The difference between M&A fund and other types of investment is that venture capital mainly invests in entrepreneurial enterprises, and M&A fund chooses mature enterprises; Other private equity investments are not interested in corporate control, while M&A funds want to gain control of the target enterprise.
M&A funds often appear in MBO and MBI.
The profit model of M&A fund;
First, the profit of "capital replacement"
M&A funds can reduce corporate liabilities through capital restructuring (that is, resetting the balance sheet or capital restructuring). Last year, the average asset-liability ratio of China steel industry rose to 70%, and the debt reached 1 trillion yuan. Others suggested that steel enterprises "don't borrow money, try to let others invest in equity".
The injection of M&A funds makes debt-ridden enterprises deleverage, greatly reducing the debt cost and giving enterprises a chance to breathe, survive and rest. Such a "capital reset" process can often help enterprises improve their efficiency and get a better valuation in the capital market.
II. The income from "asset reorganization" is from 1+ 1 > 2 or 3- 1 > 2.
M&A funds can participate in a series of activities such as asset sorting, divestiture and addition, form a new and recognized asset portfolio for enterprises, and then realize the expected annualized expected return through mergers and acquisitions.
For example, General Motors of the United States had filed for bankruptcy protection at that time, and M&A funds went in, packaged in various ways and then IPO or sold. At that time, Hony Capital acquired a glass enterprise in Jiangsu, then integrated six or seven other glass enterprises, and packaged them into "china glass", which was listed on the main board of Hong Kong on June 23, 2005, becoming one of the only two red-chip companies in the mainland in 2005. China glass registered 700 million shares, with an increase of 360 million shares, and the market value of IPO on the first day was 800 million yuan. Hony Capital owns 62.56% of the shares. China glass is a classic of Hony Capital.
Third, the "improved operation" method.
In many cases, M&A funds do not rely solely on the injection of capital to realize the return on investment, but guide and participate in the daily operation of the invested enterprise, improve the operating performance of the enterprise, and finally obtain the expected annualized expected return.
This profit model is the most common in international M&A funds. By introducing new CEO and senior management team, we will promote new development strategies and improve operational efficiency. If an enterprise's operating performance can be greatly improved within two or three years, whether it is "secondary listing" or sold to the next investor or fund, the value of the enterprise may be multiplied several times at this time.
Of course, improving operations can also form "market control power" through large-scale horizontal mergers and acquisitions. For example, China Building Materials Group realizes the "core profit zone" of the cement industry through mergers and acquisitions, reducing vicious competition; It is also possible to reduce operating costs through "vertical mergers and acquisitions" of upstream and downstream enterprises, such as coal enterprises entering the power generation industry and e-commerce merging logistics and warehousing enterprises.
Fourth, profit through "tax burden optimization"
Generally speaking, the pre-tax debt cost is lower than the equity cost; If the interest cost of debt is tax-free, then this reduces the after-tax debt cost. Therefore, M&A funds can also artificially increase the leverage of the enterprises they invest in, so as to obtain tax burden optimization.
If the accelerated depreciation of fixed assets is allowed, then the combination of high leverage and high depreciation in this way will usually bring considerable short-term expected annualized expected returns to the acquired enterprises. When the M&A fund is the actual enterprise controller, the dividend policy is also decided by the M&A fund, so the rapid dividend distribution for several years in a row will bring good income to the fund! This so-called "dividend replacement method" that benefits from debt structure rather than operating performance is often criticized by the media.
Five, "backdoor profit" method
I want to buy the shells of companies listed on the main board of Hong Kong, which has increased from HK$ 200 million in previous years to HK$ 340 million. After acquiring the "shell" of listed companies, M&A funds can continuously inject their own products or introduce new business to boost the stock price and make profits in the secondary market. In the A-share market, this backdoor behavior mainly occurs in ST company to help those enterprises that are eager to go public and have good profits.
As an equity investor of the new company, M&A fund can adopt the strategy of "follow the investment" to hold shares in order to achieve higher secondary market income in the future. Similarly, M&A funds can purchase some assets, which can be transferred to listed companies in the future through a series of "integration and decoration", or purchase assets by issuing shares to become minority shareholders of listed companies, but it does not necessarily constitute reverse mergers and acquisitions to become major shareholders of listed companies.
After Hony Capital's successful listing in china glass, its acquisition of Hua Yao Glass in Hebei Province once triggered rumors that Hony Capital intended to package and sell Hua Yao to British pilkington Company or Japanese Glaze Company (NSG).
Six, "process profit" method
Because any major M&A case will involve "transaction structure design", including the payment method of M&A transaction can be cash, stock exchange or a payment treaty with the nature of "gambling"; The design of transaction structure also includes the choice of financing instruments.
With the increase of M&A financing instruments or M&A payment instruments, such as bridge loan, directional convertible bonds, warrants or junk bonds, or the implementation of the stock grading system, there will be many combinations of M&A and restructuring in the future, so that M&A funds can realize the expected annualized expected return appreciation or the expected annualized expected return amplification through different M&A instruments in the operation process.
Seven, "corporate restructuring" profit method
This is a profitable way of M&A fund with China characteristics, that is, through the intervention of M&A fund, the original "pure state-owned" or "pure family" corporate governance structure is broken, and a more scientific and reasonable board of directors, corporate governance system and incentive system are established. , from the source to change the behavior of enterprises and corporate culture, in order to obtain better business performance returns.
For example, Hony Capital has carried out a large number of mergers and acquisitions or participated in restructuring of local government-led enterprises in recent years, and still holds many state-owned enterprises, such as Zhongfu Lianzhong, Happy Shopping, Hua Yao Glass and Unocal.