M&A - ALTERNATIVE FORMS OF ACQUISITION

In the article CRISIS AS A BUSINESS OPPORTUNITY, it was demonstrated how the current crisis became a trigger for many companies to carry out Mergers & Acquisitions (M&A) operations. In Brazil alone, according to a PwC report, it was possible to observe a 12% increase in operations between January and September 2020, compared to the same period in 2019. Considering the average of the first nine months of the last five years, the increase was 34%. In addition to the pandemic, the economic situation experienced in Brazil has an additional element, the variation in the Basic Interest Rate (SELIC). Its successive declines, applied by the COPOM (Monetary Policy Committee), have encouraged investments in the real economy (Companies) to the detriment of the income strategy in fixed income securities. Companies with aggressive strategies, especially in sectors with low margins, are among those that most seek these operations for consolidation. For them, it is important to achieve economies of scale and Market Share consistent with their expectation of profitability. Although the market is hot, this need - or willingness - to carry out M&A operations is not always supported by the companies' available capital. This explains, among other reasons, the new alternatives that frequently arise when carrying out an M&A transaction, in which payment with cash”Upfront” has been losing space for solutions that benefit the parties involved, as follows:

• Shares: An alternative widely used by companies that are publicly traded on the Stock Exchange. It reduces the need for immediate capital for the Purchasing company, since it uses treasury shares as part of the payment. For the Seller, the Buyer may share in possible success/growth in the future, with the possibility of valuing the shares. This operation can be risky for companies not listed on the Stock Exchange, since their valuation may require more efforts, their shares/shares are not liquid and the degree of Governance is theoretically lower.

• Installments: an increasingly common practice in the market, where the Buyer pays for the purchase in future installments, whether monthly, biannual or even annual. Despite being a common practice, which has always been present in acquisition transactions, this alternative also alleviates the need for immediate capital. There are some cases in which the Buyer uses the profit from the acquired company's own operation to pay off future obligations.

• Debt: the most common debt acquisition transaction is the LBO (Leveraged Buyout), a topic highlighted in the Article LBO: LEVERAGED BUYOUT OPERATIONS, in which the Buyer issues a debt on the company he intends to acquire, and with that capital effective the payment to the Seller. In this modality, the Buyer expects to monetize the acquired company at a rate higher than the interest paid on the issue of the debt.

• Services: alternative where the provision of a service by the Buyer in favor of the Seller is considered, to enable the acquisition of a company. This acquisition format is commonly used to form part of the payment to be made, and there is no room for a total acquisition of the Seller. Companies that provide consulting services can serve as an example for this alternative, because their services, when strategic, add greater value to the business in the future, in a dual function.

• Real estate: Least used alternative among the previous ones, given the low liquidity of the Asset being offered as a payment method. The use of real estate generally occurs in a transaction between partners. Although unconventional, it is common to find companies that have real estate that was acquired throughout their existence, whether operational or not. In a corporate dissolution, for example, it is common to observe cases in which part of the company sells its shares and receives as payment part of these properties, especially those that are not operational.

M&A operations are important in the process of consolidating and expanding companies. As many do not have enough capital to go ahead with this plan, it is up to entrepreneurs and Advisors from M&A think “out of the box” and use alternative methods to make these operations feasible. ARTICLE WRITTEN BY HENRIQUE PORTO — PARTNER OF FC PARTNERSGo to our site: http://www.fcpartners.com.br