Question

Investment Bankers often become involved with the mergers and acquisitions of firms.

So, why might a firm need an investment banking firm to both initiate and complete either the merger or acquisition of a firm...and, tell us what the difference is between a merger and an acquisition.

In addition, as CEO (chief investment officer) of the firm, you are to determine the best time to commence the merger/acquisition and the terms of the purchase/take-over. What type of questions might you have, and, what types of market (stock/bond market levels of rates and activity) conditions might favor various methods for said merger/acquisition. Lastly, how might you go about selecting an investment banking firm?

Answer 1

1. Difference between merger and acquisition.

Consider there are two companies A and B. When A merges with B, the assets and liabilities of both these companies are combined into a single combined entity. When A acquires B, A purchases the equity portion, either partially or fully of B from its current promoters, and after acquisition A & B continue to be two different entities, with A having share holding in B.

2. Why do you need investment bankers

Investment bankers are intermediaries, who connect the buyer and a seller. They help a particular firm (either buyer or/and seller) arrive at market based valuation. Usually investment bankers bring in sectoral knowledge to the table in term of valuation of companies in the industry, thus advising their clients on a transaction. Investment bankers also help in finalizing the term sheet with the counter parties.

3. Best time to commence M&A

Best time depends on market sentiments. While a buyer would want to purchase companies in weak market conditions, the seller would wait for strong market conditions to command high price

4.How to chose Investment bankers

Some criteria are

Sectoral expertise

Spread of the investment banking firm, expertise to bring in larger number of buyer/sellers

Nature of transaction and skill set needed to execute the transaction

Fee paid to the investment banker

Past track record