M&A

A Practical Guide to Doing the Deal

Jeffrey C. Hooke

• Publisher: Wiley
• Year: 2014
• ISBN:
  9781118817018
• Edition: 2
• Topic: Commerce
• Subtopic: Finances d'entreprise

The comprehensive M&A guide, updated to reflect the latest changes in the M&A environment
M&A, Second Edition provides a practical primer on mergers and acquisitions for a broad base of individuals numbering in the hundreds of thousands:

• Investment bankers involved with mergers and acquisitions (M&A).
• Equity analysts at hedge funds, risk arbitrage funds, pension funds, and banks, who invest in firms engaged in M&A.
• Private equity professionals at buyout funds, venture capital funds, and hedge funds, who routinely buy and sell companies.
• Corporate executives and business development professionals.
• Institutional loan officers working with M&A and buyout transactions.
• Business students at colleges and graduate business schools.
• Investor relations professionals at corporations and public relations firms.
• Lawyers who work with corporate clients on M&A-related legal, financial, and tax matters.
• Independent public accounting firms that review M&A accounting.
• Government regulators
• Sophisticated individual investors

Its comprehensive approach covers each step in the process, from finding an opportunity, to analyzing the potential, to closing the deal, with new coverage of private equity funds and international transactions. This updated second edition also includes information on emerging markets, natural resource valuation, hostile takeovers, special deals, and more, plus new examples and anecdotes taken from more current events. Additional illustrations and charts help readers quickly grasp the complex information, providing a complete reference easily accessible by anyone involved in M&A.

The mergers and acquisitions environment has changed in the thirteen years since M&A was initially published, creating a tremendous need for authoritative M&A guidance from a banker's perspective. This M&A update fills that need by providing the characteristic expert guidance in clear, concise language, complete with the most up-to-date information.

• Discover where M&A fits into different corporate growth strategies, and the unique merits it confers
• Delineate clear metrics for determining risk, valuation, and optimal size of potential acquisitions
• Gain deeper insight into the fundamentals of negotiation, due diligence, and structuring
• Understand the best time to sell, the best way to sell, and the process of the sale itself

In the past decade, the dollar value of M&A deals has jumped ten-fold, and the number of individuals involved has expanded considerably. More and more executives, analysts, and bankers need to get up-to-date on the mechanics of M&A, without wading through volume after volume of dense, legalistic jargon. Finally, M&A is back – providing a complete reference to the current state of the M&A environment.

Part One
The Big Picture

CHAPTER 1
The Global M&A Market: Current Status and Evolution

This chapter reviews the global merger and acquisition (M&A) market and traces its expansion. Transactions are segmented into several categories, with most deals being medium-sized, private transactions. There is no guarantee of success in acquisitions.

An Upward Trend, Interrupted by Booms and Busts

M&A activity over the past 20 years has shown a marked growth trend, interrupted by peaks and valleys related to financial booms and busts. Volume spiked during the Internet bubble (1998–1999) and the private equity boom (2006–2007), only to drop significantly and then recover. Announced deals in the United States in 2013 totaled $1.1 trillion in volume, encompassing over 15,000 transactions. Figure 1.1 shows the trend line.

Figure 1.1 M&A Activity, 1993–2013, by Value in the United States.

Data Source: Bloomberg and Reuters

As the figure shows, the M&A market is a cyclical business. Activity is tied to several variables:

• Stock market valuations
• Availability of debt financing
• Optimistic views on the economy

When equity values rise in the stock market, an acquirer can offer his inflated stock to a seller as currency for the transaction. Using high-priced stock in a deal makes the transaction’s mathematics more attractive for the buyer. Alternatively, if the seller doesn’t want the buyer’s stock, the buyer can complete an equity raise in the public (or private) markets, and provide the seller with the necessary cash. The end result is thus identical.

For buyers to complete deals that make sense for their shareholders, borrowed money usually is part of the financing package. M&A activity is thus dependent on lenders—such as banks, finance companies, and bond funds—being open for business and willing to sign-off on the aggressive assumptions that often drive transactions.

High-priced stock investors, liberal lenders, and motivated buyers are all reflective of positive views on the strength of the economy, and this optimism promotes deals. Once a recession hits and the psychology goes negative, transaction volume dries up.

M&A Activity by Geography

The United States and Canada represent a large share of M&A activity, and this continued to be the case in 2013. Typically, transactions are aggregated by four geographies. See Table 1.1.

Table 1.1 M&A Volume by Value, Year Ended December 31, 2013

Data Source: Bloomberg.

Region	%
United States and Canada	44
Western Europe	21
Japan/Australia	12
Emerging Markets	18
	100

The United States and Canada have about 22 percent of global gross domestic product (GDP), but they account for almost double that percentage in deal volume. Emerging markets, which are defined as countries having annual GDP per capita of US$9,000 or less, make up about 35 percent of global GDP, yet their percentage of deals is much lower. We discuss these disparities in the next chapter.

Deal Categories

M&A is segmented into four broad categories:

1. Horizontal
2. Vertical
3. Strategic/Diversification/Conglomerate
4. Private Equity

A horizontal deal is when a company acquires (a) a competitor, (b) a firm doing the same business in a different geography, or (c) an enterprise engaged in a product line that is similar to that of the buyer. Recent horizontal mergers include: (a) El Paso/Kinder Morgan, two U.S. pipeline companies, $36 billion value; (b) Amgen (U.S.)/Onyx (U.S.), two drug firms, $10 billion; and (c) Valeant Pharmaceuticals (Canada)/Bausch & Lomb (U.S.), two health-care product firms, $9 billion. Horizontal is the most popular deal category because it presents the buyer with the fewest operating risks. The buyer knows the target’s product line, suppliers, and customers, and it can institute cost saving measures with little disruption to the seller’s operations. Furthermore, in the case where the seller is a direct competitor, the acquirer has the added benefit of potentially raising prices with minimal customer resistance. Perhaps three quarters of all M&A deals fit the horizontal category.

A vertical transaction occurs when a company buys a supplier, distributor, or customer. A coal-burning electric utility that acquires a coal miner is one illustration. Most industries have drifted away from vertical integration, with exceptions being the big oil companies, like Exxon and Chevron. So, vertical deals tend to be quite rare. See Figure 1.2.

Figur...