Characteristics of an Acquirer and Merger Firm
The role and influence of commercial banking has reached unprecedented levels of development and innovation with the advent of contemporary banking strategies and developmental procedures being conducted and exercised today. But in this context and situations we will specifically be limiting our discussion to the advisory characteristics that take place at each level and ground for the effective acquisition of their desired objectives.
Even though the bank and the potential acquirers may share a long-lasting amiable relationship, but a major breakdown of the business bonds takes place in circumstances during the merger and acquisition processes which are more accurately abbreviated as M&A in commercial terminology. In order to mitigate such threats the role of banks as lenders and advisors is of prime importance. Various discussions with senior banking experts and professionals reveal that the role of advisors for acquisition and mergers related to any investment bank or the target firm of acquisition varies from circumstances to circumstances. But in each case the potential extraction of benefits or the stakes to risk are conducted by the advisors from either side. Nevertheless it would not be inaccurate that the advisors are the major diplomacy practitioners from organizational fronts in the entire process.
The Respective Strategies of Banks and Target Firms
It is generally viewed and observed that in the role of lenders and advisors, banks are generally viewed as playing a certification function; but when banks act start playing a dual role of lender and advisor, this is the point where the potential interests of organization begin to clash and the real problem commences. The needs for the requirement of an outside investment, as said earlier, delivered a variable feedback, with some saying that they do not rely on acquiring such services from outsiders while others said that it depends on the nature of the project they are dealing with, if the credentials of the project does require such services it is normally acquired, but apart from all these, a major influencing factor on such options is to make decision regarding whether the bank is an acquirer or a seller.
Another thing that is worth mentioning here is that it is normally observed that when target firms own bank are directly involved in conducting the merger operation, target firms extract abnormally high returns, but on the contrary there are no possible benefits at the acquirer side. It is obvious that any healthy or profitable deal is an outcome of mutual consensus and agreement between both parties, experts however, suggest two prime reasons as a result of which the benefits that could be extracted by acquirers. (Walter, 2004)
Firstly, the certification of value might not be of much importance to acquirers because it is the target firm that is priced in the amalgamation process. The second reason is more applicable in the long run, but at the same time has a highly capricious nature also. Acquirers may utilize the commercial bank involved in the merger deal to gain access for getting loans on low interest rates and flexible terms and conditions in the post merger period, through the usage of this option; the acquirer has an option to opt for the bank that he already has healthy relationships for the advisor position in the merger deal to obtain maximum advantages from the resultant deal. But, on the flip side there is a concealed disadvantage which may not fulfill this objective. Primarily, because of the weakening certification effect that may instigate a potential collision of interest as the advisor’s merger recommendation may not be completely conform to the money lending activity or the future commercial activities of the bank. Such situations result during times when economic turmoil or financial depression reaches their pinnacle, banks restrict loans to clients and any big business for its healthy continuation overwhelmingly depends on bank loans.
Why is M&A Important?
There are a variety of reasons as to why such negotiations and diplomacy organizers constitute an integral part of the buying and selling activity.
First and most important is that experienced advisor on either side constitutes a plus point for the party, mainly because of his familiarity to the dynamics of market, his wide network of sources and public relation through which he has a certain level of comfort and communication with all key players of the market or the deal that they are a part of. Moreover, an experienced advisor is very well acquainted with the turns and twists of the market and the resultant strategies that should be devised in order to seek sanctuary from the invasion of any recession.
Secondly, all these qualities of an advisor can also help in avoiding any kind of legal complications that may halt the progressing pace of the project in any way and can also play an important role in acting as an effective mediator and diplomat in helping the buyer and seller reach a beneficial decision. In other cases, when the role of advisors is executed by investment banks, results produced still depend on the nature and efficacy of the diplomacy that is conducted by the advisors for adding value to the merger deal. The literature that was produced by reputable and credible institutions revealed a mixed combination of benefits and disadvantages in variable settings.
A study by Hunter and Walker in 1990 disclosed that profits generated by consolidation deals mediated by investment banks were much positive and helped in future also. But on the other hand a report by McLaughlin said that certain salient features or incentives that are incorporated in the banking services being offered by investment bankers can spark a potential conflict between the parties. (Stavros, 2004)
Qualities of an Advisor on Either Side
In the words of Managing Director of Sheshunoff Company Investment Banking, Curtis D. Carpenter, the advisor selected by the company must fulfill the following benchmarks; he must be a good and objective listener, must be experienced enough to understand to comprehend the various strategies and the countering tactics that will help him in acquiring maximum benefits for his company from the deal that is taking place. Proper homework is another intrinsic requirement; he must be well aware of the stakes that the acquirer can compromise on and those on which the seller can have a similar approach.
But apart from all this, his major focus must be on exercising all ways through which substantial profits can be achieved from the deal. From the seller side, the role of an advisor is similar to the truth delivering mirror, a person who has to be objective and rationale in his discussions. In accounting and business literature the prudence concept has always been of immense importance and the seller’s advisor needs to be a person who realizes this at each step of the deal. On the other hand, acquirer’s advisor has a position of a cheerleader who keeps thinking that the market will still be in our control if this deal triumphs, it is not like making some one overconfident but instead provide a courage to go for the planned task. For successful advisory services the important factor to consider is what, rather than from where, it is important to choose the right person for the right job rather than where is he from. According to David Mills, the vice president of First Busey Corporation, it is important to understand who are you working with and the nature and prospects that are anticipated from the merger deal.
When banks are also included in the setting, the presence of the experience factor becomes the invader. This is mainly because banks are mainly interested in the experience and sustainability of deals rather than the experience of the advisor or the company. An ingenious advisor from the buyer knows it very well and hence it is his sources and experience that are utilized on a practical scale in such situations. However, at the seller’s front learned advisors are fully aware of the situation and hence deal with them in a way which can provide if not greater, than considerable benefits to the organization.
It is also important to mention here that the amiable bonds and long term relationships between both parties involved in the transaction are marginalized and subsequently substituted by the economic interests above everything. No matter whatever the results of the deal are, it is the credibility between the clients and customers that still holds the key for an effective and profit generating relationship between the two, if at any place at advisor level, the credibility of either side is damaged, it results in the collapse of the any future business prospects, but it is interesting to note here that the actual ability and potential of an advisor in put to test in such crucial times only, from either side the strategy develop must focus on three core issues, first being the restoration of credibility, limiting loses and the termination of the crisis that led to a trust deficit situation. (Holliday, 2006)
The effective and smooth running of the business is the desire of every businessman; every businessman goes through profits and losses which are a part of the commercial game, but there are some businessmen who are labeled as tycoons or moguls in their respective fields, their assets compound every passing second. The difference lies in their advisor strategies and tactics, the communication skills of their advisors and through the ingenious methods they handle the merger deal which proves to be in their advantage, but above all this it is the trust and credibility that these people which makes their advising tactics much more enforcing and impactful.