Russo Global

Mergers & Acquisitions

Mergers and acquisitions (M&A) involves elements of strategic management, corporate finance and management focused on the buying, selling, dividing and combining of different companies to enable an enterprise grow rapidly.

M&A may seem like the easy option to expand a company’s products, manufacturing scale, technological base or improve its access to markets, but it is not all plain sailing. Many mergers and acquisitions ultimately fail due to poor planning, execution or post merger management.

Over the last 30 years the Russo Global team has carried out over 40 M&A transactions providing scale for smaller businesses, through to “industry roll ups” to create large businesses with up to $400 million annual revenue.

Options analysis

Before anything is done we need to ensure that the company situation is fully understood. A poorly run business merged with another the same, or better, or worse does not automatically create a winning outcome.

The company initiating the M&A presumably wishes to lead post acquisition but if the business is lacking in strategy, systems and people, then disaster looms.

A starting point for any M&A must be an honest appraisal of the company’s current situation, competencies and deficiencies. Russo Global will guide the review process and, if required, assist with creating or updating your strategic plan and subsequent restructuring in preparation for the desired M&A.

Valuation

There is a fine line between a merger and an acquisition and most assume that the target is the one that needs valuing. However, the acquirier must also be valued to answer one vital question - will the M&A "A+B" create more value for the shareholders and a better return on capital?

A range of valuation methodologies are used to evaluate the pre and post M&A situations depending on the industry, the stage of rhe business (start up or mature) and the comany’s overall preferences for methodology.

Direct valuation methods, such as discounted cash flow, provide a direct estimate of a company’s fundamental value. Relative valuation, such as price to cash flow or earnings indicate whether the company is fairly priced.

Documentation

Whether you are on the buy side or sell side, access to all relevant documents for due diligence is critical. Russo Global has developed a range of document lists depending on the industry and stage of the company.

Ideally all relevant documents are in in digital form and organized in a secure environment, which may be a drive on a server or a virtual data room. The advantage of a virtual data room is that it can be tightly controlled by the managers of the information itself and not IT managers. And the business does not need to be over run by countless people disrupting the day to day business.

Ensuring that nothing is missed or misunderstood is critical and comprehensive planning and execution is important.

Due Diligence

Due diligence is not just about financial and legal aspects, although clearly these are very important and Russo Global can assist you with a comprehensive process. However, technology, product and often scientific due diligence are the real issues, along with freedom to operate.

Will the enterprise which will deliver the technology base, product range or market access desired? Russo Global experience will enable you to get what you require.

And then there is "operational due diligence”. How are you going to integrate and run the new business? We wil work with you to gain a thorough understanding of business operations and to create a post merger integration plan.

Process management

We cannot over emphasize the importance of a sound M&A process. While a good process can’t guarantee success, a poor process will almost certainly result in failure.

If M&A is to become a regular activity then the greater the need for well-designed methodology and a dedicated competent team. If M&A is occasional then a temporary project team and “one-off” approaches will often suffice. Either way, Russo Global will design the best process.

In designing this, we identify those who will ultimately “own the deal” to ensure accountability and smooth integration. They need to have a strong voice in controlling the decision making during the acquisition process.

Negotiation

Negotiation strategy is close to being art, not science. The right strategy will depend upon the nature of the transaction and the character of the target.

If the target has set up a limited or full auction, then buyer control is limited. Unless there is a compelling reason, buying under such circumstances is to be avoided.

If acting on the buy side then we favor obtaining exclusive rights for a period of time which will give the acquirer the ability to conduct a more rigorous due diligence and negotiation process. If we are on the sell side, we still favour dealing with suitably qualified parties in a semi-exclusive defined process so that the company is not having to deal with tire-kickers.

Integration

Operational due diligence is the foundation for post merger integration. Understanding the key success factors and how to retain these going forward is essential.

There are a whole range of issues to address in the integration of the business but most often to capture the value of the business, retaining key staff is a number one priority. While no one is irreplaceable, immediately post acquisition, certain employees will have outsized value in terms of retaining key customers, know-how, supplier relationships etc. Discussions and the timing of discussions with these staff is important.

Russo Global will work with you to develop a formal integration plan and team to ensure successful outcomes.

Capital defined

Financial capital is any economic resource used by businesses to buy what they need to make their products or to provide their services to the sector of the economy upon which their operation is based; it comes from two sources: debt and equity.

Debt capital refers to borrowed funds that must be repaid at a later date, usually with interest. Common types of debt capital are bank loans, personal loans, overdraft agreements and credit card debt.

Equity capital refers to funds generated by the sale of stock, either common or preferred shares. While these funds need not be repaid, investors expect a certain rate of return.

Private equity (PE) offers a blend of equity and debt and typical strategies include leveraged buyouts, venture capital, growth capital, distressed investments and mezzanine capital; typically to gain control of an existing or mature company.

Venture capital (VC) is money provided to seed, early-stage, emerging and emerging growth companies. The venture capital funds invest in companies in exchange for equity in the companies it invests in, which usually have a novel technology or business model in high technology industries, such as biotechnology and IT.

Growth capital defined

Growth capital (also called expansion capital and growth equity) is a type of private equity investment, usually a minority investment, in relatively mature companies that are looking for capital to expand or restructure operations, enter new markets or finance a significant acquisition without a change of control of the business.

Companies that seek growth capital will often do so in order to finance a transformational event in their lifecycle. These companies are likely to be more mature than venture capital funded companies, able to generate revenue and operating profits but unable to generate sufficient cash to fund major expansions, acquisitions or other investments. Because of this lack of scale these companies generally can find few alternative conduits to secure capital for growth, so access to growth equity can be critical to pursue necessary facility expansion, sales and marketing initiatives, equipment purchases, and new product development.

Growth capital is often structured as preferred equity, although certain investors will use various hybrid securities that include a contractual return (i.e., interest payments) in addition to an ownership interest in the company. Often, companies that seek growth capital investments are not good candidates to borrow additional debt, either because of the stability of the company's earnings or because of its existing debt levels.