Rajul Raman

The Chief Financial Officer or CFO is a highly sought after executive role. The CFO is responsible for a company’s financial health. Their responsibilities include financial planning, tracking cash flow and profitability, and managing the organisation’s accounting and finance departments. It goes without saying that the position is a high-stake, high-rewards one and requires the utmost expertise and specialised skills.

In fact, most CFOs have advanced educational qualifications such as a Master of Finance or Chartered Financial Analyst (CFA) along with an MBA. Their professional background is typically in accounting, investment banking, financial analysis. They are in the same league as other C-suite executives such as the Chief Executive Officer (CEO), the Chief Operating Officer (COO), or the Chief Information Officer (CIO).

If you are a finance or accounting professional and aspire to become a CFO, in this article, we help you understand how to tread on that path and think like a CFO.

How to become a CFO?

1. Education

A CFO is the highest finance role in an organisation. As a result, it requires the equivalent education. Most finance chiefs today hold an MBA besides a background in finance and accounting. Being at a business school can teach you how to think strategically, analyse a company’s finances, work in collaboration with other teams, among other things.

A specialised education is something you cannot skimp on to become a CFO. Hence, if that’s your goal, you must plan out your career trajectory early and gain the required education. If an MBA is on your radar, you can consider specialising in finance or accounting. While not necessary at all, it does add to your credentials if your business education is from an elite institution.

2. Financial Knowledge

A CFO knows what is financially viable for a company. To be able to decipher this, you must have adequate financial knowledge. While you will be able to acquire this partly through your education, real-time work experience will help you build on this. To advance your financial know-how, you can also avail laser-focused programs in different financial fields such as this one in Investment Banking.

As a CFO, you must be a pro at budgeting, financial reporting, compliance, accounting and so on. Start early with internships in this domain and proceed to work as an accountant, financial analyst, auditor etc.

Here are some other duties of a CFO that you can attain through work experience:

Maximise profits while mitigating financial risks and losses
Manage investment portfolios and conduct audits
Support expansion by raising capital or taking a private company public
Develop financial strategies for mergers or acquisitions
Analyse market trends and generate financial forecasts

3. Leadership Skills

While you will acquire technical skills through your education and professional experience in finance, a CFO is also an organisational leader. This means that you will be managing the entire finance and accounting divisions of your firm. This requires excellent leadership acumen.

You will be able to grasp some of these skills in business school. Apart from that, you should focus on activities that help you develop your transferable skills such as communication, critical thinking, presentation, team-building, etc.

Early in your career, you should try to get involved in tasks at work that would allow you to hone some of these skills.

How to think like a CFO?

While the process to become a CFO, although challenging, is straightforward, it’s also essential to learn how to think like one. After all, the role involves deep strategic and critical thinking as well as a problem-solving attitude. Here are some tips on how to think like a CFO:

1. Be open to learning

Most CFOs are already highly experienced yet the learning process must never stop. In today’s digital landscape, technology and businesses are constantly evolving. Any aspect of a business also impacts its financial health. Hence, leaders like CFOs must always be open to learning new concepts, ideologies, government regulations, economic challenges and so on.

Even for financial analytics, the tools are constantly improving hence, a CFO can only pass on this information to their team if they are cognizant of these changes. Usually, at most companies, the Learning & Development department offers training on new technologies and methods. Regardless of how high your position might be, you will be able to find something new to learn.

2. Plan for the unknown

A CFO is responsible for a business’s financial success. This requires careful planning, risk assessment, and forecasting. Since this is entirely a numbers game, a CFO must have the acuity and keenness to predict consequences based on available financial metrics and reporting.

Only when you as the CFO can plan and think about the unknown can you keep the business sailing smoothly. In this case, many other chief executives are also counting on your knowledge and ability to predict the most risky scenarios. A CFO should always be thinking multiple steps ahead of the current situation and be prepared to act when the need arises.

3. Ace decision-making

As any chief executive, you are expected to make informed, high-stakes, and at times, rapid decisions. As the CFO, this responsibility further intensifies as you are in-charge of a business’s monetary soundness. You will be required to make quick and even difficult decisions.

Through your early career and even in your personal life, you must start to sharpen and improve your decision making skills. Even in case of quick decisions, you should have the skill of accounting for all major factors that influence that decision and its consequences. This requires practice and extreme attention to detail but is a skill that you must ace as a CFO.

Conclusion

Becoming a CFO is a journey that you must begin early in your career. Every step of the way, you should consciously work towards honing your technical and transferable skills so you can make a mark as a CFO.

While education and expertise will account for a majority of what you need, the right attitude towards learning, a visionary approach, and nimble decision making is what can set you apart as a CFO.

As we all know, a job in the financial markets requires an understanding of maths. Learning maths for the financial markets with no prior experience can feel scary. It is not necessary to be an expert in mathematics, however, it is essential to know the basics.

During the actual job, investment bankers don’t use complicated maths. They use templates and models that have been made to compute numbers. So knowing advanced maths is not a prerequisite. It is enough to learn how to perform basic calculations and understand the main concepts.

For anyone who does not belong to a commerce background, learning maths can seem like a daunting task. Arithmetic concepts can also feel like advanced mathematics to them. Here are some things to keep in mind while starting the journey of learning maths for a job in IB:

Not all investment banking fields require the same maths skills

We can broadly divide investment banking into two divisions – corporate banking and quantitative banking. The quantitative divisions require understanding higher-level maths concepts and good technical skills to perform mathematical computing.

Corporate banking fields require a basic knowledge of maths. Adding, subtracting, multiplying, dividing, and compound growth calculations are enough. Having advanced maths on your resume will not give you an edge over others. It will only show the recruiters that you can grasp maths concepts fairly easily.

Recruiters don’t dive too deep into your classes

Whether you have mentioned 10 challenging classes or 10 easy ones, recruiters will not care too much. They are more focused on the overall score/GPA. They do not have the time to analyse each class mentioned and check the difficulty level. It is better to focus on learning basic maths and getting good scores instead of trying to ace higher-level maths and get average scores.

If you have no prior experience, how can you learn maths for your finance job?

You should start with the foundational concepts. This will include interest calculations, arithmetic calculations, algebra, etc.

If you build your way slowly, you will have a better understanding of the higher-level concepts and you will be able to apply your learnings in real life. It is best not to jump straight into advanced maths.

To start at a beginner level, you can check out this FMI course. It will teach you:

Financial maths for capital markets
Financial statistics
Financial maths for derivative markets

By learning these concepts you will feel ready to take on the job! It will equip you with the basic knowledge and concepts you will use most during work.

Conclusion

For someone with no prior experience, maths for investment banking can feel like a daunting task. With the right attitude and courses, you can grasp maths just like a finance degree holder can.

You must first decide which field you want to enter within IB. Having this clarity will help you understand the scope and depth of maths you need to learn.

Corporate banking fields require basic knowledge while trading and hedge funding require advanced maths. Don’t put too much pressure on yourself if you can’t understand higher-level maths. Chances are you will not even use it. It is essential to enrol in a good course so you can clear your doubts and understand everything well.

Good luck with your maths journey!

If you have tried working with any aspects of financial markets, be it professionally or by investing in stocks, you would know that this field isn’t the easiest to understand theoretically. What you need is to learn by doing. This is possible through finance simulations.

These are mockups of a financial concept, created using mathematical formulae, which duplicate how those concepts work in real-time. For example, if you wanted to learn about investing in shares, a finance simulation would allow you to choose shares, create a portfolio, and trade them on mock markets. So, when you’re doing this on an actual stock market, you wouldn’t be intimidated by unfamiliarity.

The same applies to concepts that investment bankers and financial analysts might need to use in their jobs. If you’re an aspiring financial services professional, you can use these simulations in multiple ways to get a glance and hang of complex topics such as M&A advisories, asset management, understanding capital markets, risk management, among other things. Let’s look at the various ways you can benefit from finance simulations:

1. Get ahead of the competition and land your dream role

Investment banking is a complex and competitive industry. When you are just starting out, you will need to work tirelessly to even land an internship interview. During these interviews, you will be asked technical and behavioural questions. Simulations can help you ace the technical aspect of the interview.

If you have been able to peek inside how some investment banking divisions work, you will be well equipped to answer questions around the same topics as compared to if you have only read about them. Simulations mean that you got involved in the actual role, hence, you will be able to talk from experience and share examples with the interviewers.

For example, in this M&A simulation, you can analyse your stocks, construct your portfolio, and send your instructions to the dealing desk. You can then even use detailed analytics to track your performance as the news unfolds. The pressure in a simulation is replicated to reflect the real-time environment. These learnings can enrich your interview answers and help you land the job you desire.

2. Be better prepared for your IB job

It is common knowledge that investment banking is a strenuous industry to work in with challenging roles and long work hours. The last thing you need in such an environment is to feel that you are not skilled in your job. As a newcomer, this feeling is natural but simulations can help you feel in control. They enable you to gain practical, real-world skills and insights that you will be able to utilise in your early career in financial services and capital markets.

For instance, in this Marketing Making simulation, you can practice your market making skills in the options market. You will be competing for client orders, managing your risk, and setting your own bid / ask spread.

When you have already participated in such activities, you will feel confident of your knowledge and skills when starting out in your IB career.

A glance at the Marketing Making simulation from FMI

3. Add thrill to the learning process

When you’re working in a real, high-stakes environment, as a fresh entrant in the IB industry, your focus will be solely on the learning process. You will be bombarded with new concepts, which may seem overwhelming.

In a simulation, however, while the hustle is replicated, the pressure is reduced since it is a mockup. This allows you to enjoy the learning process and gives you room to take risks, which you may not be able to enjoy at first as a real investment banker. This is thrilling and creates a positive interest in learning new concepts.

For example, this Investment Management simulation allows you to attempt outperforming the benchmark and beat the market.

Conclusion

Simulations, which are shorter than traditional courses, are a remarkable way of learning difficult financial concepts. They allow you to be involved and assume responsibilities nearly as you would in the actual environment. This can significantly aid in putting your knowledge to test, learn by doing, and gain practical experience.

Investment bankers and financial analysts are known to crunch numbers, run analytics, be mathematics experts and so on. Yet, while these skills are not absolutely mandatory to work in the investment banking industry, they can certainly help you gain a leg up at your job. Although many courses and tools exist online to aid with becoming proficient at these skills, if there were one tool that encompasses everything else, it is Microsoft Excel.

Using Excel, you can extract, analyse and interpret key data with filters, pivot charts, data tools and a range of built in functions. You can also learn the trick to present your data in a more compelling manner, and ultimately with letting Excel do a majority of the groundwork, you can enhance your productivity.

So, let’s understand the various benefits of Excel for an investment banker:

1. Save Time and Enhance Productivity

It’s no secret that investment banking is a high-pressure, all-consuming job. You will most likely be working at least 12 hours a day in the beginning. In such a situation, any tool that helps you save time can be highly useful.

Excel can help you with solving complex calculations, deriving a formula for otherwise repetitive work, and filtering data to understand it better. With Excel taking care of these often mundane and time-consuming tasks, you will have the extra bandwidth and energy to focus on other key priorities. Increasing your proficiency and productivity will ultimately boost your career prospects and help you become more organised.

2. Build and Analyse Financial Models

As an investment banking professional, you can use Excel to build financial models around merger and acquisition deals, IPO pricing, and raising capital. This can aid in creating financial forecasts for any business. Excel can also further be used to make visual representations of financials through charts, pivot tables, scatterplots, and infographics.

Next, you also also calculate any company’s valuation using Excel be it through the Discounted Cash Flow, Price to Earning Ratio methods. Financial reporting instruments such as the Profit and Loss statements can also be created fully using raw data extraction in Microsoft Excel.

Once these models are created, as an investment banker and particularly as a financial analyst, Excel can significantly help you analyse and draw conclusions on the data present as well as explain it better to your clients.

3. Become Proficient at VBA

Visual Basic Applications or VBA is Excel’s programming language. Once you are able to use Excel swifty, learning VBA then can help automate nearly every task that needs to be done in finance and investment banking. Since it is an extremely fast programming language, it can take some time to get the hang of VBA. But once you start, it can be used to:

Connect to a database directly
Create highly sophisticated visuals
Build pricers for security products such as options and bonds
Design VBA applications

You do not need any special training to gain proficiency in VBA. If you are a student or already a banker, a primer course in VBA can help you grow further in your career and stand out.

How to Become a Pro at Microsoft Excel

So, now that you know the many benefits of using Excel as a current investment banker or an aspiring one, you must quickly begin your journey to learn and ultimately become an Excel pro. Many courses online can offer this training. If you’re looking to start right from the basics and slowly advance to intermediate and expert levels, we recommend this FMI course: How to Learn Excel for Investment Banking.

With this course, you will start from the bottom up such as how to leave comments, track your changes, apply formulae and then, steadily move on to building financial models, reports, and learning VBA. The only prerequisite for this course is to have access to Microsoft Excel.

Mezzanine finance is a hybrid form of financing that combines debt and equity. After a certain time has passed, the lender has the option to convert the loan (debt) into an equity share in the company. This form of financing can fetch higher returns for investors than typical debt, often paying between 12% to 20% a year. The typical timeframe for mezzanine financing is five years or more.

It is typically used during acquisitions and buyouts and for the expansion of established companies rather than for raising funds for start-up or early-phase financing. Mezzanine financing is also a way for companies to accumulate funding for specific short-term projects. In terms of risk, mezzanine finance exists midway between senior debt and equity, hence the name “mezzanine.”

Since mezzanine finance is not extremely well-known and carries some level of risk, a few myths surround this method of financing. Let’s understand and explain what these myths are:

Myth 1: Mezzanine Finance is Too Risky for Financially Testing Times

Since the control lies primarily with the lender, many believe that if a company is undergoing financially turbulent times, mezzanine finance can be tricky. Yet, it typically has a 7-8 year maturity period. This not only keeps the lenders at ease but also allows senior management the time to solve financial issues. This form of finance also lies below senior debt from a hierarchical point of view and does not require amortisation before maturity.

Myth 2: Mezzanine Finance Means Higher Cost of Capital

Equity is considered the most expensive source of capital in which shareholders have to give up control. Hence, since mezzanine finance is only part equity, it is lower in risk compared to pure equity capital. This makes mezzanine debt a lucrative method for raising capital. The best mix is for companies to use the right combination of senior debt, mezzanine debt, and equity to bring down the cost of capital and increase asset returns.

Mezzanine financing can in fact be useful in getting access to more capital without having the business be undercapitalized.The interest payment on mezzanine funding is also tax-deductible.

Myth 3: Mezzanine finance is an Unsafe Investment Avenue

From the perspective of investors, mezzanine finance is an extremely attractive and safe option. The investor can turn the debt into equity if the company becomes highly profitable. This gives them access to the company’s monetary benefits. On the other hand, if only the debt part of mezzanine finance continues, even then the lender has access to regular interest payments.

Limitations of Mezzanine Finance

Although mezzanine financing has a range of benefits, it does come with its set of limitations as well. For example, since these loans are unsecured, meaning not supported by collateral, the rate of interest on them is higher than bank loans and can go up to 20% per annum. Further, the due diligence process requires a long time from the lender’s end as they need to thoroughly evaluate a company’s financial position. This may also include presenting elaborate financial documentations, regulations, etc., which may not be ideal for many companies. Lastly, if the business fails to deliver on its obligations, lenders may have additional protections requiring a company to give up major control as equity.

Conclusion

As an investment banker or if you aspire to be one, it is vital to understand the various forms of financing that exist for your clients. Since there’s a high chance that you will work in mergers & acquisitions or buyouts, you must be well-versed in the various forms of financing, and mezzanine finance is one of them. To understand other methods of fundraising as well as mezzanine finance further, you can avail this detailed course on Investment Banking.

S&P Global has put Mergers & Acquisitions on their list of 2021 trends shaping sectors. As per their recent Global Market’s Intelligence report, Q2 FY 2021 was the third straight period with the total M&A value suprassing $1 trillion. With this rapid surge and growth in volume, a few trends have begun shaping the mergers and acquisitions sector. As an investment banker, you should care about these because you might find yourself working in M&A advisory. Let’s take a look at three such recent trends impacting private equity M&A:

1. Virtual M&A Deals

Consolidations or buyouts of companies are highly complicated transactions, which not only require an elaborate 9-step process but also extreme attention. To imagine such demanding work be performed online might have been nearly impossible until a few years ago. Yet, after the pandemic, virtual M&As have not only gained prominence but become the preferred mode of conducting these deals.

With almost everyone working from home and limited international travel, all parties’ schedules have been easier to match, making virtual deals a viable option. With remarkable technology, these strategic deals have not only become a popular reality but are also efficient and pragmatic offering companies the ability to save time and resources.

J. Neely, Senior MD at Accenture Strategy predicts, “I don’t think things will go back to the way they were. We will likely have more of a hybrid approach in the future, with a mix of in-person and virtual. Now that companies are seeing the value technology can bring to a deal, it is here to stay.”

2. ESG

If you’ve observed or worked in any business lately, you must have comes across ESG – Environmental, Social, and Governance. These are non-financial metrics to assess a company on its social responsibility beyond profitability. It has, in fact, become a major criteria for global indices and investors to evaluate companies for risks and growth opportunities.

According to Deloitte’s 2022 M&A Trends Survey, more than 70% of the responding organisations mentioned that they incorporate ESG metrics into target valuations and have re-evaluated their portfolio through this lens. ESG evaluation now also forms a vital part of the M&A due diligence process. Nevertheless, more than half of Deloitte’s survey respondents said that the focus on ESG would lead to more M&A deal activity, not less. It was also reported as a key factor defining interest in foreign markets right after access to technology, market expansion, and product or market diversification.

3. Cross-Border Deals

Although the pandemic significantly slowed down international travel, cross-border deals are gaining prominence when it comes to M&As. Deloitte reported that more than two-thirds of respondents expect their companies to increase their interest in foreign markets over the coming year.

This has been made possible with the ability to carry out and close deals virtually. The number one reason behind overseas deals being given preference is access to technology, with the Americas and Europe as geographies of choice.

In 2021, global mergers and acquisitions (M&A) hit record highs in 2021, according to PwC. The number of announced deals were at 62,000 globally in 2021, up an unprecedented 24% from 2020.

Malcolm Lloyd, Global Deals Leader, Partner at PwC Spain said, “We’ve seen deals lead the way to economic recovery—looking forward, I expect M&A will continue to play a pivotal role for companies navigating technological disruption and increasing pressure from stakeholders to unlock value in their companies and portfolios.”

Conclusion

Mergers and Acquisitions have always been the highlight of the investment banking sector. With the current revolutionising and innovative trends, interest is further heightened in this domain. If you are keen to work in investment banking or specifically in M&As, you must understand how the trends around virtual deals, ESG, and massively increasing globalisation affect M&As. This will help you stay ahead of the curve as an investment banker. To understand the M&A process in further detail, you can opt for this comprehensive introductory course on investment banking.

Many look at investment banking as a cushy career option but not everyone fully understands what investment bankers do. Within investment banking, there exist multiple divisions called IBDs (Investment Banking Divisions).

These are various departments within the profession for different tasks such as capital raising (underwriting in equity, debt, and hybrid markets), executing mergers and acquisitions, advisory services, and structuring the Initial Public Offer for a company, among others.

Within an investment bank, there is a clear distinction between the Investment Banking Division (IBD) and other areas of the bank such as:

Equity research
Sales and trading
Commercial banking
Asset management
Retail banking

Here are the various Investment Banking Divisions:

Mergers & Acquisitions (M&A) – In this division, investment bankers provide advisory services on the consolidation of two or more companies. This could be through a merger, sale, or purchase. The services typically comprise creating an in-depth analysis and valuation of the companies involved, the risks and benefits of the deal, the pricing element and so on. There are 9 stages of Mergers and Acquisitions, and investment bankers are involved in most of them.
Leveraged Finance – This involves lending money to companies to help with the financing of acquisitions.
Equity Capital Market – Investment bankers provide advisory services on raising equity through products like shares, options, futures, etc. They also help structure and execute the IPO process.
Debt Capital Markets – This involves advice on raising debt for a company to finance its acquisitions.
Restructuring – Investment bankers are often called upon if a company is looking to restructure its financial blueprint for increased profitability.

Within IBD, there are 5 major roles for any division:

Analyst – This is the entryway after college into the IB industry. Investment banking analysts are known to work almost entirely on grunt work such as valuing companies, creating models, drafting pitch books, extensive research, creating spreadsheets etc. Analysts are well known for working 80-100 hours per week and usually start out with a salary of $100,000. To become an analyst, aspirants usually start out with an internship in the junior year of University, which typically turns into a full-time offer after finishing their studies.
Associate – An associate manages analysts, while also conducting some financial modelling and drafting pitch books. This position is either applied for after an MBA or after the third year of being an analyst. The role involves a fair amount of coordination and managing the analysts’ work. Hence, communication skills and organisation are key for an associate. They are known to make around $150,000 a year and work either the same or slightly fewer number of hours than analysts.
Vice President – After their third year, exceptional associates are trained for a vice president position. In this role, you manage associates, design pitch books, attend client meetings, etc. This is a managerial position as the majority of your work involves overseeing your subordinates’ work and meeting the director’s expectations. Vice presidents work heavily with clients and close significant deals. According to Wall Street Oasis, the average base salary for an IB VP is over $200,000, but a significant chunk comes from bonuses, which can surpass the salary in a good year.
Senior Vice President / Director – Most veteran investment bankers go as far as senior VP. Here the responsibility shifts almost entirely to scouting for new lucrative businesses. This requires major travelling, and the compensation ranges between $300,000 and $350,000 base salary per year.
Managing Director – This is the highest position in the IB hierarchy below a group head or CXO. It is focused almost exclusively on sourcing and winning new business/clients. They have immense authority and are responsible for the profitability of the bank through strategy, bringing in high-end clients, and maintaining relationships with them. They are not involved in the deals particularly. MDs end up making over $500,000 in a year without bonuses, and nearly $1 million with them.

How to forge a successful career in IBD?

With the various roles, descriptions and compensations in IBD, one can quickly gauge that it is a highly demanding career that requires a certain personality type to be successful. Here are the traits you should evaluate yourself for when looking to start a career in investment banking:

Intellect

Investment banking requires you to be proficient in analytics, finance, mathematics, and problem-solving. A sharp intellect can help you ace these skills and have a tactical approach toward solutions. While it’s not mandatory to have a degree in finance or economics, a strong intellect can help you navigate your role as an investment banker more smoothly. You can also build your intellect and knowledge through courses such as this primer on all the basics of investment banking.

Discipline

It is common knowledge that investment bankers work long hours. This requires a certain discipline whether it pertains to staying organised, prioritising your day, and operating efficiently without giving in to stress.

Creativity

This might be an underrated skill for an investment banking job but creativity allows people to look for innovative solutions to a problem. This can help adopt a new way of looking at or doing things. This can also elevate your personality as an investment banker.

Ambition

While the pay in IBD roles is lucrative, it does come with the challenge of a highly demanding job. To flourish in such an environment and endure its stressful nature, one must be devoted to working in this industry. If you’re ambitious and driven, you will enjoy the new aspects of your job and be keen on learning more. Without ambition, the analytical and at times, repetitive nature of the job can seem mundane and underwhelming.

Relationship-Building Skills

Investment bankers work regularly with clients. Roles that are managerial in nature also require solid relationships with both subordinates and directors. Hence, relationship-building is a key aspect of investment banking. Interpersonal skills can help you understand client needs and maintain outstanding connections with them. While these skills can be polished over time, all aspirants in this field must work actively toward learning these skills from the beginning.

Conclusion

From raising capital to advising on high-level M&As or working in a high-pressure environment, IBD comes with its own set of challenges. Yet, with the right attitude and skills, you can manoeuvre through these and flourish in such an industry.

You can begin by charting your desired professional journey for the various roles and then build on each skill required to get to your position of choice. While you will learn many technical skills on the job, ensure that you work equally to hone some of the transferable skills such as creativity, problem-solving, discipline, and relationship-building.

Poison Pill Defense, Crown Jewels Defense, Pac-Man Defense, Greenmail Defense, and the Golden Parachute Defense. All these terms feel like they would only be used in movies! However, these are defenses against hostile takeovers. In the mergers and acquisitions world, hostile takeovers are common, or at least hostile takeover attempts are common.

These defense strategies come in handy and have saved multiple corporations from being acquired without permission. If you’re an aspiring investment banker, this article will help you understand these strategies better.

What Is A Hostile Takeover?

A takeover refers to a situation where a successful bid has been made to acquire a target company. There are friendly takeovers that can either be structured as a merger or an acquisition. When a friendly third party takes over, the board of directors and shareholders all agree to join forces.

Next are hostile takeovers. It is when one party does not want to get merged or acquired by the bidder. This potential acquirer tries to take over the target company without the permission of the board or the existing shareholders. They force their way into the target company.

The defences used by target companies to save themselves during a hostile takeover are crucial. Some of these defence strategies are:

1. Poison Pill Defence

The poison pill strategy was first used in the 80s in New York. It was devised by New York-based legal firm Wachtell, Lipton, Rosen, and Katz. It is a reference to the poison pill spies used to carry with them in case they got caught by the enemies. If they got caught, they would swallow the poison pill to avoid being questioned and tortured by their enemies.

In the business world, adopting the poison pill defence works similarly. The target company’s shareholders have distributed the rights to purchase shares of the target company at a discounted rate. When the acquirer’s shareholding in the company increases to a certain point, these rights are given to the other shareholders.

Through this defence strategy, the acquirer’s shareholding in the company is drastically decreased. This makes the takeover an unfavourable situation for the acquirer. This strategy also ensures that the management is in control and the minority shareholders are protected by the company.

There are two main types of poison pill strategies deployed by companies.

The flip-in poison pill strategy: When this strategy is used, all shareholders, except the acquirer, are given the right to buy additional shares at a discounted rate. With every additional share bought, the acquirer’s shares are further diluted. To properly put this strategy to use, a large number of additional shares need to be bought.
The flip-over poison pill strategy: This strategy allows the target company’s shareholders to purchase shares of the acquiring company at a highly discounted rate. The shareholders that agree to the acquiring company’s bid can exercise their rights in that company. This enables them to buy their shares as well. This is just the opposite of flip-in, as dilution is still taking place but in the acquiring company.

2. Crown Jewel Defense

This defense strategy is shown a lot in movies and TV shows. Under this strategy, the target company decides to sell its most valuable assets/branches of business. This reduces the target’s attractiveness to the acquirer.

This strategy is generally the last-ditch effort made by the target to save themselves from a hostile takeover. The company is intentionally sabotaging its business because of the circumstances.

The crown jewels of a company are the most valuable and profit-producing assets/branches. They not only create profits but also majorly contribute to the asset value of the company and have bright prospects. The crown jewels differ across industries and companies. In the manufacturing industry, factories/manufacturing techniques are generally considered the crown jewels.

In most cases, the target company sells its crown jewels to a friendly third company. This third company is often referred to as the White Knight. Once the acquirer backs off from the hostile takeover, the target buys back the crown jewel at a price that was predetermined. The crown jewel defence temporarily destroys the company until the jewel is bought back.

3. Pac-Man Defense

As the name suggests, this defense strategy is based on the video game Pac-Man. The target company tries to take over and acquire the bidder instead of letting themselves get acquired.

To implement this strategy, the target company needs to have a “war chest”. This is a large amount of cash and other assets that are kept handy with the company to deal with contingencies like a hostile takeover.

The cash is not kept idle in the company, however, it is invested in highly liquid assets like treasury bills. They can be turned into cash on demand. Assets with high liquidity are considered cash equivalents and are sometimes referred to as just cash.

A Pac-Man defence usually looks something like this:

1. The bidder is attempting a hostile takeover of the target company. They purchase large amounts of the target’s shares to secure control of the company.
2. The target realises what is happening and uses the Pac-Man strategy to prevent the hostile takeover. They deploy their war chest and purchase an even larger amount of shares of the bidder company.
3. The bidder usually abandons the hostile takeover once it sees the dilution taking place in their own company.

It is essentially a tit-for-tat situation. A hostile takeover is answered with another hostile takeover. Sometimes, the target companies also get outside funding for their hostile takeover of the bidding company.

4. Greenmail Defense

Greenmail defense is very similar to paying a blackmail ransom. A bidder buys a large number of shares of the target company and threatens a hostile takeover. It threatens the target company and forces them to buy back the shares at an exorbitant price. Greenmail is the money paid by the target to the bidder to put an end to the aggressive behaviour.

It is a measure to prevent a hostile takeover of the company.

Greenmail refers to the extra money or premium the target pays to buy back its shares. Once this payment/ransom is received, the bidder/acquirer retreats and ditches the takeover attempt.

During the 1980s, greenmail became a very common practice. Large sums of the money were being given to raiders/bidders as greenmail. However, the governments decided to step in and enforce rules, regulations, and policies.

This intervention drastically decreased such greenmail situations. Companies are now better equipped with other defence strategies like the poison pill to stop the hostile takeover.

5. Golden Parachute Defense

This defense strategy is another form of a poison pill a firm has to take to stop a hostile takeover. Under this strategy, top executives and employees are given extra benefits and severance packages in case the company gets acquired and they are terminated. These benefits act as a parachute for the employees who lose their jobs.

The benefits can range from cash bonuses and severance pays to stock options in the company. Some companies even give the employees the option of vesting previously earned compensation or even their retirement benefits.

The golden parachute strategy can be used as a defence against hostile takeovers. The bidders that are looking to take over the target company with many golden parachutes might think twice before doing so. This is because, if the takeover goes through, the bidder will have to pay all the benefits to all employees. The golden parachute benefits are given in an air-tight employment contract, so the bidder will not have any other option but to adhere to it.

The acquirers usually replace the whole management team and bring in their people to run the company. So, by implementing the golden parachute strategy, a company can make itself look less attractive to a hostile takeover.

Conclusion

Hostile takeovers are not extremely common today. This is mostly because companies can create other types of temporary associations like joint ventures in case they do not want to merge or acquire.

However, in the rare event that an attempt is made to take over a company with hostility, there are many defence strategies the target can use to save itself. Sometimes companies use a mix of strategies to get rid of the bidder at once. Some strategies are more extreme than others, like the crown jewel defence, while others are more subtle, like the golden parachute. Most companies prepare for contingencies like a hostile takeover and have plans in place in case they happen. If you’d like to further understand each of these defences and other related concepts for a job interview or since investment bankers are called upon at multiple stages of M&As, you can avail of this comprehensive course on Investment Banking.

If you’re an aspiring investment banker, one of the major areas you work in can be mergers and acquisitions. This is the process of companies being consolidated either through merging or one company acquiring the other. Investment bankers, in M&As, assist with crucial aspects -— valuing the companies, analysing the financial health of the firms involved, valuing assets, raising tender offers and so on.

You may also be asked about the various steps of M&As during investment banking interviews. So, here are all the stages of this process:

1. Develop a Strategy

The first and most critical step during M&As is developing a strategy: what’s the motive behind the consolidation? What type of transaction should it be? Here are some more questions to consider when crafting the strategy for an M&A deal:

What’s the purpose of the transaction?
How to identify potential companies?
Will it be a merger or an acquisition?
How will the company acquire financing for the transaction?
What does the end operating model look like?
Which entities are involved?

2. Identify the Target and its Background

Next, the legal and financial teams will need to identify potential target companies after a thorough evaluation. Many firms typically rope in investment banks to carry out this step and pitch a list of target companies.

It may be further broken down into the following steps:

a) Determine all the constituent players. In the case of a general M&A transaction, you need to identify the target. In a three-way merger, however, you will need to narrow down the target and subsidiary.

b) Conduct a background check on all entities. You’ll need to know in-depth about the companies’ backgrounds, industries, branches, legal status etc.

3. Exchange Information

Immediately after all the involved companies have expressed an interest in pursuing the transaction, they must begin the exchange of documentation. It starts off with a Letter of Intent to put on paper the interest in carrying out the process.

A confidentiality agreement is also typically signed to ensure the sanctity of information on all ends. Then begins the exchange of key information such as company history, customer base, and financials. This allows each company to evaluate the other thoroughly and assess the benefits of the deal for their respective investors.

4. Conduct a Valuation Analysis

This step involves both the financial and legal teams. While the former conducts elaborate financial modelling, the latter’s job is to ensure the authenticity of the information shared, any pending cases against the company, and compliance with jurisdiction requirements.

Any red flags spotted here can be potential deal-breakers for either side. Note, that this is the analysis before the actual valuation models are presented.

5. Offer and Negotiate

After a detailed valuation analysis, the buyer submits an offer to the shareholders of the target. The price can be decided based on a number of valuation methods. Here is an article on how a company can be valued.

The seller will then discuss and assess the offer with the respective teams. In some cases, there might be more than one potential buyer if the target is an attractive one. This allows more negotiation power for the seller. This process can be time-consuming as a fair amount of back and forth is required on the price.

6. Perform Due Diligence

After a price is agreed upon, both internal and external sources are involved to complete a comprehensive due diligence process. This includes a close examination of the target company. Due diligence tasks are usually focused on evaluating:

Assets
Operations (including its employees, customers, intellectual property, and financial records)
Legal matters
Filings: Formation of any shell/holding companies, an entity’s registration jurisdictions after incorporation.

Other documents that are carefully examined include charter documents, records of good standing, credit reports and so on.

7. Close the Deal

After the due diligence, all involved parties move forward to execute the M&A transaction. All paperwork pertaining to the merger or acquisition must be filed by this stage. After the deal’s closure, the management teams of both companies come together and carry out the integration. Investment bankers can also be closely involved in executing and closing each aspect of the M&A deal.

8. Integration of the Merged Firm

Successful integration of the merged firms would involve bringing together the required teams and resources seamlessly. This must be prepared for in advance and carried out smoothly to ensure minimum friction and concern among employees. Special resources are often called upon to carry out the actual integration of the firms.

9. Post-Merger Integration

It will take a considerable amount of time for merged entities to adjust to the transformation and start conducting business as per before. Any employee concerns must be managed well and patiently. This process, which is skipped by many companies, is quintessential to the M&A process. While it may be tedious, omitting the post-merger integration can lead to short and long-term risks for all entities.

Conclusion

In the business world, mergers and acquisitions are a common occurrence. As you read this article, one of the world’s largest M&A deal valued at $44 billion is unfolding between Tesla CEO Elon Musk and Twitter. Hence, if you plan on working in the finance or IB domains, it’s highly useful to acquire a basic understanding of the M&A process as well as what your role could potentially be in it. To dive deeper into the workings of merger and acquisitions, you can take this free Investment Banking course.

As an investment banker, you should be well-versed in the stock markets and their various features as companies will rope you in for determining stock prices, issuing their IPOs, raising capital, and undertaking mergers and acquisitions. An important aspect of the stock markets is also dual and secondary listings. Let’s understand what these are.

What is a dual listing?

A dual listing is when a company lists its stocks on one or more primary stock exchanges under different registered entities. Essentially, dual-listed stocks are different stocks of the same business traded on more than one exchange in different geographical regions. The first exchange is typically in the company’s home country.

Advantages of a dual listing

Dual listing allows companies to raise additional capital since the shares are offered to a larger number of investors. Further, the company also has access to higher liquidity as the buying and selling of stock is carried out by a higher number of people as compared to only one exchange. The exchanges also operate in different time zones, hence, allowing for an increased trading time.

A popular example of a dual-listed company is Unilever. According to the Unilever website:

“Unilever PLC ordinary shares of 3 1/9 pence (ISIN GB00B10RZP78) are listed in the UK and traded on the London Stock Exchange, they are listed in the Netherlands and traded on the Amsterdam Stock Exchange (ISIN GB00B10RZP78) and they are traded as American Depositary Receipts (CUSIP 904767704) on the New York Stock Exchange.”

Depository receipts

As you’ll see, the last listing is called American Depositary Receipts (ADR).

These are not exactly the same as dual listings. Depositary Receipts (DRs) are negotiable financial instruments that represent the publicly traded securities of a foreign company. Hence, they’re not actual shares. They’re issued by a bank and can be traded on the local exchange without the company being registered on that stock exchange.

However, in the case of dual-listings, the company has to be registered on any other exchanges. The multiple registered companies operate under a single business.

Dual-listed companies must follow and comply with the regulations of each country’s exchange that it is listed on.

What is a secondary listing?

Secondary listing or cross-listing is when one company lists the same stock across several exchanges. Note that in dual-listings, there are two or more companies operating as a single business.

In cross-listing, however, only one company is listing its securities on exchanges other than the primary exchange. In terms of regulations, the company needs to follow those of its primary exchange only.

Advantages of a secondary listing

A secondary listing is subject to less scrutiny as a company does not have to register as an entity in a different country. Also as compared to dual listings where the company must abide by regulations of all the exchanges it is listed on, in the secondary listing, this needs to be done only for the single primary exchange.

Secondary listings are also used by companies looking for access to capital markets or to circumvent any issues when trying to issue a dual listing.

For example, Chinese electric carmaker Nio recently announced its plans for a secondary listing of its shares in Singapore.

Nio is currently listed on the New York Stock Exchange and issued a secondary listing in Hong Kong in March. Singapore would be the third exchange for Nio’s shares to trade on.

Nio’s plans are reported to be a result of a law passed in 2020 by former U.S. President Donald Trump requiring U.S.-listed foreign companies to comply with higher auditing standards. Those that failed to follow the rules could be delisted.

Major Chinese companies listed in the U.S. — such as Alibaba, JD.com and others carried out secondary listings in the event of being delisted from America’s stock exchanges.

Conclusion

Dual listings and secondary listings are common instruments used by companies to gain access to wider capital markets. Both methods have their own advantages and should be decided upon after understanding a company’s goals and priorities. To understand dual and secondary listings more extensively, you can avail this free-of-cost course on Investment Banking.