All businesses strive to grow and expand. There are generally two ways a business can get bigger, either through internal growth or external expansion. Internal growth occurs through the regular growth trajectory of an entity, whether by use of new technology, an acquisition of assets, better supply chain management and/or new lines of products. This path often takes time for the company to yield results. The other way companies look to grow is by exploring the option of corporate restructuring. This can be achieved through different types of corporate actions such as mergers, takeovers or acquisitions. The external path way of growth is very popular among companies globally as it helps in crossing trade barriers and building capital across countries.
What Is a Merger or Acquisition?
A merger or acquisition is one of the most significant corporate events for a company, an action that becomes stamped in its history forever. In an atmosphere of increased competitiveness, this strategy is common for both small and large businesses.
The intention behind such a move or decision is unique to every business, but is based on the principle of creating more value (after combining) than the individual companies are worth individually. The additional value created by the merger or acquisition process is called synergy. Though it sounds simple, the whole process of a merger, takeover or acquisition to create synergy (financial benefit) is daunting. It involves large sums of money, paperwork, government regulations, legalities and accounting procedures. (For more, read What Makes an M&A Deal Work?)
How M&A Firms Run the Deal-Making Process
The merger or acquisition deal process can be intimidating and this is where the merger and acquisition firms step in. They will facilitate the process by guiding their clients (companies) through these transformative, multifaceted corporate decisions — for a fee.
The various types of merger and acquisition firms are discussed below. The role of each type of firm is to help successfully seal a deal for its clients, but they do differ in their approach and area of focus.
Investment banks perform a variety of specialized roles. They carry out transactions involving huge amounts of capital in areas such as underwriting. They act as a financial advisor (and/or broker) for institutional clients, sometimes playing the role of an intermediary.
Investment banks also facilitate corporate reorganizations, including mergers and acquisitions. The finance division of investment banks manages the merger and acquisition work, right from the negotiation stage until the deal closes. The work related to the legal and accounting issues is often outsourced to affiliate companies or enlisted experts.
The role of an investment bank in the process typically involves providing vital market intelligence and preparing a list of prospective targets. Once the client is sure of the targeted deal, an analysis of the current valuation is done to know the price expectations. All the documentation, management meetings, negotiation terms, and closing documents are handled by the representatives of the investment bank. In cases where the investment bank is handling the selling side, an auction process is conducted with several rounds of bids to determine the buyer.
Some of the major investment banks are Goldman Sachs (GS), Morgan Stanley (MS), JPMorgan Chase (JPM), BofA Securities (BAC), Barclays Investment Bank, Citigroup (C), Deutsche Bank (DB) and Credit Suisse Group (CS). (Also, see The Buy-Side of the M&A Process.)
Corporate law firms are popular among companies looking to expand externally through a merger or acquisition, especially companies that cross international borders. Such deals are more complex as they involve various laws governed by different jurisdictions, and require very specialized legal handling. The international law firms are best suited for this job with their expertise on multi-jurisdiction matters.
Some of the leading law firms engaging in mergers and acquisitions are Wachtell, Lipton, Rosen & Katz, Skadden, Arps, Slate, Meagher & Flom LLP (“Skadden”), Cravath, Swaine & Moore LLP, Sullivan & Cromwell LLP, Simpson Thacher & Bartlett LLP, Latham & Watkins, LLP and Davis Polk & Wardwell LLP.
Audit & Accounting Firms
These companies also handle merger and acquisitions deals with an obvious specialization in auditing, accounting, and taxation. These accounting firms are experts in evaluating assets, conducting audits and advising on tax considerations. In cases where a cross-border merger or acquisition is involved, the understanding of the tax implications becomes critical. In addition to audit and accounting specialties, these companies have other experts available to manage the other financial aspects of the deal as well.
Some of the well-known firms from this category with specialized services in mergers and acquisitions are: KPMG, Deloitte, PricewaterhouseCoopers (PwC) and Ernst & Young (EY). These companies together are often referred to as the "Big Four" accounting firms.
Consulting & Advisory Firms
The leading management consulting and advisory firms guide clients through all stages of a merger or acquisition process, whether they are cross-industry or cross-border deals. These firms have a team of experts who work towards the success of the deal right from the initial phase to the successful closure of the deal. The bigger companies in this business have a global footprint that helps in identifying suitable targets. The firms are tasked with working on the acquisition strategy followed by screening, due diligence, and advising on price valuations to make sure that the clients are not overpaying and so on.
The Bottom Line
Every year companies enter into inter-industry, cross-industry, and cross-border deals running into the trillions, though the success rate of such deals is under fifty percent. Huge sums of money are paid to companies for being a dealmaker or facilitator. The fee for these services is dependent on the size and worth of the companies involved in the merger and acquisition process. (For more, read How Mergers and Acquisitions Can Affect a Company)