MERGERS AND ACQUISITIONS
To build competitive strength in the markets, companies should consider the advantages of mergers and acquisitions, and collaborations with venture capital funds.
Argus Group provides professional support for mergers and acquisitions, i.e., the transactional process (whether you are buying or selling a company), which includes:
- Identification and contacting of potential investors (if representing the seller)
- Discovery of potential purchase opportunities (if representing the buyer)
- Preparation of transaction documentation (information memorandum, teaser, term sheet, Non-Disclosure Agreement, etc.)
- Management and structuring of the entire process
We assist you in making the best possible decision, relating to questions such as:
- How much is your business worth?
- Who should you sell your company to?
- How should you sell your company?
- How should you carry out the transaction?
- Do you need an advisor for this transaction?
- What documentation do you need for this process?
Depending on the relationships of the companies in the process, mergers and acquisitions can be divided into horizontal, vertical, and conglomerate mergers, or related and unrelated mergers and acquisitions:
- Horizontal mergers refer to companies operating in the same industry. These are formerly competing companies.
- Vertical mergers refer to the merging of companies that have a buyer-seller relationship.
- Conglomerate mergers refer to diagonal mergers or mergers of companies in different industries that do not have a buyer/seller relationship.
The process of conducting an acquisition, merger, and integration for buyers typically includes the following steps:
- Defining transaction objectives
- Analysis of estimated economic and financial gains realized by this transaction
- Formation of a team to lead the merger and acquisition process
- Conducting due diligence analysis of selected candidates
- Initial negotiations with the target company
- Valuation of the target company
- Determination of transaction structure
- Securing necessary financial resources for the transaction
- Detailed negotiations on the transaction price
- Informing minority shareholders and third parties about the transaction
- Conducting all legally mandated preparations
- Conducting remaining activities necessary for the conclusion of the agreement
- Conducting the transaction conclusion
- Keeping track of post-conclusion obligations
- Implementing the integration of the two companies.
Acquisition – What is it?
Companies that want to survive in a globalized world market must grow, and this is possible in two ways:
- Increasing sales by developing new products or expanding their distribution network and penetrating new markets.
- The other, faster way to develop a company is through mergers and acquisitions, where the company acquires new products and expands its market to new areas.
Some of the terms that may arise for easier understanding are:
- Business company acquisitions (acquisition) – one company takes over another company by buying business shares or stocks from existing owners. The acquired company continues to operate, but with a new ownership structure.
- The acquirer can be a physical person (existing or new management) who wants to take over the business from the owner.
- Business company mergers – when two or more companies decide to merge into a completely new company. In this way, the existing companies cease to exist.
- Business company acquisitions – a larger trading company acquires a smaller trading company. After that, the purchased company ceases to exist, and the acquirer becomes a larger company with increased assets, but also obligations.
Today’s market situation, characterized by the presence of fierce competition and numerous rapid changes in the environment, is the reason for the appearance of an increasing number of companies, both large and small and medium-sized, which face the problem of stagnation and regression in business. At the beginning of the new millennium, one fact is crystal clear – only those companies that have learned to quickly and effectively adapt and change and those that are ready to accept a new form of business development – through private equity and venture capital investments will succeed.
The economic reasons for acquisitions and mergers lie in the need for concentration of capital, technology, experts, labor force, resources. In business practice, these procedures are of paramount importance. It could be said that acquisition is more often implemented in practice. Its advantage over a merger is that one company still exists, retains the existing brand, all market relationships, which has its economic value.
EBITDA – što je to?
(Earnings Before Interest Tax Depreciation and Amortization)
EBITDA or earnings before interest, taxes, and amortization is one of the indicators of a company’s business success, which takes into account the fictional nature of amortization as an accounting category.
Amortization is strictly an accounting procedure and has no effect on the company’s cash flows. Along with amortization, EBITDA excludes the effects of financing, extraordinary business events, and other possible non-cash accounting postings. Thus, EBITDA shows us the pure (“bare”) business success and serves as a good approximation of the cash flow from operating activities.
In addition, EBITDA is an extremely good indicator of profitability, especially in relation to relative comparison with other companies in the same industry. EBITDA is used as a basis for credit analysis (assessment of the company’s ability to regularly meet its financial obligations).
Investors and creditors often use the EBITDA coverage ratio for comparing large companies that have significant amounts of debt or large investments in long-term assets, as this measurement excludes the accounting effects of non-operational costs such as interest and amortization expenses.
The EBITDA indicator is calculated as follows:
EBITDA = earnings before interest and taxes (EBIT) + amortization
In practice, there are actually several ways and methodologies for calculating EBITDA. This is not a standard figure and analysts include various accounting items in the EBITDA calculation.
Regardless of the calculation method, the results must be meaningful, consistent, and must allow comparability of companies with each other. The fundamental task of the analyst is to adjust EBITDA in a way that ensures comparability among companies.
EBITDA becomes an extremely useful indicator when combined with some other items from financial statements:
- EBITDA margin
- Net debt / EBITDA
It is also widely used in company valuations where the EV / EBITDA (Enterprise Value / EBITDA) ratio is often used.
It seems important to point out that EBITDA is only an approximation of the cash flow from operating activities. It would be wrong to completely equate it with the cash flow from operating activities since EBITDA neglects the cash flow needed to finance working capital.
Liquidity – Why it Matters
Liquidity refers to the ability to quickly convert an asset into cash. From the perspective of an ordinary citizen, liquidity is the ability to pay short-term obligations without any problems.
Net working capital is the difference between short-term assets and short-term liabilities, and it serves as a measure of a company’s financial stability.
A company’s liquidity is often defined as its ability to timely meet its obligations. This ability of the company is conditioned by a number of elements: the flow of working capital through the company’s business process, the final maturity date of obligations, and the alignment of debts and own sources of financing.
Financial Statement Analysis
For a company to survive and develop in the market, it is assumed that its operations and development are managed. This tends to involve a comprehensive analysis of the company’s business, which includes value and quantitative data and information that are necessary for making quality management decisions.
The analysis of financial statements is primarily focused on value data and information. Given the current very challenging market conditions, the importance of analyzing financial statements need not be emphasized.
The following analytical tools and procedures are used in the analysis of financial statements:
- Comparative financial statements that enable tracking changes over several accounting periods,
- Monitoring changes using various indices,
- Structural financial statements,
- Analysis using indicators,
- Special analyses (break-even analysis, cash flow forecasting, gross margin change analyses)
In addition to management, other users also use financial statement analysis, especially creditors, owners, auditors, and other stakeholders. Each of these users is interested in specific information. For example, bankers are interested in information about a company’s liquidity and indebtedness, while owners are interested in long-term profitability and business security, etc.
Financial indicators are seen as carriers of information needed for business management.
Indicators are calculated to obtain the information that forms the basis for making business decisions. Depending on the user making the decision and the type of information needed to make a decision, we differentiate the following groups of indicators:
Liquidity indicators – show the company’s ability to settle due short-term obligations. Indebtedness indicators – show how much the company is financed from external sources.
- Liquidity indicators – show the company’s ability to settle due short-term obligations.
- Indebtedness indicators – show how much the company is financed from external sources.
- Activity indicators – show how the company uses its resources.
- Economy indicators – show the relationship between income and expenses.
- Profitability indicators – measure the relationship between invested capital (most significant indicator of success).
- Investment indicators – show the success of investing in stocks.
Each group of indicators provides valuable insights into different aspects of a company’s financial health and performance. By assessing these indicators collectively, stakeholders can make more informed decisions about the company’s overall performance and potential risks.
Cash flow, or “novčani tok” in Croatian, represents the inflow and outflow of cash equivalents in a business. This does not only refer to physical cash but also includes all money in checking accounts, cash registers, receivables for deposits, and any other instruments that can be quickly converted into cash.
Understanding the basic concept of cash is very important because it is not only the physical money that people hold in their hands, but also all the aforementioned items. In a colloquial sense, the cash flow in a company is similar to the wallet in the user’s pocket. Cash is, in fact, a key resource for every company.
The cash flow statement is the most important instrument for analyzing the stability of a company. It allows management to assess the success of cash management and to estimate future cash flows. The cash flow concept is prevalent among investors, financial institutions, and those who want to make quick money because a stable cash flow is necessary to get a return on the invested capital. The cash flow statement serves to convey information to managers, investors, and creditors about the inflows and outflows of cash during one accounting period.
It should be made clear that the profit or loss from the Profit and Loss account will never match the inflow or outflow of cash from the company’s account. These two elements must be clearly distinguished when analyzing a company, whether the company is being bought or sold:
- Profit and Loss Account = Revenues – Expenses = Profit
- Cash Flow Statement= Receipts – Expenditures = Cash
It is very important to recognize the difference between profit/loss and cash flow (inflow/outflow). There are many examples where a company has shown high profits, but within a few months, it went into pre-bankruptcy or bankruptcy. This type of immediate danger is particularly pronounced today in the era of the coronavirus pandemic, disturbances in the currency market, and disturbances in the oil market. No company should ignore the importance of managing liquid assets.
The information that various financial analysis indicators can provide means nothing by itself if the management cannot recognize and use this information to ensure the security and transparency of the company’s operations.