The phrase mergers and acquisitions (abbreviated M&A) refers to the aspect of corporate finance dealing with the buying, selling and combining of different companies that can aid, finance, or help a growing company in a given industry grow rapidly without having to create another business entity.
Usually mergers occur in a consensual (ie. both parties agree) setting where executives from the target company help those from the purchaser in a due diligence process to ensure that the deal is beneficial to both parties.
Corporate mergers may be aimed at reducing market competition, cutting costs, reducing taxes, removing bad management, “empire building” by the acquiring managers, or other purposes.
Such actions are commonly voluntary and involve a stock swap or cash payment to the target.
An acquisition, also known as a takeover, is the buying of one company (the ‘target’) by another. An acquisition may be friendly or hostile. In the former case, the companies cooperate in negotiations; in the latter case, the takeover target is unwilling to be bought or the target’s board has no prior knowledge of the offer.
Acquisition usually refers to a purchase of a smaller firm by a larger one. Sometimes, however, a smaller firm will acquire management control of a larger or longer established company and keep its name for the combined entity. This is known as a reverse takeover.
The term demerger is used to indicate a situation where one company splits into two, generating a second company separately listed on a stock exchange.
As a junior M&A banker, or analyst, you will spend a lot of time working on documents outlining a bank’s ideas for a particular transaction. Analysts in M&A usually conduct basic research and build the financial models used to price the companies concerned.
One notch up from analysts are associates, who oversee analysts’ work and check their models are correct. Further up the scale are vice-presidents, who survey the work of analysts and associates.
Vice-presidents report to directors and managing directors, who ‘own’ the client relationship (i.e. the main point of client contact).
When a client elicits a positive response, the M&A team see the deal through to completion.
On a day-to-day basis, typical activities in M&A will include:
* Thoroughly researching market conditions and developments
* Identifying new business opportunities
* Carrying out financial modelling, then developing and presenting appropriate financial solutions to clients
* Liaising with the chief executive and chief finance officer of large and small organisations
* Constructing takeover timetables
* Due Diligence on prospectors & financial statements
* Breakfast, Lunch, Dinner Road Shows (Drinking)
iii) Private Equity
Private equity is an asset class consisting of equity investments in companies that are not traded on a public stock exchange.
Private equity and venture funds exist to help raise money for companies by offering cash in return for an ownership stake. As a result, they become co-owners or even sole owners of the companies in which they invest.
Private equity firms generally receive a return on their investments through one of three ways: an Initial Public Offering (IPO), a sale or merger of the company they control, or a recapitalization. Unlisted securities may be sold directly to investors by the company (called a private offering) or to a private equity fund, which pools contributions from smaller investors to create a capital pool.
Private equity investments can be divided into the following categories:
- Venture capital: an investment to create a new company, or expand a smaller company that has undeveloped or developing revenues;
- Buy-out: acquisition of a significant portion or a majority control in a more mature company. The acquisition normally entails a change of ownership;
- Special situation: investments in a distressed company, or a company where value can be unlocked as a result of a one-time opportunity;
- Merchant banking: negotiated private equity investment by financial institutions in the unregistered securities of either privately or publicly held companies.
In an ideal situation, they invest in an underperforming company, turn it around and sell their stake at a profit some years later. However, they also occasionally engage in the unpopular practice of asset stripping, or breaking a company up and selling its assets individually to make a profit.
The money invested by private equity funds is frequently used for management buy-outs (MBOs) where a company, or a division of a company, is bought by its managers. Alternatively, it may be used for a management buy-in (MBI), where managers from outside take over a company.
The investors in a private equity fund can usually afford to have their capital locked in for long periods of time and are able to risk losing significant amounts of money. This is balanced by the potential for huge returns.
The majority of investment into private equity funds comes from three sources:
- Institutional investors through pension funds, corporate pension plans, insurance companies, endowments, family offices and foundations.
- Fund of funds. These are private equity funds that invest in other private equity funds in order to provide investors with a lower risk product through exposure to a large number of vehicles often of different type and regional focus.
- Individuals with substantial net worth (Sophisticated Investors).
The amount of time that a private equity firm spends raising capital varies depending on the level of interest amongst investors for the fund, which is defined by current market conditions and also the track record of previous funds raised by the firm in question. Firms can spend as little as one or two months raising capital where they are able to reach the target that they set for their funds relatively easily, often through gaining commitments from existing investors in their previous funds, or where strong past performance leads to strong levels of investor interest. It is not unheard of for funds to spend as long as two years on the road seeking capital, although the majority of fund managers will complete fundraising within nine months to fifteen months.
The credit crunch has created uncertainty for the private equity industry, with many banks unable to sell on the loans they made to clients to help finance deals.
Private equity houses will hire research analysts who number crunch and scrutinise the accounts of companies in which a fund is thinking of investing.
The principals appraise whether a deal is worth pursuing and, if it is, do anything from arranging legal documentation to negotiating the right price.
Originators are usually a funds partners who find new companies to invest in. They oversee the deals and make the most money if an investment is sold at a profit.
In private equity you will often be providing management of the companies the fund invests in with skills and funding. Private equity houses encourage companies to succeed and in doing so, make a profit themselves.
Often private equity fund managers will employ the services of external fundraising teams known as placement agents in order to raise capital for their vehicles. You will be dealing with placement agents who will approach potential investors on behalf of the fund manager, and will typically take a fee for the commitments that they are able to garner.
In a nutshell, you will be heavily involved in the businesses in the fund and everything that goes along with that including analysing the companies, developing the companies and raising funds for the companies are looking to return your investment many times over.
iv) Venture Capital
Venture Capital and Private Equity are closely related and the terms are used to mean the same thing by different people. Private equity / Venture Capital firms generally receive a return on their investments through one of three ways: an Initial Public Offering (IPO), a sale or merger of the company they control, or a recapitalization. Unlisted securities may be sold directly to investors by the company (called a private offering) or to a private equity fund, which pools contributions from smaller investors to create a capital pool.
v) Underwriting
Underwriting refers to the process that a large financial service provider (bank, insurer, investment house) uses to assess the eligibility of a customer to receive their products like equity capital, insurance, mortgage or credit to a customer.
- Securities Underwriting
Securities underwriting is the way business customers are assessed by investment houses for access to either equity or debt capital.
When an Investment Bank raises money for a company they will use an underwriter in order to guarantee the purchase of securities in the event that nobody else will purchase.
This is a way of placing a newly issued security, such as stocks or bonds, with investors. A syndicate of banks underwrite the transaction, which means they have taken on the risk of distributing the securities. Should they not be able to find enough investors, then they end up holding some securities themselves. Underwriters make their income from the price difference, or underwriting spread, between the price they pay the issuer and what they collect from investors or from broker-dealers who buy portions of the offering.
If the investment bank and company reach an agreement to do an underwriting, also known as a firm commitment, then the investment bank will buy the new securities for an agreed price. It will be your job to facilitate this transaction.
You will be registering the new securities with the London Stock Exchange, setting the offering price, possibly forming and managing a syndicate to help sell the new securities, and to peg the price of the new issue by buying in the open market, if necessary.
One of the biggest tasks of an underwriter is determining the price of the transaction. If the offer price is too high, the investment bank will fail to sell all of the new issue (aka undersubscription), then it will have to hold some of the issue in inventory, hoping to sell it later. If the investment bank holds the new issue in inventory, this will tie up capital that can be used elsewhere, or, worse yet, it will have to borrow money.
If this happens you will have to answer to the initial customers who paid a higher price for the new issue who will be disappointed that they paid a higher price, and the investment bank may lose these customers in a future offering. You will be reporting back to investors throughout the transaction.
If the offering price is too low, then the new issue will quickly sell out, and the price of the new issue will rise quickly because the supply will be limited (aka oversubscription), inducing the initial investors to sell for quick profits commonly called flipping.
Essentially your job is to evaluate risks, use financial modelling to come up with an underwriting level and facilitate the transaction.
- Insurance Underwriting
Underwriting may also refer to insurance; insurance underwriters evaluate the risk and exposures of potential clients. They decide how much coverage the client should receive, how much they should pay for it, or whether to even accept the risk and insure them. Underwriting involves measuring risk exposure and determining the premium that needs to be charged to insure that risk. The function of the underwriter is to acquire or to “write” business that will make the insurance company money, and to protect the company’s book of business from risks that they feel will make a loss. Underwriting work is largely about relationship building and it demands close attention to detail. You are likely to be involved in networking to get things done, gathering and assessing information, studying proposals and, for any given scenario, calculating possible risk, weighing up the likelihood of a claim being made and in what timeframe. Underwriters compute results to determine the cost of insurance and decide whether the risk is viable. You might also find yourself liaising with specialists, negotiating terms with policyholders or brokers, specifying conditions for certain types of cover, and drawing up policies and contracts.
vi) Syndicating
Syndicators usually sit on the trading floor, but don't trade securities or sell them to clients. The syndicate provide a basic role in placing stock or bond offerings with buy siders and aim to find the right offering price that satisfies both the company, the salespeople, the investors and the corporate finance bankers working the deal. In any public offering, syndicate gets involved once the first prospectus is sent out to potential investors. At this point syndicate associates begin to contact other investment banks interested in being underwriters in the deal. Investors who agree to put up money for the IPO participate in what is called the syndicate. In the prospectus each participant is allocated a number of shares.
You will spend most of your time on the phone and meeting with people working on the prospectus. You will also spend time pricing the IPO by supply and demand. Syndicate professionals:
- Make sure their banks are included in the underwriting of deals
- Put together the underwriting group in deals the investment bank is managing
- Allocate stock to the various buy-side firms indicating an interest in the deal
- Determine the final offering price of various offerings
- Sorting out people who are likely to invest and those who are likely to pull out
- Distinguish investors who are looking for a quick profit and will sell the stock immediately after inflation from the longer term investors
- Keeping the company in touch with pricing
vii) Investor Relations
Investor Relations (IR) is the field of corporate communications specializing in information and disclosure management for the companies it holds as clients and the investment banks shareholders.
Investor relations encompasses the broad range of activities through which a quoted company communicates with its current and potential investors. The constantly evolving requirements of disclosure, transparency and corporate governance create significant challenges for all quoted companies. Investor relations practitioners, whether they work in-house or in an advisory capacity, have a vital role to play in helping companies to manage these issues and to communicate more effectively with the investment community.
The job of investor relations in investment banking can be split into three main roles:
- Communicating with the investment bank’s shareholders
- Communicating with the institution’s clients about the clients share price
- Communicating with investors in the institution’s public issues (ie. when the bank sells new shares in the market)
They communicate with the investment community at large. The term describes the department of a company devoted to handling inquiries from shareholders and investors, as well as others who might be interested in a company’s stock or financial stability.
The investor relations function also often includes the transmission of information relating to intangible values such as the company’s policy on corporate governance or corporate social responsibility.
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