BTR2 MC4 Financing Growth 1: JV & M&A PDF

BTR2 MC 4 Financing Growth 1: JV & M&A  Business Transformation 2 3  Strategic Finance: Financing Growth 1 Learning Outcomes 1 Learn about various financing options available Understand the financing options available for JV and...

BTR2 MC 4 Financing Growth 1: JV & M&A  Business Transformation 2 3  Strategic Finance: Financing Growth 1 Learning Outcomes 1 Learn about various financing options available Understand the financing options available for JV and 2 M&A Recognise the risk and the opportunities of leverage for 3 growth strategies Understand the capital raising implications of chosen 4 structure 5  Why is this relevant to me? Link to BTR2 Assessments Link to Real Life Strategic Finance is one of the key How many of you want to … elements of the Pitch: get better understanding about how to finance such structures as rubric 2 & 3 in the Pitch grading JV, Merger and/or Acquisition? rubric be able to advise what sources of Strategic Finance is a part of the Fair finance are the best option to poster: consider? rubric 2 & 3 in the Fair grading rubric learn about risks associated with Strategic Finance is a part of the different sources of financing? Knowledge Exam 6 Remember: we reason from the perspective of a publicly listed company only! So, your commissioner is listed! In questions about M&A, JV, SPV etc, remember this well! (so management does NOT own the company, but runs the company in name of the shareholders!)  (1) Specific Debt financing Examples (not to be tested in the Exam, only debt, equity and mezzanine): Loans: A loan is a type of debt financing where a company borrows a fixed amount of money from a lender, which must be repaid with interest over a specified period of time. Loans can be secured or unsecured, and can be used to finance a wide range of business activities Bonds: A bond is a type of debt financing where a company issues debt securities to investors in exchange for a fixed interest rate over a specified period of time. Bonds can be publicly traded or privately placed, and can be used to raise large amounts of capital for long-term investments Lines of credit: A line of credit is a type of debt financing where a company establishes a credit limit with a lender and can draw on the funds as needed. Interest is only charged on the amount borrowed, and lines of credit can be secured or unsecured Convertible bond: Convertible debt is a type of debt financing where the lender has the option to convert the debt into equity in the company at a later date. This can be an attractive option for investors who want to participate in the potential upside of the company, but also want the security of a fixed-income investment Lease financing: Lease financing is a type of debt financing where a company borrows money to purchase or lease assets, such as equipment or vehicles. The lender retains ownership of the assets until the loan is repaid, and the borrower pays interest on the loan over the term of the lease 9  Pros of debt financing structures Interest on debt is tax-deductible Debt financing does not dilute current shareholders Interest expense is fixed, so if company is successful, company does not have to pay the creditors extra; all the extra is for the shareholders. Cons of debt financing structures Debt financing requires regular payments despite of company’s performance Failure to pay interest and/or repay debt can lead to bankruptcy or financial distress Debt financing can result in restrictive covenants 10  (2) Equity financing Examples (not to be tested in the Exam, just know what equity is and why there are many types of equity): Common stock: Common stock is a type of equity financing where a company issues shares of stock to investors in exchange for ownership in the company. Investors who own common stock are entitled to vote on certain company matters and may receive dividends if the company earns a profit Preferred stock: Preferred stock is a type of equity financing where a company issues shares of stock to investors that have preferential rights to dividends and other distributions. Preferred stock may also have a fixed liquidation preference, meaning that in the event of a sale or liquidation of the company, preferred stockholders are entitled to receive their investment back before common stockholders Convertible equity: Convertible equity is a type of equity financing where investors receive equity in the company that can be converted into another form of equity or debt at a later date. This can be an attractive option for investors who want to participate in the potential upside of the company, but also want to protect their downside risk Stock options: Stock options are a type of equity financing where a company issues options to purchase shares of the company's stock to employees or other stakeholders. The options typically have a strike price, which is the price at which the stock can be purchased, and may have a vesting period, which is the amount of time an employee must work for the company before the options can be exercised 11  Pros of equity financing structures No regular payments are required, dividends are optional, and equity capital never has to be repaid. So, low risk. Equity financing does not require collateral or personal guarantees Cons of equity financing structures Equity financing dilutes current shareholders (if company issues new shares, the current shareholders have to share the spoils with the new shareholders..) Shareholders sometimes expect a quick return on their investment, which may require the company to prioritize short-term profits over long-term profitability Equity financing is more expensive than debt 12 Equity issue can be expensive due to high transaction costs and legal fees  (3) Mezzanine financing: Examples (not to be tested in the Exam): Convertible debt: Convertible debt is a hybrid financing structure that combines elements of debt and equity financing. It is a type of debt that can be converted into equity at a later date, typically when the company achieves certain milestones or raises additional capital. This provides the lender with the security of debt financing, while also allowing them to participate in the potential upside of the company through equity Preferred convertible stock: Preferred convertible stock is a hybrid financing structure that combines elements of preferred stock and convertible debt. It is a type of equity financing where investors receive preferred stock that can be converted into common stock at a later date. This allows investors to participate in the potential upside of the company, while also having preferential rights to dividends and other distributions Revenue-based financing: Revenue-based financing is a hybrid financing structure that combines elements of debt and equity financing. It is a type of financing where investors receive a percentage of a company's future revenue in exchange for an investment. This provides the investor with a regular stream of income, while also allowing them to participate in the potential growth of the company 13  Pros of mezzanine financing Hybrid financing is cheaper than pure equity Hybrid financing can provide more flexibility in terms of repayment and ownership structure Hybrid financing can be tailored to the specific needs of the company and project Cons of mezzanine financing Hybrid financing can be more complex than debt or equity financing alone Hybrid financing often comes at a higher costs due to transaction fees and legal expenses Hybrid financing can result in dilution of current shareholders Hybrid financing is more expensive than pure debt 14  Factors to consider when selecting financing - Specific terms and conditions - Company's creditworthiness - Investor's investment expectations - Balance between debt and - Interest rates equity - Amount of equity to be issued - Loan terms and conditions - Potential costs and complexity - Valuation of the company - Collateral requirements of the hybrid financing option - Degree of dilution current - Debt-to-equity ratio, ICR, etc. - The impact on the company's shareholders debt-to-equity ratio, ICR, etc. 15  Financial factors: o Fiscal factor o Economic factor o Capital market factor o Governance factor o Foreign exchange factor o Country/political factor o Reputational factor 16  A joint venture (not the same as a MERGER!) is a contractual agreement between two or more businesses to pool their resources and expertise to achieve a particular goal. They also share the risks and rewards of the enterprise (often, but not always 50-50). So, company A and company B, create a JV named company C, so there will be 3 companies! (with a merger, company A and B merge into a new company C, and A and B cease to exist!) Company 50% A JV JV C 50% Company B Company A MERGER New Company C Company B 18  Types and Advantages of JVs 19  Joint ventures examples Tata Starbucks Private Ltd HULU BMW Brilliance 20  Potential financial benefits of JV Access to new markets: JV can provide access to new markets and customers that the company may not have been able to reach on its own, which can increase revenue and profitability Shared resources: JVs can result in cost savings by sharing resources, such as facilities, equipment, and technology, which can improve operational efficiency and reduce costs Reduced risk: JVs can help to reduce risk by sharing financial 9the investment!) and operational responsibilities, which can help to spread the risk of a new venture across multiple parties Potential financial risks of JV Lack of control: The company has less control over the operations of the JV than it would over its own operations, which can lead to difficulties in managing the JV effectively Investment risk: While the company’s total investment may be less compared to the organic route, the fact that the JV is not in total control of the company means its invested capital (in the JV) might be at a higher risk compared to going it alone. Reputational risk; the JV partner (company B) might do something bad, and it 21 reflects badly on the company A  JV financing When structuring a new project or idea in the form of JV, the following financing could be used: capital contributions by JV partners in proportion to their ownership stake loans provided by JV partners external financing via banks or other lenders, bonds could be possible as well mezzanine financing Etc. 22 Mergers & Acquisitions 24 Mergers & Acquisitions Motivations for change Vertical acquisition Horizontal acquisition Diversification Growth Regulation New opportunities Threats Economies of scales New technology or process Tax purposes 25 Checklist for a new opportunity / option for M&A Identify Target Assessing chances of success Assessing future cash flows Value the target Discounted cash flows Legal compliance Relative pricing Integration 26  M&A: Mergers vs Acquisitions Key Differences Titles Mergers Acquisition Benefit #1: Mergers and acquisitions lead to a bigger market share Two or more individual One company takes over the Procedure companies agree to form a new resources and synergies and operates separate business entity. it under the acquiring company. It is an agreement by mutual Decision consent of the involved parties. Therefore, these types of An acquisition may not always be mutual, as it can happen without the Benefit #2: Mergers and acquisitions help transactions are generally considered friendly and target firm's consent, which could be deemed a hostile takeover. with talent recruitment planned. Benefit #3: Mergers and acquisitions The acquired entity operates under the same name as the acquiring Name The emerged entity operates under a new name. company. However, there are a few exceptions where the target expedite company goals company is allowed to keep its Ex: JP Morgan + Chase Bank original name. of America = JP Morgan Chase Ex: Tata Motors' acquisition of Land Rover and Jaguar led to acquiring Benefit #4: Mergers and acquisitions offer companies retaining their name The parties involved in an ideal The acquiring company during an economies of scale Comparative scenario tend to have similar acquisition is often larger and stature stature, size, and scale of financially stronger than the target operations. company. There is a dilution of power Power The parent company has complete between the involved companies. power over the target company. Merger: old shares cancelled, replaced by Shares Post integration, the new There are no new shares that are new shares of combined entity. company issues new shares. issued Acquisition: acquiring company’s shares When two or more companies The acquiring company is larger 27 Situation consider each other on equal than the target company and wants are not cancelled but those of the acquired terms, they usually merge. to increase its market share. company yes  Merger considerations Fiscal factor: depending on how the assets of the merging parties are valued, tax consequences might occur Capital market factor: a merger can be executed in different ways (an exchange of shares, or all cash or a mix); normally, financing need is often less compared to an acquisition, as the old shares are changed into new shares (so technically, no new equity capital is needed). Reputational factor: often deemed more friendly than an acquisition by the outside world, but makes running the combined entity a lot more complex 28  Mergers examples The Kraft Heinz company DSM – Firmenich DowDupont 29  Merger example - DowDupont Dow, Dupont to Merge, Split Into Three - Bing video 30  Acquisitions’ considerations Fiscal factor: an acquisition transaction itself might have fiscal consequences; tax credits, carry forwards, tax jurisdiction might change because of acquisition Capital market factor: big financing packages will be involved especially when the acquisition target will be bought at a premium price Foreign exchange factor: could have a significant impact especially when two companies are located in different countries with different currencies Reputational factor: acquiring a company can strengthen or weaken the reputation of the acquirer 31  Acquisitions examples Microsoft Ebay Google 32  Financial advantages of M&A Increased revenue Cost savings Improved profitability Increased market capitalisation Financial disadvantages of M&A Acquisition costs Integration costs Reduced liquidity: mergers can result in reduced liquidity for shareholders, as the shares of the merged company may be less liquid than those of the individual companies. Increased debt (if debt is being used to finance the deal) Loss of value: mergers and acquisitions can fail to generate the expected financial benefits, resulting in a loss of value for shareholders 33  M&A financing In the M&A deals the most common sources of finance are: exchanging stock debt financing bond issuance bank loan mezzanine financing cash IPO 34  Other considerations ✓Anti-trust law ✓Securities laws ✓Tax complications 35 Questions? 37  BTR2 Boosters – tips & tricks to accelerate success JV vs Mergers vs Acquisitions: underpin your choice Sources of financing: Size matters Different providers will require different returns Other consideration: What are the benefits and drawbacks of your choice? 38  Strategic Finance: Financing Growth 2 Quick Recap of Learning Outcomes 1 Learn about various financing options available Understand the financing options available for JV and 2 M&A Recognise the risk and the opportunities of leverage for 3 growth strategies Understand the capital raising implications of chosen 4 structure 39  Recap: Why is this relevant to me? Link to BTR2 Assessments Link to Real Life Strategic Finance is one of the key How many of you want to … elements of the Pitch: get better understanding about how to finance such structures as rubric 2 & 3 in the Pitch grading JV, Merger and/or Acquisition? rubric be able to advise what sources of Strategic Finance is a part of the Fair finance are the best option to poster: consider? rubric 2 & 3 in the Fair grading rubric learn about risks associated with Strategic Finance is a part of the different sources of financing? Knowledge Exam 40  Ensure you prepare for our next Workshop in WK14 1) Review all materials available on mhs with regards to financial options applicable for each growth path; 2) Based on the information discussed in the masterclass, prepare your advice to the Commissioner which financial option is the best fit for the chosen strategic growth option and path; 3) In your Pitch you need to explain which growth path you recommend and underpin why other two growth paths are less beneficial. Finance could be one of the factors to limit the Commissioner’s choice in identifying the right path to follow, discuss within your team what information could you use in underpinning your final recommendation. 41