In the afterhours of the new year, government officials averted the long-anticipated fiscal cliff that would have sent the U.S. economy into another deep recession. Despite the aversion, frustration and concern among Americans has been very apparent in the past few months. In the last week of December, markets were down as shareholders looked for more conservative vehicles to put their money into. However, in the first week of the new year, stock exchanges across the board experienced a spike that reflected optimism about the economy. But how positive will Americans stay as the kinks continue to get worked out?

The combination of tax increases on wealthy Americans and spending cuts that will occur in the coming months is causing investors to rethink their financial strategies in order to achieve stable, ... Read More »]]> What the Fiscal Cliff Means for M&A Deals.

In the afterhours of the new year, government officials averted the long-anticipated fiscal cliff that would have sent the U.S. economy into another deep recession. Despite the aversion, frustration and concern among Americans has been very apparent in the past few months. In the last week of December, markets were down as shareholders looked for more conservative vehicles to put their money into. However, in the first week of the new year, stock exchanges across the board experienced a spike that reflected optimism about the economy. But how positive will Americans stay as the kinks continue to get worked out?

The combination of tax increases on wealthy Americans and spending cuts that will occur in the coming months is causing investors to rethink their financial strategies in order to achieve stable, tax-deferred, long-term growth. In addition to the stock market, the market for mergers and acquisitions remains unpredictable. Private equity investors and owners of closely held companies had been cautiously watching out for the fiscal cliff; it will be interesting to see how they play their cards going forth into the future.

M&A Deals

The anticipation of increases in both capital gains and dividend tax rates after the expiration of the Bush Tax Cuts caused dealmakers to scramble in order to close merger and acquisition deals before the new year. The large capital gains that result from the sale of a company are going to be more heavily taxed in 2013 than they would have if deals were concluded before the end of 2012. For filers earning more than $400,000 the capital gains and dividend tax rates increased from 15% to 20%. This means that the backers of M&A deals will have to pay more in taxes.

At the end of 2012, the fear of the economic implications companies would face after falling from the cliff caused companies and private equity investors to attempt to close deals, fast. As a testimonial to the increase in the number of deals at the end of 2012, middle-market M&A investment firm, Monroe Capital noticed a heightened influx of deals in the past month and a half. Though it is common for more deals to come to fruition at the end of the year, 2012, investors say, was hotter than expected. Regardless, the global M&A market is down nearly 22% in total transaction value from the first half of 2011.

Now that the cliff has been averted, temporarily, optimism will continue to resonate with investors in the short term. But for M&A dealmakers, long term implications are important to consider as well. With uncertainty increasing over the fate of the debt ceiling, the still growing deficit, and long term consumer optimism, we may continue to see shortfalls in the number of M&A deals despite the heightened deal action at the end of 2012 and the aversion of the cliff. Companies will continue to constrain capital spending due to economic uncertainty. As a result, we will probably see American companies making less large investments, at least for the foreseeable future. Heads may turn to more foreign investment opportunities in order to avoid tax implications and benefit from growing economies like China and countries in the Middle East. It will be interesting to see how a potentially lower amount of M&A deals will affect banks and the economy as a whole. As government continues to sort out issues and short term consumer outlook stays positive, it is important to be wary of the long term health of the U.S. and be conservative about large M&A opportunities.

This is what the Fiscal Cliff Means for M&A Deals.

by Ryan Erfer – ryan(at)mergers.com

The last decade has seen consistent progress for middle market M&A, and the lower middle market has shown evidence of increasing appeal for Private Equity firms in particular.  While there is a considerable amount of public fixation on the multi-billion dollar mega deals, the lower middle market is quietly providing many private equity firms with more certain returns.  It is time to be less surprised about growth in lower middle market M&A, and more interested in learning about the deals that often go unnoticed amidst 9 billion dollar failures of mega deals, like that of HP.

Where are all of the deals?

According to PitchBook, the survey entity that tracks middle market private equity deals, the first half of 2012 saw lower middle market deals making up 55% of all middle market deals, up from 41% in 2011.  As ... Read More »]]>  

The last decade has seen consistent progress for middle market M&A, and the lower middle market has shown evidence of increasing appeal for Private Equity firms in particular.  While there is a considerable amount of public fixation on the multi-billion dollar mega deals, the lower middle market is quietly providing many private equity firms with more certain returns.  It is time to be less surprised about growth in lower middle market M&A, and more interested in learning about the deals that often go unnoticed amidst 9 billion dollar failures of mega deals, like that of HP.

Where are all of the deals?

According to PitchBook, the survey entity that tracks middle market private equity deals, the first half of 2012 saw lower middle market deals making up 55% of all middle market deals, up from 41% in 2011.  As firms become more hesitant to take home run swings on larger deals, the sub $100 million deals are like picking low hanging fruit for PE firms.  The lower middle market deals still don’t rival the amount of capital invested in the core middle market, which held relatively close to its 2011 trends, but the upward trend in lower middle market deals marks a definite movement toward a new normal.  Meanwhile, the upper middle market has suffered a decrease in number of deals.  There are many reasons why there is a downward trend in upper middle market deals, while lower middle market deals increase.

1.  Leverage is tough to get.
The PE industry has seen a steady drop in the amount of debt used to finance transactions.  Lenders became strict as a result of the financial crisis, and even though lenders have since begun to loosen up, the industry has seemingly adopted a policy of less leverage.  Even in the last two years, the percent of debt used has dropped from 60% to 37%.  And debt to EBITDA is down to 2.5, the lowest in a decade.  It is plain that PE firms are either unable to unwilling to finance their deals with the amount of debt for which the industry became famous.  The following chart from PitchBook shows the downward trend in debt financing.

2.  Less Risky
As discussed in my last article, there are a plethora of factors that can impede upon the accuracy of a company’s valuation.  From bias and emotion, to fraud and the unavoidable pitfalls of human estimation inherent in the various valuation calculations.  These issues are compounded dramatically as the deal in question gets larger and larger.  There are simply too many things that can slip through the cracks, just ask HP.  With a small acquisition, it is easier to manage the various factors and track their respective outcomes. There is also less risk with respect to the exit strategy: If the firm is successful in increasing an entity’s value, a smaller company will be easier to sell.

3.  Growing Popularity of Add-ons
A typical PE acquisition is called a platform acquisition.  The platform is the core business that the firm is trying to optimize.  These platforms can be enriched by add-ons.  Add-ons are small companies that offer synergies to the acquired platform companies.  Add-ons are often very small, with almost all add-ons under $50 million in revenue.  PE firms can make any number of add-on acquisitions to be added-on to the platform company.  The realized synergies are then useful in increasing the “platform + add-on’s” value for IPO or resale.  The following chart is also from PitchBook and details the marked increase in add-on acquisitions over the last decade.

Takeaways
While the Upper Middle Market will likely rebound in coming years, the current trend toward lower middle market deals is an understandable response to current market conditions.  One of the first indications that upper middle market deals are bouncing back will be an increase in the leverage ratio, but I don’t think we’ll see leverage ratios as high as the mid 2000s for several years.  One of the biggest positives about the trend toward lower middle market deals is for the business owners looking to sell.  Private Equity firms that might not have previously targeted $25 million dollar companies might now be considering the add-on implications of smaller companies in their portfolio.  It’s going to be a time of finding the small companies with great potential for growth, Warren Buffet would be so proud.

by Jim Kerrigan – jkerrigan(at)mergers.com

Ryan Seacrest, the hardest working show host in Hollywood, is quickly becoming famous for more than introducing American Idol contestants.  This last week, Seacrest Global Group made some noise in the acquisition market when it purchased a majority stake in Civic Entertainment Group.  This acquisition will beef up promotional capabilities for Ryan Seacrest Productions, his rapidly growing, and surprisingly diversified, production company.  His position in media has made him a hot commodity in the M&A world, with private equity firms like Bain Capital getting involved in his production company.  So far they have invested $300 million in Seacrest’s projects, though I doubt it was Keeping Up With the Kardashians.

After building a global name through his successful career as a media personality; hosting his syndicated daily radio show, which airs in over 150 radio stations in North America, ... Read More »]]>  

Ryan Seacrest, the hardest working show host in Hollywood, is quickly becoming famous for more than introducing American Idol contestants.  This last week, Seacrest Global Group made some noise in the acquisition market when it purchased a majority stake in Civic Entertainment Group.  This acquisition will beef up promotional capabilities for Ryan Seacrest Productions, his rapidly growing, and surprisingly diversified, production company.  His position in media has made him a hot commodity in the M&A world, with private equity firms like Bain Capital getting involved in his production company.  So far they have invested $300 million in Seacrest’s projects, though I doubt it was Keeping Up With the Kardashians.

After building a global name through his successful career as a media personality; hosting his syndicated daily radio show, which airs in over 150 radio stations in North America, hosting the top rated television show, American Idol for over ten years, and co-hosting the New Year’s eve coverage with Dick Clark for the past 7 years (just to name a few).  On top of that he has used his exposure and connections to become an Emmy award-winning producer.  

As he has leveraged his connections and experience to production, his production company has grown and boasts the production of movies, game shows, new scripted series, and popular shows on E!, including Keeping Up With the Kardashians.

The acquisition of Civic Entertainment Group is evidence to the fact that Seacrest is focused on expansion of the long-term business, and is eager to develop new aspects of his production company.  Civic Entertainment Group is a very successful marketing company responsible for clients such as HBO, ESPN, and CNN, and it has a forte in large branded events.  Seacrest’s current production projects are diverse in nature, but as of yet, his company does not produce live television events.  Civic Entertainment is equipped with the infrastructure and experience to produce and promote such events, thus the driving force of this acquisition.

Why has Seacrest been so successful as an entrepreneur?  It comes down to his experience in media and the connections that go with it; he is himself: an instrument of synergy.  And the most impressive part is that he knows how to use that advantage.  Seacrest defined his niche as, “[being] in the business of communicating to an audience, creating content and working with brands to bring them to customers.”  With upcoming game shows and movies, a cable-channel venture with Mark Cuban, and extensive marketing deals with P&G, Coca-Cola and Ford, Seacrest’s ability to bridge the gap between producers, advertisers, networks, and viewers will be a force to be reckoned with for other media companies.  And don’t be surprised to hear about Ryan Seacrest in M&A news from now on, he is interested in make more deals with companies that can work strategically with his properties and is already quoted at saying, “I am looking to add another asset that could take this to a more global level.”

While most probably wouldn’t have guessed that a chubby kid from Atlanta, Georgia would become a famous television personality, fewer might have guessed that he would leverage that success into becoming a media tycoon.  The founder of Civic Entertainment Group, Stuart Ruderfer, made a bold forecast about Seacrest’s future, “Ryan has a singular, incredible vision of building the next-generation media and entertainment Empire.”  If Seacrest continues on his route of synergy and diversification, that prediction might just come true.

By Jim Kerrigan jkerrigan(at)mergers.com

Bulge Bracket Firms vs. Boutiques

Bulge bracket investment banks are essentially the demigods of Wall Street and the entire investment banking industry. When one thinks of investment banks the most common names that surface are J.P. Morgan, Goldman Sachs, Morgan Stanley, Citigroup, Barclays, Credit Suisse, UBS, Deutsche Bank, and Bank of America. Rightfully so, these banks generate colossal revenues and advise on multi-billion dollar acquisitions whereas smaller banks do not. But, aside from the biggest banks, there are many boutique investment banks that also generate high revenues and lots of deal flow. The main difference between boutiques and bulge bracket banks is the size of the transactions. Typically, a boutique will advise transactions up to $1 billion, but usually much less. Regarding the work experience and one’s individual role in the firm, there are some common differences between bulge bracket banks ... Read More »]]>  

Bulge Bracket Firms vs. Boutiques

Bulge bracket investment banks are essentially the demigods of Wall Street and the entire investment banking industry. When one thinks of investment banks the most common names that surface are J.P. Morgan, Goldman Sachs, Morgan Stanley, Citigroup, Barclays, Credit Suisse, UBS, Deutsche Bank, and Bank of America. Rightfully so, these banks generate colossal revenues and advise on multi-billion dollar acquisitions whereas smaller banks do not. But, aside from the biggest banks, there are many boutique investment banks that also generate high revenues and lots of deal flow. The main difference between boutiques and bulge bracket banks is the size of the transactions. Typically, a boutique will advise transactions up to $1 billion, but usually much less. Regarding the work experience and one’s individual role in the firm, there are some common differences between bulge bracket banks and boutiques. For an analyst at one of the bigger firms, a lot of time is often devoted to doing administrative work, creating pitch books, and completing other various projects whereas at a smaller bank, analysts can be more hands on with deals and learn about the actual process a lot faster. The bigger banks, however, see a lot more deals than boutiques so the actual level of involvement at the analyst position is subjective.

While the size of boutiques varies greatly, only the biggest ones can rival the aforementioned demigods. Three boutiques in particular, Lazard, Greenhill & Co., and Evercore are highly active in M&A deals and are some of the top performing boutique firms among others. These banks only recruit on select campuses but you can apply on their website Careers pages. What follows is an overview of each firm, but there is much more to be discovered and learned about them.

Lazard

Lazard is a very prominent boutique investment bank that has advised over 1,000 mergers and acquisitions in its history. The company’s M&A division is a master at restructuring and sequentially gets a lot of high quality deal flow. Since the 1850s Lazard has advised some of the most well-known and complicated mergers including the sale of Barclays Global Investors to BlackRock for $13.5 billion, the merger of Pentair and Tyco Flow Control for $10 billion, the merger between the United Parcel Service and TNT Express, and the $52 billion acquisition of Anheuser-Busch by InBev. Clearly these deal sizes are some of Lazard’s biggest, even rivaling the biggest banks, but most deals hover closer to $1 billion. Since 1999, the firm has managed more than 250 restructuring deals totaling over $1 trillion in assets. The impressive track record of Lazard’s Financial Advisory division is responsible for a little more than half of the company’s revenue. The rest is attributable to the Asset Management Division which offers mostly securities. The company is very large for a boutique firm with over 2,500 employees in 42 cities worldwide. Employees, for the most part, say they enjoy the deal flow and fast paced work environment at Lazard, but are discouraged by the extremely long hours and heavy corporate feel . Boutiques will range from feeling very quaint and personal to a corporate powerhouse. On this scale, Lazard fits more toward being a corporate powerhouse. The company is a good fit for first year Analysts or internship applicants who are looking to be more hands on in deals and want to be at a boutique.

Greenhill & Co.

Also focused primarily on mergers and acquisitions is Greenhill & Co. Despite being on the NYSE, most shares of Greenhill & Co. are controlled by its Managing Directors, a distinguishing characteristic from other investment banks that are usually owned by a larger conglomerate. Greenhill & Co. advocates its independence and thus avoids conflicts of interest. Also unique to the firm is its sole focus on advisory services such as mergers, acquisitions, financings, restructurings, and capital raisings. With this business model, the firm is able to allocate its most senior associates to suit client needs without getting distracted by other research or trading divisions. The 16 year old company has a track record of successful deals attributable to its supreme staff of bankers. If you are looking for an internship or position at this firm, there is a very positive corporate culture that gives newcomers decent exposure to deals, clients, and senior professionals. Employees are extremely passionate and intelligent, but are warming at the same time. The environment is stimulating, but not necessarily as stressful as some of the other firms out there. If you know you want to do M&A, Greenhill & Co. is a renowned firm that is worth considering.

Evercore

Evercore was founded by Blackstone in 1996 and went public in 2006 with incredible success. The company increased net income by 80 percent and revenue by 47 percent and has continued to display market success ever since. In 2011 the firm saw several large deals come to fruition. In August of that year Evercore acquired an United Kingdom based investment banking advisory firm, Lexicon Partners, a deal that added about 100 employees to the firm and positioned it for continued growth in the future. In October of 2011, Evercore entered a strategic alliance with Kotak Investment Banking to provide joint M&A advisory services to clients in the U.S., Mexico, the United Kingdom, and India. In November, ABS Investment Management sold 45% equity stake to Evercore. ABS Investment Management is a hedge fund of funds that specializes in long/short equity deals. This purchase by Evercore is yet another attempt to expand operations by the already large boutique firm. As a whole, Evercore gets a lot of deal flow and it is a very rewarding environment to work in. While it is a rigorous and demanding culture, the firm is filled with extremely bright bankers and helpful employees. The company only recruits at the best universities and business schools, but you can apply on the Careers page of its website.

By Ryan Erfer  ryan(at)mergers.com

The Big Decision

Have you ever been faced with a decision that you feel will impact the rest of your life? How about when that decision is between two alternatives that both have balancing pros and cons, opportunities for success and personal growth, and are equally appealing in terms of your desire to pursue them. The last time I had to make a decision like this was when I was deciding whether to go to Emory University or Penn State University. (Though they are pretty much totally different schools, to me, they were equally appealing – making my decision an ongoing three-month-long battle). Now a junior studying at Emory University’s Goizueta Business School, a similar pivotal decision is drawing near. What do I want to do with my life? Junior year is an important year for business students who hope to ... Read More »]]>  

The Big Decision

Have you ever been faced with a decision that you feel will impact the rest of your life? How about when that decision is between two alternatives that both have balancing pros and cons, opportunities for success and personal growth, and are equally appealing in terms of your desire to pursue them. The last time I had to make a decision like this was when I was deciding whether to go to Emory University or Penn State University. (Though they are pretty much totally different schools, to me, they were equally appealing – making my decision an ongoing three-month-long battle). Now a junior studying at Emory University’s Goizueta Business School, a similar pivotal decision is drawing near. What do I want to do with my life? Junior year is an important year for business students who hope to enter corporate America after graduating. Firms that recruit juniors for their summer internship programs offer a promising opportunity for future work in addition to an incredible experience and connections. For me, the decision is whether to pursue investment banking or entrepreneurship.

A dilemma that is faced more and more by college students in today’s age is that between pursuing entrepreneurship or investment banking. On the one hand, the sound of becoming a self made billionaire like Zuckerberg with the freedom and control to build a company from the ground up sounds like quite an appealing adventure. On the other hand, fitting into the elite career of a high paid Wall Street investment banker doesn’t sounds too shabby either. Most would agree that pursuing a startup is much riskier than a career in investment banking, but for me the notion of “risk” is subjective depending on what you’re talking about. Riskier in terms of making money: probably. Riskier in terms of enjoying yourself, learning and growing as a person, establishing yourself, and making connections: who knows. It really all comes down to the individual. Perhaps a closer look at the pros and cons of being both an entrepreneur and an investment banker will provide better grounds for a scale on which to weigh the options.

Entrepreneurship

The life of an entrepreneur is thrilling and unpredictable. There is no other feeling like having an idea keep you up at night, rationing through strategies, thinking of action steps, development, networking, etc. The ability to live and work on your own comes with a lot of freedom and responsibility. It takes more than just a bright, determined, and motivated individual to be a successful entrepreneur. A successful entrepreneur is one who is obsessed with their vision and will go to the end of the earth to bring it to fruition. This type of ability and passion is not common among college students simply due to a lack of life experiences and a lack of confidence, but there are some that possess it. For me, the desire to be an entrepreneur stems from the urge to solve problems, put myself out there, and create something I can call my own. In today’s age, I genuinely believe that anyone can learn anything. With the internet at the core of a fast paced technology race, knowledge is for the taking. If someone else out there can be an entrepreneur and build a company from the ground up like lego bricks, then why can’t I? It is all a matter of just diving off the edge, but it’s not an easy jump.

Two factors that turn many college students away from entrepreneurship are the stress that come from having to wear many different hats and the reality of college debt. As an entrepreneur you need to be a manager, marketer, salesman, financier, networker, developer, and a creative mind all in one. Jumping into all of these sudo careers, as a college student who normally has to choose just one career, is scary. However, the experience you can gain from doing so is incomparable to any other career and may be perceived as the opportunity of a lifetime. Moreover, with the average debt of a college graduate nearing $27,000, the financial uncertainties of running a startup become a serious factor. For students with college debt, a more conservative path to corporate America is the only practical option. But then again, as you get older and have an established job and family, it will be far more risky to quit and pursue a startup. The whole risk reward thing is clearly a recurring theme here.

Investment Banking

When compared to going for entrepreneurship right out of college, investment banking sounds like a much more reliable path to financial success and a fulfilling early career. The high salary coupled with a rigorous, fast-paced work life is an appealing opportunity for young and hungry college students. Not to mention, there is something elitist about being an investment banker. Wall Street is home to some of the wealthiest and most prestigious financiers in the world and is a breeding ground for some of the country’s smartest college students. After working on a variety of projects with other bright individuals and superiors, you will be sure to achieve a wealth of knowledge and individual growth. If you love finance like I do, the work at an investment bank will be very mentally stimulating. Projects in line with advising a multi-billion dollar M&A transaction are incredibly interesting and demanding. While the life of an investment banker is tireless, it is definitely very rewarding. Investment banking Analysts earn some of the highest salaries among college graduates. As someone who wants to pursue finance as a career, and make a lot of money, investment banking sounds like an obvious choice. But of course, a position at an investment bank will not be handed over on a silver platter, nor is it for everyone.

Two of the main reasons deterring students from pursuing investment banking after college are the feasibility of entry and success in the industry and the amount of hours that are required on the job. Most bulge bracket and top boutique investment banks only recruit at the most prestigious universities and business schools. They want to see tailored resumes, superb academic records, and experience in finance. The behavioral and technical interviews take lots of practice and are what make or break your entry into a firm. The competition is always well-tailored so it is necessary to prepare accordingly. For those without a lot of finance experience or not studying on a recruiting campus, the journey is even harder. Aside from the process of getting the job, the work-life balance is another deterrent to being a banker. Working 80 to 100 hour weeks is extremely demanding and there is no doubt that it takes a toll on you. Again, the job is not for everyone and that is why the selection process is so difficult. The banks need to make sure they are hiring the right person for the job.

Reviewing the “Risks”

So what can you take from all of this? Whether or not to pursue entrepreneurship or investment banking (both of which are incredible opportunities and choices, might I add) is a decision based on a number of factors. Every person will evaluate the pros and cons of the two careers differently, but some of the main factors that I look at are whether I will be able to make money, establish myself, make connections, learn and grow as a person, and enjoy myself. As I weigh the opportunities of both entrepreneurship and investment banking under these credentials, the decision remains close to deadlock. Either way, it is important to realize the following: success stems from being a great person who does great work. If you are both a great person and do great work, you cannot go wrong in either industry. And let’s face it, there’s time to try a number of careers so don’t stress too hard about one or the other. Just be the best.

by Ryan Erfer

Here is a ... Read More »]]> After a slowdown in India’s M&A action earlier this year, momentum is building up once again in light of a recent clarification given to a legal regulation. The Times of India reported that amendments to India’s General Anti-Avoidance Rules (GAAR) were finalized earlier this month. This controversial Indian law was crafted to combat the nation’s long-time problem of tax evasion; the section of concern for business aims to prevent tax avoidance through foreign investments. There was fear that its vague wording would give excessive power to tax officials that would result in the harassment of investors. According to a Firstpost article, a lot of Indian companies sitting on substantial amounts of cash are scouting out acquisition opportunities in the international market. It appears that firms have been able to begin taking action, especially in very recent months.

Here is a look at the November highlights of India’s M&A scene:

ONGC Videsh Ltd. agreed to buy an 8.4-percent stake in Kazakhstan’s Kashagan oil field for about $5 billion. This stake is currently held by US energy giant ConocoPhillips. According to a Firstpost article, this M&A transaction would be India’s sixth-largest merger to date. ONGC is the overseas arm of state-owned Oil and Natural Gas Corp.

After facing rejection of its offer to buy Orient Express Hotels Ltd. stock at $12.63 a share, Tata Groups’ Indian Hotels is considering increasing its offer, according to the Wall Street Journal. The Mumbai-based company’s offer included a 40-percent premium over Orient Express’s share price at the time. However, Orient Express Chairman J. Robert Lovejoy expressed that the offer was made at a time when the shares’ value had been significantly depressed. One executive articulated that he believed the stock was worth about $18 a share, about double the stock’s market price at the time of Indian Hotels’ offer.

It was reported this week that Indian conglomerate Sahara India Pariwar purchased a 75-percent interest in the Plaza Hotel New York for $575 million from El Ad US Holdings. Kingdom Holding Co., controlled by Saudi Prince Alwaleed bin Talal, holds the remaining minority interest. Fairmont Hotel and Resorts will continue to operate the luxury hotel.

In what has the potential to be India’s largest inbound M&A deal this year, U.K.-based Diageo Plc will acquire a 53.4% stake in United Spirits for $2 billion, according to a Hindustan Times article. In past years, the U.K. has been the top acquirer of Indian assets. However, Deloitte India leader Avanish Gupta says that this deal is unique and “does not signify that many more inbound deals are likely to happen.”

by Ashley Luttenegger

Over the past decade, two words have become a bit more commonplace in Brazilian business vocabulary: fusões e acquisições; that’s Portuguese for “mergers and acquisitions.” Since 2002, the mergers scene in this developing country has been growing with an impetus mirroring that of the growth of the nation’s economy as a whole. From 2002 up until 2011, on average, this emerging South American economy realized a real growth rate in GDP of just over 3% per year, with the number of mergers increasing annually at a rate of about three times that. According to a study carried out by PwC published at the beginning of this year, a reported 746 M&A transactions took place last year, 273 of which disclosed values. The majority of those transactions with disclosed values were in the food and beverage, financial, retail, and ... Read More »]]> by Ashley Luttenegger

Over the past decade, two words have become a bit more commonplace in Brazilian business vocabulary: fusões e acquisições; that’s Portuguese for “mergers and acquisitions.” Since 2002, the mergers scene in this developing country has been growing with an impetus mirroring that of the growth of the nation’s economy as a whole. From 2002 up until 2011, on average, this emerging South American economy realized a real growth rate in GDP of just over 3% per year, with the number of mergers increasing annually at a rate of about three times that. According to a study carried out by PwC published at the beginning of this year, a reported 746 M&A transactions took place last year, 273 of which disclosed values. The majority of those transactions with disclosed values were in the food and beverage, financial, retail, and construction and real estate industries. Three of the four most highly valued transactions were specifically related to steel, including a deal in which five Chinese companies purchased a 15% stake in Brazil’s niobium production giant: CBMM. In 2010, CBMM had a reported profit margin of nearly 40%, and demand for niobium is expected to rise, as Diana Kinch noted in a Wall Street Journal article published on September 2, 2011.

Not surprisingly, the vast majority of Brazil’s 2011 M&A action took place in the nation’s Southeast region, where the country’s two most populous cities, São Paulo and Rio de Janeiro, are located. The M&A transactions in these two locales alone accounted for approximately two-thirds of the economy’s overall merger activity.

Unfortunately for Brazilian M&A enthusiasts, the mergers momentum may face a slow down this year. Jones Day, a worldwide legal institution, reported this May that as of May 29, 2012, firms must notify and wait up to 330 days to obtain approval from Brazilian officials before they can close their deal. At the very least, they will face a statutory review period of 240 days. The new bureaucratic constraint may cause companies to experience an approval hold-up in Brazil similar to the one they face when carrying out mergers with Chinese companies. Firms that seal the deal without approval can face fines of up to 60 million reals (about 29 million US dollars), and Brazil’s regulatory agency, the Administrative Council for Economic Defense (CADE), could declare the deal void. However, minority interest deals such as the 2011 Chinese stake acquisition in CBMM are not required to notify. Nevertheless, in 2011, these types of deals made up less than one-third of all announced transactions. Meanwhile, merger and acquisition deals made up a combined total of 60% of these transactions. This means that the new law could have a substantial effect on the number of M&A deals that will occur on Brazilian soil this year and in years to come.

Fraud While this is not the main reason for companies to ... Read More »]]> Last week, HP recognized its latest acquisition failure in the form of an $8.8 billion write-off of its $9.7 billion acquisition of the British software company, Autonomy. In the wake of this mega-deal’s mega-bust, we at mergers.com wondered why big deals often seem to go so wrong. Obviously, the HP deal had to include a major element of fraud for Autonomy to have been overvalued by almost 1,000%, but the fact that large M&A deals show a convincing trend of overvaluation make low to mid-market M&A deals far more appealing.
Anyone who wishes to understand and be involved in the M&A industry should grasp the complexity of the valuation process, and more importantly, why overvaluation is so frequent. The following are some of the main reasons for companies to be overvalued.

Fraud
While this is not the main reason for companies to be overvalued it is important to note that fraud is entirely relevant. The incentive is extraordinary for stakeholders to solicit the highest price possible in a deal. There is also ample room for oversight with so many moving pieces in a huge deal. It’s hard to believe that there was no fraud involved in the Autonomy acquisition for the valuation to be so far off the mark. It will be interesting to see the results of the investigation into the Autonomy deal because there were extensive audits by Deloitte and KPMG, not to mention the due diligence of the investment banks and HP itself. Fraud is the most obvious way that a company can be overvalued, but even with the best intentions, many deals go south.

Calculation Flaws
While major M&A deals use a combination of valuation methods, the outcomes are often dependent on a plethora of assumptions. The main valuation methodologies are: (i) The comparable company analysis, where the value is determined by comparison to comparable companies; (ii) the discounted cash flow analysis, where the value is based on the present value of future cash flows; and (iii) the Precedent Transactions method, where the price is determined based on past transactions.
The latter method is probably the most susceptible to overvaluation due to the implementation of a control premium to reach a final price. The premium is the amount the buyer is willing to pay greater than the current market price of that company, and is often based on previous transactions that were overvalued in their own day. This premium is justified by the subsequent synergies that will result from the merger/acquisition, but many are skeptical about the ability of a mega-merger to realize synergies in an efficient manner.
The discounted cash flow model is highly sensitive to changes in assumptions because it relies on a multitude of factors, from Revenue growth, to Cost of Goods Sold, various timings, and much more. There is also a tendency for projections to be overly optimistic. This is fueled by not only by the target company wanting to look appealing, but the acquiring company also wanting to feel optimistic about their new business unit’s prospects.
The comparable company methodology is good for determining whether the current market price is over or undervalued compared to competitors, but also relies on various assumptions for consolidating various metrics to reach a final price. Regardless of which method dominates the valuation, each has its vulnerability to overvaluation, and when the decision-makers get emotional and eager to make the deal, those vulnerabilities are forgotten.

Emotion
Mergers can absolutely lead to synergies that increase the value of each company, the classic example: 2 + 2 = 5. There is a lot to be said about economies of scale, resource integration, production efficiency and other synergies that can be reached, but these efficiencies are worthless if the company sets disproportionate expectations. Warren Buffett says that anything can be a good investment, “at the right price.” In an M&A transaction, most parties want the price to be high, the target obviously wants a high price, the Investment Bankers work on commission, and the acquirers, can often be too impatient to get the deal done. They have demanding shareholders who want progress and synergies, not to mention the prestige of executing a major deal. In the end, their fiduciary duty becomes a convoluted picture of conservative company strategy vs. making massive acquisitions and bold, awe-inspiring decisions.

Don’t get too cynical; massive, multi-billion dollar M&A deals aren’t all bad, they are just highly vulnerable to error, unsurprising considering all of those zeros. That is why so much money goes into the execution of M&A transactions. In a perfect world, slow deliberation, and transparent communication can lead to great M&A outcomes. Unfortunately for HP, this is not a perfect world.

by Jim Kerrigan

Becoming an Investment Banker Trying to land a job as an investment banker is no walk in the park, but with the right preparation and desire the trek can be a successful one. Despite the repetitive application process, applicants still vicariously search for a distinct edge and that perfect formula for success. Such common questions including “Who should I talk to?”; “Is my resume good enough?”; and “How do I nail the interview?” are always being asked by hungry applicants. Thus, it is important and necessary to address these questions as well as others in order to understand the process to land a job.

Who Should I Talk to? The importance of networking can not be emphasized enough. It is a must if you want any shot at all in the investment banking industry. Networking must become a routine part ... Read More »]]> by Ryan Erfer

Becoming an Investment Banker
Trying to land a job as an investment banker is no walk in the park, but with the right preparation and desire the trek can be a successful one. Despite the repetitive application process, applicants still vicariously search for a distinct edge and that perfect formula for success. Such common questions including “Who should I talk to?”; “Is my resume good enough?”; and “How do I nail the interview?” are always being asked by hungry applicants. Thus, it is important and necessary to address these questions as well as others in order to understand the process to land a job.

Who Should I Talk to?
The importance of networking can not be emphasized enough. It is a must if you want any shot at all in the investment banking industry. Networking must become a routine part of your efforts, and it is important to get as much reach as possible. Reach out to the following people: recent graduates, friends who are entering the field as well, family members, friends, friends of family members, friends of friends, teachers, professionals in complementary fields, and of course professionals in investment banking. Students often misjudge and undervalue the power of their network, mostly because they are not using it properly. Your friends and family want to help you, so contact them, see who they know, and then go from there. Not only do you want to be contacting every potential connection to the industry, but you want to be learning, following up constantly, offering them something, asking questions, and building a credible brand image for yourself. Obviously, you must be knowledgeable about the investment banking industry and have a visible desire for wanting the job – something that all people can read in to.

Is My Resume Good Enough?
The resume is the trophy of your experiences and the backbone to your application. When evaluating your resume, look at it from the perspective of a busy and well-seasoned recruiter. Is it overwhelming? Does it look substantive and professional? Also, remember that you are competing against the best of the best applicants from top business and Ivy League schools. While you should be wary of this, it should by no means be a deterrence to your efforts. Build your resume up with finance-related work experience and extracurricular activities with leadership roles. If you don’t have a lot of visible experience in finance it is ok, but be sure that your resume shows depth, an element of personal progression, and that you are qualified enough for the job.

How Do I Stand Out Amongst My Peers?
When it comes down to it, the interview is by far the most important component of the application process. You will hear over and over that you will have to “tell your story” and tell it well. The only way to do this is through practice. Find a list of potential questions commonly asked in an interview and answer them using the STAR method. The STAR method helps you craft your story using the Situation, Task, Action, and Result. The Action component of your story needs to be detailed and strong because, after all, recruiters are evaluating you and your actions. Once you have all of the questions answered using the STAR method, take a step back and see if this collection of stories paints the image of yourself that you want to showcase. Also, during the interview, it is important to ask really good questions that are thought provoking. If you can muster up good conversation and cause people to think in new ways, chances are you will be remembered for it. Remember that all of this preparation takes time, so prepare accordingly. But with the right crafting and effort, you can get the job.

Can college students learn to manage their finances well and still have extra money on the side? The answer is yes.

The first word that should come to mind is the great six-letter word every collegian should use often in his or her vocabulary, “budget.” Budgeting is the basis of beginning life without parents and learning how to successfully spend and save money. Using an easy, free online budgeting tool and knowing how much you spend on gas, rent, and groceries can save you a lot of money over a short amount of time and create money conscious habits that last a lifetime.

Although credit cards may sound appealing when one first turns 18, steer clear of spending money you do not have. Credit cards can be a plus for building credit, but make sure it is used for ... Read More »]]> by Jenna Richardson

Can college students learn to manage their finances well and still have extra money on the side? The answer is yes.

The first word that should come to mind is the great six-letter word every collegian should use often in his or her vocabulary, “budget.” Budgeting is the basis of beginning life without parents and learning how to successfully spend and save money. Using an easy, free online budgeting tool and knowing how much you spend on gas, rent, and groceries can save you a lot of money over a short amount of time and create money conscious habits that last a lifetime.

Although credit cards may sound appealing when one first turns 18, steer clear of spending money you do not have. Credit cards can be a plus for building credit, but make sure it is used for things such as gas and groceries; the key to building good credit is just that, being good about paying bills on time and leaving no month-to-month balance. For the more timid, stick to debit cards, record purchases, don’t forget to check your monthly statements and use the free money tracking tools provided online from your bank.

According to USA Today, “two-thirds of college seniors graduating from non-profit four-year colleges in 2010 had student loan debt, and the average owed was $25,250 — up 5% from a year earlier.” Defaulting on student debt can become a graduate’s worst nightmare, having major effects on credit scores, getting a job and security clearance. If you must take out loans, make sure to do adequate research to know how much you are paying in interest and always try to pay more than is due if possible. Seek out scholarships; although many are need and merit-based there are websites dedicated to find a range of scholarships given for a number of miscellaneous reasons, such as being left handed or of a particular cultural descent.

It’s never too early to start saving for the future! Try to put away each month into an emergency fund, not to be touched unless desperately needed, or contribute earnings from a summer job into a Roth IRA. Roth IRA’s typically have low limits for entry and will give a much better return than your savings account. Contributing as low as $40 a month to a Roth IRA is a great way to get used to putting money aside for future needs. Investing now is a great step toward eventually contributing to a 401K when you get your first post-graduate job.

College itself is the number one investment for your future. Now that you’ve made it this far, consider some of these steps and take the initiative to a successful and well-prepared future. Now is just the beginning of your financial life and it is never too early to start being money conscious and saving, whether it be investing in funds or putting money away for retirement; you’ll be happy to have the extra time for your money to grow. Just remember you are a college student, so live frugally and save money while expenses are low so that you can build a better start toward your future.