What it's all about
We work alongside clients in developing and executing their corporate strategies, with a particular focus on corporate transactions. These may be mergers and acquisitions, as the name of our team suggests, but we also act for clients engaged in disposals and spin-offs of sections of their businesses, defence against hostile takeovers, and restructurings. Our role is twofold: we advise, but we can also provide our clients with the capital to help facilitate certain transactions.
Why do corporate acquisitions take place? A buyer may wish to acquire another business to start selling a new product, to enter a new geography, or to build scale and enhance profitability. From the seller's perspective, they may want to sell a division that is no longer core to their business and free up capital to invest elsewhere, to use to pay back debts, or to return to shareholders.
At Morgan Stanley, we advise corporate buyers and sellers, and also work with private equity firms, shareholders, regulators and central banks. We recently acted on Deutsche Telekom's $39 billion sale of T-Mobile USA to AT&T, the largest European M&A deal in 2011 so far.
How it brings in revenue
We serve our clients - and hence earn fees - in two ways. Firstly, we earn an advisory fee, generally when a transaction is successfully completed and the client has achieved its objectives. Secondly, we can also earn fees by providing additional services linked to an M&A transaction, for example, arranging debt or equity financing to fund an acquisition.
Revenue varies by situation. At Morgan Stanley, we believe we have the greatest opportunity to differentiate ourselves in larger and more complicated situations, which is generally where fees are highest. That said, to be a good M&A banker you need to help your clients with their full M&A agenda and not just focus on the largest revenue opportunities. Back in 2008, for example, I worked on a £7 million transaction, small in value compared to most of the other deals we do. Acting on a transaction of that size doesn't necessarily produce high fees, but it was for an important client that needed help restructuring its portfolio, and our clients need to know that they can count on us.
How it works
There is no such thing as a standard process in M&A. How things progress will depend on the deal type, market conditions, whether or not the business to be acquired (known as the "target") is public or private, and various other factors. Let's take the sale of a private company, for example a private equity firm selling a company in their portfolio, as an example.
We'll start by having a dialogue about strategy with the private equity firm. How long have they owned the business, and what would be the right point to sell it? Should they do so via M&A, or through an IPO or spin-off? These are the sorts of questions we need to answer, and we work closely with our colleagues in industry, regional and other product teams to address them. If a decision is taken to proceed with the M&A route, we then enter a preparation phase where we spend a month or so working closely with the seller and the target's management team to understand the business and what might make it attractive to buyers. We'll need to form a view on the value of the company, define the logical buyers, and put together materials to market the business.
After this preparatory work, there'll typically be a two-stage auction. In the first phase, which lasts about a month, we'll send potential buyers a "teaser" - a couple of pages to give them a feel for the business. If they like what they see, they would typically sign a confidentiality agreement and then receive an "information memorandum", which is a document with anything from 50 to 300 pages that provides a detailed description of the business. The information memorandum gives potential buyers enough data to submit offers, which are non-binding at this stage. We then go through these offers with our client and select the most competitive ones. We don't just look at the price they're offering, but also at their ability to finance their offer, status of their internal approvals to go ahead with the deal, their future plans for the business, and so on.
In the second phase of the auction, lasting say six weeks, we'll enable the short listed parties to conduct detailed due diligence on the target (research its historical and forecasted financial performance, the quality of its assets and management team, and other relevant aspects of its business) so they can finalise their offers and produce binding bids. This process will include access to company information through a data room, discussions with management, and perhaps site visits if there are industrial assets. Once we have the binding bids, we'll help our clients to negotiate with no more than a few potential buyers with the aim of signing a deal with one of them. This deal signing milestone is then followed by competition and other regulatory approval steps as necessary and any final confirmatory due diligence before the deal is actually completed. At completion, money and assets change hands.
From start to end, the deal could take anything from three to six months, although there are of course exceptions. Once completion has taken place, it's usually time for the design of the deal tombstones (commemorative paperweight-like objects engraved with details of the deal and the names of participants and advisors) - and a celebratory closing dinner!
If I had to pick just one deal as a career highlight, it would be working on the defence of Cadbury against Kraft's £12 billion hostile takeover approach in 2009. It was one of the largest European M&A transactions that year, involved key consumer brands that everyone is familiar with, and sparked national debate on a lot of different issues that ultimately led to a revision of the UK Takeover Code. Before the deal was agreed, Hershey's and Ferrero considered stepping into the fray, and Warren Buffett made various public statements as a key shareholder of Kraft. It was fascinating to be at the centre of it all.
The camaraderie we had in the team, and with our clients and other advisors involved such as the lawyers and consultants, was also particularly memorable. We had all grown up with Cadbury and were all fired up to defend it. We also ate a lot of free chocolate!
Corporate earnings have rebounded and cash balances are high so there are some motivated corporate buyers out there looking for bargains. At the same time, private equity firms have a lot of money to put to work, so have been able to execute a number of leveraged buyouts - the percentage of the deals in the market that they're involved in has crept up from the low teens in 2008-9 to over 30 per cent in the first half of 2011.
The valuations of public companies continue to be below their historical averages, which has led to an increase in the number of unsolicited and hostile offers for them. So it's become more important than ever that management teams have their defence strategy well thought through so that they're not caught off guard. Sector-wise, financial institutions have been particularly active in M&A given the ongoing consolidation in that industry, but we see activity across all sectors of the economy.
Since the summer, equity markets have taken a sharp turn downwards, and this sort of volatility impacts M&A too. It's hard to get buyers and sellers to agree on value and acquisition financing becomes more difficult. All you can do in times like these is stay close to your clients, and focused on their objectives.