I. Mergers and Acquisitions

1. Concept. Indisputable grounds for a merger (external growth versus organic growth).

A merger is an agreement between two or more legally independent companies to combine their assets and create a new company. This type of merger is sometimes called a consolidated merger and is not necessarily a “merger between equals”, rather it can be an acquisition that results in a new company.

When one of the companies acquires the equity of the others, this merger is called a statutory merger or takeover. We will call them takeovers and define them as when 2 or more companies join and only one of these companies survive.

The ultimate goal of all mergers and acquisitions between companies must be to realise synergies, which maximise the value of the resulting entity, thereby creating value for shareholders:

An acquisition produces synergies when the present value of the cash flows the company is expected to produce in a given period of time after it is in the buyer’s control is greater than its purchase price (market price + premium). This argument states that the more total synergies you can achieve the more you can pay.We must always remember, however, that many companies are good acquisition targets at one price and horrible targets at another.

2. Strategic Alliances and Joint Ventures: alternatives to mergers and acquisitions.

Joint Venture:definition and types.

  • –  Two or more companies join certain assets and work together to achieve a business objective. The duration of this combination is generally defined or limited. They maintain their own independent company operations and continue to exist separately as they did prior to the agreement. The joint venture is formally created as a corporate entity, an independent company.
  • –  We can distinguish between vertical joint ventures (transactions between buyers and suppliers) and horizontal joint ventures (transactions between companies that are in the same line of general business) and between capital joint ventures, (capital is contributed to set up something new) and contractual joint ventures, where despite the partnership each party remains corporate autonomy (normally nothing corporate is set up in a trade agreement).

Reasons for joint ventures.

–  How well they would work together: The cultural differences between the two companies can become evident when a joint venture or strategic alliance is made. –  Increase research and development skills. –  Obtain access to essential supplies: Two or more companies could form a joint venture to be able to have a greater source of supplies for their production processes. This could range from the joint exploration of oil companies to joint training programs for workers. –  Improve distribution systems. –  Access to foreign markets with the support of a local partner: you generally provide technology and experience and you benefit from the local partner’s experience, their geopolitical support…

Strategic alliances

Strategic alliances are less formal partnerships between companies in comparison to joint ventures. The nature of alliances tends to be. A strategic alliance never deals with capital w), although it may entail crossover shareholdings. Example: airlines, with a shared flight. The companies that had more experience with alliances were more likely to have successful future alliances and that companies that had a department dedicated to supervising the company’s alliances were more likely to have effective alliances.

3. Corporate Valuation Methods.
A. Approximated Methods for Corporate Valuation (equity&mixed).

Equity Methods. Extract data from the balance sheet or income statement and, unlike mixed methods, never take into account the reason for the valuation, or the on-going concern basis (outlooks), or intangible assets (goodwill).

–  Net asset method: represents the asset value of the company (capital + reserves) as per the accountingn effect). –  Adjusted net asset method: represents the value of assets, updated at market valueless, less any debt (said debt is estimated at its present liquidation value). –  Substantial value method: according to this method, the value of the company is the actual present market value of the set of goods used in operations without taking into account the funding thereof. –  Liquidation value method: asset items are classified according to their disposal options . In addition to the typical issues (in this case the net asset analysis is clearly preferred over a performance analysis, which means that the company’s continuity is not taken into account.

None of these methods include goodwill, which is sometimes the most important item of a company’s equity.

Mixed Methods. Es aquel que considera que el valor de la empresa debe tener una prima adicional, derivada de la existencia de un fondo de comercio, derivada de la existencia de un fondo de comercio.

– Método directo o anglosajón: el valor de la empresa es la suma de su valor substancial (es decir el valor real presente de mercado del conjunto de los bienes empleados en la explotación) más el valor inmaterial que representa el fondo de comercio (diferencia entre beneficio neto obtenido por la empresa, menos el rendimiento sin riesgo que ofrecería una cuantía similar al valor substancial, en función del tipo de interés de mercado), todo ello, actualizado durante el número de años que se estima se va a mantener la situación.

B. Multiples Valuation. (b.1) of comparable listed companies and/or (b.2) of similar transactions in the market.

A financial multiple, which compares the share price (prices from companies are not always common or public, but they are in the case of equals traded on stock markets, i.e., in the case of listed companies) with a piece of the company’s financial data.

This is a valuation method not only used by investment bank analysts, but also by stock exchange analysts (those who provide their opinions on the prices of IPOs or POS, for example).

b.1 Multiples valuation of comparable listed companies.

In this case we compare the share price with the net profit or profit per share in the company.

Note: The multiples valuation method using comparable listed companies could also be considered an approximate method for corporate valuation (equity method). However, not all approximate corporation valuation methods are multiples valuations of comparable listed companies, as (1) the latter only takes into consideration net profit or profit per share (and the P/E ratio of the sector at hand) to determine the company’s market value, (2) other elements are required (the P/E ratio of the sector at hand) and, (3) because the purposes are different, as the latter serves to assign a value to an unlisted company or to compare a listed company with another in the same sector.

This method is normally used by stock exchange analysts fairly frequently, while capital risk analysts tend to prefer the cash flow discount method.

P/E ratio. The P/E ratio (which is also convenient and very useful for comparing companies) aims to evaluate companies (specifically their share price) in connection with their profits.

PE ratio = PRICE/EPS o market.cap/net profit

The value of the shares is reflected by the market’s capitalisation of the company’s profits, We can also find the P/E ratio defined as the number of years of a company’s future profits that are being paid for

Notes on the P/E ratio:

i. The P/E ratio, is the combination of two variables that are calculated at different points in time, (the price used is that of the date of calculation, whereas the figure used for earnings per share is that most recently published by the company and can be 3 months old, for example). This is why some substitute the EPS with the next year’s estimated EPS (BPA1). This way both variables (price and EPS) reflect expectations. This P/E ratio is called the estimated P/E ratio.

ii. Valuating companies according to other companies’ P/E ratio has the following disadvantages, inherent to the P/E ratio:

–  The company must obtain a profit.

–  These can be tweaked in accounting through the various ways to accrue/defer income (creative accounting).

–  No two companies are ever the same, and for similar reasons and because of countries’ different accounting criteria

–  It is not reliable in the case of companies experiencing high volatility, as those fluctuations lead to very marked volatilities in the P/E ratio as well.

C. Discount Method Valuation(dividend sand freecashflows).

This method is the most accurate way to appropriately estimate the value of a going concern, as it takes into consideration its future prospects, the compensation required by its capital providers and because it is difficult to tweak.

Basically it aims to obtain a present value of the cash flows generated by the company (the cash flows the company is expected to generate in the future) within a given time frame. To that end, we must discount said future cash flows (that we will have stated beforehand, with all the difficulties that entails.

4. Forms of Corporate Restructuring.

Corporate restructuring is any operation that aims to change a company’s capital structure (modify the existing proportion of debt and internal resources), and/or ownership structure (generally consisting in maintaining only profitable and risk-free businesses).

Mergers and acquisitions are no more than a specific form of corporate restructuring.

a. The partial split of a company to third parties or divestiture (sell-off).

The arrival of a technological change and/or economic crisis marks when to sell business that are not strategic in the interest of providing the company financial stability. A sell-off is a simple divestment comprising the sale of a part of the company, such as a subsidiary or a division, to a third party.

– The sale shall also be carried out if the assets made available for sale have greater market value than if the cash flows expected to be produced should said assets continue to form part of the company were simply updated or discounted.

– The purchasing party tends to benefit from this type of transaction, especially if the acquired assets or businesses are similar to its line of bussiness or if the acquiring party is a venture capital company.

– The selling party, in turn, will benefit if the money received reduces debt and/or is used more efficiently than how these assets were being managed, careful though with selling business lines that can generate cross-selling

– In stock market terms (for those who buy shares, like investors) the best divestitures are those companies that serve as a complement to the parent company’s main operations, like when a pharmaceutical company splits from a subsidiary that manufactures medical equipment.

– Heavily indebted companies opt for divesting, while less indebted companies tend to split without surrendering control (or an equity carve-out, which we will see later).

b. The partial split of a company to shareholders (spin-off).

This consists in distributing the subsidiary company’s shares among the parent company’s shareholders, in the same proportion as their shares in the first company. The shares of the splintered entity are offered to the parent company’s shareholders, who become shareholders of both companies instead of just one.

Assets are not delivered in exchange for money or securities, rather shares are simply distributed among those who were initially ultimate owners. This means that the parent company, not the new company, does not take any money in the operation

After the operation, the subsidiary becomes an independent company, although with the same ultimate owners as its parent company.

c. The public offering of a subsidiary’s shares or a split through the sale of shares, but without surrendering control (equity carve-out).

This comprises listing part of the shares of a subsidiary that is totally controlled by the parent company on the stock market, but without losing control of the company (a split, but the reverse of a sell-off, without the loss of control). The parent, instead of financing itself by increasing capital or borrowing money, sells part of its controlling shares, an IPO.

It is also a way to be self-financed to make its own investments.

Conclusion: You include financial partners but retain control.

Equity carve-outs are favoured when the stock market is on the rise (i.e. sales of this type are carried out in the mark-up phase of the market cycle).

5. Investment Banking.

What is a Financial Market? It needs first for there to be a capital surplus that is ready to be lent, second a party to need financing in a similar volume and finally an intermediary. The most important one is London due to 2 advantages, it’s timezone between America and Asia and the English language.

In the USA, the birth of investment banking is connected to the funding of the rail road. transforming companies’ debt into long-term quoted bonds that commercial banks and investors bought.

as investment banks – entities that did not accept individual deposits, where less regulated in terms of the risks they could assume (that practised proprietary trading, which is investing for their own gains rather than for that of clients’) ,and commercial banks – entities that accepted individual deposits which they used to provide a public service, that were Federal Reserve members.

Repeal of the Glass Steagall Act Did the integrated model fail?

Allowed commercial banks to re-enter the investment banking business and assume greater, mostly off-balance, risks, such that they did not need to increase equity capital.

There are basically two integrated models:
Investment banking with private banking/asset management

Investment banking with commercial banking (hedges work by virtue of the credit they receive from commercial banks)

The first, which is the most affected by the crisis, consists in capturing and retaining local/multi-local and/or global wealthy customers (what UBS calls “key clients”) in order to advise them on their corporate finances (corporate, equity, etc.) and on the management of their personal finances. The Solution was to Go with the integrated model, but with significant risk control and solvencies separated by business lines. Reducing the likelihood of receiving government aid, investment banks would be prudent, in terms of the risks they assume, especially market risks, to ensure that the entity will not be ruined in the next market cycle and that they do not sell castles in the air to private banking clients.

Process for selling a company.

Basically, the sale of a company is a complex process that tends to last between 9 and 20 months (though transaction maturation times are increasingly longer):

1.  As they are well informed, investment banks point out business opportunities that they detect through their network. They propose potential mergers, sales or purchases to their clients, keeping relationships with these clients alive, which is appealing especially in the case of serial buyers (sometimes non-deal roadshows). If the company is interested in the proposal, a preliminary analysis of the transaction (objectives/analysis/schedule).

2.Preparing the documentation: valuation of the company and preparation of the prospectus (after signing the confidentiality agreement).

3. Analysis and selection of potential buyers and investors. Based on the preliminary bids, which are not binding, a restricted list of candidates is drawn up. These candidates are informed of the schedule for the process and the content bids are expected to include.

4. “Due Diligence”: The selected investors (see the following page on how M&A processes can go) are granted access to the Data Room, where they can find a great deal, if not all, the information on the firm (which is why a full internal audit is normally performed on the accounts once the transaction is closed).

  1. Price and conditions are negotiated (when and how payments are to be made), as are guarantees. Legal and fiscal matters and coordination with other consultants (lawyers, accounts, whose presence is more common in the purchasing process) The transaction is closed

II. Public Offerings and Corporate Strategies.

A. TOBsystemsandanti-TOBdefencesystems:prosandcons.


When a company decides to buy shares in a target company, to control it (but not encompass), it may launch a takeover bid (TOB) regarding a portion (partial TOB) or all of the company’s capital.

This bid is made by the buying company’s management to shareholders of the company to be acquired

This comprises in a fixed price per share that is generally higher than the market price (some place the TOB premium at a minimum of 20%). This,benefits the shareholders of the company to be acquired, who receive more money than what the shares are worth on the market and on the other hand penalises, at least initially, the buying party’s price.

Types of TOBs.

Mandatory/voluntary TOBs: Mandatory TOBs are presented for 100% of the company’s shares at an equitable price and cannot be subject to any conditions. Voluntary TOBs are not subject to legal requirements regarding price or number of shares and the offering party can establish conditions.

TOBs: once the offering company has control of the auctioned company. Their purpose is to allow the shareholders of the company receiving the TOB to sell their shares at an equitable price.

Competitive TOBs: when the bid concerns securities for which another TOB has already been presented, where the acceptance period of the first TOB is not yet finished, provided a series of requirements are met.

Exclusion TOBs: the goal is for the company to cease being listed on the stock market. The compensation in this type of TOB is always money.

TOBs can be hostile or friendly (e.g., the BBVA TOB for the 40% of Bancomer it did not control), depending on whether management of the company to be controlled agrees to the acquiring company’s proposal.

B. The legal regime for TOBs.

Regulations on TOBs for securities are to promote an efficient corporate control market, as well as to protect minority shareholders in the face of changes in the control of companies quoted on the stock market.

Mandatory partial TOBs are disappearing (there will be fewer operations from now on) and we transition to a total TOB model so that when a company has 30% or more of the voting rights, directly or indirectly through another company or it accumulates 50% of capital with voting rights the company will have to launch a TOB for 100% of the capital.

The ordinance distinguishes, however, in terms of the required price, between 2 types of TOB:

Voluntary TOBs (those derived from obtaining 30% or more of the voting rights). In this case the price of the TOBs is free, but if it receives less than 50% acceptance, a new TOB will have to be launched at an equitable price (see more below).

Mandatory or sudden TOBs: These are TOBs where the acquiring party already owns some of the company’s capital that for whatever reason exceeds the established limits (either because the acquiring party buys more than 5% in a single year or because it exceeds 50% of the company’s capital). These must be launched at an equitable price.

C. De-listing tender offer (DTO).

When a company no longer wants to be listed on the stock market, it must present a de-listing public bid, so those who want to abandon the company have a last opportunity to do so before it exits the stock market

III. Initial Public Offering (IPOs) and for Subscription (POS).

1. IPO: Concept, requirements, procedures and stakeholders.

a. Concept.

Definition: An IPO (Initial Public Offering) is placing negotiable securities in circulation and announcing their listing to the public.

It is clear that an IPO does not entail a capital increase  and what happens is that the existing shares change. Another difference is the type of share investor/buyer (in POS shares tend to be offered exclusively to institutional investors, compared to IPOs that are aimed at the overall market: institutional and minority shareholders).

In the majority of the cases said IPO/listing is combined with a POS, such that the savings banks obtain more resources for making investments

The place value on a shareholding portfolio that in all cases comprises only listed securities (this is not the case of criteria, for example).

They diversify risks and especially release own funds (for the purposes of the solvency ratio: the BIS capital ratio) to continue growing.

For shareholders this is a way to sell). At least 25% of capital must be placed on the market by, even if this includes the part reserved for the placement agents) or all the shares that are owned (privatisations).

Major operations are carried out in those markets experiencing solid growth and where more funds can be gained (China, India, a bit in the United States and none or nearly none in Europe).

b. Requirements. there are three minimum conditions for a company to be able to be listed on the stock market:

Having a minimum capital of 1.2 million Euros (excluding individual shareholdings equal to or greater than 25%)

Profits made in the last two years were enough to be able to distribute a dividend of at least 6% of disbursed capital and this once having made the provision for taxes on profits and having provided for the relevant legal reserves.

The number of shareholders with an individual shareholding lower than 25% of the capital shall be less than 100.

c. Investors. There are basically three types: minority, institutional and employees. 2. IPO versus POS (Public Offering for Subscription).

These 2 public offerings, although they can be effected simultaneously and despite the fact that both can affect the shareholding structure, are different:

  1. IPO does not involve any increase to capital. The shares simply exchange hands, when one or several shareholders sell a percentage of the capital. In POS, new shares are issued, increasing the company’s capital, such that the capital structure is affected. This is how the company tries to obtain financing for organic or external growth, to begin a project from scratch to increase the free float of the company, etc.
  2. Those new shares can be subscribed by any former shareholders that do not want to see their shareholding diluted, or by other investors in the event the former shareholders waive their preferential subscription right and their right to sell same on the market.
  3. Sometimes capital increases are effected through an express placement system and are exclusively aimed at institutional investors. This is a quick, cheap formula that is

Less vulnerable to the risk that it will not be accepted, although it also needs a merchant bank or banks to underwrite/insure the operation.