Corporate Finance: Mergers & Acquisitions Intro

Corporate & Entrepreneurial Finance: Intro to Mergers & Acquisitions

• Objectives:
  • Understand the terms "mergers" and "acquisitions," and different transaction types.
  • Learn the development history of the M&A market.
  • Identify key players and their roles within the M&A market.
  • Understand the rationale and challenges/risks of M&A transactions.

Definition and Types

• Merger: Two companies unite to form a single legal entity. The new entity can be either an entirely new entity or one of the original companies.
• Acquisition: Purchasing the shares or assets of one company by another. Both companies remain separate legal entities after the transaction. Often, terms are used together or interchangeably.

M&A Market Players and Advisors

• M&A Bankers (Investment Bank): Advisers to Buyers/Sellers
• M&A Lawyers: Legal counsel for transactions
• Buyers/Sellers: Companies involved in the merger/acquisition.
• Management Consultants: Experts in business strategy and integration.
• Auditors: Perform due diligence on financial records.
• Tax Advisors: Handle tax implications of the transaction.

M&A Market Overview

• Trends: Trends show a substantial increase in volume and amount of transactions, primarily noticeable from 1985 to present.
• Announced vs. Completed Transactions: Shows significant fluctuations; the amount of deals proposed is generally higher than the amount of deals completed. Data are presented in the form of charts(s) illustrating this information.

Types of M&A Transactions

• Horizontal: Merging companies that operate within the same market or industry sector.
• Vertical: Merging companies within the same industry chain. (e.g., a supplier merges with a product manufacturer).
• Conglomerate: Merging companies that operate in unrelated industries
• Buyouts: Typically driven by financial factors, not business synergies. A purchase is frequently conducted to secure future financial gains.
• Types of Buyouts: can be further categorized into financial buyouts; this can be further categorized into leveraged buyouts or management buyouts.

Motives for M&A

• Synergies: Revenue, cost, or financial enhancements achieved through combining resources.
• Vertical Integration: Enhancing or increasing the operating margin of products while expanding the value chain.
• Target Undervaluation: Purchase price of target is lower than the market's perceived value, improving overall profitability.
• Inefficient Management: Companies that are underachieving with poor management can benefit from buyout as a catalyst to improve operational performance and increase future profits.
• Managerial Incentives: High remuneration may be rewarded for achieving high performance.

Due Diligence Areas

• Commercial/Business/Market Due Diligence
• Financial Due Diligence
• Tax Due Diligence
• Legal Due Diligence
• Technical Due Diligence
• Environmental Due Diligence
• Organizational/HR Due Diligence (If necessary)

Challenges/Risks

• Execution Risks:
  • Competition Commission referral blocking transactions.
  • Failure to detect risk factors during due diligence.
  • High acquisition premiums due to competitive bidding.
• Other Difficulties:
  • Cultural integration issues after a merger.
  • Exchange rate risks in cross-border transactions.
  • Complex taxation and legal challenges.

This quiz covers the fundamentals of mergers and acquisitions (M&A), including definitions, types, and the key players involved in M&A transactions. Gain insights into the history, rationale, and challenges of the M&A market. Test your understanding of the critical concepts underlying corporate finance in this area.