Investment Banking: Mergers and Acquisitions

Mergers and acquisitions (M&A) is a key function of the investment banker. When companies get together and combine, which happens during mergers and acquisitions, the terms of a deal usually are straightforward. Typically, a larger company is looking to bolster a part of its business.

The company could hire a team of people to build that company from scratch, pairing up researchers to design the product, finance people to price it right and control costs, marketing people to whet the consumers’ appetite, and operations people to get the product. But all that takes time and money. So instead, companies often buy already existing companies, saving themselves a lot of work.

Why companies buy other companies

Making widgets and selling them for a profit is why most companies exist. Microsoft, for instance, is in the business of making and selling computer software and hardware. So why do so many companies during the course of business wind up buying and selling businesses?

There are many reasons why companies may consider using M&A, including the following:

• Getting big fast: Building a business takes time. There are people to hire, distribution to set up, and products to sell. Sometimes the time it takes to get up and running is too long, and the delay gives the rivals with the first-mover advantage an even bigger lead.

A great example of a merger done for speed was Microsoft’s 2016 purchase of LinkedIn, a professional social media site. Microsoft bought the company for $29 billion. By buying LinkedIn, Microsoft was instantly a player in the online media business with an already established brand name.

• Filling out a product line: Some companies may have been hugely successful in a narrow product line. But to find growth, which investors are always clamoring for, companies may need to fill in some gaps.

An old but classic example of using M&A to fill in a product-line hole came in 2001. Leading jelly maker J.M. Smucker bought the Jif peanut butter brand (along with Crisco oil) from Procter & Gamble for $813 million in stock. The deal solved a problem for J.M. Smucker — now the company could sell all the ingredients for a tasty peanut-butter-and-jelly sandwich. Talk about synergy. But at the same time, Procter & Gamble also wanted to reduce its holdings in the food business.

• Geographic expansion: Business is going global, and companies need to have a worldwide presence or risk getting beaten by rivals. M&A deals are a quick way to spread into other countries.

The biggest proposed M&A deal of 2019 was a great example of a company looking to M&A deals for a product expansion push. Pharmaceuticals firm, Bristol-Myers Squibb, made a nearly $100 billion offer for U.S. biotech company Celgene. Bristol-Myers looks to the deal as a way to get a beachhead in the fast-growing cancer-treatment area.

Source: S&P Global Markets Intelligence

The advantages of building versus buying

Some large companies may decide it’s better to just buy another company to get in the new market quickly. Large companies that buy for this reason are called strategic buyers. Investment banks are often brought in during these typical M&A deals to advise on whether it makes sense or help come up with the money to make it happen.

Sometimes the target — the company being eyed — doesn’t want to be bought. And that’s when deals often turn hostile, where the investors or management of the strategic buyer are hoping to make the deal happen, but the target is resisting. Again, investment banks are often pivotal in hostile M&A deals because the buying of a company that doesn’t want to be bought often requires more brinkmanship and cash.

Pitfalls of ill-conceived mergers

One of the reasons companies engaged in merger activities call in so many investment banks and advisors is that they don’t want to blow it. Mergers are often big bets that cost a great deal of money, either consuming cash or requiring the company to borrow or sell debt. Companies, and their shareholders, don’t want companies to blow it on deals that don’t work out.