Importance of financial circumstances during M&A:
The company benefits that does the merger and acquisition activity in good times. The company suffers huge financial losses that does merger and acquisition activity in haste and tough financial times. Three types of circumstances of a company. They decide the bargaining power of the company in the M&A transaction.
Following are the three types of M&A based on the financial circumstances of a company
- Growing business needing equity for growth
- Distressed business needing equity for turnaround
- Introvert business suddenly looking at acquisition opportunities or becoming a target
Equity funding for business growth:
Equity funding for growth is necessary and desirable but it not emergent and exigency. The company has time to explore the right kind of investor. The company has highest bargaining power and can get highest premium when it is in growth phase or is seeking funds for growth projects.
Following are the different kinds of requirements of funds in growth activities in a company:
Working capital for 100% (or more) capacity utilization
Capacity expansion through refurbishment, revamp, modernization, etc
Product portfolio expansion
Geographical expansion
Vertical – forward & backward integration
Horizontal or lateral expansion
Inorganic growth
New greenfield or brownfield projects
New product development, technology, R&D
New business structure, new contract structure
Foreign trade
International expansion
Diversification
See:
Consultancy services for business growth through equity funding
Equity finance in financial distress for turnaround:
A company has the least bargaining power and minimum time available to turnaround through equity funding. Turnaround is the most difficult kind of equity funding initiatives. Apohan has Special expertise in turnaround of financially distressed companies. The investors are highly skeptical about the very viability of a business in financial district. They are more so when it comes to a private limited company in which the compliance requirement and the transparency is very less. Generally, the investors do not go to the root cause of financial distress. If the business is intrinsically viable, profitable, able to generate expected rate of return, if the management is ethical, and if the offer made to the investors is attractive, it is not very difficult to achieve a financial turnaround through equity investment.
Apohan’s market survey shows that the lending institutions, banks and other lenders are of no use in the times of financial distress. They just don’t believe that a turnaround is possible. Even if they believe, they don’t have the risk appetite. And even if someone does have the risk appetite, they don’t have sufficient authority in the institution to disburse the funds. Equity funding is a good resource to the small and medium enterprises. A lot of novel initiatives of restructuring the company on various fronts have to be undertaken for a successful turnaround.
One of the important aspects of turnaround financing is understanding the psychological condition of the business owner and having empathy for the same. Having to lose all the fortunes made till date, having to lose the capital brought from own pocket in the beginning, repeated reminders of the creditors, repeated reminders of the suppliers, and the banks process of recovery including auction of the personal assets of the promoters and the guarantors results in a very depressing situation for the business person. Such kind of financial turnaround also becomes a very challenging process for a merger and acquisition consultant.
Following are the circumstances of financial distress:
Employee payment defaults
Supplier payment defaults
Working capital shortfall to operate beyond break-even capacity
Working capital shortfall to operate below break-even capacity to minimize losses
Inability to meet financial liabilities fully
Bank term-loan becoming Non-performing Asset (NPA)
Litigation in Lok Adalat by creditors
Litigation under SARFAESI for recovery
Strategic debt restructuring
A case with Debt Recovery Tribunal (DRT) by creditors
Asset reconstruction
CIRP under IBC process
High Court/ Supreme Court cases for recovery
Loss making but still viable business if capital is made available
Negative net-worth
Liquidation
See:
Consultancy services for business turnaround
Equity funding for or by opportunistic businesses:
The companies that are neither aspiring growth not having any kind of financial problem also engage in merger and acquisition activities depending upon the quality of the opportunity available & their mood.
Following are the varieties of managements that suddenly may take interest in merger and acquisition activity:
Not able to take M&A decisions because there is no experience
Don’t know weather this is the right time for M&A
Waiting to fail on the financial front but the management currently doesn’t know that
Loosing good opportunities frequently and falling behind competition
Companies with no timely succession planning and likely to be sold at dirt cheap value after value destruction
Companies with no timely succession planning and likely to be liquidated after retirement of the business man
Companies without horizontal or vertical integration and suffering from supply chain shocks.
Companies surviving on luck without any risk management mechanism
Surviving on relationships with political circles or with big companies
See:
Consultancy for businesses suddenly getting active/dragged in M&A
Companies can be in any of the circumstances mentioned above. Apohan carries out professional, end-to-end, customized consultancy services for above classification of circumstances of the company to achieve the objectives of the client business. Apohan carries out all these equity transactions, right from the problem identification phase, to the closure of deal with perfection.
Apohan’s services in acquisition consulting
Following are the Apohan’s services for M&A of Indian SME businesses:
Understanding business client objectives
Preparation of client profile
Industry scanning for strategic investor company for best fit
Industry scanning for financial investor company
Secondary market research of the sector and industry
Study of applicable local legal and regulatory framework for mergers
Inception report with M&A strategy for M&A transaction to the business management
Analysis of broad M&A options (contractual, equity, local, foreign, etc)
Analysis of mode of subscription to equity (private placement, etc)
Analysis of form of equity (common, preference, convertible, etc)
Orientation of client management for the M&A process
Preparation of the desired target investor profile (ticket size, fund types, etc)
Anonymous advertising in print media, online media, social media
Circulation of opportunity among investor forums, business forums, online deal platforms
Preparation of the a list target investors
Ice-breaking discussions with target companies
Selection of the target investor
Preparation of mutual NDA between principles
Structuring of the merger
Negotiation for sharing of control
Role of the previous directors
Financial performance targets in case of turnaround
Formulation of a strategy for a new project (size, location, capacity, etc)
Preparation of project information memorandum
Preparation of project profile
Preparation of a Business plan
Preparation of time Schedule of investment requirement
Negotiation on mode of issue of equity
Finalization of type of equity
Preparation of nature of amendments in MOA & AOA
Preparation of of drafts of board resolutions for internal approvals
Preparation of the financial model
Preparation of valuation for various levels of Equity stakes in the company
Preparation of key strategic terms of merger agreement
Selection of accounting, taxation and secretarial experts
Valuation for the purpose of taxation through certified valuers
Identification of due diligence agencies
Due diligence (corporate, financial, key contracts, marketing, procurement, key assets, real estate, manufacturing facility, permits & certifications, technology, operations, brand, intellectual property, compliance, associate companies, forensic, human resources, information technology, administration, etc.)
Preparation of due diligence report
Preparation of risk profile of the envisaged merged entity
Compilation of data for specific query
Preparation of term sheet
Preparation of draft business transfer agreement
Assistance in board meeting and General Meeting as special expert invitees
Preparation of disclosure schedule
Assistance in negotiation of business transfer agreement
Assistance in execution of the investment document
Assistance in understanding the investment payment process
Assistance in disbursement of payment
Resolution of deadlocks
Key inputs on integration process
Hand holding support for management of joint venture after the deal