My Personal Perspective on Mergers and Acquisitions based on 30 Years Experience

John Colley MBA, MA(Cantab)
A free video tutorial from John Colley MBA, MA(Cantab)
Investment Banking | Business| Entrepreneurship | Finance
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Lecture description

This is a very personal lecture, which you can skip if you wish, in which I share my perspective of Mergers and Acquisitions based on 30 years experience as an investment Banker.  I have completed deals of all kinds from VC funding deals, Private Equity Buyout deals, Domestic and International Acquisitions, Company sales and exits, Strategic Acquisitions and IPOs.  This lecture sets out a personal view of Mergers and Acquisitions from my perspective as an Investment Banker.  I hope you find it useful.  Please do ask me any questions you wish as long as they don't breach confidentiality.

A PDF of the Slide Deck is available with this lecture.

Learn more from the full course

Mergers & Acquisitions - M&A, Valuation & Selling a Company

Mergers and Acquisitions - Step by Step M&A, Company Valuation, Negotiation Skills, Business Plans and Finance

07:07:10 of on-demand video • Updated April 2021

  • Approach the sale of their company with greater confidence
  • Better understand the role of Advisers and how to manage them
  • Gain valuable insights into the Sales Process to avoid making expensive mistakes
  • Better understand Corporate Valuation
  • Gain an introduction to Negotiation and Term Sheets
  • Find out what is important to both sides in a Management Buyout (MBO)
English [Auto] Having been an investment banker for over 30 years I want to give you my personal perspective on mergers and acquisitions. The big challenge is how on earth do you teach something like mergers and acquisitions. Because it is such a complex subject a complex process. It's something which is not really ever been written down in a textbook. And the simple answer is you can only really teach it from experience. So you want to know that the person who's sharing their experience with you has actually been there done it got got the T-shirt as it were. It's all well and good. Having spent a couple of years in an investment bank as an analyst but then you're really a sort of a voice of the process. You're not actually doing it. You're not the senior director running the process of making the decisions. There is no shortcut to actually gaining this expertise. You do actually have to work on deals and you have to to have that experience. But having done this for 30 years now in my mid-50s I really love sharing this experience with you and I also want to give you my perspective on what it's like to be involved in mergers and acquisitions. I suppose the starting point really is the business cycle. If you think that every business has a life cycle to it the whole market is full of these companies all of which got their own life cycles and essentially it's about creating value. Entrepreneurs create businesses and they create businesses because they want to build something and they want to make money. These businesses need to grow in order to grow. They need capital and sometimes they need to make acquisitions. And then at the end of the day the entrepreneurs are going to need some form of exit whether it's partial. They maybe it's an IPO and they sell some of their stake and still retain an interest or complete or complete exit and they sell the company to somebody else. But without that they can't realize value for themselves. So you've got a system here where the entrepreneurs are busy creating businesses but they need access to capital and ultimately they need to be able to extract capital. And that's really where mergers and acquisitions comes in. So if you start with a company lifecycle you've got a startup and the startup invents a product and designs it and does all the R&D and then it goes and finds a customer. Now if one customer buys a product that's not really proof of lots of customers buys a product then you got a market. So the company is now growing now in these early stages they need access to capital so capital has to be put in. It's very difficult to bootstrap a company from absolute ground zero with no external capital whatsoever. Once they business is established it's got to be customers. It needs to grow and it needs to scale that business. And again if you grow a business then what happens before you actually get cash in is actually it sucks cash in because you have to buy materials you have to pay people and you have to do all this before you can sell a product or service to get the money back. So it needs working capital. Now at some point it needs to consider how it's going to exit how it's going how the entrepreneurs the shareholders are going to achieve an exit. And that could be through a sale or an IPO or a buyout. And as part of the growth process they may need to make an acquisition. The company may merge with another company. So mergers and acquisitions of covers everything. But it also includes a company's sale because you can have an acquisition but the other side of an acquisition isn't is the sales side. And I'll come on to explaining that as well. So mergers and acquisitions includes company exits as well. IPOs are different expertise that's where you have to have a lot of detailed knowledge about the listing roles in your market and you have to be able to go through all the the process and the documentation of doing that. I've done listings in the London market but not probably for about 20 years. But that is a different skill and that's normally held handled or the detailed work on that is handled by a stockbroker rather than an investment banker. So what are the key steps as an advisor. Well basically you need to give the company strategic advice you need to get on board and understand what they're trying to achieve and then be able to advise them from your experience of the market in the sector about what they want to do. Inevitably they will want to raise capital some station and that might be through an IPO but it's in the early stages. It's much more likely to be through private or institutional i.e. private equity venture capital investors. The company may well wish or need to make acquisitions. So you'd have to help them on the buy side to find companies to buy and then organize all of that and get the funding for it and then from a cell perspective you have to help them to realize their investment and that might be through a complete exit or by working with a stockbroker to achieve an IPO. Now let's look at some of the market players in the M&A ecosystem and I'm not really ansaphone focus here on the companies. Obviously the companies are at the core of the ecosystem but from the advisory perspective from the perspective of the M&A players who are making the process happen you've got the investment banks who may or may not have an equity stockbroking function inside them in the old days these these two functions were separate really from the late 80s onwards which may seem like history to you but it's not to me then these became very much more integrated. So you have the investment banks you have accounting and audit firms who really handle the financial due diligence on the accounting side of the deals. You have the lawyers who handle the legal due diligence on the documentation of the deals and then you have the consulting firms who may or may not be involved. The larger the Clyde company the more likelihood they will be involved. They're very useful from a strategic point of view from a due diligence point of view and also from an international point of view because very often they have international offices. If you're an investment banking advisor you really need to have a sector focus. It's too wide a market unless you're operating really at the tiny tiny end to be a generalist these days that's my phobia. So I concentrate on the tech sector. So you need to understand the the sector who the players are what the different subsectors are how the state sector is structure and and organize what the trends are what is driving the growth of the sector what technologies are new what regulations are coming in. Who are the major players. What is hot what do people want to invest in. And then you need to have a very good grasp on how you value companies in the sector and different sectors have different metrics and different sometimes different techniques because the way of valuing a property company is very different from valuing a tech startup. Let's look at the sector focus in a bit more detail. You need to understand the landscape and the business is business ecosystem so who are the players in the market. You need to know who the the market leaders are. You know need to know which of the growth companies who are the disruptors. And frankly you know where you know who are the targets who are the companies that are going to be able to be seen as acquisition targets for your clients. And of course you can put any company owned by a private equity firm or a VC firm on that list. You need to know the ownership of companies. Public companies are very easy but identifying private companies depending on which geographic market you are in US and UK relatively easy in some European markets more difficult information is more tightly held. You also need to know who are all the venture capital and private equity players in the market and which companies they own and when they bought them and therefore when they're likely to exit from them then you need to have some understanding of the strategies of the companies in the market. Are they acquirers or consolidators are they growth companies or are they targets and you need only to look at their recent history to see which of these groups they fall into. If you're an adviser you also need to have a good idea of the deal history in the sector who has done what in the past and then by watching who's doing what to whom then you can start to identify possible opportunities from an advisory perspective. But it is a complex picture because there are companies who are raising money all the time there are companies that are being started all the time their companies are making acquisitions all the time and their companies are exiting all the time. And if a company goes from a private company to a private company through an IPO. Well now it's got paper which is publicly said that they can use for acquisition. So they they in a sense they've achieved an exit but they metamorphosed into a type of company that they can get now go on and become an acquisition client. You need to understand who's funding the businesses because you need to know that the businesses are fundable. You also need to have a good National Stroke international perspective because it's no longer good enough just to understand what's going on in your market. You need to know which companies are coming in from overseas to into your market. All you need to have a perspective on the companies in your market who want to go overseas and ideally you help them with both as an adviser. What is the key question. Well the key question is why should they hire you and you have the IBM issues stroke dilemma here because nobody ever got fired for buying from IBM. So there's a tendency for clients to rush to the big bulge bracket firms who may or may not take them on but in a sense if you're not in a very very big firm then you have to be able to carve out your competitive position very clearly to demonstrate why they should be hiring you. So you need a track record. You need to have done deals you need to be able to demonstrate your your expertise both in the M&A process but also in the sector. You need the ability to originate deals you need to be able to think and come up with good ideas about companies that could be acquired for your client. And of course you need to be very clear about how you're going to be paid whether you take a retainer whether you work on a successful only whether you get paid to stages whatever it is. But you need to be very clear what your terms and conditions of business are. So if you then take that position and say Well OK I've got to identify potential clients so I'm now the investment banking advisor and I think about my own marketing for my own business. So I need to be able to identify the buyers I need to have relationships and contacts with the sellers. I need to know all the key financial investors in my sector. You need to know who is doing deals who who has the money. Which companies have got the money to do deals. And critically you need to build relationships with the decision makers so let's talk about some of the outline skills then clearly you need to have a good understanding of the M&A process and you need to differentiate in that between the buy side and the south side. So if you're on the by side you're acting for a client who wants to make an acquisition. If you're on the south side you're acting for a client who wants to sell his company. On the other side of that acquisition you need to be able to pitch. You need to go out and market and pitch yourself and persuade a client to hire you and you need to have very clear terms of engagement for your client and that's normally in the form of a detailed engagement letter which can run to several pages and often several pages of additional appendices with boilerplate stuff on them. So you need to be able to present yourself and your terms and conditions very clearly. Let's talk now about buyside processes. Is. Essentially I've now been hired by a client to make an acquisition for that client. So the first thing I need to do is to review the sector and identify targets for that client. Those targets have to be available. It's all well and good having a paper exercise identifying a long list of targets. But unless you actually know that that the board of that company are prepared to contemplate a sale now it's no good talking to them now if they're talking about a sale in two years time and then you need to be able to make an approach on behalf of your client to see if they're prepared to have a discussion that leads logically enough to initial discussions between the parties which had first may or may not involve your client and or the disclosure of their name you may do that on a no name basis to start with. You need to come to some view and then agreement on the value and valuation so you you'll need as the advisor to value the company and then you'll need to share that view with your client and then we'll pitch that value as part of the acquisition price to the target company that leads inevitably to negotiations that leads to the tabling of a letter of intent which sets out the key terms which are negotiated and then agreed once that letter of intent is agreed there's a phase of due diligence where you send in the lawyers and accountants the management consultants anybody else you want to do on environmental health H.R. whatever it is to go and check that everything is right. There are no skeletons hiding in the cupboard of the company you want to buy. And then finally you get everything sorted out you finalize the terms you draw up a sale and purchase contract and then you agree that they are on the sell side. It's a slightly different process. That's the last part of it. It mirrors the first part but from a South Side you need to go and pitch to the client and persuade them that you are competent to handle the sale of their business. So you all need to give them an idea from your perspective of the valuation. And the key exit conditions that you think will suit their business and you will also want to know from them what their key exit conditions are. Do the management want to stay. Do they want to go for instance. You'll need to identify the universe of potential acquirers. I have an understanding of their strategy and their rationale. What you're looking for is the acquirer who wants to pay a strategic premium for your client and therefore you achieve a higher price on the exit than you otherwise would have done. You'll need to put together the data room. This is the data room that is used in the due diligence process and it quite a complex collection of business documentation which will be overseen by accountants. But at the end of the day you know you are ultimately responsible as investment banking advice. Make sure it is put together. Then you'll need to market the business. You might do this as a rifle shot only approaching one or two potential buyers or you might run a wide ranging auction and approach a whole wide range of potential buyers. Maybe initially on a no name basis maybe initially only with a one or two page teaser about the deal but you will then need an information memorandum on the company as part of your marketing materials to then once the the potential buyer has indicated interest they've signed a letter of confidentiality and then you provide them with the information memorandum which is probably a 30 or 40 page book about the business which helps to form a view as to whether they want to make an offer. There'll be some negotiation and discussions and then you receive an offer or offers. Ideally those offers need to be negotiated and ultimately heads of terms agreed with one buyer you may be negotiating several heads terms at the same time which you would then really want to sign up with one that there needs diligence that leads to final documentation sell puncheons contract closing and the money changes hands. So that is the other side of the deal. As an advisor as an investment banker in this process whether you need a lot of skill. This is not something which is you know a and Airfix kit in construction it is a very complex process and it depends on a lot of experience. You need to have a network in relationships across your sector and across all the financial investors and probably into other investment banks as well. You need a track record and you need to be able to demonstrate your integrity because confidentially ality and trust is so important. You need to be able to pitch your business and your abilities and sell yourself to clients. You need to know how to market their businesses to other potential buyers in the market so you need marketing skills as well. You need to master and understand all the documentation involved. You may not write a lot of it but youll certainly want to be able to advise is on whether the phrasing and the weight of paragraphs and content of detailed documents are all right and are in your client's favor this doesn't this is something which you can only really gain from experience. You then need to be well organized and be able to manage the deal process because that's your primary role is Kate taking it all the way through and that means following up on meetings organizing agendas making sure that action steps are taken making sure that the process follows the timetable that you set out. And of course you need negotiation skills because you are the lead negotiator for your client and you need to advise them on the best way to negotiate the deal and to get the deal closed. So that's my personal perspective on mergers and acquisitions is based on over 30 years of experience. I know this has been quite a long lecture but I want to share that personal experience with you to give you the confidence that I have that detailed understanding of the mergers and acquisitions process which I'm trying to share with you.