An Introduction to Corporate Finance and M&A for people new to the industry. These notes are the result of an intensive training programme at my workplace. They aim to cover a broad depth of topics to gain a fundamental understanding. Useful for interviews and those starting out in a role within t...
Overview of typical corporate finance deals
▪ Trade acquisition
Acquisition by another a company usually not for financial investment purposes.
Acquisitions in this space are usually cash funded. This is because most trade
buyers tend to be large PLCs with significant cash balances on the balance sheet.
Their funders, the capital markets, do not favour a high level of gearing.
▪ Private equity acquisition
These firms have a pot of money to invest, create value and re-sell the acquired
company for a profit. These deals tend to happen quicker than a trade deal with
investment committees meeting more regularly than the board of a Trade
company.
▪ Debt raise
Raising debt can either be for growth or PE motivations. The latter is to increase
leverage when acquiring a company whilst the former may be an efficient way to
raise capital (and therefore reduce WACC).
Note on tax: no VAT on share sale on stamp duty and them CGT on share sales by
individuals.
Key value drivers for each party
▪ Trade – synergies, defensive, strategic, market share
The main motivations will be to complement or to expand product ranges or
market share usually by acquiring a competitor. It could also be an upstream/
downstream consolidation via acquisition of suppliers/ customers respectively.
Synergistic benefits for Trade Buyers (PE will have the acquisition often as a stand
alone company in their portfolio) is why Trade Buyers can afford to pay more. The
synergistic benefits is why Trade Buyers will only consider acquisitions in line with
their overall strategy - important to know for a CF advisor when pitching to buyers.
▪ PE – growth story, cashflow / repayment of debt, multiple arbitrage
The aim is solely to increase profitability. This will be through growing companies
with a low CAPEX demand and high levels of cash generation - usually those
within the tech sector. The PE firm will seek to exit within a few years for profit.
Other revenue streams for a PE firm include interest on loan notes to the business
and a monitoring fee for their chairman/ non-executive installed on the board. The
structure of the deal will include 3 additional companies created to acquire the
company - TopCo, MidCo, Bidco. This is to maximise tax reliefs available on
interest. A growing EBTIDA allows for a profitable exit. The PE firm helps this by
being v stringent in the business they pick to buy, putting top management in
place and holding them to account (noticeable difference in ex-family firms)
through the non-exec chairman and ensuring the future strategy maximises profit.
, The aim is solely to increase profitability. This will be through growing companies
with a low CAPEX demand and high levels of cash generation - usually those
within the tech sector. The PE firm will seek to exit within a few years for profit.
Other revenue streams for a PE firm include interest on loan notes to the business
and a monitoring fee for their chairman/ non-executive installed on the board. The
structure of the deal will include 3 additional companies created to acquire the
company - TopCo, MidCo, Bidco. This is to maximise tax reliefs available on
interest. A growing EBTIDA allows for a profitable exit. The PE firm helps this by
being v stringent in the business they pick to buy, putting top management in
place and holding them to account (noticeable difference in ex-family firms)
through the non-exec chairman and ensuring the future strategy maximises profit.
Valuation terminology
▪ Enterprise value
This is the company value excluding cash and debt. Most companies use EBITDA
(a proxy for cash) and a multiple to find the company value. Asset heavy business
will use EBIT with depreciation included. Small, high growth businesses - often in
the early stages of setting up - will a sales multiple as they're often not making a
profit.
▪ Equity value
This is the net of cash and debt plus the EV:
Equity Value = Enterprise Value + (Cash - Debt)
▪ Debt and cash like items
Types of debt: Corporation Tax; Onerous Leases; Pension interest
Types of cash: s455 Tax
▪ Working capital
Essentially the net of current assets: stock, receivables, cash and current payables.
Working capital can be either dependant on the position at the time of acquisition.
The process is as follows: working capital is adjusted over the last 12m period to
obtain the 'normal' level required for business operations. The adjustments will
include things like removing one-off, non-trading related items (e.g. fines). This 12m
figure is averaged for 1 month and this is compared to the actual working capital at
the time of acquisition. If the latter is higher than the average, then this is a cash
like item and vice versa for debt like item.
Other terminology
▪ Mid-market parameters
£10m - £300m in the UK
▪ Sector focus
Some firms will focus on sector and develop specialisms in them. However, this
restricts their deal making ability in the wider market. In general, there are 5 sector:
Consumer (anything you or I could buy); Tech; Industrials; Healthcare; and Business
services (people based businesses). Tech and then healthcare are most popular in
the industry due to the low capex requirements, high growth and cash generation.
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