By Kelly Luo, April 29, 2020
Mans International hosted its online COVID-19 training session about cross-border mergers & acquisitions recently. The majority of the audiences were entrepreneurs, senior executives of companies in the TMT sectors, as well as investors.
We invited a senior investment banker who would like to keep a low profile and therefore we won’t disclose the name here.
The session covered the following three topics using a Q&A style:
- Cross-border M & A process and key concerns
- Precautions for overseas acquisitions
- The impact and opportunities of the COVID-19 epidemic on overseas mergers and acquisitions
Here are the key takeaways:
Part I - Cross-border M & A process and key concerns
1. Cross-border M & A transactions have a complex structure and high transaction uncertainty and are usually advanced in a process-oriented manner. What are the overseas equity/asset sales methods? What are the advantages and disadvantages of different sales methods?
According to the seller’s goal, the sale process can be divided into two categories:
- Public auction — Entrusting investment banks to extensively contact investors and selecting buyers with the best acquisition conditions through bidding is the most commonly used sales process
- Negotiated bid — Negotiate the transaction with only one party, the buyer and the seller have one-to-one direct contact with each other, negotiate to determine the transaction structure and price and complete the acquisition.
2. What is the typical overseas bidding process for M & A? What are the misunderstandings about the transaction process?
3. It is an international practice to engage investment banks in M & A transactions. What are the main tasks of investment banks in M & A transactions?
Investment banks are broadly defined as financial institutions that provide all capital market services (full-service investment banks). The business covers investment banking, sales and trading, equity research, corporate banking and capital markets.
Investment banks only include underwriting, mergers and acquisitions and other capital market businesses as narrowly defined.
Investment banks, also known as financial advisors, are the first advisors to enter the overseas M & A process.
The investment bank is responsible for the management of the project process, and the service covers all the processes. Hiring an investment bank depends on the size and complexity of the M & A transaction and the project execution experience of the buyer ’s internal team.
During the merger and acquisition process, the main tasks of the investment bank include:
- Provide target company financial analysis
- Provide advice on transaction considerations or valuation methods
- Gather information that can influence acquisition strategy
- Assist in the preparation of non-legal transaction materials
- Provide strategic and tactical consultation for negotiation
- Assist in dialogue with the target company and its financial advisor
- Assist other external consultants to complete due diligence
- Assist in transaction settlement
Tasks of other consultants:
- Legal advisors: legal adjustment, related negotiation and legal document production, communication with regulatory authorities
- Audit and tax: Valuation, audit, financial and tax adjustment of the target company
Part II – Precautions For Overseas Acquisitions
4. It becomes more and more common to hire investment banks to manage the transaction process in cross-border M & As. Do I need to choose an investment bank? How to choose an investment bank?
In cross-border mergers and acquisitions, it is an international practice to employ investment banks as external consultants to communicate with the target. Screening investment banks through the bidding process is a common form of hiring investment banks.
After receiving the investment bank tender, you should pay attention to the following points:
- Investment bank qualifications and capabilities
- Related qualifications and recent transaction performance
- Understanding of the target company’s business/shareholders/management
- Transaction experience
- Related industry experience
- Experience in related deal size
- Experience in cross-border transactions
- Project team composition
- Do you have relevant experience
- Do you have experience in the Chinese market
- Competence of team members in charge of daily work
5. During the M & A transaction process, we will receive a lot of materials with various names. What materials need to spend more time to read carefully?
The confidential information memo is a detailed introduction to the project. It is a non-legally binding document, usually 50-100 pages, which is an important basis for potential buyers to make judgments before submitting the first round of non-binding quotation.
The terms specified in the first round of non-binding quotes are the basis of the final transaction agreement. In general, the quotations in the first round of non-binding quotes and the final transaction agreement will not fluctuate more than 10%.
Before reading through the entire content, you should first pay attention to the following chapters:
- Investment highlights
- Performance forecast and rationality of model assumptions
- Industry status and prospects
- Market competition pattern and target company’s market competitiveness
- Management team, analyze and judge the ability of executives
- Customers, suppliers, product
Part III – The impact and opportunities of the COVID-19 epidemic on overseas mergers and acquisitions
6. The impact of the COVID-19 epidemic on global finance and economy exceeded the SARS in 2003 and the financial crisis in 2008 in terms of depth and breadth. What is the impact of this epidemic on finance and the economy?
In the short term, investment activity is reduced due to:
- Businesses are under pressure from cash flow
- The inflection point of the global epidemic is unknown
Increased uncertainty in transaction execution:
- Travel restrictions affect the negotiation process and due diligence process
- Home office delays transaction review and approval time
- The cost of capital rises and the uncertainty of transaction funds increases
- Modification of valuation assumptions and forecasts
7. Affected by the epidemic, some companies have fallen into operating difficulties or bankruptcy due to the break of the capital chain, providing rare opportunities for companies to go out and buy at low prices. Is it the best time to bargain overseas? If so, which sectors deserve attention? What new challenges will overseas acquisitions face?
The impact of the epidemic has accelerated the digital transformation of global traditional industries, spawned and promoted the development of some emerging industries.
After the epidemic, the global supply chain will be optimized and integrated, but the deglobalization in sensitive industries will increase the risk of overseas mergers and acquisitions
- New retail, e-commerce, logistics
- Medical and health industry, Internet medical
- Online education/training, remote office/conference platform
- VR, AR and other scene experiences
- Online games, online movies;
- Strengthening domestic approval and supervision
- More stringent overseas approvals
- Anti-globalization, geopolitics
As the former British Prime Minister Winston Churchill said that never let a good crisis go to waste. Every crisis lies a new opportunity. If you are a buyer looking for a quality target company, Mans International is here to help.