You often hear the word(s) M&A or mergers & acquisitions get thrown around.
It has something to do with Wall Street, Gordon Gekko and The Big Short, but it is hard to figure out what excactly it is.
And that is not surprising…
Because M&A is an umbrella term that can mean a lot of different things.
Today, we are here to help you understand what M&A is through the use of examples.
But before getting to that we want to show you that yes, this does have something to do with Wall Street and yes, there are huge amount of money within this industry.
Here are a couple of M&A examples of some of the biggest deals in recent years:
All these three deals are examples of Acquisitions and it is thus a fitting time to get into defining what M&A is.
And following that, we are going to show you how an M&A process works.
Here’s how to use this guide: Click one of the chapter links below to jump to your desired chapter. The definition of the types of deals can be used as a dictionary where as the latter part of the article can be used as a step-by-step guide.
- Chapter 1: The powerfull merger
- Chapter 2: In an acquisition, everything stays the same
- Chapter 3: Buying only the machines? That’s an asset acquisition
- Chapter 4: New name for a company? It was probably due to a consolidation
- Chapter 5: The high-octane levered buyout
- Chapter 6: Management takes control: Introducing the MBO
- Chapter 7: Public fighting over company control? That’s the tender offer
- Chapter 8: Remember when Facebook went public? That happened through an IPO
- Chapter 9: Goldman Sachs and JP Morgan? They are some of the most powerful Investment Banks
- Chapter 10: And what about BCG and Deloitte? Both are involved in M&A through being Advisory Firms
- Chapter 11: Winning a pitch: Introducing the beauty parade
- Chapter 12: The hard works begins. Writing the Information Memorandum and countless sleepless nights
- Chapter 13: The fun begins – the first offers (LOI) are received
- Chapter 14: Even more hard work – the due diligence phase
- Chapter 15: Almost at the finish line – receiving the final offer
- Chapter 16: Negotiations ahead! And afterwards, Signing the deal
Defining M&A: The devil is in the details
In the figure below we have summarized what M&A actually means, and below the diagram, we will dive into each topic in detail with examples given.
In a merger, two companies are combined to create one company.
Following the merger, one of the companies ceases to exist and becomes part of the acquiring company (i.e. it is merged into the company).
Normally, it is the smallest company that is merged into the largest company.
If one or both companies are listed, the Board of Directors will in advance have approved the new combination after which, the stock holders vote on it.
In 2006, Bell South merged into AT&T.
In an acquisition a company buys a majority or all shares in another company.
The company acquired does not change its legal name or structure – the only difference is, that it gets a new owner.
And in 2016, Microsoft acquired LinkedIn for $26 billion.
In an asset acquisition, one company acquires some or all the assets of another company.
Typically, the selling company is in liquidation with a liquidator trying to get as much value to the debtholders as possible.
As such, it can be compared to a clearance sale in a store. The items will usually sell at a discount and the sellers rarely get full value for their assets.
Asset acquisition example
An example as when Lehman Brothers went bankrupt as a number of assets were sold off to Barclays.
A consolidation is very similar to a merger.
The difference is, that in a consolidation a new company is created.
This is often seen in a merger where the companies are of similar sizes. Here none of the companies wants to “give up” its heritage and thus they often agree and a name that is a combination of the two former names.
As such, the merger between Exxon and Mobil represents a consolidation when they consolidated in 1998.
Leveraged Buyout (LBO)
A leveraged buyout (LBO) is very similar to an acquisition.
The main difference is that instead of another company being the purchaser, the purchaser is a private equity fund.
Further, a private equity fund will use a lot of leverage (debt) in the transaction – thus the term Leveraged Buyout.
Hint: If you want to know more about Private Equity you’re in luck. We wrote an article on the subject which you can find here.
Leveraged Buyout examples
Management Buyout (MBO)
A management buyout is yet another form of acquisition.
In this particular type of acquisition, the management of a company takes control of the company.
Management Buyout example
Curiously, the 2013 take private of Dell was a management buyout and a leveraged buyout at the same time. It is the most high-profile management buyout in recent times.
A tender offer does not necessarily lead to any M&A. And yet, it is a part of the M&A universe.
In a tender offer, a company or private equity firm offers to purchase the stocks in a company at a specific price.
The Board of Directors of the company will advise the shareholders on whether to accept or refuse the offer.
A tender offer can lead to both an acquisition and a merger.
Tender offer examples
Basically, every time a company is delisted as part of an acquisition, it will have happened on the back of a tender offer.
Initial Public Offering (IPO)
An initial public offering (IPO) is the first issuance of shares to the public.
Following a successful IPO, the company begins trading on stock exchanges such as Dow Jones and Nasdaq.
In 2003, Google went public… had you invested $10,000 in Google back then you would have $170,000 by now.
Most the largest companies in the world are publicly traded included Microsoft, Coca Cola and Apple.
An investment bank is closely related to the concept of M&A.
Investment bank advises its clients on all M&A activities presented above in this article.
Types of investment banks
One investment bank that is not with us anymore is Lehman Brothers. Its collapse triggered the worst part of the Global Financial Crisis in 2008.
An advisory firm is like an investment bank.
However, the advisory form will usually only advise on M&A deals and not be involved in stock market transactions.
Examples of advisory firms
Anatomy of a M&A deal
When you read about a M&A deal in the news, it seems like it is “just something you do”.
However, a M&A process is a very intense process.
In structuring a M&A process, there are typically 5-6 distinct phases spanning at least four months and a structured auction process will typically run for six months.
Below, we will shed light on what the investment banker and the selling company does, to ensure price is maximized.
Part 1: Choosing the advisor (beauty parade)
Description: Having decided to sell the company, a number of investment banks are invited to give their view on the company.
The presentation drafted by the investment bank will be 30-100+ pages. It will include their views on the unique qualities of the company, a valuation and potential buyers of the firm. Further, a proposed transaction structure will be given.
The two most widely used structures are presented below.
The fee the investment bank commands will usually be around 1% of the value of the company (enterprise value) for a USD 500 million firm.
The percentage goes up for lower value companies, and goes down for larger value companies. Usually there will be several percentages quoted by the investment bank.
Fee example: A firm is judged to be worth approx. USD 500m. The investment bank quotes a fee of 1% up to USD 500m, and a fee of 2% of the extra fee for any value above USD 500m. So if the company is sold for USD 600m, the investment bank would receive: 500*1% + (600-500)*2% = USD 7m for its services. In other words, the investment bank is highly incentivized to get a higher value for the company.
The investment bank will usually have a “no cure, no pay” fee structure, so if the deal falls through, it will not receive any money.
Duration & workload: Usually, an investment bank will be given a week to prepare the pitch to the company owners. While the owners can sit back and keep running their business, the investment bank usually drops everything in their hands and it is not unusual for junior members of the team to pull several all-nighters during the preparation of a pitch.
Part 2: Preparing documentation & distribution of IM
Description: During the second part of an auction process, the main documents which educate buyers about the company is prepared.
This includes a thorough business description in the form of an Confidential Information Memorandum (“CIM” or “IM”) as well as the preparation of vendor due diligence reports. The main documentation is listed below:
Duration & workload: The documentation puts a large strain on junior members of investment banks who are the main responsible for producing the IM, while the seniors reviews it.
The same mechanics are at play for the selling company. The strain on CFO’s, COO’s (and other top management below the CEO) is large as they will be responsible for digging out the information that is used in the IM and vendor due diligence reports.
The CEO of the company will, like the seniors in the investment bank, most likely be less hands on and more involved in reviewing and approving the documentation.
Part 3: Indicative bids (Letter of Intent) and Management Presentation
Description: The selling company and the investment banks receive the Letter of Intent from buyers and evaluate these. There can be anywhere between 0 and in extreme cases up to 30 bids for a company at this stage of the process.
If the company is highly sought after, there will usually be more buyers invited into the process, as this keeps pressure on buyers. Although the buyers are not supposed to know how many other buyers there are, they usually “sniff out” who their competitors are.
The investment bankers like to see at least four buyers progress to the management presentation, as some potential buyers usually leave the process later on without completing their due diligence and making a binding offer.
Duration & workload: Although it is tiresome to give up to 10 presentations with a duration of between 4-6 hours, this period is usually somewhat of a breathing space for the company and the investment bankers.
This is especially valuable for the company, who are in a high stress situation where they both need to run their business and run a sales process.
Part 4: Updated indicative bids and due diligence
Description: In this part of the process, all stones are turned. The buyers will hire lawyers, consultants and accountants to go through all documentation of the company to be acquired.
Previously, these “hired guns” entered a physical data room in the morning and left during the night. Now this is luckily handled through a virtual data room, where all documentation of the company will be uploaded.
In the documentation uploaded, there will usually be things blacklined, usually key customers and suppliers. This is especially true, if one of the potential buyers is a competitor. Many documents will also have no print and download access and can only be viewed on the screen.
Due to these limitations, the first couple of days of due diligence will usually consist of the potential buyers asking for download access and the seller either granting this or refuse to grant it.
Duration & workload: This part of the process is extremely intense for the selling company. For a company worth USD 500m, there will usually be between 200-400 questions asked (per buyer) in the Q&A.
These will be answered partly in sessions, either physically or over the phone, or through the virtual data room Q&A function. Some questions are relatively simple while other can take hours to answer.
If four potential buyers go “to the finish line” this implies that there will be between 800-1,600 questions to answer.
There will of course be overlap in questions asked amongst buyers, but usually, more than 50% of the questions asked will be unique for the given buyer.
It is not unusual for the sellers to “go dark” for a couple of days during due diligence. Severe fatigue will set in and sometimes, the CEO of a company will order the employees to take a day off to recuperate. Other times, people will simply not answer phone calls and emails for a day or two.
Part 5: Final offers and confirmatory due diligence
Description: The fun part! This is where all the really important persons gather and negotiate the deal. Depending on the number of potential buyers and the gap between the seller’s demands and the buyer’s wishes this can take anywhere between a day and 14 days.
Usually, it is not the price that will set the parties apart at this point (as this was agreed upon in the letter of intent), but instead the terms of the deal. The most common deal breaker is non-compete clauses.
Duration and workload: Negotiations can as stated take up to 14 days and confirmatory due diligence is usually done in less than a week. Confirmatory due diligence will usually focus on reviewing documents that were blacklined during the due diligence phase.
Part 6: Signing and announcing the deal
Description: Signing and announcement is where the deal will be official. Closing, is where the money and ownership is transferred.
Although ownership is not formal before closing, the money a company makes between signing and closing will usually go to the new owners of the company and mechanism will be in please to ensure this.
It is extremely rare for deals to break down between signing and closing. When it happens, it is almost always due to anti-trust issues where two companies are not allowed to merge.
Duration and workload: If there are no anti-trust matters to handle, signing, closing and announcement can be done in a day.
Usually, however, there will be some matters to be handled, with signing and closing often being 1-2 months apart. In cases with anti-trust matters, signing and closing will often be six months apart.
Limitations in this article
This segment on M&A deals / M&A auction processes is a high-level intro to the subject. There are many more documents prepared during the process and although there always is a time plan which is simple in principle, even the most well-prepared M&A deals has a tendency to not follow the time plan 100%.
Further, no two processes are the same and the professionality with which a process is run is often down to the selling company. If senior management has tried an M&A process before, the processes naturally tends to go smoother.
However, even in these circumstances something always goes wrong / surprises happen and thus, no two processes are ever the same.
Information memorandum: A detailed document describing the business, including its markets, financials and growth opportunities. The document should be readable without any oral presentation / guidance.
Letter of intent: Outlines the high level deal terms and serve as the agreement on which to move forward on. A letter of intent is non-binding.
Due diligence: Extremely thorough investigation of the business prior to making a final and binding offer for the company.
Management Presentation: Presentation of the selling company by the management of the company. Will almost always include at least the CEO and CFO, and often other C-level executives.
C-level executive: The highest ranking senior business leaders in a company, whose title start with “C” (meaning chief). Examples are CEO, CFO, COO, etc.