Mergers & Acquisitions

M&A Overview and Transaction Types

Mergers and acquisitions advisory is the most prominent and prestigious area of investment banking. M&A transactions involve the combination, acquisition, or disposal of businesses and are driven by strategic rationale including growth, diversification, synergies, market consolidation, and shareholder value creation. For the Series 79 exam, a deep understanding of M&A structures, processes, regulatory requirements, and the investment banker's role is essential.

Types of M&A Transactions

M&A transactions can be categorized in several ways:

• Merger: Two companies combine to form a single entity. In a statutory merger, one company absorbs the other (the target ceases to exist). In a consolidation, both companies combine to form an entirely new entity.
• Acquisition: One company (the acquirer) purchases another (the target). The target may continue to exist as a subsidiary or be fully integrated. Acquisitions can be structured as stock purchases (buying the target's shares) or asset purchases (buying specific assets and liabilities).
• Tender Offer: The acquirer makes an offer directly to the target's shareholders to purchase their shares at a specified price, bypassing the target's board. Tender offers can be friendly (with board approval) or hostile (without board approval).
• Divestiture/Spin-Off: A company sells or separates a business unit. In a divestiture (asset sale), the unit is sold to another party. In a spin-off, shares of the separated business are distributed to existing shareholders, creating an independent public company.

Strategic vs. Financial Buyers

Strategic buyers are operating companies that acquire targets to enhance their own business operations. They can typically pay higher prices because they expect to realize synergies (cost savings from eliminating redundancies or revenue enhancements from cross-selling). Strategic buyers often have industry knowledge and existing operations that enable integration.

Financial buyers (primarily private equity firms) acquire companies as standalone investments, using significant leverage to enhance returns. They focus on improving operational efficiency, growing earnings, reducing debt, and eventually selling the company (through a sale or IPO) to generate returns for their fund investors. Financial buyers typically cannot pay as much as strategic buyers because they lack synergy benefits.

The M&A Process

Investment bankers typically advise on M&A transactions through two primary engagement types: sell-side advisory (representing the company being sold) and buy-side advisory (representing the acquirer). The process differs significantly depending on the side of the transaction.

Sell-Side Process

A sell-side engagement typically follows a structured auction process designed to maximize the sale price through competitive bidding:

1. Preparation Phase: The investment bank prepares marketing materials, including a "teaser" (anonymous one-page summary) and a Confidential Information Memorandum (CIM) providing detailed information about the company. The bank develops a target buyer list and conducts preliminary valuation analysis.
2. First Round: The teaser is distributed to potential buyers, who sign confidentiality agreements (NDAs) to receive the CIM. Interested parties submit initial, non-binding indications of interest (IOIs) specifying their proposed valuation range, financing plan, and key terms.
3. Second Round: A shortlist of buyers advances to the second round, gaining access to the virtual data room for detailed due diligence and management presentations. Second-round bidders submit definitive, binding offers (or "final bids") including a markup of the draft purchase agreement.
4. Negotiation and Signing: The seller selects the preferred bidder and negotiates final terms, including the purchase price, representations and warranties, indemnification, closing conditions, and any required regulatory approvals.
5. Closing: After satisfying all closing conditions (regulatory approvals, financing, third-party consents), the transaction closes and consideration is exchanged.

Buy-Side Process

Buy-side advisory involves helping an acquirer identify, evaluate, and execute an acquisition. The investment bank assists with target identification and screening, strategic rationale development, valuation and financial analysis, due diligence coordination, negotiation strategy, financing arrangements, and integration planning.

Tender Offers and Deal Structure

Tender Offers

A tender offer is an offer made directly to a company's shareholders to purchase their shares at a specified price, typically at a premium to the current market price. Tender offers are governed by the Williams Act (amendments to the Securities Exchange Act of 1934), which established disclosure requirements and procedural rules to protect shareholders.

Key Williams Act requirements include:

• Schedule TO: The bidder must file Schedule TO with the SEC at the commencement of the tender offer, disclosing the terms, purpose, source of funds, and plans for the target company
• Schedule 14D-9: The target company's board must file its recommendation (accept, reject, or no opinion) within 10 business days
• Minimum 20 business days: The tender offer must remain open for at least 20 business days, giving shareholders time to evaluate the offer
• Withdrawal rights: Shareholders who tender their shares can withdraw them at any time before the offer expires
• Best price rule: All shareholders must receive the same price; if the bidder increases the price, all tendering shareholders (including those who tendered early) receive the higher price
• Pro rata acceptance: If the offer is oversubscribed (more shares tendered than the bidder wants to purchase), shares must be accepted on a pro rata basis

Consideration Types

M&A transactions can be structured with different forms of consideration:

• All Cash: Provides certainty of value to the target's shareholders but requires the acquirer to have financing in place. Cash deals are taxable to the target's shareholders at the time of the transaction.
• All Stock: The acquirer issues its own shares to the target's shareholders. Stock deals allow the target's shareholders to participate in the combined company's future upside but expose them to the acquirer's stock price risk. Stock-for-stock mergers can be structured as tax-free reorganizations.
• Cash and Stock (Mixed): A combination of cash and stock provides a balance of certainty and upside participation.
• Earnouts: A portion of the purchase price is contingent on the target achieving specified future performance milestones. Earnouts are used to bridge valuation gaps between the buyer and seller.

Fairness Opinions

A fairness opinion is a professional assessment provided by an independent investment bank or financial advisor to the board of directors of a company involved in an M&A transaction, stating whether the consideration to be received (or paid) in the transaction is fair from a financial point of view to the company's shareholders. Fairness opinions serve as an important component of the board's decision-making process and provide evidence that the board fulfilled its fiduciary duties.

The fairness opinion typically includes the methodologies used (DCF, comparable companies, precedent transactions), key assumptions and limitations, the range of values implied by each methodology, and the conclusion regarding financial fairness. It is important to note that a fairness opinion addresses only financial fairness; it does not opine on the strategic merits of the transaction or whether shareholders should vote in favor of the deal.

Defensive Strategies

Target companies facing hostile acquisition attempts may employ various defensive strategies to protect shareholders or resist the offer:

• Poison Pill (Shareholder Rights Plan): Allows existing shareholders to purchase additional shares at a discount if any party acquires more than a specified percentage (typically 15-20%) of the company's stock without board approval, massively diluting the hostile acquirer
• White Knight: The target seeks a more friendly acquirer to make a competing offer
• Pac-Man Defense: The target makes a counter-offer to acquire the hostile bidder
• Crown Jewel Defense: The target sells or threatens to sell its most valuable assets to make itself less attractive
• Staggered Board: Only a fraction of board members are elected each year, preventing a hostile acquirer from gaining immediate board control
• Supermajority Voting: Requires a supermajority (e.g., 67% or 80%) of shareholders to approve a merger
• Golden Parachute: Generous severance packages for executives triggered by a change of control, increasing the cost of an acquisition

Regulatory Approvals in M&A

Many M&A transactions require regulatory approvals before they can close. Understanding these requirements is important for the Series 79 exam.

Hart-Scott-Rodino (HSR) Act

The Hart-Scott-Rodino Antitrust Improvements Act of 1976 requires parties to certain M&A transactions to file pre-merger notifications with the Federal Trade Commission (FTC) and the Department of Justice (DOJ) Antitrust Division. The HSR filing triggers a mandatory waiting period (typically 30 days) during which the agencies review the transaction for potential antitrust concerns. If the agencies have concerns, they may issue a "Second Request" for additional information, extending the review period substantially.

SEC Requirements

Public company mergers require SEC filings including proxy statements (for shareholder votes), registration statements (if stock consideration is used), and tender offer materials (for tender offers). The SEC reviews these documents for adequate disclosure but does not approve or disapprove the transaction itself.

Industry-Specific Regulators

Certain industries require additional regulatory approvals: banking transactions require approval from the Federal Reserve, OCC, or state banking regulators; insurance transactions may require state insurance department approval; telecommunications transactions may require FCC approval; and defense industry transactions may require CFIUS (Committee on Foreign Investment in the United States) review for national security implications.