Strategic Due Diligence

Transcription

1 Strategic Due Diligence Lecture on SGH Warsaw, April 2014

2 Content The importance of conducting a comprehensive due diligence Overview of due diligence process and content 1

3 M&A deals often destroy value for the acquirer's shareholders In % Global M&A deals Regional differences in M&A deals Europe North America Asia-Pacific in % Negative Positive Value creation 1 n = 3,207 Negative Positive Negative Positive Negative Positive Value creation 1 Value creation 1 Value creation 1 n = 814 n = 1,950 n = 443 Data for Value creation is based on cumulative abnormal returns from three days after announcement of a deal Note: Analysis is based on a sample of 3,207 M&A transactions completed worldwide between 1992 and 2006, with s acquiring more than 75 percent of the targets. All targets and acquirers are publicly listed. Acquirers' stock returns are available from Datastream. Deal value > $150M in North America (1,950 deals), > $50M in Europe (814 deals), > $25M in Asia-Pacific (443 deals) Source: BCG M&A Research Center, data provided by Thomson Financial/SDC 2

4 While effective due diligence can prevent value-destroying M&A Example: United-US airways merger Initial premises... Significant revenue synergies by combining networks to offer unparalleled convenience to major corporate accounts Integration relatively straightforward; significant cost savings from merging airport operations, building a single network, reducing capital expenditures and eliminating duplicate functions Washington D.C. operations only divestitures required for success Accretive to shareholders' in year two... refuted during due diligence Corporate travelers defecting from United due to ongoing labor disruptions and deteriorating customer service Several barriers to integration Incompatible fleets Union contracts limiting opportunities for workforce integration Significant additional divestitures likely required, including U.S. Airways 'crown jewel' Northeast shuttle operation United stock price down 40% from time of announcement to withdrawal of offer Source: Literature search; Yahoo finance 3

5 ...poor due diligence can cause significant value destruction Example: Federated's failure to understand Fingerhut's business model Initial optimism Federated saw opportunities to drive growth via Fingerhut's strength in non-store retailing operations Catalog infrastructure Prowess in database management and direct marketing Access to 30MM customers Strong internet position Believed savvy management of the Fingerhut portfolio could also drive incremental revenue Fingerhut annual revenue: ~$2B Paid $1.7B for deal The reality Paid too much for perceived 'value add' 'Federated, could have replicated [Fingerhut's infrastructure] for a lot less than $1.7B' Sales performance consistently failed to meet expectations Target markets differed between two entities 'Fingerhut's typical is... younger, less educated, and less affluent than Federated's' Net end result Anticipated synergies were not realized Federated eventually decides to put Fingerhut up for sale Lytle Business Development Group most serious suitor Sluggish economy hampers Lytle from financing the deal Federated can t find another bidder and must shut down Fingerhut operations ~6K employees eventually laid off Business broken-up (ie, customer database, facilities, etc) will be sold to help offset closing costs Source: Literature search 4

6 Due diligence can be seen as an iterative process of raising and then addressing critical questions "Occasionally, the 's final due diligence effort uncovers a golden nugget of value, but in my experience, the opposite generally occurs. Final, intensive due diligence inevitably reveals negative items that diminish the seller's value by a considerable amount 1 Negotiation Price range Assets Terms, conditions Issue identification Financial Data-related Cultural Due Diligence Re-assessment Attractiveness Valuation Integration plan Information gathering Memorandum Data room Q&A 1. Jeffrey C. Hooke; M&A guidebook Source: BCG experience 5

7 Strategic due diligence evaluates target attractiveness Typically four or more teams running in parallel Strategic due diligence Financial due diligence Legal due diligence Technological/ environmental due diligence Objectives Assessment of growth and profitability potential for financial valuation Determination of offer price Deal structure Certification of accounts Draft of investment agreement Legal go-ahead for deal Assessment of technological risks Assessment of environmental risks Tasks Evaluation of market dynamics Sustainable growth Customer needs Segmentation Competition Sources of competitive advantage Internal operations turnaround potential Mgmt plan assessment Financial analysis Various valuation models In-depth review of accounting information Scrutiny of contractual risks Assessment of regulatory risks Formulation of investment agreement Delivery of technological expert opinion Delivery of environmental expert opinion Responsible Strategy consultants "Gray haired gentlemen" Accountants I-banks (Strategy consultants) Lawyers Specialized consultants, scholars Note: Other advisors may be involved for a tax or pension due diligence Source(s): BCG experience 6

8 Content The importance of conducting a comprehensive due diligence Overview of due diligence process and content 7

9 Strategic due diligence evaluates target attractiveness and packages findings for different target audiences Assessment of target attractiveness Assess attractiveness of target's market segment and derive baseline for market development Identify and quantify potential synergies between target and acquirer Evaluate target's business model and conduct financial valuation Assess feasibility of transaction considering rival bids, regulatory concerns etc. Specific output DD document to summarize key findings for the investor (equity case) Banking presentation must be convincing to secure financing Generate data and work-plans as input for post-merger integration phase Source: BCG experience 8

10 Overview of a typical strategic due diligence process Prequalification Nonbinding bid Strategic due diligence Decision Final bid Teaser Info provided by target company/i-bank Info-memo Data room Q&A Documentation of "equity case" Pre-due diligence 1 Strategic/commercial due diligence + Initial analysis Know-how internal interviews Strategic Consulting Company expertise Research External interviews Presentation of "banking case" Also to answer if target fits to investor strategy / what are exit options Financial due diligence (provided by accountant) Legal due diligence (provided by lawyer) 1. Occasionally done in large transactions based on desk-top research and interviews Source: BCG corporate finance task force 9

11 A strategic due diligence consists of four key elements Market and target Business plan and Synergies Feasibility attractiveness Valuation Market growth/category Market segmentation, product and pricing Competitive landscape (incl. substitution, new entrants & economies) Target assessment Marketing/sales Operations/IT Dist. and logistics R&D Finance HR/culture Potential along merged value chain revenue synergies cost synergies Financing synergies Managerial synergies Integration needed to achieve synergies Costs of integrating the companies (if applicable) Historic performance Forecasts Value driver analysis Competitive benchmarking Revised business plan through delta analysis Sales, EBIT(DA), Capex, working capital Valuation of developed scenarios Internal resources Culture and organizational issues People retention Management team Investments required Financing capability Integration needs Other bidders /Competitive response A key output is a view on the delta EBIT (or delta cash flow) versus management plan Source: BCG experience 10

12 1 Market attractiveness Typical components in assessing market attractiveness Always ask yourself: is it an attractive industry and an attractive target? Market dynamics Customer understanding Business economics Technology assessment Competitive dynamics Total market size and growth Key growth drivers Price/volume development Attractiveness by segment Customer/ channel Product Geography Types of customers/ channels Segmentation Key purchasing criteria Cost-to-serve Concentration Dependence on single or small group of customers Cost structure Cost drivers Scale/scope economics Key trends Degree and speed of development Migration/shifts Nature of competition Concentration versus fragmentation Competitive positions Scope/focus Cost Is it an attractive industry? What are the key success factors (current and future)? + Is it an attractive target? What are the key value drivers? Source: BCG corporate finance task force 11

13 1 Market attractiveness Sample output: forecast of construction spend in Malaysia Provides an overview of the market's attractiveness US$ Bn 25 Real construction spend in Malaysia Actual historical Forecast CAGR (in %) 1998 to to to 2010 to % Total % 7% % 3% Residential Commercial Infrastructure xx CAGR y-o-y % growth Note: Base year 2005 Source: BIS Shrapnel; Building and Construction in Asia Report 2009; BCG analysis 12

14 2 Synergies Estimation of synergy potential is critical to due diligence process for strategic/industrial s Synergy potential in benchmark transactions Key elements in synergy estimation % of combined sales Example Identification of possible synergy areas Generall Mills / Pillsbury Not specified 2.9 Coors / Molson Stretch 0.4 Core 1.6 (2) P&G/ Gillette Stretch 0.7 Core 0.9 (1) PepsiCo Quaker Oats Not specified 1.8 Kellogg / Keebler Kraft / Nabisco Not specified Unilever / best foods Verification with line managers (internal) and historic comparable transactions (external) Scenario building/simulation to determine probability-weighted best synergy estimate Preparation of necessary joint effort between signing and closing Preparation for jumpstart into synergy realization immediately after closing Announced revenue synergies Announced cost synergies 1. After adjustment to $400m in 2008, however offset by accounting changes Announced synergies ($14B-B16B out of which $10B-$11B as cost synergies) were the present value of the total, cumulative savings the companies expect from the merger in all future periods. Yearly cost synergies expected to reach $1B-$1.2B in year Source: BCG experience 13

15 2 Synergies Sample checklist for typical synergy buckets Savings will tie to individual P&L line-items R&D Purchasing Conversion Distribution Selling/ Marketing G&A Pipeline enhancement Lab/tools utilization Know-how spread Access to unique technology Avoidance of capital expenditures Portfolio optimization Bundling / Switching suppliers Outsourcing Global sourcing Component sharing Capacity utilization Network structure Make-or-buy decisions revisited Access to unique technology Harmonization of investments Combination of services Reduced funding costs Complexity reduction Warehouse consolidation Bundling of external services (e.g., freight capacity) Sales force/ customer overlaps Bundling of external services (e.g., agencies) Standardization of systems (IT) Financial restructuring (Finance) Overall levers Consolidation of overheads/admin functions/elimination of duplications Reduction of occupancy/maintenance costs Best-practice sharing Standardization of processes Alignment of compensation/incentive programs 14

16 3 Business plan and valuation Essential to validate seller s business case and adjust projections appropriately Adjustment of management case business plan according to DD findings How to creates value for acquirer EBITDA (M ) Example Challenge existing business plans and replace management plan with challenged values Original BCG-Adjusted CAGR +61% CAGR +37% 26,7 Consider upside potential via synergies, restructuring and add-on acquisitions (buy-andbuild) 20 CAGR -10.1% 19,6 Compile 'poison list' for negotiations with individual price tags for discounts 10 12,0 10,4 9,7 10,3 8,1 10,9 15,2 Analyze scenarios based on likely market and environmental developments A 2007A 2008A 2009E 2010P P Source: BCG corporate finance task force 15

17 4 Feasibility Deal feasibility must be carefully addressed Conduct careful analysis of deal feasibility along four major dimensions How to add value for acquirer 1 Internal capacities/issues 1 Addressing acquirer's internal issues, e.g. Management team quality Skills gap 4 Financing 2 Bid analysis/ competitive response 2 3 Preparing bid analyses and determining estimated price limits for other bidders Process control in terms of timing, support in negotiation tactics 3 Timing 4 Preparation and negotiation support in assembling the necessary deal financing Source: BCG corporate finance task force 16

18 Wrap-up: A strategic due diligence consists of four key elements Market and target Business plan and Synergies Feasibility attractiveness Valuation Market growth/category Market segmentation, product and pricing Competitive landscape (incl. substitution, new entrants & economies) Target assessment Marketing/sales Operations/IT Dist. and logistics R&D Finance HR/culture Potential along merged value chain revenue synergies cost synergies Financing synergies Managerial synergies Integration needed to achieve synergies Costs of integrating the companies (if applicable) Historic performance Forecasts Value driver analysis Competitive benchmarking Revised business plan through delta analysis Sales, EBIT(DA), Capex, working capital Valuation of developed scenarios Internal resources Culture and organizational issues People retention Management team Investments required Financing capability Integration needs Other bidders /Competitive response A key output is a view on the delta EBIT (or delta cash flow) versus management plan Source: BCG experience 17

19 Due diligence result also used to prepare the integration process Build base assumptions for integration plan New management structure How will the organization charts change? Who reports to whom? Will there be a plan for succession determined ahead of time? Employment issues Will there be a unified benefits / compensation plan? What will be the impact of union contracts? Executional issues How do we consolidate functions? How do we integrate systems? Who will be on the integration team? How will we achieve the synergies? Identify and surface cultural differences There will be differences that need to be identified 'Management philosophy' and styles Centralized versus decentralized People's personal styles Open, friendly versus closed, protective Work policies HR, environment, etc Cultural differences Customs, holidays, etc And plans must be made to prepare for the integration Which management philosophy will prevail, and how will that affect key management talent? How to overcome cultural differences? Source: BCG experience 18

20 Thank You! Now time for questions 19

21 Unused slides

22 3 Business plan and valuation "Momentum case" forecast Typical elements of financial model Step 1: Forecast market growth Quantify past market growth - Past 7-10 years - Capture full economic cycle - Look at past 2-3 years Analyze major trends in the market influencing those trends Create an estimate of the likely range of growth Compare with other expert forecasts - But be skeptical Step 2: Forecast likely change in market share Quantify past company growth for same time period as market - Use organic growth rates - Analyze whether target is losing / gaining share Analyze how well the company is positioned in the market - Likely changes in share going forward Create an estimate of the likely range of share change Compare with analyst forecasts Derive capex requirements Step 3: Estimate change in margin Examine past trends company margin (by business) Understand underlying drivers - Fixed vs. variable cost - Cost reduction activities - Change in business / product mix Project forward based on revenue growth projections Key is to develop independent forecast - external analyst/industry reports only function as comparables 21

23 Final document ("equity case") as basis for the final bid Relevant for strategic and financial investors Final documentation Binding Bid Next steps Objective Getting the internal approval to place a final bid Audience: Board of directors / investment committee Contents All information gathered on target company Delta business plan Recommendation for binding bid Price Strategy Value creation possibility Objective Getting into 'the last round', becoming the exclusive negotiation party Audience: Seller management Contents Binding price offer (maybe spread) Planned strategy Employees Management and management compensation Products/Subsidiaries Consolidation with other PE portfolio company? Legal restrictions to the offer, in case of any uncertainties Signing of contract 1 Antitrust clearance Closing preparation Day 1 preparation 100-day plan Exchange of information (potentially with clean-team support) 1. Sale and purchase agreement Source: BCG Corporate Finance Task Force 22

24 BCG has extensive project experience in all aspects of corporate development Case experience Jan 2008 Apr Americas Europe Asia/Pacific Corporate Strategy 464 1, Shareholder Value Corporate Transactions 471 1, Office of the CFO Total 1,198 3, Number of cases Note: Corporate Strategy includes Corporate Strategy and Industry Landscaping; Capital Markets comprises Investor Management and TSR Strategy; Corporate Transaction includes further corporate finance topics like Partnering, Alliances, Divestitures, and IPO support; Office of the CFO includes Corporate Planning/Budgeting/OCFO and Risk Management Source: BCG Finance Database 24

25 BCG with extensive experience in Private Equity Case experience Jan 2008 Apr Americas Europe Asia/Pacific Due diligence Portfolio work Total Number of cases Note: Vendor due diligences and other projects conducted for PE firms directly are accounted for under portfolio work Source: BCG PE database 25

26 Broad expertise from major transactions (I) Deals involving growing private equity sector B 1.6B BFS seller 0.1B 0.4B 1.2B 250B Source: BCG 26

27 Broad expertise from major transactions (II) Deals involving growing private equity sector $3.2B 0.1B $4.1B 0.2B seller 0.5B 0.2B 0.5B Source: BCG 27

28 Broad expertise from major transactions (III) Deals involving growing private equity sector seller 0.2B 0.4B B 0.2B 0.3B Source: BCG 28

29 Broad expertise from major transactions (IV) Deals involving growing private equity sector seller 0.1B 0.7B $0.3B 0.2B 0.9B B 0.3B Source: BCG 29

30 Broad expertise from major transactions (V) Deals involving growing private equity sector 0.2B 1.0B 0.4B 0.2B $0.4B $0.2B Source: BCG 30

31 Broad expertise from major transactions (VI) Deals involving growing private equity sector US OTC Assets seller 0.4B 0.1B 0.4B 3.6B $0.2B $0.1B $0.9B 0.2B Source: BCG 31

32 Broad expertise from major transactions (VII) Deals involving growing private equity sector New Zealand Franchise seller seller seller 3.6B $0.1B 0.7B $0.5B $34m 1.0B seller $0.2B 0.2B 1.8B Source: BCG 32

33 Broad expertise from major transactions (VIII) Deals involving growing private equity sector 2010 seller 220M 243M 215M 669M Russia seller 37M 550M 33

34 Broad expertise from major transactions (IX) Deals involving growing private equity sector 95M 268M 1,641M 136M 114M seller seller 73M 615M 34

35 Broad expertise from major transactions (X) Deals involving growing private equity sector seller seller seller $3,300M 75M 250M 35