The success of some of the largest companies and many smaller companies in the world is largely due to the benefits of mergers and acquisitions (M&A). The term “mergers and acquisitions” refers to the business strategy of acquiring or merging companies to achieve cost savings, expansion, improvement of capital structure and other goals. Unfortunately, the M&A field is also full of business mergers that have failed to thrive due to poor strategic planning, insufficient due diligence and other problems. M&A professionals can help avoid these pitfalls and ensure that the two companies join successfully. Read on to find out if a career in this ever-evolving industry is right for you.
Over US$190 billion
The largest acquisition occurred in 1999 between the British wireless company Vodafone AirTouch and the German wireless operator Mannesmann. This figure includes equity and debt assumed.
Why companies do mergers and acquisitions
M&A professionals need to be familiar with several types of transactions. The transaction may involve acquisition, that is, 100% acquisition of the target company. A merger is the merging of two companies into one entity.
Minority or non-controlling investments usually involve the purchase of less than 50% of the target company’s shares. Joint ventures and/or strategic alliances are cooperative efforts between two entities to unite and commit to joint initiatives.
The company makes mergers and acquisitions for a variety of reasons:
- Revenue synergies. The target company may provide opportunities for the acquired company to increase revenue by reaching out to new customers, innovative product development teams, or expanding geographic scope. Diversified product and service lines can also bring cross-selling opportunities. The company may also target another company for its proprietary technology or excellent R&D department.
- Cost synergy. By eliminating redundant roles through the newly merged entity, management hopes to reduce operating or capital expenditures. The financial, accounting, legal, procurement, and human resources from the two entities can be combined to save costs while allowing the newly combined entity to retain the best talent. In addition to streamlining initiatives, larger entities may receive larger discounts from their suppliers.
- Reduce capital risk. The company can be regarded as a cash flow that senior management can actively manage to reduce cash flow fluctuations. The market regards the reduction in volatility as a reduction in the risk of investment capital, and returns accordingly. Merging two or more companies and subsequently merging their cash flow may reduce the risk of the entire portfolio company.
- Higher valuation multiples. Compared with small companies, large companies usually have higher valuations. Generally speaking, larger companies are considered less risky because they have more resources and capital.
- Companies conduct mergers and acquisitions (M&A) for a variety of reasons, including increasing revenue, reducing capital risk, and reducing costs.
- The main participants in the M&A process include business development officers (BDO) who advocate and support the process, senior managers who formulate strategies and operational guidelines, and consultants who act as intermediaries and brokers.
- The tasks of M&A professionals are usually to find deals, analyze and evaluate deals, and manage post-merger integration.
- Although not required, most M&A professionals have advanced degrees, such as an MBA, and finance and/or accounting majors, such as CFA and CPA.
Key person; main force; important member
Within a company, the key participants in the M&A process include corporate business development professionals who act as internal M&A supporters in the strategic operating company (usually a large company). The mission of these business development officers or BDOs is to develop their companies through acquisitions.
Other members of the senior management team play an important role in providing strategic and operational guidance, including the chief executive officer, chief financial officer, and chief operating officer. Lawyers, risk management experts, accountants and other various transaction personnel provide support to help guide the success of the transaction.
As consultants to companies involved in mergers and acquisitions, professionals may work for investment banks, which act as intermediaries and help facilitate transactions. They can act as consultants to the buyer or seller of the proposed acquirer or target company, and they can also help finance the transaction. Private equity/acquisition companies raise funds from institutions and high-net-worth individuals for the acquisition and operation of the company. Most acquired companies are small, and all levels of the organization are usually involved in specific aspects of the transaction process.
A special purpose acquisition company (SPAC) is a public shell company that raises funds from the general public in the form of stocks and warrants. The raised funds are used to acquire the target company. Finally, various advisors may be involved in the transaction: legal and tax advisors, as well as valuation or appraisal companies that provide advisory services in specific areas.
The role of M&A professionals
As more and more companies seek to integrate or expand globally through mergers and acquisitions, opportunities for M&A professionals should continue to grow. Those who are interested in entering this field should travel frequently and often work long hours in a high-stress environment.
M&A professionals have various responsibilities to help create successful results before and after the transaction is completed. Those who work in this field must be very good at business strategy, finance, and interpersonal skills. Flexibility is the key, because professionals may face many transaction problems every day, and almost all anticipated transactions have unique features. They need to properly evaluate the proposed merger and ensure that the newly merged equity successfully provides value to shareholders.
The issues that M&A professionals need to solve include:
- How does a proposed merger between entities create shareholder value?
- Are the forward assumptions reasonable?
- What is the reasonable price paid for the target company?
- Is the potential return sufficient to compensate for the risk taken?
The mission of an M&A expert is to guide the transaction to success. Responsibilities may include:
- Purchase transactions. This involves correctly identifying and communicating with potentially relevant target companies based on established acquisition standards guided by management.
- Transaction filtering. Communication inevitably leads to most companies being classified as unsuitable for potential acquisitions. The pricing expectations may be unreasonable, or the direction of the target company may be inconsistent with the direction of the acquiring company. Great cultural differences can also hinder transactions. Transaction filtering is critical, because the completion of a transaction by two different companies may bring disaster to all parties involved. For example, the merger of AOL and Time Warner resulted in a significant drop in shareholder value.
- due diligence. The process of evaluating and confirming the financial and operational information communicated by the target company’s management involves conducting an operational and legal risk assessment of the company.
- Valuation and transaction structure. This stage involves performing a combination of valuation techniques, such as the discounted cash flow (DCF) method. M&A professionals also look at similar companies in the industry and evaluate comparable multiples. Transaction structuring involves the successful execution of negotiation points, such as employee contracts, securing transaction financing, pricing, and allocating ownership of contingent liabilities.
- Post-merger integration. In this final stage, management implements the integration plan authorized and approved by senior management to quickly and successfully realize the benefits of the transaction.
To engage in mergers and acquisitions requires proficiency in accounting, finance, law, strategy and business. Although it is not necessary to have an advanced degree, many M&A professionals have an MBA degree, while a law degree is rare. Certifications such as Chartered Financial Analyst (CFA) or Certified Public Accountant (CPA) are helpful for initial M&A roles.
Professionals must be familiar with business valuation and be able to understand and speak accounting language. By analyzing the company’s income statement, balance sheet, and cash flow statement, a thorough understanding of the company and the ability to identify its unique position in the market are key elements of this work. Talking to the management level is important for analyzing operations, drivers, and motivations. Understanding the cash flow generated by operations and being familiar with similar companies in the same industry will provide a certain basis for preliminary judgment of the value of a company.
Self-evident motivations can often drive transactions, as well as the ability to evaluate what is said and what is said no Said to be a key success factor. M&A professionals must also possess leadership skills and the ability to get along well with others. They are usually tested in a stressful environment, where the data points must be complete, relevant, accurate and timely. Meeting short deadlines is crucial, especially in the highly competitive acquisition market. Since months of communication have accumulated a lot of paperwork, the deal maker should prepare to summarize the information into a few pages for execution review. Strong negotiation skills enable M&A professionals to influence the process to move forward, while avoiding pitfalls that can lead to transaction termination.
There are many ways to become an M&A professional. Regardless of the field, success in business shows that an individual has the interpersonal skills, business and financial acumen, leadership qualities, and negotiation skills to succeed in an M&A. Equally important, the deal maker needs to be able to foresee the opportunities that the transaction will bring in a potentially long and complicated process.
The newly merged entity has a real opportunity to enhance its position in the market, enrich its stakeholders, employees and customers, and create value for shareholders. Although many transactions achieved their desired goals, many transactions ended with disappointing results. In the negotiation process, lack of foresight, inappropriate due diligence, or unreasonable expectations will reduce the chance of increasing revenue and achieving cost synergy. After the transaction is completed, conflicting corporate culture or dilute corporate identity will become a threat.
Fortunately, well-prepared M&A professionals can help the merged company successfully transform, avoid potential problems, and help ensure that all parties involved get a favorable outcome.