The Business of Investment Banking

By K. Thomas Liaw | Go to book overview

3
Mergers and Acquisitions

Takeover activities, including mergers and acquisitions (M&As) and leveraged buyouts (LBOs), are an important part of investment banking business. The volume of transactions in the 1980s totaled $1.719 trillion, and investment banks took in billions of dollars in fees. The volumes have increased to record highs in the mid-1990s. The M&As in the U.S. set another record at $626 billion in 1996. Volume in 1997 continues the upward trend, with $919 billion in value of deals. The activities in M&As and buyouts will continue to generate significant fee income for Wall Street and help build up merchant banking operations. Successful M&A bankers need to understand client business and objectives and respect the confidence of clients. Bankers should also examine options to overcome the effect of the proposed bill in Congress that would prohibit selling subsidiaries on a tax-free basis under the Morris Trust structure. This chapter discusses the motivations, negotiation process, valuation techniques, M&A banker's fees, regulatory issues, closing, legal risks, and risk arbitrage.


MARKET OVERVIEW

The M&A1 market has been a part of the continued evolution of the U.S. business. The forces that drive the market are from the strategic buyers, the financial buyers, and the consolidators. The strategic buyers are seeking to extend their geographic reach, expand their customer base, boost market share, and fill out product lines to be more competitive. The financial buyers play a significant role in increased M&A activity. Financial buyers are formed from various sources including buyout funds, wealthy individuals, and investment arms of financial institutions. Another type of buyer is the consolidator. Consolidators are to roll up or consolidate businesses in industries that were previously characterized by a large number of mom-and-pop type shops.

Investment banks frequently act as a finder and/or a financial advisor. Bankers are knowledgeable in finding a seller or a buyer, terms of recent transactions, financing structure, arranging or providing bridge loans, fairness opinion, negotiations, and conducting divesture auction.

The M&A transactions totaled $1.719 trillion in the 1980s. Investment bankers took in billions of fee income. Wall Street is obsessed with M&As, because win, lose, or draw, they produce fees: fees for advising, fees for lending money, and fees for divesting unwanted assets. The activities in the early 1990s were below the 1988 peak, but were still significant and generated substantial income for Wall Street. By the mid-1990s, the M&A market revitalized and the dollar volumes in annual deals set record highs. The

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The Business of Investment Banking
Table of contents

Table of contents

  • Title Page iii
  • Contents v
  • Preface vii
  • Acknowledgments ix
  • 1: Investment Banking in Global Capital Markets 1
  • 2: Venture Capital Markets 9
  • 3: Mergers and Acquisitions 27
  • 4: Stock Underwriting 47
  • 5: Underwriting Fixed-Income Securities 72
  • 6: Asset Securitization 94
  • 7: Foreign Listing on Wall Street 111
  • 8: Euromarkets and European Markets 125
  • 9: Japanese Securities Markets 148
  • 10: Emerging Markets 167
  • 11: Trading and Trading Techniques 185
  • 12: Repurchase Transactions 203
  • 13: Financial Engineering 222
  • 14: Money Management 241
  • 15: Clearing and Settlement 261
  • 16: Securities Regulation and Ethics 275
  • 17: Investment Banking Trends and Section 20 296
  • Chapter Notes 309
  • Glossary 315
  • Index 325
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