Mergers and Acquisitions which can also be abbreviated as M&A, relates to the corporate strategy, company finance and management of buying, selling and combining of different firms which can assist, finance or help a developing company in a particular sector develop more without generating a need to create different business entity.
The history of M&A has evolved in five stages. The process of M&A is triggered by the economic factors such as growth in GDP, interest rates and monetary policies which brings the companies and organizations to emerge in the transactions of M&As.
The first stage is known as the first mergers wave which was commenced from 1897 to 1904. During this phase merger occurred between the companies who are in the line of productions of heavy manufacturing products like railroads, electricity, etc. All the mergers that happened during these phase are of horizontal type. The companies and organizations that are merged had enjoyed monopoly in the market because of their same kind of manufacturing business of heavy machineries and industrial goods.
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At the end of the first merger wave those companies that are involved in mergers and acquisitions have tasted bitter failures because of non achievement of desired efficiency. These failures were highly fuelled by the economic slowdown and stock market crash in 1903 and 1904 respectively. Those companies were further more retaliated by the legal frameworks, which are even not in their favour. The Supreme Court had passed a mandate stating the possibility of halting of the anticompetitive companies using the Sherman Act – an act which was passed in 1890 by the US government against the combination of companies who creates the potential harm to the competitive markets by their cartels and monopolies. (William L. Letwin, Congress and the Sherman Antitrust Law: 1887-1890, 23 U.Chi.L.Rev 221 (1956))
The second wave merger took place from 1916 to1929. During this period the mergers between oligopolies had taken place rather than monopolies. The economic boom after the World War I had given rise to these mergers. The technological advancement in railroads and transportations by motor vehicles had given a proper infrastructure to these mergers and acquisitions. The government encouraged the companies to work united and the policy was implemented in 1920s. The second mergers wave was mainly a horizontal or conglomerate type. Mergers happened during this phase were mainly between the companies producing petroleum, food products, metals, transportation equipments and chemicals. Investment banks had a vital role in facilitating mergers and acquisitions during this phase.
The end of second wave mergers happened due to sudden crash in stock market in 1929. The tax relief provided by the government helped mergers to start again in 1940s.
The third wave merger took place between 1965 and 1969 which was of conglomerate in nature. These mergers were inspired by the high interest rates, rise in stock markets and strict antitrust policies. The interesting fact about these mergers is, the bidder firms were smaller in size than the target firms. These mergers were financed from equities and investment banks have no more vital roles in those mergers.
The third wave mergers ended by the plan of the Attorney General to split the conglomerates in 1968 and also due to a poor performance by the conglomerates.
The fourth wave mergers took place between 1981 and 1989 which was a kind of acquisitions. These mergers were not big in size as compared to those in third wave mergers. Mergers were happened between the oil and gas companies, airline and banking companies and pharmaceuticals. This wave ended due to anti takeover laws, financial reforms and Gulf war.
The fifth wave mergers took place between 1992 and 2000. During this period mergers were inspired by globalization and rise in stock market. Mergers were financed by the equity and not by the debt. The motives of mergers have changed from short term to long term profits. This merger wave ended with the burst of stock market bubble.
To sum up, the process of mergers and acquisitions is coming from all the way long and has passed through lots of economic and geographic barriers. It is being developed by the various economic factors. Many other factors have contributed in its growth and as long as these economic units of production exist, M&A will continue to spread and develop.
As this paper is all about the financing of M&As, firstly, we must know about the ways in which the transactions of M&As are financed. You can finance an acquisition by borrowing money based on assets you own yourself or you can borrow money based on the business value and assets of the company you wish to purchase. Mergers are also frequently financed by stock swaps or by issuing new stock in your company to use as payment to the target company’s shareholders.( http://www.ehow.com/how_2119515_finance-buyout-merger.html)
“If a company takes on debt to make an acquisition and the deal goes sour, it runs into financial trouble and the executives are replaced. But if an equity-backed deal goes wrong, the stock price simply underperforms and nobody can be sure why. One thing is certain – unwise acquisitions abound in this market.” – Michael H. Lubaktin and Peter J. Lane
Acquisitions can be financed by cash purchase, an exchange of stocks of shares or a combination of both cash and shares. However, from all these stated mediums, cash is considered as a most preferred mode of financing. It has started taking pace during 1970s, when the percentage of takeovers grew from 20% in 1960s to over 50% during 1970s. (D. A. Blackmon, 1997. WorldCom’s massive bid shakes up little town. Wall Street Journal, October 13: Bl, B9; P. Elstrom, C. Yang, and S. Jackson, 1997. WorldCom + MCI: How it all adds up. Business Week, November 4: 44.)
Whenever a company decides it wants to merge or acquire another firm, they use the services provided by the professionals outside the company. It may include the Investment banks, accountants and valuation experts. There is variety of services provided by the Investment banks like helping to select the target, target valuation, advising on strategy and raising the required finance to complete the transaction.
We have seen the origin of Mergers and Acquisitions and even various ways of financing it. But in this paper we are going to talk more about the role of Investment banks in the entire procedure of M&A. So, before we move on further, let’s just see how these Investment banks came into existence. We will see their origin, a bit of services they offer and finally their extreme importance in the transaction of mergers and acquisitions.
In the true sense, Investment Banking is investing in the securities of the issuing companies, i.e. buying their shares and then to resale them to the general public. (Fleuriet, Michel, 2008, p.1). Investment banking is originated in 1792 outside the Wall Street and under a Buttonwood tree. This is the only known origin of investment bank by number of investment bankers. However, there is no exact report of truth of its origin. Anyways as nobody knows where Investment banking came from; let alone what it actually is.
There are various other services apart from reselling the securities that investment banks provide. But it is believed that most of them are much older than the Investment banks themselves. Let’s begin with the financial products the Investment banks offer. Investment banks deal with the underwriting and trading government bonds. They trade in international bond syndications. They develop new instruments of structured finance; one of them is mortgage-based securities.
The major functions of Investment banks are:
Advising on Corporate Mergers and Acquisitions.
In general terms Investment banks act as intermediaries between the sellers and the buyers of securities. Moreover, they do more than just that. “The scope of investment banking include all major capital market activities such as underwriting, private placement, M&A, venture capital, market making, proprietary trading, financial engineering, clearing and settlement, and financing and money management.” – K.T. Liaw, The Business of Investment Banking (New York: Wiley, 1999).
Apart from the rest of the duties of Investment banks, we are going to see more about its duties towards advisory on deals of Mergers and Acquisitions. Investment banks are nowadays having become more focused on taking the deals of M&As which are of logically planned to think deeply and apply thoughtful logic in the whole merger transaction. If an Investment bank is on the buy side of the transaction, it will spend lot of time to analyze the situation, strategic setting of the acquirer and of the target. It will help them to identify potential strategic aims for the transaction.
AIMS and OBJECTIVES:
The main aim of this paper is getting a legitimate understanding of the entire process of M&A as well as an extreme vital role of Investment banks in the entire process of M&As.
Moreover, by doing this research work, I would try to find out various strategies and methods that the Investment banks use according to the company’s situations. Furthermore, I would also try to find out the ways the Investment banks use their arbitragers in taking higher risks to get the maximum amount of profit out of the entire merger transactions.
There are several other objectives and questions that are needed to be answered that I would try to find and present my best possible outcome of the research in this paper.
In recent trend, the transaction of mergers and acquisition requires a strategic plan to create a successful merger. There are several ways that the companies involved are applying nowadays. Firstly, the acquirer company makes a tender offer which means, it makes a takeover bid in public like an open offer or an invitation to all the shareholders of the target company. It offers the stock for sale at a specific price during a stipulated time period. That offer may be for a minimum or maximum number of shares. And in this case the acquirer firm directly contact the shareholders through the medium of newspaper advertisements and the directors of the target firm may not have endorsed the proposal of the tender offer. The price which the acquirer firm offers to the target firm’s shareholders usually have included premium over the current market price of the target company’s shares. Acquirer firm does so to induce the shareholders to sell their maximum number of shares to them.
There is an extreme importance to study both the perspectives of the entire process of M&A. It means the process consists of both the buyer’s perspective and the seller’s perspective. Here, we are going to study these perspectives and try to conclude the outcomes of the entire research.
First of all we will see the transaction from the buyer’s point of view. How a buyer of the firm gathers all required materials, assemble the team, recruit the internal team to go on for further details, getting things done by the outside teams, etc.
Secondly, we will go for the seller’s perspective of the deal. What made the seller to sell his business, preparations made to close the bid, keeping in mind the needs of prospective buyer, gathering the decisions of the seller’s entire team, preparing financial terms, taking help from the outsiders, etc.
Moreover, we will also focus on the importance of the advisory teams which plays a vital role in closing the deals. They may be accountants, attorneys, investment banks or other financial institutions. As this paper is made to get insight on workings of the Investment banks as an advisor to both the parties in the deal, we will see more on the entire work done in the past by various Investment banks from all over the world. We will also take some examples of the Investment banks and their financial advisory terms and structures to get exact and insight knowledge of the Investment banks as an advisor.
Finally, we will conclude on the basis of ethics, the working of both sides of the merger deals and the ethics used by the Investment banks in its advisory role to the process of mergers and acquisitions.
Methodology and Data:
Research methods are the techniques for gathering data (Aldridge and Levine, 2001). It is a systematic and orderly approach for collecting and analyzing data and obtaining particular information from collected data (Jankowicz, 2000).
The research I am doing on is a topic that can be discussed a lot. Because of its increasing importance, the data regarding my research can be available in ample quantity from number of sources like journals, articles, magazines and some research papers, electronic search engines from college, World Wide Web, documentary data, Survey based data etc which helps to develop a good literature and synthesize and analyze primary data. Secondary data analysis provides higher quality data than could be obtained by collecting on your own (Stewart and Kamins, 1993). Re-analyzing secondary data can lead to unforeseen or unexpected new discoveries (Saunders et al, 2003). These available secondary data can give me that information that is at least a basic idea giving and can be my first approach to initiate my research work. Because of the day to day financial news is available in Financial News Papers, lot of information regarding investment banks are available from it. Along with that the internet is considered as the best source of getting information on almost every topic we wish to work on. So, my first move to start research would be secondary data available from above mentioned sources.
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Data collection through interviews has been the prime source of this research. An interview is a purposeful discussion between two or more people (Kahn and Cannell, 1957). It is a type of social interaction between a researcher and an interviewee, who serves as the potential source of information relevant to the research. The use of interviews helps the researcher to collect valid and reliable data that are significant so as to the research questions and objectives (Saunders et al, 2003). Bryman and Bell (2007) says that the research interview is an important data collection strategy in any type of research whether it is quantitative or qualitative.
The major merit of interview to be used as a data collection tool is that it focuses predominantly on the researcher’s topic along with being more insightful. The objective behind conducting interview is to collect relevant information required to the respondent’s knowledge in particular field (Merriam, 1994, pp. 86 &87).
Structure of the Study:
This study has been divided into five chapters: Chapter two describes empirical literature based on past studies conducted on single and panel countries and an overview of Investment bank’s working towards the finalizations of merger deals with description of recent trend and progress of M&A deals. Chapter three explains the methodology and data used in this study together with the description of variables. Chapter four states the analysis of the collected data and findings. Finally, chapter five provides the results and conclusion derived from the given study.
CHAPTER TWO: LITERATURE REVIEW
An acquisition is a transaction where one company buys shares of another company, by issuing its own new shares, cash, debt or a mixture of these forms of consideration. A merger transaction is where both parties agree to combine their business, and for this purpose form a new company that issues shares which replace the shares of both businesses (Reuvid, Jonathan, 2007).
Mergers and Acquisition activities have been circled from long time, which is based on various macro economic factors.
The overall economic state of the nation and abroad.
Stock prices of public listed companies.
Liquidity levels in the financial markets.
The level of pressure by antitrust on Mergers and Acquisitions.
The level of regulation in accurate checking of certain industries, such as airlines, telecommunication, banking and other financial services.
If the conglomerates or pure play companies are in favour of market experts and analysts.
There are so many differences in aspects of the number of companies bought and sold, as well as prices paid for these deals, as time has passed.
Firstly, we will see the examples of the merger transactions that had failed due to lack of proper preparations and over spending of money in transaction.
Here is the case of Conseco Finance, which was trading near its highest level at $50 per share in June 1998. The CEO of the company, Stephen Hilbert, and the public market were very confident about the company’s prospects. However, Hilbert announced the acquisition of Green Tree Financial, a subprime mortgage and consumer lending company, for a whopping $7.6 billion, that same month. The offered price was more than seven times the net worth of Green Tree, or a $6.6 billion premium to the tangible book value. Then the disaster had started to happen over the next two years. The stock price of the company dropped to $below $10 per share from $50 per share. The company was declared bankrupt in the spring 2003. Moreover, the analysts attributed the company’s long and painful downfall to its overpayment for the Green Tree assets and the subsequent adverse impact of that purchase on Conseco’s operations. This disaster not only resulted in loss of job to Hilbert, but also drove a very successful company out of business.
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