Mergers and Acquisitions The Essentials You Need to Know | John Colley | Skillshare

Mergers and Acquisitions The Essentials You Need to Know

John Colley, Digital Entrepreneurship jbdcolley.com

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12 Lessons (1h 13m)
    • 1. M&A Essentials Course Introduction

      2:18
    • 2. My Personal Overview of Mergers and Acquisitions

      8:52
    • 3. My Personal Overview of Mergers and Acquisitions Part 2

      9:59
    • 4. What Do We Mean By Mergers and Acquisitions

      2:48
    • 5. What Is The Difference Between A Merger And An Acquisition

      4:18
    • 6. Why Do Companies Merge?

      6:35
    • 7. Why Do Companies Make Acquisitions?

      6:44
    • 8. What Do We Mean By Synergies

      7:40
    • 9. Who Are The Advisory Players In The Market?

      6:54
    • 10. Financing An Acquisition

      4:18
    • 11. How Are Companies Valued in Mergers and Acquisitions?

      5:04
    • 12. The Mergers and Acquisitions Process

      7:23

About This Class

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If you are an entrepreneur, investment banker, MBA Student or accountant, then this course will help you to start to get to grips with the process of mergers and acquisitions.  And its always smart to have as much information as you can before you start dealing with investment bankers – I should know, I am one!

In this course you will discover: 

  • What is meant by Mergers and Acquisitions
  • The difference between a Merger and an Acquisition
  • Why companies merge
  • Why companies make Acquisitions
  • What we mean by Synergies
  • Who the Advisory Players are in the M&A market
  • How Acquisitions are financed
  • How companies are value in Mergers and Acquisitions
  • The Mergers and Acquisitions process

Let's start at the beginning - what do we mean by Mergers and Acquisitions?  I am going to set out a simple definition of the term, which is often used in common parlance, without an understanding of what it really means.

Mergers and Acquisitions are two terms that are not the same although often used inter-changeably.  The course explains the difference between the two.

There are a number of reasons given for mergers and there are also five different types of Merger from a strategy perspective.

If we understand Why companies make acquisitions we can begin to understand the rationale behind the deal process.  This is a great starting point before we start to explore the Mergers and Acquisitions Process.

Synergies in a Mergers and Acquisitions deal are the benefits arising from the business combination.  These can cover a wide range of business areas and this lecture explains where these areas lie and why synergies are not always all they are cracked up to be.

There are a number of Corporate Advisors in the Mergers and Acquisitions Market who play varying and sometimes overlapping roles in the M&A process. These are identified and their roles explained.

It is helpful to gain an initial insight into the financing of Merger and Acquisition deals.  As ever, in real life, financing of deals is a complex and drawn out process, but understanding the basics of where the money comes from is an important piece of the jigsaw puzzle.

Company valuation is a highly subjective matter and the cause of much discussion and argument in a Mergers and Acquisitions deal.  We explain the fundamental basis of valuation.

The transaction process can be complex.  This final lecture walks you through an overview of the Mergers and Acquisitions process.

Have I missed a topic you would like covered?

Have a question relating to the course?

Just reach out to me here and I will do my best to help!

Thanks for Enrolling!

Best regards

John

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Transcripts

1. M&A Essentials Course Introduction: Hello and welcome to this course on the essentials off mergers and acquisitions. My name is John Colley, and I'm delighted to be with you today. I can't teach you 30 years of experience in investment banking in mergers and acquisitions in 1 60 minute course. But what I can do and I'm really hoping to in this course, is to give you a structured overview off the whole emanate process. So at least you come away with an informed understanding of how it all works. Now, if you are in business, if you're in investment, banking, accountancy or even if you're an M B a student, this is going to be really helpful for you on. I really hope you're going to enjoy learning with me now in the 1st 2 videos in this course , I'm going to give you my personal overview off em in a on the sector. In the process based on my experience, so you'll find is quite wide ranging but hopefully informative on a lot more interesting than reading a textbook. Then I'm going to go through some of the key topics in detail on these Gonna cover really, what is meant by mergers and acquisitions. The difference between a merger andan acquisition because they're not the same why companies merge. Why companies make acquisitions critical topics as you. I'm sure you appreciate on what we mean by synergies Thief. Gosh, these air talked about so much, but they're much misunderstood as well. I'm gonna take a look at the key advisory players in the M and a market. If you want to come into the market, this may help you to make some career decisions. You're gonna be shown how acquisitions can be financed and how companies are valued during the M in a process which, of course, is critical on. Then Finally, I'm going to take you step by step through the M and a process itself. So I hope you enjoy this course as much as I did making it for you. And I really hope we're gonna come away with an informed understanding off, at least from a high level. How emanate works in real life. So welcome to the course again. Great to have you here. And I look forward to sharing my experience with you over the course off the following lynchers 2. My Personal Overview of Mergers and Acquisitions: having Bean, an investment banker for over 30 years. I want to give you my personal perspective on mergers and acquisitions. The big challenge is how on earth do you teach something like mergers and acquisitions? Because it is such a complex subject, a complex process. It's something which has not really ever bean, written down in a textbook on the simple answer is you can only really teach it from experience. So you want to know that the person who sharing their experience with you has actually bean there, done it, got the T shirt, as it were. It's all well and good, having spent a couple of years in an investment bank as an analyst, But then you're really a sort of voya off the process. You're not actually doing it. You're not the senior director running the process of making the decisions. There is no short cut to actually gaining this expertise. You do actually have to work on deals, and you have to to have that experience. But having done this for 30 years, I'm now in my mid fifties. I really love sharing this experience with you, and I also want to give you my perspective on what it's like to be involved in mergers and acquisitions. I suppose the starting point really is the business cycle. If you think that every business has a life cycle to it, the whole market is full of these companies, all of which have got their own life cycles. And essentially, it's about creating value. Entrepreneurs create businesses, and they create business because they want to build something and they want to make money. These businesses need to grow in order to grow. They need capital, and sometimes they need to make acquisitions on. Then, at the end of the day, they, the entrepreneurs, are going to need some form off exit. Whether it's partial, maybe it's an I P O and they sell some of their steak and still retain, uninterested or complete a complete exit. And they sell jump leads somebody else. But without that, they can't realize value for themselves. So you've got a system here where the entrepreneurs are busy creating businesses, but they need access to capital and ultimately they need to be able to extract captain. And that's really where mergers and acquisitions comes in. So if you start with a company life cycle. You've got a start up on the startup, invents a product and designs it and does all the R and D, And then it goes and finds a customer. Now, if one customer buys a product, that's not really prove it, lots of customers buys a product, then you've got a market. So the company is now growing. Now, in these early stages, they need access to capital is the capital has to be put in a very difficult to bootstrap, a company from absolute ground zero with no external capital whatsoever. Once the business is established, it's got a group of customers it needs to grow, and it needs to scale that business. And again, if you grow a business, then what happens before you actually get cash in is Actually, it sucks cash in because you have to buy materials, you have to pay people, and you have to do all this before you can sell a product or a service to get the money back. So it needs working capital now. At some point, it needs to consider how it's going to exit how it's good how the entrepreneurs, the shareholders are going to achieve an exit, and that could be through a sale and I po or buyout. And as part of the growth process they may need to make an acquisition. The company may merge with another company, so mergers and acquisitions have covers everything. But it also includes a company's sale because you can have a knack quiz Ishan. But the other side of an acquisition isn't is the sale side, and I'll come onto explaining that as well. So mergers and acquisitions includes company exits as well. I pose are different expertise. That's where you have to have a lot of detailed knowledge about the listing rules in your market, and you have to be able to go through all the process and the documentation of doing that. I've done listings in the London market, but not probably for about 20 years, but that is a different skill, and that's normally held handled the detailed working that is handled by a stockbroker rather than an investment banker. So what are the key steps as an advisor? Well, basically, you need to give the company's strategic advice. You need toe, get onboard on, understand what they're trying to achieve on, then be able to advise them from your experience off the market in the sector about what they want to do. Inevitably, they will want to raise capital at some station, and that might be through an I p o. But it's in the early stages. It's much more likely to be through private or institutional I private equity venture capital investors. The company may well wish or need to make acquisitions, so you'll have to help them on the buy side to find companies to buy and then organize all that and get the funding for it. And then, from a sales perspective, you have to help them to realize their investment. And that might be to a complete exit or by working with a stockbroker to achieve an I. P. O. Now let's look at some of the market players in the M and a ecosystem, and I'm not really gonna support focus here on the company's. Obviously, the companies are at the core of the ecosystem, but the from the advisory perspective, from the perspective of the M and A players who are making the process happen, you've got the investment banks who may or may not have an equity stockbroking function inside them. In the old days, thes thes two functions were separate, really from the late eighties onwards, which may seem like history to you, but it's not to me. Then these became very much more integrated. So you have the investment banks you have accounting in order to firms who really handle the financial due diligence and the accounting side off the deals. You have the lawyers who handle the legal do diligence on the documentation of the deals. And then you have the consulting firms who may or may not be involved. The larger the client company, the more likelihood they will be involved. They're very useful from a strategic point of view, from a Jew diligence point of view and also from an international point of view because they often they have international offices. If you're an investment banking and Baeza, you really need to have a sector focus. It's to wider market. Unless you're operating really at the tiny, tiny end to be a generalised these days, that's my firm view, so I concentrate on the tech sector. Eso you need to understand the sector who the players are, what the different sub sectors are how the state sector is structure and unorganized, what the trends are, what is driving the growth of the sector, what technologies and knew what regulations air coming in, Who were the major players, what is hot? What do people want to invest in? And then you need to have a very good grasp on how you value. Companies in the sector on different sectors have different metrics on different, sometimes different techniques because the way of valuing a property company is very different from valuing a tech startup. Let's look about the sector. Focus in a bit more detail. You need to understand the landscape in the business business, easier ecosystem. So who are the players in the market? You need to know who the market leaders are, you know, need to know which of the growth companies who are the disruptors and frankly, you know, you know who were the targets? Who are the companies that are going to be, um, able to be seen as acquisition targets for your clients? And, of course, you can put any company that's owned by a private equity firm, RBC firm. On that list, you need to know the ownership of companies. Public companies are very easy, but identifying private companies depending on which geographic market you're in US and UK relatively easy in some European markets, more difficult informations more tight, be held. You also need to know who are all the venture capital and private equity players in the market and which companies they own and when they bought them, and therefore, when they're likely to exit from them, then you need to have some understanding off the strategies off the companies in the market . Are they acquirers or consolidators? Are they growth companies, or are they target? And you need only to look at their recent history to see which of these groups they fall into. 3. My Personal Overview of Mergers and Acquisitions Part 2: If you're and advisor, you also need to have a good idea off the deal history in the sector. Who has done what in the past, and it's by watching who's doing what to whom, then you could start to identify possible opportunities from an advisory perspective. But it is a complex picture because there are companies who are raising money all the time . There are companies that are being started or their time. Their companies are making acquisitions all the time on their companies who are exiting all the time. And if the company goes from a private company to a public company through an I Po Well, now it's got paper which is publicly listed, that they can use for acquisitions. So they in a sense they've achieved an exit. But they metamorphosed into a type of company that they can get now. Go on and become an acquisition client. You need to understand who's funding the businesses because you need to know that the businesses are fungible. You also need to have a good national stroke international perspective because it's no longer good enough Just to understand what's going on in your market, you need to know which companies air coming in from overseas to enter your market. Or you need to have a perspective on the company's in your market who want to go overseas. And ideally, you help them with both as an advisor. What is the key question? Well, the key question is, why should they hire you? And you have the IBM issue stroke dilemma here because nobody ever got fired for buying from IBM. So there's a tendency for clients to rush to the big bulge bracket firms who may or may not take them on. But in a sense, if you're not in a very big firm, then you have to be able to car about your competitive position very clearly to demonstrate why they should be hiring you. So you need a track record. You need to have done deals. You need to be able to demonstrate your your expertise both in the M in a process but also in the sector, you need the ability to originate deals you need to be able to think and come up with good ideas about companies that could be acquired for your client. And of course, you need to be very clear about how you're going to be paid whether you take a retainer, whether you at work on a successfully, only whether you get paid for stages, whatever it is. But you need to be very clear what your terms and conditions of business par. So if you then take that position and say, Well, OK, I've got to identify potential clients. So I'm now the investment banking advice and I think about my own marketing for my own business, So I need to be able to identify the buyers. I need to have relationships and contacts with sellers. I need to know all the key financial investors in my sector. You need to know who is doing deals, who who has the money, which companies have got the money to do deals and critically, you need to build relationships with the decision makers. So let's talk about some off the outline skills. Then clearly you need to have a good understanding off the M in a process. Andi, you need to differentiate in that between the buy side on the south side. So if you're on the buy side, you're acting for a client who wants to make an acquisition If you're on the sell side, you're acting for a client who wants to sell his company on the other side. Off that acquisition, you need to be able to pitch. You need to go to go out on market and pitch yourself and persuade a client to hire you on dure. Need to have very clear terms of engagement for your client, and that's normally in the form of a detailed engagement letter, which can run to several pages and often several pages of additional appendices with boilerplate stuff on them. So you need to be able to present yourself on your terms. Conditions very clearly. Let's talk now about by side processes. It's such essentially I've now been hired by a client to make on acquisition for that client. So the first thing I need to do is to review the sector and identifying targets for that client. Those targets have to be available. It's all well and good having a paper exercise, identifying a long list of targets. But unless you actually know that that the board of that company up a pair contemplate a sale now, it's no good talking to them Now. If they're talking about a sale in two years time, and then you need to be able to make an approach on behalf of your client to see if they're prepared to have a discussion that leads logically enough to initial discussions between the parties, which had 1st may or may not involve your client on door the disclosure off their name. You may do that on a no names basis to start with your need to come to some view and then agreement on value on valuations are you you'll need as the adviser to value the company. And then you'll need to share that that view with your client on. Then we'll pitch that value as part of the acquisition price to the target company that leads, inevitably to negotiations. That leads to the table ing of a letter of intent, which sets out the key terms which are negotiated and then agreed Once that letter of intent is agreed. There's a phase of due diligence where you send in the lawyers and the accountants, the management consultants, anybody else you want to do on environmental health, HR whatever it is to go and check that everything is right, there are no skeletons hiding in the cupboard off the company you want to buy, and then finally, you get everything sorted out. You finalize the terms, you drop a, sell it and purchase contract, and then you agree that deal on the sell side. It's a slightly different process. That's the last part of it. Mirrors the first part, but from a sell side, you need to go and pitch to the client and persuade them that you are competent to handle the sale of their business. So you'll need to give them an idea from your perspective, off the evaluation and the key exit conditions that you think will suit their business. And you'll also want to know from them what their key exit conditions are. Do the management want to stay? Do they want to go? For instance, you'll need to identify the universe of potential acquirers, have an understanding off their strategy and the rationale. What you're looking for is theocrats ire. Who wants to pay a strategic premium for your client and therefore you achieve ah, high price on the exit. Then you otherwise would have done. You'll need to put together the data room. This is the data room that is used in the Jude Allegiance process. And it's quite a complex collection off business documentation, which will be overseen by accountants. But at the end of the day, you need you are ultimately responsible. Is the investment banking advice for make sure it's put together? Then you'll need to market the business you might do. This is a rifle shot only approaching one of two potential buyers. Or you might run a wide ranging auction and approach a whole wide range of potential buyers , maybe initially on a no names basis, maybe initially only with a one or two page teaser about the deal. But you will then need an information memorandum on the company as part of your marketing materials to then, once the the potential buyer has indicated interest, they've signed a letter of confidentiality, and then you provide them with the information memorandum, which is probably a 30 or 40 page book about the business, which helps them to form a view as to whether they want to make an offer. There'll be some negotiation and discussions, and then you receive an offer or offers. Ideally, those offers need to be negotiated and ultimately heads of terms agreed with one buyer. You may be negotiating several heads terms at the same time that you and then really only want to sign up with one that there needs to due diligence that needs to final documentation. Sela punches contract closing on the money changes hands. So that is the other side off the deal. As an advisor, as an investment banker in this process, whether you need a lot of skill, this is not something which is, you know, a on ethics kit. Construction. It is a very complex process, and it depends on a lot of experience. You need to have a network in relationships across your sector and across all the financial investors and probably into other investment banks as well. You need a track record, and you need to be able to demonstrate your integrity because confidentially ality and trust is so important. You need to be able to pitch your business and your abilities and sell yourself declines. You need to know how to market their businesses, two other potential buyers in the market. So you need marketing skills as well. You need to master and understand all the documentation involved. You may not right a lot of it, but you'll certainly want to be able to advise on whether the phrasing and the weight off paragraphs and content of detailed documents are right and are in your client's favor. This doesn't This is something which you can only really gain from experience. You then need to be well organized and be able to manage the deal process because that's your primary role is is Kate taking it all the way through? And that means following up on meetings, organizing agendas, making sure that action steps to take and making sure that the process follows the timetable that you set out on. Of course, you need negotiation skills because you are the lead negotiator for your client on Do you need to advise them on the best way to negotiate the deal and to get the deal closed? So that's my personal perspective on mergers and acquisitions. It's based on over 30 years of experience. I know this has been quite a long lecture, but I want to share that personal experience with you to give you the confidence that I have that detailed understanding off the mergers and acquisitions process, which I'm trying to share with you 4. What Do We Mean By Mergers and Acquisitions: What do we mean by the term mergers and acquisitions? The term is, in common parlance has bean for 20 or 30 years. And you hear people talking in the news, Andi in business about Emma and about mergers and acquisitions. But what does this term actually refer to? Essentially, what we're talking about is the combination off Cos. Or business assets. So when you put two of these two things together, you get either a merger or an acquisition. Now there are different types of transactions on. I don't wanna get too technical too quickly, But broadly speaking, you can have a merger where two companies are broadly speaking equal companies come together and combine. You can get an acquisition. Where one company takes over, takes control off another. You can have a consolidation. This is Mawr, where a company goes out and it starts to Hoover up lots of little companies. Andi. So it is consolidating a fragmented market so that it ends up with one major player that hopes to dominate that market. You can have a tender offer where a public company or private company will offer the for the shares off a public company and they'll make a tender offer to the shareholders sometimes if its hostile, bypassing the management off the target company on offer them cash or indeed, their own shares. In order to take control off and acquire the target company, you can have asset purchases, and this is where the assets off a company are acquired. But the company itself is not acquired on. There's an important difference here because if you acquire the assets, then all the liabilities can be left behind in the company. That is the target off the acquisition. But the businesses that actually comprise that company can be taken out on brought into another corporate vehicle. And then finally, we talk a lot about management, acquisitions or management buyouts where often backed by a financial investor, a group off senior management will go in and take control off another corporate entity. So those are the main types off deals that you find in M and A on. We're going to explore these in a lot more detail, so that's what we mean by mergers and acquisitions 5. What Is The Difference Between A Merger And An Acquisition: What is the difference between a merger andan acquisition? It's important to understand this, because thes terms are often uses if they are synonymous, as if they're actually mean the same thing. But strictly speaking, in deal terms, they are very different. A merger is when two companies, often of comparable size, joined forces to create a new joint business. Now, in theory, both are equal partners on. That's why thes combinations sometimes call a merger of equals. They often you'll see the jobs, the main jobs of the board being split relatively equally. So. If one company provides the chairman, the other company might provide the CEO sometimes their Joint CEO appointments. Although these air seldom successful, so it's genuinely a combination off to companies. The company's agreed to do the deal with one another. There's often a lot of negotiation about the terms of the deal, although there of comparable size, there will be a lot off jockeying to get the right split off Theo value. It's very rare that it's exactly 50 50. It might be 60 40 or 55 45 but there's normally one side that tries to get a Piven edge over the other on then both sets of shareholders have to give their approval to the combination off the deal when the deal is closed. The two businesses are then merged into a new corporate entity, and this is normally done by having a new coat the top, which then takes ownership off both businesses whose day to day operations Andi systems and everything can them be combined as they see fit. A good example of this is when Chrysler and Daimler Benz got together to form cries that time. A good example of this is when Chrysler and Diamond Ben's combined to put their businesses together. That was genuinely a merger Off equals now. Very often a deal is referred to us a merger rather than acquisition when actually it's an acquisition on. The main reason for doing that is to make the buying company that make the buying company be able to present the deal as a much more friendly deal to the target company, shareholders and management. So they actually suggested and put it forward in public as a merger, whereas in fact the buyer is acquiring and taking over the target. So what do we mean by an acquisition when an acquisition is exactly that, one company acquires another company now. Very often, this is a large company buying a smaller company. But when this happens, a new company does not emerge. The target company is subsumed into the buyer on this is often referred to as a takeover. On the way this works is that the buying company acquires a majority stake or very often up 100% in the target firm. Andi, the target company doesn't change its name or corporate structure anything but becomes a wholly owned subsidiary off the company that's made the acquisition. Now, how the operations are then dealt with from there is a matter for the business. But in legal terms, the target company has gone on Ghana underneath the corporate entity in the corporate ownership off the buying company. Now, an acquisition can be paid for in cash or in stock or a combination of both. Sometimes you Seymour elaborate arrangements. You see low notes, you get buyout to get all sorts of different details. But essentially the exchange is a cash or paper in return for the business and assets over the target company. So that's the difference between a merger and acquisition is important from the outset to understand that there is a difference and what the subtleties off that difference are. 6. Why Do Companies Merge?: That's not the question. Why do companies merge? We understand that a merger is a mutual agreement to combine to business entities on bay. Often that means that there's a new corporate entity created out of that combination. But why are they doing it? What is the rationale for companies wanting to merge? Will. Basically, there are some core reasons why they do this. First of all, it's the opportunity to expand into new products or new geographical markets. So by putting themselves together, one company may have a product the other company doesn't have. One company may be operating in a geographical market that the other company doesn't operate in. It's an opportunity to gain market share. So if there are two companies which are in the same market and they combined together, then their market share combined will increase. Andi. Just by combining, they may actually even grow faster than that. It's not choosing to eliminate duplicated costs. Aunt to take overlap out of the business on these are often referred to as synergies. So there's benefits to be gained just by putting 22 companies together and then eliminating the emblem. It's an opportunity to grow revenues and profits. The argument is that if you put these two businesses together, the rejuvenation of the business is with the extra energy and then the new ideas and the larger products and services offerings and all the rest that they can sell more products to the same customers and therefore grow revenues and profits. And ultimately, this is all about, of course, creating value for shareholders. And this is what it's always bean about. Now there are five main types off company mergers, and I want to take you through each one. In turn, they are conglomerate, con, generate, con, generic, market extension, horizontal and vertical said it's look at conglomerate first. Thies is where there are two completely unrelated businesses there in different industries in different geographical markets. On they aim to gain the problem together. You ain't again a product or market expansion now. This was a very popular strategy in the 19 seventies, when the Argument waas that expert management could run any sort of business and the MAWR businesses you gave to very highly performing management, the more value you would create because they were better than the other managers. By combining yours also lower the central overhead. But the argument is essentially about management expertise. This argument has Bean largely discredited in the last 20 or 30 years, but it waas the rationale behind the wave off mergers and takeovers in the sixties and early seventies. Con generic is essentially where two businesses operate in the same market, and they are basically selling complementary products on they want to extend their product range by combining this often involves overlapping technologies. It involves overlapping market marketing, production processes, R and D. Um, a product line from one business can be added to a second. So if you got a company selling washing machines and they buy a company that sells vacuum cleaners, then by combining the two you can sell washing machines and vacuum cleaners to the same customer. And by doing that, you can arguably growing revenues and sales, and you can also increase your market share. Market extension is all about two businesses which sell the same products, but they sell them in different markets on by combining. Then they increase the reach off their market. Very straightforward. Ah, horizontal deal is where businesses operating in the same operating the same industry sell the same products on. By putting them together side by side, they can lower costs and become more competitive. A lot of this happens in the banking sector, where you see large banks combining on their basically selling the same groups of business and services they haven't emanate department, have a bond department, have an equity department. They have a consumer products financial products department, and they combine them and they just going for economies of scale on market share. And it's a horizontal combination. Now a vertical combination is where component companies provide component parts or services within an industry, but at different levels in the supply chain. So think about the oil industry, so you may have an oil refining business, and then you may have annoyed oil sales or distribution business, so maybe they own four courts. Or maybe they're in a business that distributes Theo oil with the refined oil products from the refineries to the market. And if you combine those two, then they can offer that single offering. They could do the refining and the distribution to the customer base. This often provides opportunities for costs and operational synergies, and you take out the margin between the two businesses because the top business the refining business well, what want to sell its products, products and services to the distribution business with a product attach? If you combine them that product that profit gets removed from the centre Andi, they can arguably sell their business that their products more profitably at the other end to their end consumers. So vertical combinations are providing where companies provide similar products and services in the same industry, but at different levels in the supply chain. So those are the reasons behind company mergers. And if you are looking at a business deal, you can often look at it and then you can say, Oh, well, yes, it's that sort of deal because the rationale that is put forward for the deal makes it very often makes it very clear why the deal is taking place. 7. Why Do Companies Make Acquisitions?: Let's take a look at why companies make acquisitions. We've already understand that acquisitions happen when one company takes control of another . This is normally done by acquiring more than 50% off the shares of that company and won't go into complex shareholding structures where you can have different classes of shares and and all the rest of it. But essentially, it is the financial control off the equity of the target business that defines the takeover . This is normally seen with large companies acquiring small companies, and that's the standard model for an acquisition. But you can also have a situation where a smaller company buys a larger company, and that's often referred to as a reverse takeover. Thes most frequently happened when the small company is a public company on the large company is a private company, and this enables the larger private company to effectively go public to get its shares listed on the stock exchange without having to go through the full AIPO process. Now let's talk about some of the reasons why companies make acquisitions by combining the two entities become bigger and therefore you get economies of scale, so this enables cost reductions to be made across the combined business, although very often the costs are taken out off the acquired company on the structure off, the buyer changes very little. The deal can give the buyer increased market share. So if they acquire a competitors that has already got part of the market, and if they have 10% of the market, the acquirer the target has 5% of the market. They can end up with 15% of the market and maybe more. The synergy benefits often talked about as good reasons to do the deal. And this is a broad description off the cost savings across the business that can be gained as well as some of the growth benefits that you can get from combining products and services now very often in deals. These are talked up on very often. In practice. They failed to deliver them, so synergies need to be looked at with care and not taken for granted. An acquisition can give the buyer the opportunity to enter a particular market Now. This could be a new product or it could be a new geographical markets. It could be in the US it might be going from the West Coast to the East Coast, but also from going from the U. S to Europe. So market entry is a very good rationale for doing a deal. It's also an opportunity for a product or technology for I P or technical expertise to be acquired. Now you see this a lot in the big tech companies Google, Facebook, Microsoft, all these guys. They often they're acquiring small, disruptive tech companies on their buying them, either for their tech. For there are indie for their intellectual property and patents. Or, indeed, for the teams off expert engineers they have within their businesses. And indeed, on the West Coast, the the these big tech companies. They often find it easier to make an acquisition off a team off expert engineers, then to try to hire a team individuals into former team separately. Such is the scarcity off good talent in that particular market. So these are all reasons why companies make acquisitions. So what is the difference between to take over an acquisition? Would Essentially, they're the same thing, but a takeover does have hostile connotations to it, whereas an acquisition implies that there's more agreement that the target company has agreed to be acquired by the larger company. Very often, one talks about hostile deals and friendly deals. What does this mean? Well, ah, hostile deal is where the buyer has to persuade the shareholders of the target company to sell their stock, despite the fact that the management off the target company does not want to do the deal on . Do you see these particularly happening in public companies? Because very often the shareholders are separate from the management. The company's gone public. They've sold a lot of shares to the public on the management, have a very small stake on. Therefore, the buyer can go over the head off the management company to the shareholders and asked for a deal. If the management team control, the company will have more than 50% off the equity, and that can happen in public companies. But it's quite unusual very often after an initial AIPO, this can happen, but after amount of time, then the initial shareholders get diluted down or they sell. But if the management team control 50% then they're not under the risk or at threat off being taken over in a hostile deal because they just have to say no. So the deal has to be friendly. The buyer has to persuade them to sell their stock, so that's the difference. Trina Hostile and Friendly Deal in Hostile Deals There's a lot more management of regulation off the whole performance off the deal itself. Because of the hostility on the SEC. Manages this in us and the stock exchange in the takeover panel. Manage it in the UK, what is meant by accretive or dilutive? This is another term which is often associated with acquisitions. It's a secretive, dealer diluted deal. Will. An accretive deal increases the earnings per share off the buying company, whereas a diluted deal reduces thier earnings per share of the buying company. Now, bear in mind that creation or dilution can change over time and often if a deal is dilutive at the outset, the management will argue that it will become a creative over time as synergies air realized on extra growth and more sales are achieved. So these are some of the reasons behind acquisitions on. I hope it gives you some feeling for why companies want to make acquisitions 8. What Do We Mean By Synergies: What do you mean by synergies in Emerges and acquisitions deal. Essentially, synergies are a catchall term for the benefits that arise when you combine to corporate businesses. Now, sometimes these are ephemeral. Sometimes these are more imagined than riel. You get the directors off one or both sides, producing long documents and press releases, explaining the wonderful benefits off this business combination on why they're gonna be all these synergies and seven shareholder created about shareholder value created on what happens very little. So synergies are much criticised because they are very often not realized, but it is important to understand what they are and where they can arise from. So the question is, what are synergies? What does this term mean? Essentially, this two sides of it. There is the opportunity for revenue enhancement on there is the opportunity for cost savings, and either of these obviously has a beneficial impact on the profitability off the company . So the first way of looking at it in the most general sense is that synergies can be achieved because there is more growth. When you put two businesses together, you would expect the combination to provide more opportunities and for the companies to grow faster and further. They've got customer basis they can address. They've got products and services and technology and all these other things, so it should enable the company to grow faster. Their sales gained customers improved profit margins, etcetera. This is the broadest interpretation off synergies, but we can be more specific. Let's start with competition, and a acquisition or merger can preempt competitors from gaining the benefits off the same deal. So it strengthens the competitive position off the buyer or off the enlarged entity. Depending on whether you're talking about an acquisition or merger, the scarcity of targets in a hotly competitive sector can make this a really, really important factor. Because if there is a particular technology or an expertise in a team or something like this and you can secure those people in that technology for your business, then you're preventing a competitors from getting it on. Things like the Oculus rift, where a number of people could have bought that business on Facebook, jumped him with a baby check and bought it preemptively before it had really got going. And that was to capture the expertise in that business and stop other people getting it. Market leadership can be achieved or enhanced by a business combination on acquisition on If you have market leadership, then you can start to set the strategy for the sector you condone innate with your size and your scale on that can lead to all sorts of additional benefits. Of course, there are monopolies issues which are carefully regulated both in the U. S. And in Europe and obviously elsewhere in the world. But market leadership can be achieved, or a step towards it can be achieved through a combination tax benefits. Now, I'm not a tax expert. I'm certainly not giving tax advice. But one of the tricks that U. S companies have bean pulling, um up to now is to acquire an overseas company with in a lower tax jurisdiction. Because corporate taxation rates in the U. S. Were some of the highest in the world. Andi to shelter some of their U S domiciled earnings through various perfectly legitimate tax avoidance schemes. Um, through this combination now, President Trump recently, I think, at the end of 2017 slash U. S corporate tax rates, which means that this may no longer be a worthwhile strategy. Staff reductions is an obvious synergy. When you put two businesses together, there is going to be overlap in people, mostly in the central business functions such as marketing, sales, accounting HR, that sort of thing and that duplication. You only need one ahead of marks and you need one head of HR. That duplication can lead to a reduction in the payroll, and that's obviously a benefit. This office often extends to the main board as well. You don't need to CEOs in a merger, although sometimes you have one. Guys becomes chairman. The other guy becomes two year. We'll go becomes president or whatever or people go. And sometimes they get paid off very nicely for leaving the company, thank you very much. But these benefits in reduction off overlapping functions in terms of people can clearly lead to financial benefits. For the large business economies of scale is a very real benefit. If you can harness it, essentially, larger companies should be able to get better terms from their suppliers. They should be able to work to better margins. They should be able to price more effectively and take a stronger position in the market, and therefore they get benefits just from their scale, which should impact the bottom line. There's also benefits, which are slightly mawr subjective but nonetheless clearly identifiable through the acquisition off things like technology, off business process, expertise of intellectual property and patterns off skilled people, particularly technical engineers and the like. And this means that these benefits are more difficult to quantify sometimes. But clearly, if you are a growing tech company and you need a group off technicians who are experts in virtual reality, such as the team at Oculus rift that Facebook snapped up, then if you can't hire these guys in individually and build your own team than the one of the best ways is to make the acquisition and that is a clear synergy, you get the expertise you want very often, probably at a cheaper price in some respects, Although popular Swift came with a massive amount of technology than necessarily hiring people individually, its Oculus rift is much more of a tech in an I P deal than just a personal skills and expert technicians deal. But nonetheless you, I'm sure, can understand what I'm getting at market reach. Invisibility is another one. I mean, clearly, if the company becomes a market leader than Brand becomes better known on did, it makes it easier to find your customers. And so on the market that can lead as well to improve marketing distribution, as you might expect, they got more resources. They perhaps got more expertise in the marketing department, whatever this that can lead to new sales opportunities. And indeed, larger companies also benefit from access to capital because they're seen as less risky than smaller companies. Inherently so. Those are some of the synergies that can result from a business combination, a merger or an acquisition. You'll see that it's somewhat subjective subject. It's always interesting when you see a deal announced to look through and see what synergies they're claiming very often justifying on acquisition premium that's being paid. Teoh finance the deal 9. Who Are The Advisory Players In The Market?: Let's take a look now at who the advisory players are in the mergers and acquisitions market. There are a number of advisory firms who inhabit this space Andi, who have varying roles and responsibilities and, indeed, expertise on. Don't forget that in every deal there is a sell side on the buy side. So you get two sets of advisers on both sides, although they will have different goals. And you may not get both sets mirrored on the other side. I'll explain. The first and foremost player in this market is clearly the investment banks. They are the guys who are seen as the central player in the mergers and acquisitions market , not to decry the importance or value of the others. But the investment banks are the guys who are seem to be calling the shots most of the time because they have got the closest of relationships with the companies that are out there creating and doing the deals. Now their roles will be several, the first of which I am. But these were no particular order is underwriting the finance, and what this basically means is they give the buyer the certainty that the money will be available by basically saying, If we can't raise it, we'll provide it from our own resources. That's effectively what an underwriting means. Now you can lay off the risk with other players so the banks may not actually have to cough up the money personally. But the bottom line is the buyer needs to know he can pay the pay. The the target company needs to know that they're going to get paid if they agreed to this process. So there has to be certainty that the money is there, and if it's necessary to raise the money through a share issue or through a debt issue, then the banks will say yes, where we'll make sure we can do this and we guarantee it because we'll underwrite it. They also have a rollers financial advisor. They will basically be the guys steering the whole process, but particularly advising on the financing off the transaction. They may also be a broker, so if there's a share issue involved, or if there's an acquisition of shares than their equity teams will be out there handling the issue of new shares and the purchase off the existing shares off the target. They're advisory. Role is primarily going to be around deal structuring and pricing, although it does go further because they will run the whole investment process, which means that they will assist with the target identification. They will help the buyer come up with and agree the right valuation and the right price. Normally, buy writing a detailed and complex presentation document, which basically goes through the whole range of different valuation methods and comes up with a range valuing the target. And then you will think about the premium on top. They will put together all the documentation on run all the documentation from the initial issuing off confidentiality agreements and letters of intent all the way through to managing, but not necessarily writing the closing documents. They will manage the process so they'll be organizing the meetings, the timetable organizing the other players, the other advisers, the accountants and the lawyers. Particularly in the process. They'll organized meetings and they will run the meetings. They will sit there with the agenda and make sure the points are covered off and follow up the points. They will be instrumental in the negotiation of terms off the deals from their client's perspective, so they will lead. The negotiation is often easier to allow your advisor to lead the negotiation, and you is the principal. Sit back because you reserve your position and your advisor then can argue, but ultimately has to go back to get clearance from you on. Then they run and manage the closing documentation, although much of that is written by the lawyers. So let's talk about the lawyers. The law firms essentially advice on the legal documentation of the transaction, but this gives everything from a confidentiality agreement all the way through to the sale and purchase agreement. They'll also manage the legal due diligence, so they will review the target company's legal side. They will get to all their contracts all that their employment contracts for the contractors, suppliers with customers at all. They're Inc materials. All this sort of thing, their leases or checking the everything from a legal perspective is, um is correct that that crosses the highs have been dotted and the T's have been crossed. And of course, if it's a cross border deal, then you're talking about two sets of law. Two sets of different rules and regulations which have to be applied. And the big law firms obviously have got offices in both jurisdictions, so they have expertise in both sets off law, and they are able to give that advice. Or did an accounting firms basically look after the financial site? As the lawyers look after the legal side he ordered? And counting firms look after the the financial side, and they will be responsible for the financial and accounting due diligence on the target company. They will have a say on valuation. There's always a negotiation about working capital. For instance, they will look at taxation issues both in terms off the target company but also the structuring of the deal. And, of course, cross border issues make the whole matter off the finance more complex, particularly where tax is concerned. And they will have a say in that as well. The consulting and advisory firms. And we talk about management consulting firms here. They're the guys who are really leading strategy. If they have a role, they're not present in every case. But certainly the major major Corporates will listen and talk to consulting firms to get a view and get some input on their strategy, so they'll be giving strategy advice. They will be identifying and screening targets. They may well be running some off the business due diligence going into the company's and producing a huge do due diligence report on the business and the management. And they may have a say on valuation. So those are the main advisory players in this process. On around them, you know, sits the secret system, and in the middle sits the buyer on, Obviously, on the other side, you have the target, and the target will have its own a collection of advisers as well, and that's what the advisory players ecosystem looks like. 10. Financing An Acquisition: I want to touch on acquisition finance at this point so that you can understand the starting point for financing an acquisition. Clearly, mergers and acquisitions deals need to be financed, and this is often the roll off the advising investment bank who is advising the buyer. Their role is to put the acquisition finance in place, and they only get a fee for the advisory work. But they also get a fee for putting the finance together. And essentially, finance can be deals could be financed with equity or with debt or with combinations off the two on variations off the two. And this is where it can get quite complicated. But let's just try and keep it. Reads me simple at the moment and talk about the basics here. A deal can be financed with basically cash or with stock with paper with equity. And if it's done with cash, it can be from bank debt. And loans are obviously from the cash that's held already within the buying business. Of course, you can then combine a combination off debt and equity finance so that part of the acquisition cost is paid for with cash and part of it is paid for with equity debt. Financing can also be a combination off loans with different terms and very often, in order to get a big deal away. There will be different levels off different tranches off debt put together, which can be sold to different types of investors in order to put the whole package together on these are very often referred to a senior junior and mezzanine on. Basically, the senior debt has the lower coupon and has the highest. The those lows coupon Lois Risk on the highest call on the assets against which the debt the loans are being made. Junior debt is a below senior and has a high risk. It pays a higher coupon. Andi ranks below senior in the event of a liquidation, and then mezzanine is almost a sort of hybrid between debt and equity, where it has the lowest call on the assets. It has the highest risk, but as a consequence, it has the highest coupon and all these different risk profiles. And these different coupon payment profiles appeal to different types of investors. So where can you get your money from? Well, clearly you can get your assets the assets that buyer has to start with on DSO. They may have cash on the balance sheet already, or they may use their paper to make the acquisition. They can get it from their existing shareholders by issuing new shares to its their own shareholders for cash and then using that cash to make the acquisition. They can go to banks on, organize the banks to provide them with the money on. The banks, will then organize the package. This is the investment bank, and they'll do it in a combination off loans or whatever the combination off the financing package turns out to be. We've already alluded to some of the complexities of that on then. Thirdly, you can go to third party financial investors. Private equity occasionally venture capital who take a significant stake in the buying company in return for providing cash to make the deal. I'm happened, and these thes often referred to as a buyout deals. But again, I don't get too much company complex. He just think about the different sources of finance when you're trying to understand the basics of financing and acquisition. So that's a very quick overview. But as you start to get more into the hole issue of mergers and acquisitions. If you start to think about, well, where can the money come from? Then we're starting to advance the process of understanding how much is and acquisitions actually work. 11. How Are Companies Valued in Mergers and Acquisitions?: how are companies valued in mergers and acquisitions in a merger? Both sides are arguing that their company valuation is higher than the other in the deal on . The reason for that is basically, you're gonna put the two companies together, and they're arguing about the share of the pie. So they will want to argue that their evaluation to say, a $1,000,000,000 the other company's valuation is, say, half a $1,000,000,000. So they get 2/3 off the enlarged pie being twice the size in an acquisition. The buyer essentially wants to pay as little as possible, while the seller obviously wants to receive as high evaluation as possible. So what happens is that the buyer will come up with evaluation off the target and make an offer on very often. The target company, if they are prepared to engage in the discussion, will argue that they are being undervalued on that. The buyer needs to pay Mawr for them because the evaluation is hires. That's the essence of it. There are essentially two main approaches. There are other ways of doing it, but let's just focus on these two main approaches. The first is comparable transactions. On the second is discounted cash flow. Let's look at comparable transactions. Comparables ca NBI used in acquisitions by looking at other market based deals on then evaluating the metrics on which the total deal consideration was paid. So you're looking at a deal that's happened in the market being announced, and you'll be able to see probably the revenues of the company, the profits of the company, the earnings per share of the company. You'll understand the the enterprise value of the business. You'll know how much was paid. And so you've got the whole structure of the deal there. You'll want to know what the debt of the businesses. So you get an enterprise value, not inequity value on, then what you do is you apply metrics to those those values, such as price earnings ratio, which looks at the value off the business. It's as a multiple off the earnings per share. Once you've got this earnings per share ratio for a number of companies, then it's usual to put them into a basket and take averages for them. So you get a range of high low range. You can eliminate any stand out numbers because no company is exactly the same. So you do need more than one to make these comparisons. The enterprise to sales ratio is another metric. There are a whole range of them. But I'm just focusing on a couple on. This is basically saying, What is the value off the business as a multiple off sales? This is quite useful. If the business is a very early stage business and it hasn't yet started making any profits in discounted cash flow, this is a more complex process. But essentially what you're saying is we're going to value the target business as a on the basis of evaluation today, which is represented by the future cash flows that we believe this business will earn in the coming years, including a terminal valuation of the end on. We're gonna use the weighted average cost of capital for that business as a discount factor to bring those future cash flows back to the present day. So you estimate the value on the basis of the future cash flows. The future cash flows for each year are discounted to the present on, then added up, and the because you can't continue this ad infinitum you do it for five or 10 years on, then at the end of that period you have a terminal value, which you also discount to the present, and you end up with a discounted cash flow valuation off the target company. Of course, on top of this, then there's the argument about acquisition premium. This is the pre MIA that you have to pay in addition to the value to justify to the selling shareholders that they should sell for the shares. Because if you're only going to pay the value of the company as it is today, what incentive do the target shareholders have to sell their shares with? The answer is very little, So you need to pay a premium. In addition to the company's enterprise value, as you calculated on this represents things like a share of the synergies. An excellent payment. Teoh Target shareholders who forgo future values in the increase of the company. Andi, By doing this, you're giving them an incentive to sell their shares. So that is a an initial look at how valuation fits into mergers and acquisitions, and how companies and their advisers go about valuing that the targets that they want to buy 12. The Mergers and Acquisitions Process: I'd like to walk you through now a typical mergers and acquisitions process. Now there are variations between private deals and public deals, but essentially the flow off what happens is the same. It's the technicalities that very so let's start at the beginning and a board has decided it wants to make an acquisition. Or, indeed, it wants to merge with another company, four strategic regions, which we can understand because we've looked at why companies want to acquire why companies want to merge. So the first thing they're going to do is to evaluate the opportunities. And this means they look at the other companies in their market and they evaluate them against the strategy that they want to follow. And they identify targets, and then they decide on a target they'll probably inside on two or three targets and explore their simultaneously. If it's a public company that they're going after in there public company, it's likely that they'll try to require a small number of shares in the open market before they have to declare. Now in the US, they can acquire up to 5% off the shares before they have to file with the SEC and make a declaration. Onda. There are also rules in the UK market about this sort of stake building to stop people basically being snuck up on. I think the level is about 3% in the UK, where you have to disclose a sizable holding on did, indeed, the company, if it gets wind the target company. If it gets wind that somebody is building a stake in it shares, it has the ability Teoh approach them and ask them to disclose that state publicly. So when they get to that that point they built a 5% stake, Let us say on. They then have to declare their shareholding publicly on explain their intent where they're going by the company or hold the investment. Clearly, if it's a private deal, there is no pre stake building, but they will then make an approach to the target company. Now, during this process, the buyer, the company that wants to make the acquisition or the merger, will work with their financial advisors. They're going to evaluate the value of the company. They're going to decide on a price they want to offer, that they're willing to pay for this business, and they will then with their advisors, make an approach to the target company. Now this is sometimes done by the advisers. This is sometimes done by personal connections, but in an Emmett event, there has to be a discussion initialized between the two Andi. If it's a public offer, then the buying company will make a public tender offer through the business press to the shareholders for their stock on. That may or may not involve a discussion and a meeting with the Target Company board, depending on the the hostility or the friendliness of the deal. In a private deal, typically, a letter of intent is delivered, which sets out the proposed terms of the deal on There are aspects of this letter of intent , which are binding a few of them. Most of them are nonbinding. A subject took the sale and purchase contract. They'll also be subject to due diligence, which is when the buying company goes in and checks all the legal and accounting and all the detail of everything in the target company to make sure there are no skeletons in the cupboard. And then, of course, the letter of intent is subject to negotiation. The buying company does not have to accept it. And then, of course, if it's a private deal, then there is a matter off the confidentiality and keeping the deal private between the two parties. The target company will then respond to the approach. And, of course, they could just accept the offer that clearly seldom happens. What is much more likely is that they allow the rejected all they will want to negotiate the terms, the price, the form of consideration, the timing etcetera. So they'll want to have a negotiation and discussion and try to improve the deal. From their point of view, they may not like the buyer at all, and they may therefore seek or turns of offers from other buyers. This is particularly the case if it's a public company, when the company's then essentially seem to be put in play on this scene publicly as a takeover target, and all sorts of speculation arises on the management of either go to come up with a very resolute reason why they're turning it away or they've got to go and find a better deal from somebody else. And of course, this can also include approaching private equity buyers to basically take over the business is instead off the buyer who is making the approach. If the deal is large enough, then there are going to be regulatory implications. There are going to be authorities as well as the SEC and the stock exchange, who are we're going to get involved. This is particularly true in terms off monopolies or in terms of regular, regulated companies where the regulator will step in and have a say in on the terms of the deal. So if you get very large companies and you are going to get regulatory interference and process involved in the whole deal, and of course if you doing of a big deal in Europe, you're also going to get the you having to approve it as well. So there are a whole series of hurdles and sometimes these deals were announced and they can take over a year to close. But when you get to closing the deal, you got a situation where both sides are agreed. You've got all the due diligence completed. You've got the documentation, the seller purchase and all the other agreements arranged. I mean, I've done lots of these deals, and you go into the closing meeting and you literally have a large table full of piles of documents on. The lawyers normally run this meeting, and they will tell everybody who has to sign what. But it is a complex arrangement, and basically, things have to be done in the right order. And if it's a public deal that you've gotta get everything done before the markets open so that you can announce the deal soon as the markets open. Which is not about getting the announcement in about seven o'clock in the morning, which inevitably means you're working all night to get this thing done. So you get the deal signed and agreed. The consideration is paid to selling shareholders in a private deal. That's literally a bank transfer is authorized, and it goes into the account off the people who are in the business. Or, indeed, if it's a public offer, it's a question of getting They hold broking process off people, sending in their share certificates with acceptance forms and getting cash back. And of course, you can have a cash paid for the sock or you can receive MAWR shareholder paper you know, says chassis to figures in the new entity or the buying company in in consideration for your stock in the target company. So that is a quick run through the mergers and acquisitions process is literally an outline because there's so much detail that one can go into and I will go into in later videos.