The Complete Guide to Mergers and Acquisitions

For those of us in finance, the aura surrounding the world of Mergers and Acquisitions (M&A) is all too familiar. From unspeakable working hours to staggering bonuses, the M&A sector, while highly coveted by many business school students, remains a complex field. But fear not! We’re here to demystify this sought-after domain.

Contents

• What is Mergers and Acquisitions?
• Different Types of Mergers and Acquisitions
• Various Classifications of a Merger and Acquisition Operation
• Key Players in a Merger and Acquisition Transaction and Their Roles
• Different Types of Investment Banks in Mergers and Acquisitions
• Stages of a Merger and Acquisition Operation
• Sell-Side or Buy-Side: Which Side to Choose?
• The Biggest Mergers and Acquisitions in History
• Everything You Need to Know to Work in Mergers and Acquisitions

What is Mergers and Acquisitions?

The term “Mergers and Acquisitions” refers to the merger of two companies, a buyer (“Buy side”) and a seller (“Sell side”), or the acquisition of one by the other. Thus, a Mergers and Acquisitions operation can take various forms, such as the sale of a company to another, the acquisition of a target company, the acquisition or sale of a company division, or even the sale or acquisition of one or more assets. To successfully carry out a sale or acquisition, both companies must appoint investment banks that will then take on the role of financial advisor during the transaction.

• In a Sell-Side operation, the bank will accompany the selling company.
• In a Buy-Side operation, the bank will accompany the buying company.

Different Types of Mergers and Acquisitions

Beyond the simple distinction between buyer and seller, several types of Mergers and Acquisitions are to be recognized. These nuances are mainly related to the buyer’s objective in conducting its merger and acquisition operation:

• Vertical Integration: Involves acquiring a client and/or supplier. For example, the 1996 acquisition of Turner Broadcasting System (an American media group whose best-known network is the news channel CNN) by Time Warner (an American cable operator). This allowed Time Warner, which produced audio-visual content, to have its own broadcasting activity through this acquisition. This was also Rockefeller’s strategy in the late 20th century when he bought multiple gas station companies. As his oil company Standard Oil already owned oil wells and refineries, by buying gas stations, he positioned himself across the entire value chain, from the first drop of crude oil to the customer’s gas tank.
• Horizontal Integration: Involves buying out a competitor in the same market. For example, the 2014 merger between Fiat (an Italian car manufacturer) and Chrysler (an American car manufacturer) to form Fiat Chrysler Automobiles. Thus, Chrysler was able to open up to the European car market, and Fiat to the American market.
• Conglomerate: A grouping of several companies with different activities. For example, LVMH (Louis Vuitton Moët Hennessy). The group is indeed the world leader in the luxury sector. But luxury is a broad activity, isn’t it? Therefore, LVMH is considered a conglomerate that seeks to acquire any type of company that would fit into the “Luxury” category: fashion companies (Dior), leather goods (Louis Vuitton), spirits (Hennessy cognac), vineyards (Moët champagnes), jewelers (Tiffany), and watchmakers (Tag-Heuer).

Various Classifications of a Merger and Acquisition Operation

Three distinct classifications characterize Mergers & Acquisitions operations based on the size of the operation:

• Small cap: All operations where the sale price is less than €30M.
• Mid cap: All operations where the sale price is between €30M and €150M.
• Large cap: All operations where the sale price is more than €150M.
  Note: M€ = Millions of euros Depending on the size category, the operation will involve more or fewer participants. Sometimes, when a large company conducts a Small cap operation, it already has the necessary skills and resources internally to handle much of the work. Therefore, it does not necessarily need to appoint an investment bank. On the contrary, a Large cap Merger and Acquisition operation involves many actors: investment banks that will advise the buyer and the seller, accounting firms to manage the effects of the operation on the balance sheets of both companies, and especially, specialized law firms, which will check that the Merger and Acquisition operation does not violate any law, and more particularly, the rules of free competition by becoming “too” big once the acquisition is completed.

Key Players in a Merger and Acquisition Transaction and Their Roles

Investment Banks
They play a crucial role in an M

&A operation as they manage the process from A to Z. From pitching the company for sale, estimating the valuation, organizing meetings between buyers and sellers, to taking part in negotiations, they have a true conductor’s role. The investment bank has a quite particular role as it acts both as financial support, for example, by helping to calculate valuations, and as a commercial agent. Indeed, if it advises the seller, it will try to negotiate with the buyer to increase the price as much as possible. Conversely, if it advises the buyer, it will try to negotiate the price downwards.

M&A Law Firms
M&A law firms are responsible for drafting all the contractual, legal, corporate, and regulatory documentation (examples: share purchase agreement, management package, etc.). They also ensure crucial steps not covered by investment banks, such as consulting employee representative bodies, auditors, shareholders, and relations with regulatory authorities (AMF, Competition Authority, sectoral authorities, etc.). The law firms will thus check that no law prevents the merger and acquisition operation from taking place and that once the operation is completed, the new situation of the two companies will still be in compliance with corporate law and the law in general. Sometimes a Large cap operation involves companies so large that the operation could distort competition by creating a player that would have a monopoly position at the end, which is illegal in many countries and in the European Union. In such cases, the buyer, to have the right to buy, must simultaneously sell some of its activities to competitors. For example, when AB Inbev (the world’s No. 1 beer company) acquired SAB Miller (the world’s No. 2 beer company), the company would have owned so many different beer brands that it would have been in a monopoly position. The European Union then asked AB Inbev to divest certain brands (such as Peroni) to have the right to acquire SAB Miller. These are the law firms that negotiate this with the authorities and defend their clients’ interests. Examples of M&A law firms: Bredin Prat, Darrois Villey Maillot Brochier, Cleary Gottlieb Steen & Hamilton, Skadden, etc.

Audit Firms
They bring their expertise mainly during the due diligence phases thanks to their transaction services teams. Indeed, they will audit the transaction and ensure the authenticity of the documents shared between the two companies and with external actors. It should be noted that members of the “Big Four” (KPMG, Deloitte, EY, and PWC) also have M&A teams, allowing them to position themselves as investment banks on a transaction. However, it is important to keep in mind that this is not their core business. Examples of audit firms outside the Big Four: Mazars, BDO, etc.

Different Types of Investment Banks in Mergers and Acquisitions

There are four types of investment banks, which we will describe the main differences:
Bulge Bracket Investment Banks
We start with the biggest stars in the Mergers and Acquisitions scene with the largest global banks. They have the capacity to offer all financial products and services to their clients. They work on the largest operations (i.e., those whose valuation generally exceeds one billion euros) and are not sectorized. They are highly reputable and recognized by their “brand name.” Much of the folklore around Mergers and Acquisitions is related to these banks that handle billions. Examples of Bulge Bracket: JP Morgan, Goldman Sachs, Morgan Stanley, Bank of America Merrill Lynch, etc.

Elite Boutique Banks
These boutiques are an alternative to Bulge Brackets. Smaller in size, they tend to specialize in Mergers and Acquisitions and restructuring, unlike Bulge Brackets, which have a much broader range of products and services. Nevertheless, Elite Boutiques are no less prestigious than Bulge Brackets and offer equally interesting career prospects. The names of these banks generally make people dream, and any junior who lands an internship or first job there will have a CV coveted by any company. Examples of Elite Boutiques: Lazard, Rothschild & Cie, Evercore, Moelis, etc.

Middle Market Banks
These banks have a wide range of financial products and services as well as a global geographical presence. However, they generally work on deals worth less than 1 billion euros. Career prospects are also interesting, although slightly below those of Bulge Brackets and Elite Boutiques. Nonetheless, securing a job in Mergers and Acquisitions at one of these banks will make your CV shine in the eyes of many recruiters. Examples of Middle Market Banks: Lincoln International, Macquarie, Baird, Houlihan Lokey, etc.

Industry-Specific Boutiques and Regional Boutique Banks
Much more specialized than the banks described above, they tend to handle deals worth less than 100 million euros. They are generally specialized in sectors they know inside out. Their hyper-specialization and expertise, therefore,

make them seen as references, and if you land a job or internship there, you will also be seen as a specialist in the sector in question. Examples of Industry-Specific Boutiques: Allen & Co (TMT = Technologies, Media, and Telecommunications), Clipperton Finance (TMT), Green Giraffe (Energy), Natureo finance (Energy), etc. Examples of Regional Boutique Banks: generally all non-specialized Mid cap and Small cap investment banks such as Largillière Finance, In Extenso Finance & Transmission, or Equideals.

Stages of a Merger and Acquisition Operation

The different stages of an M&A operation vary depending on which side the investment bank is on between Buy-side and Sell-side.
Sell-side (seller side)

1. In a divestiture operation, the mandated investment bank will, in the first instance, meet with the selling company to obtain all the necessary information about its business. Following this meeting, the investment bank will prepare a “teaser” for the company to be sold and a list of potential buyers. The teaser is an executive summary that includes the main information about a company (description of the activity, key indicators, etc.). Its purpose is to be sent to potential buyers who will express (or not) an interest. Therefore, the teaser must always be anonymous and very sales-oriented.
2. In a second step, the investment bank and the selling company will meet again to validate the teaser and the list of potential buyers to be contacted. Once validated, the investment bank can start the commercial canvassing stage, which consists of sending the teaser to all the selected potential buyers. As you can imagine, the investment bank must therefore know the sector of activity in question very well to know all the companies that could be interested.
3. Upon receipt of the teaser, potential buyers who wish to enter the negotiation process will have to sign a Non-Disclosure Agreement (“NDA” or in French “Accord de non-divulgation”). By signing this document, the potential buyer agrees not to disclose the information that will be communicated to him about the selling company.
4. Once the NDA is signed, the investment bank will send an investment memorandum on the selling company to the potential buyer. The investment memorandum is an exhaustive file containing a very detailed description of the selling company, its activity, as well as a sectoral and competitive analysis. It also includes the financial statements and the valuation of the company to be sold in order to specify an initial price for the deal, which will then be the basis of many negotiations. This memorandum serves as the basis for negotiation in a Merger and Acquisition operation.
5. A few weeks after sending the investment memorandum, the investment bank will send a request for an indication of interest to potential buyers. Potential buyers who have signed the NDA and have had time to study the memorandum in its entirety will have to confirm (or not) their interest in the deal. In case of confirmation of interest, the investment bank organizes a meeting between the company for sale and each potential buyer separately.
6. Following the meeting, if the potential buyer wishes to buy the company for sale, he will send a letter of intent or Letter Of Intent (“LOI”) in which he confirms his intention and provides a firm price.
7. If the selling company accepts the LOI, a Due Diligence phase (more commonly called “Due Dil”) begins, during which the buyer side will verify all the information claimed by the seller. All documents will be placed in a “Data Room” which is a virtual platform with limited access (a Cloud if you prefer) allowing the buyer and seller to store and exchange all documents related to the operation. In general, the seller will ask for a lot of information and documents (legal, financial, technical, administrative, etc.) to make sure there is no “snake in the grass” before signing the check for several million (or billion) euros to buy the target. The lawyers and the investment bank advising the buyer will have a lot of work since they generally ensure most of this verification work. As they engage their responsibilities, everything is checked, re-checked, and re-re-checked.
8. Once the Due Diligence is completed, a Share Purchase Agreement (“SPA”) will be drafted to allow the closing of the transaction. This SPA summarizes the conditions of the Merger and Acquisition.
9. The two companies proceed to the closing of the operation by signing the SPA.
10. Integration phase of the sold company within the buying company. Note that some post-closing adjustments may be necessary (accounting, legal, or financial).

Buy-side (buyer side)

1. In a Merger and Acquisition operation, the buying company will mandate an investment bank to accompany it in the purchase of a target company to expand its activity and grow.
2. In a first step, the investment bank will conduct a search for potential targets based on the client’s criteria. The investment bank will ensure that the planned acquisition will indeed be beneficial for its client by identifying possible synergies.
3. Once the list of potential targets has been validated, the investment bank will draft a teaser informing of its client’s purchase intentions.
4. The investment bank signs an NDA to access the memorandum of the company that has responded favorably to the teaser. The investment bank will then make a presentation of each targeted company to its client, accompanied by an estimate of the valuation.
5. If the client wishes to proceed with one of the companies targeted by the bank, a meeting is organized between Buyer & Seller.
6. If the Buyer is interested, he drafts an LOI with a firm price.
7. If the Seller accepts the LOI, the Due Diligence phase begins. As with the Seller side, this Due Diligence phase will allow checking all aspects of the operation.
8. Once the Due Diligence is completed, an SPA will be drafted to allow the closing of the transaction.
9. The two companies finally proceed to the closing of the Merger and Acquisition operation by signing the SPA.
10. Integration phase of the selling company within the buying company. Note that some post-closing adjustments may be necessary again.

Sell-side or Buy-side: Which Side to Choose?

Are you hesitating between Sell-side and Buy-side? Don’t worry, here’s a summary of the advantages of each side. It’s up to you to see which you prefer.
Mergers and Acquisitions on the Sell-side

• By definition, the probabilities of closing a deal are higher on the Sell-side.
• You will study a company and its sector of activity in detail.
• You will follow the transaction from start to finish.

Mergers and Acquisitions on the Buy-side

• You will develop an “investor” vision that may appeal if you wish to pursue a career in Private Equity.
• The diversity of companies studied will give you more experience than on the seller side, where you will be focused on only one company per transaction.

The Biggest Mergers and Acquisitions in History

Below, you will find the top 5 of the largest Mergers and Acquisitions operations ranked by valuation. Be warned: billions will rain down, along with the bonuses of bankers and lawyers! Operations like these have inspired many films, novels, and have made a lot of ink flow in the press and on contracts. Note: M = million and Bn = billion
1/ Vodafone AirTouch & Mannesmann AG – $202.8 Bn In February 2000, the British company Vodafone AirTouch decided to acquire the German conglomerate Mannesmann AG for $202.8 billion. The early 2000s were marked by the internet bubble and a surge in valuations in the telecom sector, which helped achieve such an astronomical valuation for this particular Merger and Acquisition. Let’s just say that after this deal, all the bankers involved in the operation bought themselves a new bespoke suit and a nice Italian convertible! Even Gordon Gekko in the movie Wall Street would have eyed an operation of this magnitude. Banks involved: Warburg Dillon Read, Morgan Stanley, Merrill Lynch, JP Morgan, and Deutsche Bank

2/ AOL & Time Warner – $181.6 Bn At the heart of the internet bubble, Time Warner and AOL came together to form AOL Time Warner. However, the operation was closed just before the bursting of the Internet bubble, and AOL shares lost about 60% of their value about 2 years after the merger (don’t worry, the bankers still got their bonuses for this deal). The group reported a net loss of $54 Bn in the first quarter of 2002, a real record. In 2009, Time Warner and AOL separated, marking the end of a mega-merger considered the biggest fiasco in history (yes, as the saying goes, “shit happens…”). Banks involved: Goldman Sachs, Merrill Lynch, Salomon Smith Barney, Morgan Stanley.

3/ Verizon Communications & Cellco (became Verizon Wireless) – $130.3 Bn Verizon Wireless is a mobile telecom operator created in 2000 in the USA under the name Cellco Partnership, owned 55% by Verizon Communications and 45% by Vodafone. In 2013, Verizon decided to buy out Vodafone’s shares to become the sole shareholder of Cellco. A wise bet since Verizon Communications is now one of the largest telecom operators in the world. Banks involved: JPMorgan, Morgan Stanley, Goldman Sachs, UBS, Merill Lynch.

4/ AB Inbev – SABMiller – $110.3 Bn AB InBev, a Belgian-Brazilian brewing company (a brewer of beer for the uninitiated) and the world leader in its sector, decided to buy the British brewer SAB Miller, the world’s No. 2 beer company, in October 2016. Let’s just say that when No. 1 decides to buy No. 2, in the

end, you get a real behemoth in its sector! Our most informed readers will undoubtedly recognize the AB Inbev group since it owns world-famous beer brands like Budweiser, Corona, Stella Artois, Leffe, and Hoegaarden. In fact, when you buy a beer in your supermarket, there’s a good chance it belongs to AB Inbev! Banks involved: Lazard, Deutsche Bank, BNP Paribas, Morgan Stanley, J.P. Morgan.

5/ AT&T & Time Warner – $85 bn After the resounding failure of the Merger and Acquisition with AOL, Time Warner tried its luck again in 2016. Approached by AT&T, the historic American telecom operator, the merger took 2 years to be validated by the American justice in 2018. It had been argued that this merger would have negative consequences for consumers because it would have reduced competition in the sector, thus the choice for customers. This vertical merger (Time Warner is a content producer and & AT&T is a content distributor) thus gave birth to a new behemoth of Entertainment that can now tickle the leading group Disney. Banks involved: Perella Weinberg Partners, JPMorgan Chase, Bank of America Merrill Lynch, and Allen & Co.