusivity is granted, due diligence begins. This is often the longest and most demanding phase of the process. A virtual data room is opened. Financial statements, contracts, tax filings, operational reports and internal presentations are uploaded. Questions are submitted. Answers generate further questions.
Due diligence typically covers several areas:
- Financial: earnings quality, cash flow sustainability, working capital dynamics
- Legal: contracts, litigation exposure, compliance
- Tax: liabilities, structuring implications
- Commercial: competitive positioning, customer concentration
- Operational and IT: systems, IT risks, cybersecurity
The financial review is often the most sensitive. Reported EBITDA is rarely accepted without adjustments. One off revenues are stripped out. Non recurring expenses are debated. Working capital trends are examined carefully.
What consumes time is not confusion but iteration. A small inconsistency in revenue recognition may require a deeper dive into contracts. A contract may reveal change of control clauses. Those clauses may affect customer stability assumptions. Each layer leads to another.
This is also the stage where transactions sometimes fail. Undisclosed liabilities, overestimated margins, regulatory complications or excessive customer concentration can materially change the economics of the deal.
Many elements of due diligence follow structured checklists. But interpreting what they mean requires judgment. A risk is rarely just a line item. It must be evaluated in context.
Negotiation and allocation of risk
After due diligence, the negotiation becomes more precise. The share purchase agreement is drafted and negotiated in detail. Representations, warranties, indemnities and closing conditions define who bears specific risks. If a liability emerges after closing, who pays. If performance deteriorates before completion, who has the right to walk away.
At this stage the process is less about modeling and more about balance of power. Urgency, alternatives and market conditions influence leverage. Legal language becomes central. Templates exist, but no transaction is identical. The negotiation reflects not only facts but bargaining strength and timing.
Financing and market exposure
In transactions involving leverage, financing adds another layer of uncertainty. Debt terms must be agreed. Covenants negotiated. Lenders engaged. Credit markets monitored. In stable environments this phase may appear routine. In volatile conditions it becomes critical.
A shift in interest rates or market sentiment can alter the feasibility of the capital structure. Financing risk is sometimes underestimated until market conditions change.
Regulatory approval
Some transactions require antitrust or sector specific approval. This part of the process is largely outside the direct control of buyer and seller. Regulators assess competitive impact and compliance with applicable rules. Even well structured transactions can face delays or additional conditions. This stage reminds participants that not all risks can be negotiated. Some are systemic and external.
Where the process is easier and where it is not
Financial modeling, screening of targets and data organization are structured tasks. They follow established methodologies and can be replicated with consistency. The more difficult elements are different in nature. Aligning valuation expectations, structuring earn outs, allocating risk through contractual clauses and navigating regulatory uncertainty require negotiation and strategic thinking.
In most transactions, due diligence is the most time consuming phase. It is not particularly visible from the outside, but it determines whether the initial valuation survives detailed scrutiny.
The role of artificial intelligence
Artificial intelligence is likely to reshape specific components of the M&A workflow. Document review, contract abstraction, anomaly detection in accounting datasets and automated screening of comparable transactions are areas where efficiency gains are already visible.
Over the coming years, it is reasonable to expect shorter document review cycles and faster identification of inconsistencies. However, negotiation dynamics, strategic judgment and relationship management are far less susceptible to automation. M&A transactions involve incentives, reputation and trust. These dimensions extend beyond data processing. Technology will reduce friction in mechanical phases. It will not remove the need for experienced decision makers.
A final reflection
From the outside, an acquisition looks like a number attached to a company name. From the inside, it is a sequence of stages in which information is gradually revealed and risk is redistributed. Models initiate the discussion. Due diligence tests assumptions. Negotiation defines responsibilities.
Understanding this internal process changes how one interprets deal announcements and clarifies where value is actually created.