We have entered conditions typical of the last phase of a bull market in equities. Since their lows in early 2009, the major developed market indices have nearly doubled.
At this time companies, having experienced a recovery in business conditions are now seeking to grow. However the possibilities for organic growth are limited due to sluggish world economies, continuing economic downturn in China and the problems of the Eurozone. Accordingly, to continue the progress in their earnings and share prices, senior management has two options:
- To make strategic Mergers & Acquisitions of competitors, or companies in new market areas which they wish to address. For example Shell has announced an over £40bn acquisition of BG Group, the oil and gas producer that was once state-owned utility British Gas (the British Gas retail name is now owned by Centrica). Given both companies have UK headquarters, the acquisition synergies arising from eliminating duplicate staff functions and facilities will be substantial. Operational synergies will arise at the oil and gas production and exploration levels. And BG has some promising new deposits e.g. in offshore Brasil, where Shell’s drilling expertise will be very useful.
- The other alternative is to release shareholder value by selling or spinning off businesses which are insufficiently related to the core business. Proceeds from such activities can be used to buyback shares, and this will enhance Earnings Per Share and other metrics such as Return on Capital. This is the strategy General Electric has opted to pursue. The majority of its financial services arm (which at times has been half of group profits) is being sold or de-merged, and the company expects to return $90bn to shareholders via buybacks and dividends as a result of these activities.
There are challenges for management in all of this. Empirical evidence shows that less than half of M&A transactions add value for the acquiring company—good M&A takes skill and knowledge. It is important to place the correct value on the target and the expected synergies, and to know when to walk away. Similarly companies have an indifferent record in buying back shares, often doing so at the top of the market and then needing to raise capital at much lower share prices.
BPP addresses the needs of companies and finance professionals in these areas through a number of courses. Our Valuation Techniques (with Valuation Modelling) course considers the fundamentals of valuing companies through the lenses of Discounted Cash Flow and Comparable Multiples techniques. Our Advanced Equity Valuation course covers the most up-to-date ways of valuing the equity of companies.
On the transactional side our Mergers & Acquisitions course is a 2-day soup-to-nuts introduction to the process of M&A – how to buy companies, but also how to market them for sale. We consider strategic, corporate finance and review legal issues that arise from such transactions. We also offer a 1 day course on Due Diligence which focuses on identifying the value drivers in an acquisition and the possible red flags.
In addition we offer specialised technical 1 day courses covering The Takeover Code (Blue Book) which governs the acquisition of UK listed companies. And also The Listing Rules which considers the requirements of a company or spin-out that is to be listed on the London Stock Exchange. Both of these courses assume only limited prior knowledge but cover their topics in detail.
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