Some of the world's largest companies and many smaller ones owe much of their success to the benefits derived from mergers & acquisitions (M&A). The phrase "mergers & acquisitions" refers to a business strategy of purchasing or combining companies to achieve cost savings, expansion, an improved capital structure, and other goals. Unfortunately, the mergers and acquisitions landscape is also littered with corporate combinations that fail to thrive due to poor strategic planning, inadequate 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 growing industry may be right for you.
More than $190 billion
The amount of the largest merger and acquisition, which occurred in 1999 between British wireless company Vodafone AirTouch and German's wireless carrier Mannesmann. This figure includes equity and assumed debt.
Why Companies Engage in M&A
M&A professionals need to be familiar with several types of transactions. A deal can involve an acquisition, which is a 100% purchase of a target company. A merger is a combination of two companies into a single entity.
A minority or non-control investment typically involves the purchase of less than 50% of a target company, and a joint venture and/or strategic alliance is a collaborated effort between two entities to join together and work on a common initiative.
Companies engage in mergers and acquisitions for a variety of reasons:
- Revenue synergies. A target company may offer opportunities for an acquiring company to increase its revenue through access to new customers, an innovative product development team, or expanded geographic reach. Diversified product and service lines can also lead to cross-selling opportunities. Companies may also target another company to acquire their proprietary technology or superior R&D department.
- Cost synergies. By eliminating redundant roles through the newly combined entity, management hopes to reduce operating or capital expenditures. Finance, accounting, legal, procurement, and human resources from two entities can be combined to achieve cost savings while allowing the newly combined entity to retain the best talent. In addition to streamlining initiatives, a larger entity may enjoy more significant discounts from its suppliers.
- Capital risk reduction. Companies can be seen as cash flow streams that senior executives can proactively manage to reduce the volatility of that cash flow. The market sees a reduction in volatility as a reduction in investment-capital risk, and rewards accordingly. Combining two or more companies and, subsequently, their cash flow streams may reduce the risk of the overall portfolio company.
- Higher valuation multiples. Larger companies are often valued at higher multiples than smaller companies. Generally speaking, larger companies are perceived as less risky because of greater resources and access to capital.
- Companies pursue mergers and acquisitions (M&A) for many reasons, including increasing revenues, reducing capital risks, and reducing costs.
- Key players within the mergers and acquisitions process include business development officers (BDO) who advocate for and champion the process, senior management who develop strategies and operational guidelines, and consultants who serve as intermediaries and brokers.
- M&A professionals are often tasked with sourcing the transaction, analyzing and appraising the deal, and managing post-merger integration.
- Although not required, most M&A professionals hold advanced degrees, such as MBAs, and financial and/or accounting designations, such as CFA and CPA.
Within a company, key players in the M&A process include corporate business development professionals, who serve as in-house mergers and acquisitions champions within a strategic operating company, often with a large corporation. These business development officers, or BDOs, are tasked with growing 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. Various transaction personnel, such as lawyers, risk management professionals, and accountants provide support to help guide a deal toward a successful conclusion.
As consultants to companies involved in mergers and acquisitions, professionals may work for investment banks, which act as intermediaries and help to broker a deal. They can serve as either a buy-side or sell-side advisor to a proposed acquirer or target company and may also help in financing a deal. Private equity/buyout firms raise capital from institutions and high-net-worth individuals for buying and running companies. Most buyout firms are small, and all levels of the organization are typically involved in specific aspects of the deal-making process.
Special purpose acquisition companies (SPACs) are public shells that raise money in the form of stocks and warrants from the general investing public. The monies raised are used to acquire a target company. Finally, a variety of advisors can be involved in a transaction: legal and tax advisors and valuation or appraisal firms offer consulting services in specific areas.
The Role of the M&A Professional
As more companies seek to consolidate or globally expand through mergers and acquisitions, the opportunities for M&A professionals should continue to grow. Those interested in entering this field should expect to travel frequently and often work long hours in a high-stress environment.
M&A professionals are charged with a variety of responsibilities to help create successful outcomes, both before the deal closes and afterward. Those investigating a career in this field must be highly adept in business strategy, finance, and interpersonal skills. Flexibility is key, since professionals are likely to face numerous transactional issues daily, and virtually all contemplated deals have unique features. They need to properly assess a proposed combination and ensure that the newly combined equity succeeds in providing shareholder value.
Questions an M&A professional will need to address include:
- How can a proposed combination between entities create shareholder value?
- Are go-forward assumptions reasonable?
- What is a fair price to pay for the target company?
- Do the potential rewards adequately compensate for risks undertaken?
An M&A professional's mission is to guide a transaction toward a successful conclusion. Duties may include:
- Sourcing the transaction. This involves properly identifying and communicating with potentially relevant target companies based on defined acquisition criteria directed by management.
- Deal filtering. Exchange of communication inevitably leads most companies to become classified as not feasible for a potential acquisition. Pricing expectations may be unreasonable, or the target's direction may not be aligned with the acquiring company's. A substantial difference in culture can also thwart a deal. Deal filtering is critical as a completed deal of two divergent companies can lead to disaster for all parties involved. For example, the merger of AOL and Time Warner resulted in a significant loss of value for shareholders.
- Due diligence. The process of evaluating and confirming financial and operational information, as conveyed by the target company's management, involves conducting operational and legal risk assessments of a company.
- Valuation and deal structuring. This stage involves performing a combination of appraisal techniques, such as the discounted cash flow (DCF) method. M&A professionals also look at similar companies within the industry and assess comparable multiples. Deal structuring involves the successful execution of negotiation points, such as employee contracts, securing financing for a deal, pricing, and assigning ownership of contingent liabilities.
- Post-merger integration. In this final phase, management executes an integration plan mandated and approved by senior executives to successfully realize the benefits of the transaction promptly.
Practicing mergers and acquisitions requires a strong proficiency in accounting, finance, law, strategy, and business. While it is not necessary to have an advanced degree, many M&A professionals have MBAs, and less frequently, law degrees. Certifications, such as a Chartered Financial Analyst (CFA) or Certified Public Accountant (CPA), can help in landing an initial M&A role.
Professionals must be familiar with business valuations and able to understand, as well as speak, the language of accounting. Thorough understanding of a company and the ability to discern its distinct position in the marketplace through the analysis of its income statement, balance sheet, and cash flow statement are key elements of the job. Interviews with management are important to analyze operations, drivers, and motivations. Understanding cash flow from operations and being familiar with similar companies within the same industry will provide some basis for a preliminary judgment of a company's value.
Unspoken motives can often drive a deal, and the ability to evaluate what is said and what is not said is a key success factor. M&A professionals must also have leadership skills and the ability to get along well with others. They are often tested in highly stressful environments, where data points must be complete, relevant, accurate, and timely. Meeting short deadlines is critical, especially in a competitive buyout market. With a flood of paperwork accumulated from months of communication, dealmakers should be prepared to summarize information into a few pages for executive review. Strong negotiation skills allow M&A professionals to influence the process to move forward while avoiding the pitfalls that could lead to deal termination.
Proven Track Record
There are multiple paths to becoming an M&A professional. Demonstrated success in business, no matter the field, shows that an individual has the interpersonal skills, business and financial acumen, leadership traits, and negotiating ability to succeed in M&A. Just as important, dealmakers need to be able to envision the opportunities a deal presents during what is likely to be a lengthy and complex process.
The Bottom Line
A newly combined entity has a real opportunity to elevate its station in the marketplace, enrich its stakeholders, employees, and customers and provide shareholder value. Although many transactions accomplish their intended goals, a good number end with disappointing results. During the negotiation process, a lack of foresight, improper due diligence, or unreasonable expectations can reduce the chances to enhance revenue and realize cost synergies. After a deal closes, clashing corporate cultures or diluted corporate identities loom as a threat.
Luckily, properly prepared M&A professionals can help merging companies to transition successfully, avoiding potential problems and helping to ensure a beneficial outcome for all parties involved.