The Merger & Acquisition (or M&A) boom of the last three years has been led principally by private equity firms gobbling up public companies, fuelled with cheap debt. The high watermark of this period was the leveraged buy-out (or LBO) of the chemist Alliance Boots by Kohlberg, Kravis Roberts - KKR. Boots became the first FTSE 100 company to be taken private in a LBO.
In this deal, KKR paid approximately 11 times Boots' earnings and funded the acquisition with debt equal to 10/11 of the purchase price. The banks who provided this debt were intending to parcel it out to other investors, so that they would not be left with the whole pie. They planned to syndicate (i.e. share the cost of the business) through the debt markets. However, the onset of the credit crunch on 9th August 2007, sparked by the US sub-prime mortgage sector, meant that the banks who provided the finance were stuck with it, as it was now not possible to syndicate it out to other investors.
On the face of it, these were bad times for M&A and the investment banks who earn fees advising both private equity firms and corporate targets alike, and providing the finance to the former.
It was also bad news for graduate job prospects, for the following reasons:
"¢ M&A advisory services looked set to be seriously scaled back
"¢ Debt Capital Markets were also to
be reduced considerably
"¢ Leveraged finance was choked
"¢ The M&A departments of the legal and accounting firms were also braced for cut-backs in their workloads
However, since August last year, there have been a few welcome signs of increased optimism for the M&A market. The boom might actually have a little further to run, thanks to big corporates taking the place of private equity.
First, Carlsberg and Heineken announced plans to take over rival brewer Scottish and Newcastle. Then, mighty mining company, BHP Billiton, signalled their intention to bid for rival Rio Tinto. And now, this battle for corporate control sees Microsoft Corporation have a pop at search engine Yahoo. So why have corporate mergers now come to the fore?
When debt was cheap, private equity had a trump card - they could always out-bid a corporate in a takeover bid, by being able to afford a higher price or premium for the target company.
When one company buys another, it will either pay in cash or shares (i.e. equity). Debt is cheaper than equity for two reasons. Firstly it is less risky to the entity lending it, so they demand a lower return. And secondly, interest on debt is deductible from a company's taxable profits, resulting in a lower tax payment.
However, the credit crunch has now made it harder for private equity companies to obtain leveraged debt. At the height of the leveraged boom, it was possible for private equity to obtain funding equal to about nine times the amount of a company's profits (depending on the type of company). But, that initially generous ratio, has now fallen to about five.
The rationale for private equity-led takeovers is financial, whereas for one corporate taking over another; it's strategic. The overriding motivation for a corporate M&A is to unlock synergies - the idea being that two companies are worth more together than apart. In effect, one plus one equalling three.
And the takeover of number two internet search engine company, Yahoo, is not necessarily a bad deal for its shareholders. Third place, Microsoft, has offered to pay a 61% premium to their pre-bid share price and to pay half of it in cash, half in shares. In an uncertain world, this certainly seems like a good deal.
Good News for Graduates
So, while M&A prospects for graduates were promising and then stumbled, they're now back on the up. What is certain, is that with new deals the size of RBS/ABN Amro, BHP Billiton/Rio Tinto, and Microsoft/Yahoo being staffed in the world's investment banks, there will be positive knock-on effects in retail banking, accounting, law, consulting, PR and even headhunting.
Although nothing's guaranteed, it's looking good. So, you might not have to scour too many search engines when it comes to pinning down that all-important job next summer, after all.
Grdauate job prospects
providing strategic advice on deal tactics, valuation opinion and financing advice and support.
*Retail banks *
further opinion on valuation and helping to integrate the companies after acquisition.
speculating on the outcome.
verifying financial statements, forecasts and under-pinning the valuation.
drafting the offer documents and financing the agreements.
*Conventional asset managers *
voting their shares in favour (or not) of the deal.
*Public relations *
helping to win hearts and minds in the media.
standing by to recruit new directors for Yahoo.
watching on from the sidelines.
Possible job interview questions
What is the rationale behind the merger between Microsoft and Yahoo?
How would the rationale be different if the takeover was by a private equity company?
How much should Microsoft pay for Yahoo?
Does the mix of cash and shares offered as a consideration affect the price?
What will be the big issues to be solved by the investment bankers to complete the deal?
Microsoft vs Yahoo: Key Facts
Microsoft CEO - Steve Ballmer
Yahoo CEO - Jerry Yang
Proposal - Microsoft acquires 100% of Yahoo
Consideration - half in cash, half in stocks
Premium offered - 61% above Yahoo's closing share price on 31st January 2008
Deal value - $44 billion
"¢ Acquisition Essentials by Denzil Rankin
"¢ Big Deal by Bruce Wasserstein
"¢ Valuation by Tom Copeland
"¢ Business at the Speed of Thought by Bill Gates
"¢ Inside Yahoo!: Reinvention and the Road Ahead by Karen Angel