Roleof Investment Banks in M&A and Corporate Restructuring
Roleof Investment Banks in M&A and Corporate Restructuring
Theimportance of competitiveness in corporate market cannot be gainsaidas far as the sustainability and overall profitability of a businessentity is concerned. It is noted that the globalized world has seenan increase in the competitive pressures that are being exerted onbusiness entities, which, coupled with the heightened trend towardsglobalization, has forced companies to seek out other ways ofenhancing their competitiveness. One of the most popular techniquesor strategies used in this regard remains the mergers andacquisitions of businesses, as well as restructuring of the same. Inthese three activities, a large number of companies seeking tostreamline and expand their businesses use investment banks, whichwould provide some relevant advice and information pertaining to thepotential buyers and/or targets. This advice usually includes a fullvaluation, as well as recommended tactics. Of particular note is thefact that the role of the investment banker falls within or undereither buyer representation or seller representation (which are alsoreferred to as acquirer representation or target representation).
Oneof the major roles of the investment banks in mergers andacquisitions revolves around the establishment of a fair value of thecompanies that are involved in the transaction. It has been wellacknowledged that investment banks have sufficient expertise in thecalculation of the overall worth of a business, as well as thecapacity to make predictions regarding the manner in which that worthmay be modified or rather what would happen to the company’s valuein varied scenarios, as well as the financial implications of thepotential futures. Investment banks construct financial models thatwould allow for the capturing of the most crucial variable and fixedfinancial components that have the capacity to influence the overallcompany value (Elton,2010,pp. 36). Subject to the proposed transactions, the models may be extremely complicated with a number of special variables beingincorporated to cater for certain areas considering that there existsvaried financial factors that have to be considered in varyingcountries, sectors and markets in the course of measuring the valueof a company or making predictions for the same. With their expertisein valuation of business investment banks may also offer the clientssome arbitrage opportunities services (Moran,2009,47). For example, in cases where a bank has undertaken valuationbased on likely target company that states that its market value isconsiderably lower than the business could be worth in real life, itcould facilitate an acquisition or merger of the target the companyfor the client that comes with an opportunity for substantial profit.
Inaddition, an investment bank plays the crucial role of providingfinancing in the merger and acquisition. The purchase or acquisitionof a company as a going concern often requires immense amounts offunds not only to purchase but also to run in both the long-term andshort-term. There are varied options available for a company thatwishes to obtain funds for such an activity including debt financingor even selling its own shares. Investment banks would play a crucialrole in ensuring the success of the company in raising the requiredfunds. Investment banks, in fact, have their most fundamental role asthe introduction of new securities into the market (Elton,2010,pp. 39). They would not only determine the best price for the newissues, whether debt or equity, through an examination of the marketand the valuation of the company, but also find new buyers who wouldtake up the new issues. In essence, they are usually called marketmakers as they carry out the functions of both sellers and buyers.
Further,investment banks would not be completely dependent on the sellers andbuyers who are approaching them rather they often source dealsthrough undertaking a study of the market and approaching thecompanies with some profitable strategic ideas. For instance, theymay make suggestions pertaining to the merging of two companies, theacquisition of one by the other or the sale of one to the other.Scholars have noted that an investment bank that is representing apotential seller has a considerably higher potential for completingthe transaction and getting paid that it counterpart that representspotential buyers or acquirers (Petersen,2003,pp. 43). The seller representation, which is also referred to assell-side work underlines the form of advisory assignment that isproduced by a business entity once it approaches an investment bankand requests its services regarding finding a buyer for either a partof its assets or even the entire business entity. It is noted thatthe tasks that are involved in the search for a buyer would includethe crafting of a “Selling Memorandum” or a detailed salesdocument, after which financial or strategic buyers would then becontracted (Elton,2010,pp. 46). On the same note, when the investment bank has the role ofadvising sellers, its task would be complete when another partymanages to purchase the business that has been put up for sale, thatis, when another party essentially purchases the assets or company ofthe client. The same case, however, cannot be said in instances wherethe investment bank is representing the buyers. The simplicity of theadvisory task is sufficiently evident as the investment bank wouldcontact the firm or business entity that their client would want topurchase, try to come up with an offer that is acceptable to allparties and ensure that the deal is realized in good time.Nevertheless, there are numerous instances where the proposals arenever realized as few owners or firms would be willing to readilypart with their businesses. Since the collection of fees byinvestment banks is primarily based on the transactions that theentity has managed to complete, they would be forced to defend theirproposals.
Onthe same note, investment banks play the crucial role of raisingcapital, as well as underwriting security during corporaterestructuring. Corporate restructuring involves the process ofmodifying the organization of a business entity, where dramaticalterations are made to the business entity through merging orcutting out departments. These actions usually result in thedisplacement of the staff members. However, the restructuring thatinvestment banks would be interested in would revolve around asignificant modification of the structure, operations and debt of acompany (Acemoglu,2009,pp. 86). This form of corporate action is often made in instanceswhere there exists significant problems in the company which may beresulting in some financial harm on the overall sustainability of thebusiness and putting it in jeopardy. The corporate restructuring isaimed at assisting the company to eliminate financial harm, as wellas enhance the business. In instances where a accompany isexperiencing problems with regard to making payments on its debt,there is often the possibility for consolidation and adjustment ofthe terms pertaining to the debt via debt restructuring. Once thedebt has been restructured, the payments made on the debt would bemore manageable for the company, in which case there would be anincrease in the likelihood or potential for payment to thebondholders (Farazmand,2002,pp. 49). It is noteworthy that companies restructure their structuresand operations through reducing their costs such as the salaries andwages or payroll, or even lowering the company size through the saleof its assets. Such actions become necessary in instances where thecompany’s current situation is one that may result in its collapse(Acemoglu,2009,pp. 87). In security underwriting and raising the necessary capital,scholars acknowledge that investment banks act as the middlemenbetween the capital aiming at issuing new securities and the publicthat is buying the new securities. In essence, once a companyregisters its intention to, for instance, issue new bonds so as toeliminate an older bond or pay for a new project or acquisition, itwould hire an investment bank, which would then determine the value,as well as riskiness pertaining to the business (Gunasekaran,2009,pp. 78). This would then allow the business to price, underwrite,and, eventually, sell the newly issued securities or bonds. Banks mayalso underwrite other securities such as stocks via initial publicofferings or even any subsequent secondary public offering. Ininstances where an investment bank underwrites bond issues andstocks, it would also ensure that the public that is buying the newsecurities, particularly institutional investors such as pensionfunds or mutual funds, commit themselves to purchasing the bonds orstocks even before they actually get into the market. Investmentbanks, in this regard, take the form of intermediaries between theinvesting public and the issuers of securities. More often than not,however, a number of investment banks purchase the new issue ofsecurities from the company issuing them for a considerably low ornegotiated price, after which they would promote or market thesecurities to potential investors (Beinhocker,2006,pp. 62). The company, in this regard would be guaranteed of aparticular amount of capital, which it will have raised from theinvestment bank, while the investment bank would form a syndicate orrather a group of banks, which would resell the so issued securitiesto the investing public and customer base that is mainly made up ofinstitutional investor. Investment banks may facilitate the tradingof securities through the purchase and sale of securities out oftheir own account, after which it would profit from the spreadbetween the ask price and the bid (Gunasekaran,2009,pp. 86).
Inaddition, investment banks undertake the modeling of working capitaland cash flow. It is noted that working capital is mainly composed ofthe short-term mechanisms through which a business entity wouldfinance its daily operations such as purchasing supplies and payingsalaries. In instances where working capital is deficient, thebusiness entity would rapidly become incapable of meeting its debtobligations (Acemoglu,2009,pp. 93). In essence, investment banker would undertake an analysis ofthe rate at which cash is burnt so as to precisely and accuratelydetermine the length of time that the company has in the currenttrend until such a time when it becomes insolvent and faces thelikelihood for being forced into bankruptcy.
Moreover,investment bankers undertake the negotiations with the creditors ininstances where the company is facing the prospects of restructuring.The investment banker must start working with the creditors so as toreconfigure the current lending agreements to allow the clientcompany to have more time to fulfill the impending or potentialinterest payments. It is imperative that the investment bankerprepares and provides the financial documentation that the creditorswould be interested in so as to extend the loan agreement (Saxena,2009,pp. 52). In instances where this fails, the investment banker wouldhave to start negotiations with clients pertaining to the cents onthe dollar that the client company will repay the tender. This amountwould then be reconciled against the opinions of the creditors’attorneys regarding the manner in which the lender may fare in abankruptcy court. In some instances, the process could play itselfout in the reverse in cases where the client company of theinvestment bank has issued some loans (Farazmand,2002,pp. 48).
Onthe same note, investment bank would undertake negotiations with thecustomers and vendors. Investment bankers would go ahead to come upwith a hierarchy of payments on the basis of the funds available, aswell as the potential asset liquidation, against the accounts payablethat the company has to pay down (Beinhocker,2006,pp. 67). This undertaking would also encompass a highly technicalanalysis pertaining to what is known as the “ordinary course ofbusiness” terms, where the investment banker would undertake aclose examination of the normal business practices with regard to theaverage days that would be required so as to collect from debtors andpay the vendors or creditors. This is aimed at proving that anypayments or collections beyond the ordinary course of the normalbusiness terms of the industry are reversed, and the judge would ruleon this matter as long as it would be beneficial to the client.Similarly, investment bankers would strive to optimize thecollections from customers. It has been noted that vendors andcustomers have a high likelihood for withholding delivery of goods orpayments in instances where they find out that a supplier or customeris becoming bankrupt (Saxena,2009,pp. 54). In essence, the investment bank would undertake themaximization of collections from the customers, while also ensuringthe continuity of the business by negotiating with the vendors.
Inconclusion, investment banks have a crucial role to play in themergers and acquisitions, as well as the restructuring of businessesin times of crisis. These roles are particularly aimed at ensuringthat the business’ sustainability and competitiveness are enhancedin the long-term and short-term. In essence, the investment bankswould ensuring that the client company would get a fair value of thebusinesses, undertake evaluation of other businesses, raise capitaland underwrite companies during restructuring, negotiate withcustomers and vendors, as well as model the working capital and cashflow. During corporate restructuring, businesses often have problemswith their cash flow, in which case creditors may be interfering withthe business operations. In this case, the investment banks wouldnegotiate with the creditors regarding the payment terms.
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