Advising in Mergers, Acquisitions, and Financial Restructuring Advising

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ADVISING IN MERGERS, ACQUISITIONS, AND FINANCIAL RESTRUCTURING ADVISING

Investment banks are active in mergers and acquisitions (M&A), leveraged buyouts (LBOs), restructuring and recapitalization of companies, and reorganization of bankrupt and troubled companies. They do so in one or more of the following ways: (1) identifying candidates for a merger or acquisition, M&A candidates; (2) advising the board of directors of acquiring companies or target companies regarding price and non-price terms for an exchange; (3) assisting companies that are the target of an acquisition to fend off an unfriendly takeover attempt; (4) helping acquiring companies to obtain the needed funds to complete an acquisition; and (5) providing a “fairness opinion” to the board of directors regarding a proposed merger, acquisition, or sale of assets. Another area where investment banks advice is on a significant modification of a corporation’s capital structure, operating structure, and/or corporate strategy with the objective of improving efficiency. Such modifications are referred to as financial restructuring of a company. This may be the result of a company seeking to avoid a bankruptcy, avoid a problem with creditors, or reorganize the company as permitted by the U.S. bankruptcy code. The activities described above generate fee income that can either be a fixed retainer or in the case of consummating a merger or acquisition, a fee based on the size of the transaction. Thus, for most of these activities, the investment bank’s capital is not at risk. However, if the investment bank provides financing for an acquisition, it does place its capital at risk. This brings us to the activity of merchant banking.

The activity of merchant banking is one in which the investment bank commits its own capital as either a creditor or to take an equity stake. There are divisions or groups within an investment bank devoted to merchant banking. In the case of equity investing, this may be in the...
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