By Samuel Harrison – Current MIF student
Last week, IE hosted the second session in the Titans of Finance series. The conference was hosted by Jorge Vasallo, a Managing Partner of Arcano Group. Arcano is a boutique corporate finance and private equity house based in Spain. Mr Vasallo provided the class with an introduction to Mergers and Acquisitions (M&A), and we examined the usual motivation for undertaking M&A and also how they go about valuing these transactions. The valuation discussion examined the typical methodology to value stand-alone operations, valuing by the ‘sum of the parts’ and also assessing the synergies that a potential merger transaction may hope to provide.
Classical valuation methods such as looking at comparable companies were discussed, as well as leveraged buy-out (LBO) analysis, comparable transactions and DCF, the latter being the best known and most widely used. This will derive an ‘EV’ or Enterprise Value, made up of equity value and the value of the company’s debt. LBO’s were a topic of interest for the class and discussed at length, including their meteoric rise in popularity up until 2007. We also touched on the recent decline in LBO’s, caused by the current dearth in financing, which is part comes after many banks had their fingers burnt after making crucial mistakes with their risk-management and transaction valuation during the boom periods. The underlying structure behind typical “old-school” historical deals as well as more modern LBO transactions was examined as well.
Moving beyond valuation metrics, we looked at the various common financing methods for M&A transactions. This included cash, debt, capital raising through new equity, or indeed secondary shares (treasury stock), and of course a mixture of these methods, if it is deemed most appropriate. Indeed, unique explicit and implicit restrictions apply to each of these financing methods, which we also analysed in some detail. Various exotic options were also looked at, including more flexible “earn-out” options for payment, which is contingent on performance of the target business, which can reduce the risk of overpayment and give the target shareholders the possibility to receive higher premiums. A potential win-win scenario.
We arrived at the conclusion that whilst M&A will remain a complex animal, with scientific content at least to an extent, it will always remain somewhat subjective. This is where there is room to develop a different opinion to the rest of the market, and hopefully, get it right. Thus, we are told that successful M&A is as much an art, as it is a science.
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