Investment Banking - Mergers and Acquisitions (M&A)

Merging with, or acquiring, a business is one way of increasing business value for a company.

It can include the following:

• Acquisitions - buying a company by acquiring some or all of its stock or assets
• Divestitures - splitting up and/or selling off existing parts of a business
• Mergers – buying a company through a legal arrangement whereby all shareholders of the acquired company receive stock or cash
• Strategic alliances - working closely with other companies to pursue a mutual advantage
• Joint ventures - forming a new company with other parties. However, unlike a merger, this new company is a separate entity, with the parent companies still retaining their original identities

When increasing competitive pressures are placed on businesses and with the trend to globalization, companies engage in M&A activity.

Many companies looking to expand, or streamline, their business will use investment banks for advice on potential targets and/or buyers. This will normally include a full valuation and recommended tactics. Each party to a transaction will have their own M&A advisor.

Such advice is particularly necessary for M&A deals that involve uniting companies from different countries. These types of deals, that involve more than one country, are known as cross border deals. As you can imagine, cross border deals often involve working with different countries' accounting, tax and company laws. These types of deals can then become extremely complex.

Many large international companies have, therefore, set up internal M&A teams. These teams have developed substantial experience in planning and executing deals and tend to carry out the search for potential targets and threats themselves. However, these companies are still open to investment banks bringing forward potential deals and will still generally need an investment bank to advise on valuations and tactics / negotiations.

In an ideal world M&Atransactions would simply involve the matching of a seller and a buyer, or in the case of a merger, the bringing together of two interested parties. However, this is not always the case and sometimes one company will be threatened by another. In these types of deals one company will try and buy or merge with another without that company's consent. This is better known as a hostile takeover.

M&A transactions can occur through an acquisition of stock, an acquisition of assets or a merger. A merger is a legal arrangement whereby all shareholders of the acquired company automatically receive stock in the acquiring company as consideration in return for their stock in the acquired company. A merger often requires a shareholder vote and board approval.

The Investment bank's role, in both these types of deals, falls into one of either two buckets: seller representation or buyer representation (also called target representation and acquirer representation).

For an investment bank, M&Aadvising is highly profitable, and the possibilities of types of transactions are virtually unlimited. Perhaps a small private company's owner/manager wishes to sell out for cash and retire. Or perhaps a big public firm aims to buy a competitor through a stock swap.

Also, remember that investment banks do not just rely on buyers and sellers approaching them, they will also study the market themselves and have been known to approach companies with their own strategic ideas (i.e. they might suggest that two companies merge, or that one company acquires, or sells, to another).

Let us look in more detail at the role of the investment bank in representing either the seller or the buyer.

An investment bank that represents a potential seller has a much greater likelihood of completing a transaction (and therefore being paid) than an investment bank that represents a potential acquirer.

This seller representation, also known as sell-side work, is the type of advisory assignment that is generated by a company when it approaches an investment bank and asks it to find a buyer of either the entire company or part of its assets.

Generally speaking, the work involved in finding a buyer includes writing a "Selling Memorandum" (a detailed sales document) and then contacting potential strategic or financial buyers.

If the client hopes to sell a high tech factory, for instance, then the investment bank will contact firms in the same industry, as well as "buyout" firms that focus on purchasing technology or high-tech manufacturing operations.

In advising sellers, the investment bank's work is complete once another party purchases the business up for sale (i.e. once another party buys the client's company or assets).

However, representing a buyer is not always as straight forward.

The advisory work itself is simple enough: the investment bank contacts the firm their client wishes to purchase, attempts to structure an acceptable offer for all parties, and make the deal a reality.

However, many of these proposals do not work out; few firms or owners are willing to readily sell their business. Because the investment banks primarily collect fees based on completed transactions, their work often goes unpaid.

Consequently, when advising clients looking to buy a business, an investment bank's work often drags on for months.

In many cases a firm will, therefore, pay a non-refundable retainer fee to hire an investment bank and say, "find us a target company to buy." These acquisition searches can also last for months and produce nothing except associate and analyst fatigue as they repeatedly build merger models and work through the night.

However, these types of deals are still very attractive to investment banks because when the deals do "get done" the fees that are generated can be enormous.