PAID ADVERTISEMENT IN THIS ISSUE: BRINGING CLARITY TO COMPLEXITY IN M&A TODAY BUSINESS STRATEGIES Total Money Management from the professionals at First National Bank
Vincent J. Delie, Jr. Chairman, President and CEO F.N.B. Corporation First National Bank Merger and acquisition (M&A) activity in the middle market can be an indicator of the economy’s health. When it is high, it tells us that businesses are excited to grow and investors share the enthusiasm. M&A, however, can be complex — particularly for the uninitiated. Raising capital, finding the right partners and identifying ideal financing solutions are all priorities. Those objectives also highlight the importance of preparation and a team of reliable advisors, including accountants, lawyers and, most importantly, investment bankers with in-house and industry expertise. In this edition of Business Strategies Today, we break down several of the concepts that drive investment and M&A decisions and position companies for these transformative transactions. Readers will find articles about understanding their capital allocation ahead of a deal, divesting non-core businesses, calculating business valuations, and asking the right questions before a contract is signed. Ultimately, we hope this issue begins to bring some clarity to the complexity. As a full-service financial institution, our investment banking advisory services are among many solutions we provide leaders to unlock, maximize and leverage the value in their business. We welcome you to learn more about our services and to explore our award-winning eStore® at fnb-online.com. THE FIRST NATIONAL BANK DIFFERENCE First National Bank, the largest subsidiary of F.N.B. Corporation (NYSE: FNB), is a growing financial services organization with a long-standing tradition of helping our customers and communities thrive. Throughout more than 160 years of service, we have remained dedicated to providing total money management solutions for our consumer, small business and commercial clients. We have a core business concentration on middle and upper middle market companies and serve their needs as a value-added partner. MORE INSIGHT FROM FNB You can always look to FNB for expertise on the topics and trends that have the greatest impact on you and your business. In Business Strategies Today, experts from across our Company have covered a wide range of subjects, such as making the most of the economic environment, staying the course to innovation and planning for the future of your business. Just a few of the topics we’ve covered recently include: check International Expansion check Interest Rate Management check Payments Solutions check Wealth Management check Succession Planning check Cybersecurity check M&A To learn more about topics that may benefit your business, call us at 1-866-362-4603 or visit fnb-online.com/business 02
04 CAPITAL STRUCTURE AND CAPITAL STACK: BREAKING DOWN A BUSINESS’ FINANCING SOURCES 06 DIVESTING NON-CORE BUSINESS UNITS: BUILDING VALUE BY FOCUSING ON KEY COMPETENCIES VALUATIONS: THE NUMBERS THAT MAKE OR BREAK A DEAL 08 10 PREPARE FIRST, DEAL LATER: KEY DRIVERS FOR SUCCESSFUL MERGERS & ACQUISITIONS DELAWARE DISTRICT OF COLUMBIA MARYLAND NORTH CAROLINA OHIO PENNSYLVANIA SOUTH CAROLINA VIRGINIA WEST VIRGINIA FNB Planned Expansion Branch/ATM FNB Branch/ATM COMMERCIAL BANKING* ▶ Corporate & Business Banking ▶ Investment Real Estate ▶ Builder Financing ▶ Asset-Based Lending ▶ Lease Financing ▶ Capital Markets ▶ Investment Banking ▶ Commodity Hedging ▶ Public Finance ▶ Mezzanine Financing ▶ Treasury Management ▶ International Banking ▶ Small Business Administration (SBA) Lending ▶ Government Banking CONSUMER BANKING* ▶ Deposit Products ▶ Mobile & Online Banking ▶ Mortgage Banking ▶ Consumer & Small Business Lending ▶ eStore® Digital Banking Experience * Bank deposit products and services provided by First National Bank of Pennsylvania. Member FDIC. Equal Housing Lender. FULL-SERVICE SOLUTIONS INSURANCE ▶ Property & Casualty ▶ Employee Benefits ▶ Personal ▶ Title WEALTH MANAGEMENT ▶ Trust & Fiduciary ▶ Retirement Services ▶ Investment Advisory ▶ Brokerage ▶ Private Banking Not FDIC/NCUSIF Insured Not Guaranteed by the First National Bank of Pennsylvania or its affiliates May Lose Value Not Insured by Any Federal Government Agency Not a Bank Deposit 03
CAPITAL CAPITAL AND STRUCTURE STACK B R E A K I N G DOWN A BUSINESS’ FINANCING SOURCES FNB-ONLINE.COM 04
CAPITAL STRUCTURE ▶ Capital structure is the combination of a business’ debt and equity used to fund operations and growth initiatives, often expressed by a measurement called the debt-to-equity (D/E) ratio. Calculated by dividing total liabilities by total shareholder equity, the D/E ratio can describe how reliant a company is on debt financing, which can be useful information to potential investors. CAPITAL STACK ▶ Capital stack is the hierarchy of a business’ financing sources, with conceptualized “layers” representing different forms of liabilities and equity. Layers are organized by repayment priority and risk. For example, senior debt sits at the top of the stack and has the lowest risk but highest repayment priority. Next, mezzanine debt (junior, or subordinate, to senior debt) carries elements of equity financing that can provide higher returns and may have longer terms than senior debt loans, but it also has higher risk and interest rates. Equity, representing investors’ ownership in a company, sits at the bottom of the stack and has the highest expense because it has no collateral and is repaid after senior and subordinated debt, although it carries upside for investors through its potential to increase in value. As the definitions suggest, capital structure, or the D/E ratio, provides a more holistic view of a business’ financing sources and how they are currently leveraged, while the capital stack offers a closer view of debt, risk and priority. INTERPRETING THE DATA The information derived from a company’s D/E ratio and capital stack goes a long way toward appropriately balancing debt and equity sources, minimizing risk and maximizing value. Drawing conclusions from the D/E ratio generally is dictated by context. A ratio of 2.0, for example, means a business has $2 of debt for every dollar of equity. While that ratio may be considered high, it could also suggest the business is expanding and taking advantage of tax-advantaged financing, bringing the potential for higher earnings and the associated risks for investors. Businesses and investors alike also benefit from comparing the ratio to other companies in the same industry. Certain sectors generally are more capital-intensive and have elevated ratios, so a seemingly high figure may simply be the mean rather than an outlier. In contrast, a capital stack cannot be reduced to an equation, but an analysis of a business’ financing sources can provide meaningful takeaways and direct future decisions. Senior debt, being the least expensive form of financing, should be the largest layer of the stack, with mezzanine debt used more frequently when a company needs a large amount of capital in a shorter time frame, such as during an acquisition. Businesses must carefully manage when to take on new debts or offer more equity, and companies lacking expertise in such matters often turn to external advisors to find the right solution that balances their stack. CAPITAL CONCLUSIONS Decisions about capital require nuanced thinking, but with a clear short- and long-term vision and an understanding of how financing impacts risk and return, a business owner can foster financial flexibility while maintaining the stable foundation that attracts investors. For assistance safely building and structuring capital, refinancing debt or making an acquisition that will require a fast influx of funding, consult with advisors or a banker. Learn more about FNB’s solutions at fnb-online.com/business. D/E RATIO = TOTAL LIABILITIES TOTAL SHAREHOLDER EQUITY Mezzanine debt, the middle of the capital stack, can be an ideal financing vehicle for growth projects. Scan the code to learn more. From the tallest skyscraper to a modest office building of a few stories, the elements that go into such structures are not so different. There is a foundation, a skeleton of steel beams and a series of floors encased by walls, windows and doors. The same is true for company finances. Regardless of an organization’s size, there are a few common components, such as debt and equity, that comprise its financial blueprint. Two concepts used to analyze a business’ current financing sources and status are “capital structure” and “capital stack,” and though they sound synonymous, there are important distinctions. Moreover, recognizing how they can drive successful business decisions can lead to a healthy financial outlook. MEZZANINE DEBT EQUITY SENIOR DEBT 05 BUSINESS STRATEGIES TODAY • FALL 2025
BUILDING VALUE BY FOCUSING ON KEY COMPETENCIES 06 FNB-ONLINE.COM
Along with divestment, what else can streamline a company’s operations? This brief guide offers some suggestions. STRATEGIC MOTIVES ▶ Focusing on core competencies: Companies may divest non-core assets or business units to concentrate resources on their primary activities and expertise. This can improve efficiency and competitiveness within the core business. ▶ Strategic realignment: Divestitures can be part of a larger strategic shift or portfolio optimization, aligning the company’s structure with its long-term goals and market positioning. ▶ Improving competitiveness: Companies may divest underperforming or noncompetitive units to enhance overall competitiveness and adapt to market shifts. FINANCIAL DRIVERS ▶ Generating cash: Selling assets or business units can generate cash, which can be used to fund new investments, pursue aligned acquisitions, or return capital to shareholders. ▶ Improving financial performance: By divesting underperforming assets, companies can improve profitability and reduce costs, ultimately enhancing value. ▶ Reducing debt: Proceeds from divestitures can be used to pay off existing debt, strengthening the company’s financial position. ▶ External pressures: Regulatory compliance issues may trigger a need to divest if a business is deemed to have too much market share within an industry, particularly in the event of a merger or acquisition. In the changing geopolitical landscape, divestiture can also serve to shift a company away from potential liabilities associated with an investment. ORGANIZATIONAL SIMPLICITY ▶ Enhancing operational efficiency: Divesting redundant or overlapping business units, particularly after mergers, can streamline operations and reduce complexities. ▶ Improving transparency: A leaner organization with fewer business units can have simpler financial statements, making it easier for investors to assess performance. ▶ Increasing flexibility and agility: Companies with a more focused structure can respond more quickly to market changes and allocate resources effectively. ▶ Addressing underperformance: Divesting underperforming business units enables the company to shed “dead weight” and reallocate resources to more promising areas. CONSIDERING DIVESTMENT? While divestment can be a powerful strategic tool, it must be executed thoughtfully. To ensure a successful divestiture, companies should be transparent with all employees involved in the transition about how their roles and responsibilities may change. Before the completion of a sale, have a detailed plan in place to refocus the business and manage the potential cash injection from the sale wisely. When done the right way, a divestiture can empower companies to focus on core competencies, optimize financial performance, and improve organizational efficiency and agility — and ultimately, enhance shareholder value. As companies grow and prosper, their strategic focus often changes to adapt to market forces, evolving technologies and customer needs. Streamlining a business’ product and service offerings can strengthen its core, enabling it to excel in its chosen area of focus. Divesting a business unit can be an excellent strategy to maximize the value and foster the success of the remaining business units. Although the loss of a revenue stream may have a negative financial impact initially, it can lead to greater long-term value by optimizing operations and cutting out unprofitable assets. Rationales for divestiture may include: BUSINESS STRATEGIES TODAY • FALL 2025 07
VALUATIONS THE NUMBERS THAT MAKE OR BREAK A DEAL FNB-ONLINE.COM 08
2 3 DETERMINING VALUATIONS Many factors can impact a business valuation — including revenues, earnings, growth rate, profit margins (e.g., EBITDA), customer concentration, capital structure, competitive analyses, industry dynamics and regulatory factors. These details are important elements in the deep analysis a potential buyer or merger partner undertakes regarding a company’s future opportunity. The three fundamental methods for determining a company’s value are: A crucial question sits at the center of every merger or acquisition: How much is a business worth? When dealing with publicly traded companies, there is readily available valuation data. When dealing with private companies, however, the answer is much more difficult and requires various quantitative and qualitative methodologies to determine the fair value question. 1 ▶ Comparable M&A transactions: Recently completed M&A transactions within the industry provide a core valuation metric for assessing a company’s value. While there are rarely any perfectly comparable companies to a potential target candidate, comparable M&A transactions are the closest barometer of value. ▶ Comparable trading values: The valuation multiples (ratios used to appraise a business’ value) of publicly traded peer companies within the same industry — and how a target company’s financial performance compares — provide a real-time measure of how the public markets value companies. The relative size of the comparable companies, their growth rates and profitability are key components influencing a company’s value. ▶ Discounted cash flow (DCF): This method builds a valuation by estimating future cash flows and profitability of the business over the next five years. In addition to the five-year cash flows generated by the business, a “terminal value” is ascribed to the business for the value of the company beyond the forecast period. This analysis incorporates future capital expenditures and working capital to grow the business. Along with M&A, DCF has obvious benefits when a company’s owners and managers are trying to project future performance. AN ART, NOT A SCIENCE Valuations are not mathematical but educated judgments based upon an array of factors. They incorporate both the historical and future performance of the business. Additionally, they encompass the current state of the global and regional economies and their influence on a company’s ability to achieve its forecasted results. Macroeconomic markets, by nature, are ever-changing and subject to influences that go beyond hard numbers. Instinct and experience play a role. In addition to the core value of the business, prospective buyers will generally value a business on how they can integrate the acquired business within their organization and accrue incremental benefits, often referred to as synergies. They will ask, “What can I do differently to unlock this company’s potential?” and factor the answer into their valuation. While buyers may be reticent to pay a seller for the value they bring to an acquisition, these synergies will influence a buyer’s willingness to stretch their valuation. Accordingly, those who take the time to understand an industry and a business’ value have a leg up in determining a fair valuation that satisfies all parties in an M&A transaction. FNB’s investment banking experts provide valuation services to business owners. Scan the code for more about the Bank’s offerings. 09 BUSINESS STRATEGIES TODAY • FALL 2025
FIRST LATER DEAL KEY DRIVERS FOR SUCCESSFUL MERGERS & ACQUISITIONS PREPARE FNB-ONLINE.COM 10
Expanding a company can be exciting and a little uncertain. This article from FNB’s Knowledge Center shares tips for a successful business expansion. FINANCIAL PREPARATION ▶ Rigorous due diligence: Conduct a comprehensive financial review and valuation to verify financial statements, assess the company’s financial health, identify potential liabilities, and determine a fair value for the transaction (see page 9 for more on valuations). ▶ Financial modeling and forecasting: Build detailed financial models to project future performance, cash flows and profitability of the combined entity. Analyze the impact of key financial metrics such as revenue growth and EBITDA (earnings before interest, taxes, depreciation and amortization) margins to determine whether the transaction is accretive or dilutive to earnings. ▶ Balance sheet optimization: Evaluate and optimize the company’s balance sheet by reducing liabilities and strengthening working capital positions to present a strong financial profile to potential buyers or partners. There is an enduring principle that successful leaders — be they in the business world, politics, sports or beyond — understand well: “Luck is what happens when preparation meets opportunity.” This principle is especially true in M&A. As complex endeavors, M&A deals require meticulous preparation across commercial, financial and organizational aspects to maximize value and minimize disruption. The following are some of the key elements for preparing for a deal. COMMERCIAL PREPARATION ▶ Strategic alignment and market assessment: Clearly define the strategic objectives driving the M&A, whether it’s market expansion, accessing new technologies, achieving cost synergies or other goals. Assess the target company’s market position, competitive landscape, growth potential and customer behavior through due diligence to confirm the strategic fit and commercial feasibility of the deal. ▶ Customer and market focus: Understand the target’s customer base, value proposition and go-to-market strategies. Analyze potential overlaps and additional values to identify opportunities for revenue growth, cross-selling and enhanced market reach post-merger. ▶ Synergy identification and planning: Develop a synergy realization plan to identify and quantify potential benefits, including revenue synergies (e.g., increased market share, expanded product lines and/ or cross-selling), cost synergies (e.g., economies of scale and reduced operating expenses) and financial synergies (e.g., tax advantages, improved access to capital). READY TO DEAL? Businesses that are integrating with a merger partner or bringing on a subsidiary must know the potential financial, regulatory and legal risks that come with the new structure. Depending on the size of the businesses involved, the target may not have the internal strategy or risk management personnel on staff to rely on for expertise in such analyses. That places great importance on the role of outside advisors who understand their clients’ industries and can determine if a merger partner is the right fit or if an acquisition promises enough potential reward to outweigh the risk. To learn more about FNB’s approach to M&A and advisory services, or to connect with a team member, visit fnb-online.com/MA. 11 BUSINESS STRATEGIES TODAY • FALL 2025
Proven performance that powers your business forward. Can your bank do that? FNB10-264 Equal Housing Lender | NMLS #766529 | Member FDIC Let’s get started. Visit fnb-online.com to learn more. FNB offers customized M&A advisory services through our boutique investment banking group, formerly Raptor Partners. Our collaboration combines specialized expertise and personalized guidance with FNB’s 160 years of strength, stability and superior capital position — everything you need to grow with confidence. has been acquired by KODIAK BUILDING PARTNERS Raptor Partners acted as financial advisor to Don’s Appliances and assisted in the negotiations. has been acquired by INCAP CORPORATION Raptor Partners acted as financial advisor to Pennatronics and assisted in the negotiations. has acquired SUPERIOR MACHINE COMPANY OF SC Raptor Partners acted as financial advisor to Woodings Industrial and assisted in the negotiations. has acquired MAGNETIC TECHNOLOGY, INC Raptor Partners acted as financial advisor to Spang & Company and assisted in the negotiations. has been acquired by IMI, PLC Raptor Partners acted as financial advisor to PBM, Inc. and assisted in the negotiations. has been acquired by FORTIVE CORPORATION Raptor Partners acted as financial advisor to Industrial Scientific and assisted in the negotiations. Business Strategies Today is not intended to provide investment, tax, legal or retirement advice or recommendations. The information presented here is not specific to any individual circumstances and does not constitute financial, legal, accounting, strategic, tax or other specific recommendations to your particular circumstances. These materials are provided for general information and educational purposes and to highlight the types of advisory services that are offered by First National Bank of Pennsylvania. The information provided herein should not be used as a substitute for consultation with professional tax, legal, financial, or other qualified advisers.
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