What is Mergers and Acquisitions (M&A)?
Investopedia defines mergers and acquisitions (M&A) as the following:
“A general term that refers to the consolidation of companies or assets through various types of financial transactions.”
Obviously, this is a very broad definition of what M&A is and the services involved in it. This encompasses several different forms of transactions, including:
- Mergers - two companies agree to merge, with the acquired business ceasing to exist and becoming part of the purchasing firm.
- Acquisitions - where a buyer acquires a majority stake in a firm, which doesn’t change its name or legal structure.
- Consolidations - the creation of a new company from an agreement between two existing businesses, with each side receiving equity shares in the new company.
- Tender Offers - where one company agrees to purchase the outstanding stock of the other firm at a specific price.
- Acquisitions of Assets - one company acquires the assets of another business, typically occurring during bankruptcy proceedings.
- Management Acquisitions - where the executives of a company purchase a majority share of the stock in another business, making it privately-owned in the process.
We delve deeper into the different kinds of mergers and acquisitions later on, but you can already see that M&A covers a notable range of activities. Knowing which one is appropriate for your situation, and then how to navigate the process associated with that specific type of transaction, requires specialist expertise.
Speaking to an experienced M&A advisory firm prepares you to navigate M&A activity with greater composure, and gives you backing of a valuable support network throughout this. Alternatively, you can learn more about the different forms of M&A by attending our complimentary executive conference.
What is an M&A Advisory Firm?
The goal of an M&A advisory firm is to guide its clients through the process of exiting their company in the most effective way possible. At least, that is the goal our dealmakers focus on accomplishing.
Without professional representation, the typical business owner is facing a daunting task when they approach the M&A process. The first hurdle is determining what the business is worth by establishing their EBITDA, then creating documentation to support that, and finally finding and negotiating with buyers willing to meet their value expectations.
The employment of M&A advisory firms to offer advice and guide company owners to exit hasn’t always been popular. Years ago when the private equity industry was in its infancy, most firms would cold call potential sellers. This was a very time-consuming process, but it gave the equity firm a huge advantage: They could offer rock-bottom prices and sellers would agree.
Soon sellers recognized this and so too did investment banks that had focused traditionally on very large deals. Many started moving downstream into the lower middle market to fill a need consulting with smaller businesses.
We found our niche in the lower middle market, supporting our clients on their journey to a successful, fulfilling exit. Through our expertise across all industries, proven process and the diligence of our experienced M&A advisors, we have been firmly established as one of the leading firms in North America.
What is the difference between Mergers and Acquisitions?
While typically seen together, the two core components of M&A actually have several differences. As alluded to above, “mergers” and “acquisitions” do not accomplish the same thing.
A merger is when two companies join together to form a new, unified entity. These businesses will typically be of similar sizes, and, at least theoretically, both sides of shareholders will get equal share in the new company. In practice, this is not always the case.
Due to the requirement to establish a new entity, as well as the need for both companies to have a strong cultural connection to complete the merger successfully, this form of transaction is more uncommon than an acquisition.
With an acquisition, typically where a smaller company is acquired by a larger company, there is no requirement to establish a new entity. Rather, the purchased business ceases to exist and its assets consumed by the buyer. Because of this, acquisitions carry a negative connotation that mergers don’t, especially if there appears to be some reluctance by the seller to complete the transaction.
That is why we see mergers and acquisitions paired together - while acquisitions are far more frequent, mergers present these transactions in a more positive light. Therefore, the combination of the two into the regularly seen M&A deal is motivated by communicating information to the public, minimising any backlash towards an acquisition.
Is an Acquisition the same as a Takeover?
Over time, acquisitions and takeovers have been conflated to mean the same process. However, there is a marked difference between the two - a takeover is an acquisition of a company that has taken place without the agreement of the selling firm.
Commonly referred to as a “hostile takeover”, this usually starts by the shareholders of the buying firm purchasing shares of the target firm directly from shareholders (or through secondary markets). As shares represent ownership of a company, acquiring a majority of shares from shareholders can result in a proxy fight, where the buyers can attempt to win control of the board of directors and force through the acquisition.
Meanwhile, an acquisition is primarily agreed on by both sides of the transaction, where the selling firm is interested in relinquishing their assets to the buyers for an acceptable offer. This is when a seller would typically enlist the support of an M&A advisory firm to help ensure they receive an offer that reflects the true value of their enterprise.
What is M&A Deal Flow?
Deal flow refers to the amount of offers and opportunities an M&A advisory firm is presented at a point in time. Subsequently, firms benefit when deal flow is high, whether this is on the buy-side or sell-side of the equation. But, a strong deal flow is also highly beneficial to those looking to exit for the maximum value.
The Intralinks Deal Flow Predictor, one of the foremost guides of what the outlook for M&A deal flow currently is, has presented positive projections across this current seller’s market. For 2019, it anticipates the number of transactions in North America to grow 3 percent year-on-year, another demonstration of the amazing resilience of M&A in the middle market.
What makes the DFP from Intralinks unique among most forecasting tools is that it provides us with a snapshot of M&A activity months in advance of deals closing, since these early-stage deals are, on average, six months away from their public announcement of closing.
Why has M&A deal flow in the middle market been especially enduring in the last few years? First, it’s easier to locate financing for a transaction valued at $25 million against one valued over $100 million. This presents less risk for both investors and buyers to focus on several small acquisitions than one substantial purchase.
Secondly, the factors driving the buyers in our niche are much more strategic and long-term than those that focus on very large transactions. Buyers we’ve dealt with tend to be looking for new products, new geographies, new markets, access to new technology and skilled people. These features tend to make insulate buyers from other issues that may affect billion-dollar transactions.
In fact, if there is one notable negative on deal flow that we’ve witnessed in M&A, it is that there are simply not enough quality opportunities being presented to active buyers right now. Despite valuations growing, relatively few middle market companies are taking advantage of the situation, opening the door for those interested in exiting their business.
Of course, while strong deal flow in middle market M&A can be a big positive on both the buy-side and sell-side of transactions, it requires the guidance and expertise of an M&A advisory firm to allow these parties to capitalize.
What is M&A activity like right now?
The last several years have played host to one of the strongest seller’s markets in decades. M&A activity (both global and in North America) is riding a wave of positivity that is boosting business valuations and encouraging buyers to invest while the iron is hot.
2018 was a record-breaking year for M&A activity. When Merrill Corporation released their December and year-end reviews of M&A activity, it revealed that deal value in the U.S. and Canada exceed 2016 and 2017 levels, both banner years themselves, as well as another strong year for private equity investment, a key element of this seller’s market. At this point, barring some very potent economic changes hit, or some geopolitical crisis rears its ugly head, buyers will continue to be very aggressive in 2019.
Furthermore, Citizens Capital Markets (part of the Citizens Financial Group) recently published their own survey about future M&A activity. Their results are of this survey are highly indicative of 2019 being a positive year in the M&A market for both buyers and sellers, as well as fascinating findings that both sides prefer to work with M&A advisory firms on transactions.
What is behind this incredible M&A activity? There are several factors that typically sustain seller’s markets in any environment, that have been notably present across the past few years:
- Strong economy - high confidence over the strength of the economy motivates buyers to use the money they’ve accrued to acquire a business, diversify their offering and enter new markets, which will help them maintain their growth when the economy slows down.
- Active buyers - as previously mentioned, buyers are looking for well-run businesses right now. And, if they can’t find them, they are more likely to take chances on companies they consider have a high potential for long-term growth with better management during times of increased M&A activity.
- Interest rates - while interest rates have been gradually increasing, they are still at generally low levels right now, releasing more capital for prospective buyers to invest into their M&A strategy.
- Tax relief - the late 2017 reduction of the corporate tax rate to 21% has added fuel to the current strong seller’s market, giving companies additional capital and incentive to spend now on assets and companies that will improve their offering.
- Private equity funding - the amount of available capital committed to equity firms right now is at a record high. This money will need to be eventually invested or it has to be returned to the PE firms limited partners. As the latter is not a welcome event, odds are good that all this money will be chasing far too few deals in the coming year, maintaining the seller’s environment we are now in.
- More competition among buyer types - with the rise of several different types of M&A buyer (as well as the global links many M&A advisory firms have established), this more competitive environment causes business valuations to rise.
- Young buyers - There is a greater trend of younger buyers with a willingness to risk it all for the opportunity of earning a greater return than they can anywhere else. This feeds into the idea that purchasing an already sustainable company and growing it is more achievable than building one from scratch in a competitive landscape.
- Baby boomer business owners - as more and more business owners approach retirement ages in the next decade or so, this will result in far more M&A activity in the foreseeable future.
Overall, this means that buyers right now have more confidence than normal investing in smaller, privately held companies AND they are choosing to invest their capital in lower middle-market businesses. It is crucial that those contemplating an exit reach out to an M&A advisory firm while activity is this notable, before you miss out on an ideal opportunity to achieve an optimal sale.
What are key M&A trends to look out for?
As previously mentioned, the big M&A trend right now outside of this remarkable seller’s market is the big issue among buyers: there simply are not enough businesses in the market today to acquire. This overarching trend represents a significant opportunity for those prepared to exit with the backing of a professional M&A advisory firm in their corner - now is the chance to secure an optimal offer before buyers become less active or the market becomes considerably more crowded.
Professional buyers generally have mandates that revolve around key M&A strategies that they are pursuing. Some we have seen in recent years include:
- Geographic expansion
- Product line addition
- Vertical and horizontal integration
- Economies of scale
- Access to skilled employees
These are just some of the M&A trends motivating their activity at this moment in time. But, these trends only build upon proven home truths:
- Big companies really do buy small companies.
- Buyers might see different opportunities for growth in your business than you do.
- Buyers are buying your future, not your past.
- Often you are too close to the daily grind to realize the significant opportunities your company can capitalize on in the hands of new ownership.
- Your company probably has significant “intangible assets” that an experienced M&A team can leverage to attract buyers.
- You most likely have been minimizing your pre-tax profits for years. Recasting allows you to present the true profitability of your organization.
You may now see you have lots to learn about exiting your company for maximum profit. Most middle market business owners do, which is why we offer comprehensive guidance about how to sell your business .
With the backing of an M&A advisory firm, you put yourself in the best position to capitalize on current M&A trends and these everlasting scenarios to maximize the value of your company when the time comes to exit.
What is your M&A strategy?
Your M&A strategy is the plan outlining your corporate development efforts, utilizing mergers and acquisitions to benefit you and your business. This could be securing investment for company growth, or exiting the business for the optimal value. Outcomes might differ, but having any form of exit strategy is a must.
A survey conducted by the National Center for the Middle Market in 2018 aimed at executives who had either recently completed a transaction or were seriously considering entering the M&A market identified several details that could influence your M&A strategy:
- When middle market executives initiate acquisitions, the buys are mostly based on a strategic rationale: buyers are looking to drive growth by acquiring market share, capabilities, technology, and/or talent.
- A majority of middle market executives who participate in M&A say that inorganic growth plays an important role in company growth strategy. The desire to drive growth is the number one reason companies consider M&A.
- The availability of more money to go after a relatively constant number of targets is driving valuations up. So, while actual deal counts have increased only slightly, there are more players in the game along with a heightened sense of urgency around deals.
- With many deals, progress can be slow and difficult to measure due to unexpected issues. Most deals take three to twelve months to complete. The planning horizon to become deal-ready ideally should be three to five times as long as the deal-making process itself.
- Developing or getting help with capabilities in planning, financial reporting, valuation, and execution well in advance of having a specific target in mind ensures that companies are ready to move when the time comes.
This cannot be stressed enough: if you want to exit in the next 9-15 months, you need to start your M&A strategy right now. Really - stop reading and start planning. In reality, you should have a relationship started with an M&A advisory firm as early as possible in order to maximize your results.
In many cases, M&A deals can fall apart because sellers have not created or followed their exit strategy closely. Without this guideline for sellers, they risk falling into several pitfalls along the way to achieving a sale and, even if they do complete their exit, it likely won’t be for an optimal value.
If you are ready to start creating your M&A strategy, take the first step by attending an executive conference. Our strategic M&A advisors provide a unique, in-depth insight into M&A activity and the keys to building a buyer ready business.
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