Introduction to M&A-related Risks

Stanley Myint and Fabrice Famery

Contents

Foreword

Introduction

1.

Theory and Practice of Corporate Risk Management

2.

Theory and Practice of Optimal Capital Structure

3.

Introduction to Funding and Capital Structure

4.

How to Obtain a Credit Rating

5.

Refinancing Risk and Optimal Debt Maturity

6.

Optimal Cash Position

7.

Optimal Leverage

8.

Introduction to Interest Rate and Inflation Risks

9.

How to Develop an Interest Rate Risk Management Policy

10.

How to Improve Your Fixed-Floating Mix and Duration

11.

Interest Rates: The Most Efficient Hedging Product

12.

Do You Need Inflation-linked Debt?

13.

Prehedging Interest Rate Risk

14.

Pension Fund Asset and Liability Management

15.

Introduction to Currency Risk

16.

How to Develop Currency Risk Management Policy

17.

Translation or Transaction: Netting Currency Risks

18.

Early Warning Signals

19.

How to Hedge High Carry Currencies

20.

Currency Risk on Covenants

21.

Optimal Currency Composition of Debt 1: Protect Book Value

22.

Optimal Currency Composition of Debt 2: Protect Leverage

23.

Cyclicality of Currencies and Use of Options to Manage Credit Utilisation

24.

Managing the Depegging Risk

25.

Currency Risk in Luxury Goods

26.

Introduction to Credit Risk

27.

Counterparty Risk Methodology

28.

Counterparty Risk Protection

29.

Optimal Deposit Composition

30.

Prehedging Credit Risk

31.

xVA Optimisation

32.

Introduction to M&A-related Risks

33.

Risk Management for M&A

34.

Deal-contingent Hedging

35.

Introduction to Commodity Risk

36.

Managing Commodity-linked Revenues and Currency Risk

37.

Managing Commodity-linked Costs and Currency Risk

38.

Commodity Input and Resulting Currency Risk

39.

Offsetting Carbon Emissions

40.

Introduction to Equity Risk

41.

Hedging Dilution Risk

42.

Hedging Deferred Compensation

43.

Stake-building

Mergers and acquisitions are an important part of corporate development strategy, and one of the key moments in the professional life of the CFO and group treasurer. Banks mandated by acquisitive companies coordinate numerous teams on M&A projects: corporate finance, legal, loan and capital market financing, as well as risk management specialists. On the corporate side, financial decision-making concentrates on a few individuals, often led by the CFO and treasurer, who must take a host of strategic and far-reaching decisions very quickly. Therefore, we think the reader will be interested in examples of best practices in acquisition-driven financial risk management, as well as M&A-specific solutions ranging from the impact on credit ratings to the hedging of uncertain FX risks.

At the time of writing, in 2018, global M&A activity set a record eclipsing a previous high reached in 2007, but the financial crisis we experienced in 2008 has deeply transformed the parameters of M&A financial risk management. In the immediate aftermath, bank deleveraging and ongoing regulation reforms11 We refer here primarily to Basel III and IV, but also Dodd–Frank, the European Market Infrastructure

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