Careers in Finance: Mergers and Acquisitions
Mergers & Acquisitions (M&A) is the flashy unit of investment banking that produces the mega-deals you see on the front page of the Wall Street Journal.
The M&A rainmaker conjures up images of a dapper executive in a finely tailored suit working the room and making deals. M&A is cyclical, so when credit is available and financial markets are strong, M&A deals increase in popularity.
But just because the number of M&A transactions increase, doesn’t guarantee the success of the marriage. There have been many famous (and infamous) mergers in corporate history. Daimler-Benz bought Chrysler is 1998 for $40 billion and divorced it nine years later with a sale to a private equity firm for just $6 billion.1
What is M&A?
Mergers and Acquisitions are transactions which brings two companies together. These restructurings are a way for companies to unlock value for shareholders, inject growth into the company or provide an investment exit for founders. There are a few different types of common transactions associated with M&A.
What are the Different Types of M&A transactions?
A merger occurs when two companies join forces and become one, new company. There are many reasons companies consider merging. Common benefits are the potential synergies between the two companies. Synergies exist if the combined company can maintain the same or increase profits while costs are reduced. This could be through overlapping systems, real estate or unfortunately through layoffs. There are variables to consider before agreeing to a merger, including possible regulatory backlash, disappointing investors and clashes between the two corporate cultures.
A vertical merger describes two companies in the same supply chain merging together into one. This is often to improve the cost and availability of raw materials. It’s also done on the distribution side, to assure a smooth, cost-effective way to sell good on the market. An example might be a brewery wanting to purchase a trucking company so it could distribute the products in a more cost-effective manner to its customers.
A horizontal merger describes when two competitors decide to join forces as one company. There may be significant synergies such as cost-cutting in duplicate staff or facilities. Using the beer company from the prior example wants to buy a regional competitor. They may both have expensive overhead in the form of warehouses and brewery equipment that could be consolidated into just one location. Anti-trust legislators look to make sure that these companies won’t constitute a monopoly and control prices.
An acquisition is when company entirely buys out another company. The acquired company simply becomes integrated into the acquirer’s company- it doesn’t exist on its own anymore. Many times the company being acquired is interested in being bought out, providing an exit strategy for founders and other early investors while keeping the shareholder base happy.
There are different reasons an acquisition (or takeover) occurs. Sometimes, two competitors might be engaged in a price war, which hurts the bottom lines of both companies, so one decides to acquire the other. A larger company often experiences stagnant sales growth as it nears the mature phase of its industry cycle. It could commit resources to R&D for new divisions and try and create growth or it may be more effective to simply buy the growth in an acquisition. Also, a company may be fearful of a competitor who has been gaining market share and wants to alleviate the threat through a takeover.
The acquiring company’s management has some decisions to make regarding how to actually fund the purchase of the other company. For an all-cash deal, it can simply use its own cash on its balance sheet.
The company can also borrow the cash to make the acquisition. The extreme of this is a leveraged buy- out or LBO. LBOs are common in private equity. One strategy companies have been doing combines both of these, using cash and borrowing money. Many public companies have been taking advantage of low interest rates and borrowing money by issuing corporate debt in their company. They take the cash proceeds from the offering and use it for different purposes, acquisitions, dividend payments or share buybacks.
Finally, it can be an all-stock deal where the acquiring company uses its stock as currency to purchase the target. This might be desirable if the acquiring company’s stock has appreciated substantially, and its own management thinks it could be used for peak purchasing power. The target company’s payment comes in the stock of the acquiring company, not cash. Many times in a strong stock market, overzealous executives reach for speculative names.
Many takeout targets prefer cash for their buy-outs but receiving stock of the acquiring company may be the only payment option available. This occurred in 1999 when Yahoo bought Marc Cuban’s Broadcast.com for $5.7 billion.2 Broadcast.com founder Marc Cuban received payment in shares of Yahoo stock. Cuban was nervous and thought Yahoo’s stock was overvalued but in a stock deal there is typically a lock up period where you can’t sell the stock you received as payment. Cuban didn’t want to take the chance and watch Yahoos stock, his currency, get devalued with a steep selloff during the lock-up. He deftly protected himself by deploying option strategies to hedge his exposure to Yahoo’s stock. This effectively locked in the original deal price for him as Yahoo’s stock did eventually crash in the dotcom bust.3
It gets interesting when acquisitions get nasty. “Hostile takeovers’ is an apt term for this and can arise when the target simply doesn’t want to be acquired. Perhaps management thinks there will be massive layoffs, including themselves, and adamantly oppose the takeover. There are defensive measures a company can take to make itself less desirable as a takeover target. A few of the more colorful options include the ‘poison pill’, the ‘golden parachute’ and ‘white knight’.
The poison pill allows existing shareholders the option to purchase more shares at a discounted price in response to a hostile action (triggered by a certain percentage of stock being acquired by one entity). The additional stock purchased at a discount would dilute the value of all the stock and hopefully deter the acquirer who’ll have to pay that much more for a controlling interest in the company now.
The golden parachute essentially says that if there is deemed to be a hostile takeover attempt that current management, if they were to get fired, would be entitled to rather lavish retirement or severance packages, sometimes into the millions of dollars. This would incentivize the acquirer to either quit the takeover attempt or keep existing management.
The White Knight defense basically delays the deal in the hopes that another, more favorable, buyer will come along and make a bid for the company instead.
This is the other side of M&A, when companies split apart. The thinking here is the sum of the parts is greater than the whole so shareholder ‘value’ can be created by selling off some parts of the existing company, often lower growth or underperforming units. This can be done in a spinoff, an equity carve out or buy selling a unit. A spinoff occurs when a party or unit of a company gets sold off, creating a separate independent company. Where there was one company, now there are two.
This area has gotten particularly popular recently as so-called “activist” shareholders have come in and tried to leverage their opinion on what they want management to do by buying up shares and making lots of headlines. Often they target a stock that has been underperforming that has some non-complementary business units and try and sell-off one of the units, with the goal of increasing the stocks price.
What are the Different Careers in Mergers and Acquisitions?
The job titles for M&A differ across categories but basically there is the entry-level positions (analyst, then associate) and onto the more client-facing, management roles (VP, Manager, Managing Director).
Analyst/Associate in M&A
Analyst is typically the entry-level position in M&A. Analysts can work inside the companies themselves or work for a third party advisor, typically an investment bank. These professionals are tasked with running detailed financial models to help determine which deals make sense and in what manner. Analysts attend client meetings and put together presentations and pitch books for more senior managers to review for potential clients.
These professionals often work long hours when meeting deadlines throughout the course a particular deal. And have a suitcase ready at all times.
An M&A manager oversees all the initiatives that are undertaken after a transaction. The manager’s job is to make sure the operational steps are being implemented throughout the course of the transaction. The manager will have to coordinate with legal counsel, tax professionals, analysts and even public relations to ensure the transaction goes through effectively.
The job description of M&A managers has as much to do with relationship building and nurturing than anything else. The more tedious analysis is taken care of by analysts and associates. A manager may have experience in only takeovers but not divestitures, etc. There are also very different industries a manager can have experience in. For example, managing a tech startup may be quite different from managing a government contractor. There may be an in-house Business Development Officer in a corporation, previously from an investment bank, whose job it is to find and develop M&A opportunities.
What’s the compensation in M&A?
Compensation in M&A is some of the highest in finance high. According to Emolument.com, starting salaries for M&A bankers earn above $100,000 at the major firms.4 The Wall Street Oasis’ 2013 Compensation Report confers and pegs compensation for first-year M&A analysts at $105,000.5 Moving up the ladder, the median salary for a Mergers and Acquisitions Manager was $133,544, according to a survey done by salary.com in November 2015.6 The numbers go up with the more experience you have in the job.
How do I get hired for M&A?!
Careers in Mergers and Acquisitions are highly competitive. One method is to get a mentor who works in the industry. They will advise you on the best way to proceed, whether that’s going the intern route or going back to school for an advanced degree or designation.
Interpersonal skills are essential in M&A because you’ll be working long-hours with teams on deals, and interacting with clients as you progress in your career. People will remember you when it comes time for full-time hiring. A bachelor’s degree is probably required and a Masters in Finance or other advanced degree is highly preferred.
A career in mergers and acquisitions will be a challenging but rewarding experience. You’ll get to work on exciting deals with some of the smartest people in the room, travel and making new relationships. Take the first step and strive for a career in M&A.