Mergers and Acquisitions
Mergers and Acquisitions are used to describe the joining of two companies, but there are key differences in the two transactions. A merger occurs when two separate entities combine forces to create a new, joint organization and an acquisition refers to the takeover of one entity by another. Mergers and acquisitions may be completed to expand a company’s reach or gain market share in an attempt to create shareholder value.
What can Lions Financial do for you?
During the merger and acquisition process, Lions Financial helps clients create a comprehensive plan based on the unique characteristic of the company. We then advise clients throughout each step of the process to ensure all aspects of the deal are reviewed during a merger or acquisition. To best assist, we applied Four-step SIRE process to create value for you.
- Survey: We will begin process with a questionnaire to have a general understanding of your business and identify the composition of the company. We clarify your business objectives and gain understanding of the unique current issues that need to be addressed.
- Insight: To have a deep insight of your specific business, we will incorporate industry research, determine product offerings available from many sources, create an assessment and evaluation about your company’s M&A strategy on issues to take into consideration.
- Recommendation: A specific recommendation and design strategy based on potential opportunities and business situation will be prepared. We will also create or/and review financing plan in place to maximize deal potential and limit liabilities.
- Execution: We will implement the strategy your company would like to execute on based on the options provided and budget available. We help achieve a better result with our professional experience, integration of technology, understanding of your industry, and staying attuned to the compliance and regulatory requirements.
The Key Items to Know in Mergers and Acquisitions
Depending on the relationship between two companies and the perspective of business structures, merger can be distinguished into several types:
- Horizontal merger: when there are companies share the same product lines and in direct competition market, the merger is horizontal.
- Vertical merger: Two companies which are in the different place of a supply chain for a common good or service tend to merger
- Congeneric mergers: a type of merger related with two businesses which are in the same market but provide different good and service.
- Market-extension merger: opposite from congeneric merger, it is Two companies that sell the same products in different markets.
- Product-extension merger:Two companies selling different but related products in the same market.
- Conglomeration: Two companies that have no common business areas.
In the merger and acquisition process, the following types of financing would be traditionally reviewed by investors:
- Revolving Credit Facility
A revolver is a form of senior bank debt that acts like a credit card for companies and is generally used to help fund a company’s working capital needs. A company will “draw down” the revolver up to the credit limit when it needs cash and repays the revolver when excess cash is available- there is no repayment penalty. The revolver offers companies flexibility with respect to their capital needs, allowing companies access to cash without having to seek additional debt or equity financing. There are two costs associated with revolving lines of credit: the interest rate charged on the revolver’s drawn balance, and an undrawn commitment fee.
- Bank Debt
Bank debt is a lower cost-of-capital security than subordinated debt, but it has more onerous covenants and limitations. Bank debt typically requires full amortization over a 5- to 8-year period. Covenants generally restrict a company’s flexibility to make further acquisitions, raise additional debt, and make payments to equity holders. Bank debt also has financial maintenance covenants, which are quarterly performance tests, and is generally secured by the assets of the borrower. Existing bank debt of a target must typically be refinanced with new bank debt due to change-of-control covenants.
Bank debt, other than revolving credit facilities, generally takes two forms:
- Term Loan A – This layer of debt is typically amortized evenly over 5 to 7 years.
- Term Loan B – This layer of debt usually involves nominal amortization- repayment- over 5 to 8 years, with large bullet payments in the last year.
The interest rate charged on bank debt is often a floating rate equal to LIBOR plus or minus some premium or discount, depending on the credit characteristics of the borrower. Depending on the credit terms, bank debt may or may not be repaid early without penalty.
- High-Yield Debt
High-yield debt is typically unsecured. High-yield debt is so named because of its characteristic high-interest rate or large discount to par that compensates investors for their risk in holding such debt. This layer of debt is often necessary to increase leverage levels beyond that which banks and other senior investors are willing to provide and will likely be refinanced when the borrower can raise new debt more cheaply. Subordinated debt may be raised in the public bond market or the private institutional market, carries a bullet repayment with no amortization, and usually has a maturity of 8 to 10 years. The interest on high-yield debt may be either cash-pay, payment-in-kind, or a combination of both.
- Mezzanine Debt
The mezzanine ranks last in the hierarchy of a company’s outstanding debt and is often financed by private equity investors and hedge funds. Mezzanine debt often takes the form of high-yield debt coupled with warrants -options to purchase stock at a predetermined price, known as an “equity kicker”, to boost investor returns to acceptable levels commensurate with risk. The warrants increase the investor’s returns beyond what it can achieve with interest payments alone through appreciation in the equity value of the borrower. Like subordinated notes, mezzanine debt may be required to attain leverage levels not possible with senior debt and equity alone.
- Seller Notes
A portion of the purchase price in an LBO may be financed by a seller’s note. In this case, the buyer issues a promissory note to the seller that it agrees to repay over fixed period of time. The seller’s note is attractive to the financial buyer because it is generally cheaper than other forms of junior debt and easier to negotiate terms with the seller than a bank or other investors. Also, the acceptance of a seller’s note by the seller signals the seller’s faith and confidence in the business being sold. However, seller financing may be unattractive to the seller because the seller retains the risks associated with the business without having any control over it.
Securitization of the cash flows attributable to particular assets, such as receivables or inventory, may provide another source of financing when a secondary market for securitization of such assets exists.
- Common Equity
Equity capital is contributed through a private equity fund that pools capital raised from various sources. These sources might include pensions, endowments, insurance companies, and wealthy individuals.
Contact Lions Financial to find a holistic and sound strategy for your company’s merger or acquisition need. Lions Financial helps business executives, together with their tax and legal advisors to develop the optimal financial solutions for success. Contact us for an initial consultation to help determine how our team can be a good for fit for your current business need.