M&A Mergers and Acquisitions April 2011 Giuseppe Cadel
CONTENTS M&A Basics The People Involved Preparation for the Deal s Side Preparation for the Deal s Side The Deal Process 2
M&A BASICS A Merger is a combination of two or more entities into a single one A A+B B (Resulting Entity) 3
M&A BASICS An acquisition is the purchase by the buyer from the seller of an interest in another entity (called target ) Target 4
M&A BASICS Different kinds of merger Consolidation Combination of two or more previously independent entities Forward Merger Incorporation of a subsidiary into its controlling entity Reverse Merger Incorporation of the controlling entity into a subsidiary 5
M&A BASICS For every acquisition There is a sale! Strategic Purposes: the buyer makes the purchase to consolidate, link or integrate the acquired business with his own, creating synergies Financial Purposes: the buyer makes the purchase to improve and revitalize the acquired business and eventually sell it at a substantial gain Full sale (exit): the seller sells his whole interest in the business Partial sale: the seller sells a part of his interest in the business to get cash and/or to solidify the relationship with the buyer, staying in as a majority or minority shareholder 6
M&A BASICS Common traits between mergers and acquisitions Both transactions change not only who controls the business, but also the strategic direction the business will take One side wants to learn as much as possible about the business and understand it deeply Both sides try to maximize the value of the deal The people involved, the key steps and processes in both kinds of transaction are very similar 7
THE PEOPLE INVOLVED The investors Founders/ angels people who started the business from scratch and helped it take its first steps Venture capital firms entities that help promising, early stage businesses to develop and grow Private equity firms entities that provide the company the human and financial resources to a later and further development and growth Institutional investors entities like mutual funds, pension funds etc., investing with a medium/long term goal to maximize the value of their portfolio, rather than trying to influence the management of the business. 8
THE PEOPLE INVOLVED The advisors Strategic consultants provide advice on strategic opportunities of the transaction the Lawyers the every transaction is a contract or transfer of legal ownership, so you only buy, sell or own what legal documentation says you do Investment Banks provide advice on the financial structure of the transaction and may also broker the transaction itself Auditors certify the target s accounting documents and provide advice on how to structure a company financially as well as tax and accounting strategies 9
THE PEOPLE INVOLVED The others Regulators M&A transactions may be subject to many regulatory issues and/or approvals being those issues and/or approvals related to general regulation (like antitrust regulation) and/or to industry and companyspecific regulation Customers, public and press itisimportanttobe concerned on how the customers, the public and the press will view (and react to) the transaction after its completion PR firms will help influence the opinion that the public and the press will have on the transaction 10
PREPARATION FOR THE DEAL BUYER S SIDE Setting up the strategy and the organization Build a corporate strategy even with the help of the strategic consultants that includes M&A transactions as the execution tools for it Focus on and point out the companies to acquire and/or to merge with The capital structure of the company (equity/debt) must be flexible and quickly adaptable to the market situation and/or to the structure of the very single transaction Build an in house corporate development team in charge to execute the corporate strategy team members must have expertise in M&A transactions Be ready to hire external advisors at the right time 11
PREPARATION FOR THE DEAL BUYER S SIDE Following the correct internal approval process Approval by the corporate development team Approval by the in house legal department Approval by the top management Approval by the board of directors and/or the CEO 12
PREPARATION FOR THE DEAL BUYER S SIDE Planning the right message Need for Secrecy Need for Publicity Information leakage may affect the negotiations Information leakage about a transaction may affect the position of the buyer before the market, his customers, his competitors and his employees If the transaction involves listed companies, the buyer must comply with the disclosure duties set forth by the market regulations Giving public detail about a transaction may have an inportant role in the buyer s PR strategy 13
PREPARATION FOR THE DEAL SELLER S SIDE Setting up the sale Thesaleofabusinessisaone and done event although, the seller must be properly organized to face the challenges of the sale: to be sure to complete the sale and to maximize the price Start thinking about the sale well in advance Focus on and point out the potential buyers Organize the company in order to make it more sellable Hire external advisors that help finding a buyer 14
PREPARATION FOR THE DEAL SELLER S SIDE Setting up the sale The business must be attractive to potential buyers not only for its profitability (actual or future), but also for how it s organized Analyzing potential buyers means to consider their needs and try to organize the business accordingly The business must comply with the potential buyers needs related to employees, technology, products, customers, financials, public image, market reputation, etc. However, this compliance must not be reached to the detriment of the profitability of the business The management and the employees must start thinking as a subsidiary and no longer as an independent company 15
PREPARATION FOR THE DEAL SELLER S SIDE Planning the right message Need for Secrecy Need for Publicity 16
THE DEAL PROCESS First approach One side approaches the other side suggesting a potential transaction The approach may be direct or through a proxy (such as an investment bank or a lawyer) In the first approach, both sides do have to disclose the main topics of the transaction, but need not to disclose its very details and terms The side making the approach needs to communicate his seriousness about the transaction to drive the other side to the negotiating table The side making the approach needs also to think ahead of the other side, anticipating some of his needs and concerns about the transaction that may arise during (or prior to) the negotiations 17
THE DEAL PROCESS The negotiations The negotiations are when the sides come together and try to reach mutually accepted terms for the transaction During the negotiations, each side tries to conclude the transaction at the best term for himself During the negotiations there is never an equal bargaining power between the sides, in fact, the power shifts between the sides all the time beacuse of inside or outside factors Pending the negotiations, the transaction is not completed, and its terms maybechanged at any time There are no hard and fast rules about how negotiations need to be conducted, however, their goal is to get a transaction done: therefore, it is very important to try to ascertain from the beginning whether the transaction is likely to happen or not 18
THE DEAL PROCESS One on one negotiations vs. competitve auction One on one Negotiations One side meets his counterparties one at a time The negotiating process is usually fast Both sides are afraid of putting the transaction at risk Competitive Auction One side narrows the field of his counterparties examining their proposals together The process allows to select the best counterparty with reference to all the terms of the transaction The auction process may be long and expensive The auction leads to a one on one negotiation with the winner 19
THE DEAL PROCESS One on one negotiations Establish a serious contact with the other side and try to ascertain his level of interest Propose very general and rough terms of the transaction by providing the other side a specific document the teaser Once both sides have expressed their serious interest about the transaction, they sign a nondisclosure agreement that provides that neither will share the information he gets during the negotiations Share more extended information about the business with the information memorandum and with a management presentation by which more details of the business are provided Start talking about the very details of the transaction (included the price) by signinig a legally nonbinding letter of intent 20
THE DEAL PROCESS One on one negotiations The signing of the LOI opens a negotiating window in which both sides undertake to exclusively negotiate with each other During that window happens a dual track process whereby: an extensive review of the details of the business (the due diligence ) takes place while both sides negotiate the detailed terms and conditions of the transaction and finalize the legal documentation Both tracks are tightly interindependent, since many terms and conditions of the transaction are determined upon the due diligence results If both sides reach an agreement on the legal documentation, the transaction is ready to be completed, if they don t, the whole process has to start from scratch with another counterparty 21
THE DEAL PROCESS Competitive auction Sometimes, one side can choose to run a competitive auction to select the most interested counterparty who will give him the best terms Thereafter, a one on one negotiation between the auction runner and the auction winner will take place The auction runner needs to: level the playing field among the bidders ensure proper communication to and from the bidders preserve the secrecy of the process Setting up (and running) an auction requires a lot of networking and expertise, therefore, the auction runner often hires an investment bank to do the job for him Setting up an auction also provides a clear demonstration that the board of directors of the auction runner made every effort to get the transaction done at the best terms 22
THE DEAL PROCESS Competitive auction The competitive auction procedures are not very different form the one on one negotiation s, although every step must be made under a rigid schedule to ensure an equal playing field among the bidders The bidders provide (or are provided) the teaser The bidders and the auction runner sign an NDA and exchange an information memorandum The bidders submit a formal LOI In larger auctions, the auction runner may decide to set some cuts to winnow the group of bidders down to a smaller number. This cut is usually set after the submission of the LOIs 23
THE DEAL PROCESS Competitive auction The bidders who make the cut are given access to extensive due diligence information The remaining bidders submit, after the completion of the due diligence, a more refined (and final) offer The auction runner picks the winning offer(s) and starts to negotiate one on one the final version of the legal documentation with the auction winner(s) If the negotiation(s) with the auction winner(s) break down, the auction runner may pick the auction runner up(s) to negotiate (and eventually conclude the transaction) with, and does not have to start from scratch with the whole process 24
THE DEAL PROCESS Due diligence In an M&A transaction, the combined entity (or the buyer) takes over all the assets, the liabilities, the rights and the obligations of the involved companies (or the seller) Those assets, liabilities, rights and obligations (even the potential and uncertain ones) need to be identified prior to the completion of the transaction through the due diligence process (DD) DD is an extensive review of the details of all the activity and the aspect of the business aimed at digging very deep and at getting a clear and accurate view of the business itself DD may pertain almost to every area thatmayberelevant to the business: operations, finance, accounting, legal, regulation, technology, product, customers, employees, environment 25
THE DEAL PROCESS Due diligence Be sure, prior to the DD, what is really important to know about the business and muster the DD team accordingly Given the way the transaction is negotiated ( dual track process ), it is very important to ensure proper communication between the negotiating team and the DD team Results of the DD deeply influence the behavior of the sides during the negotiations Results of the DD also deeply influence the terms and the condition of the transaction, as well as the content of the legal documentation 26
THE DEAL PROCESS Due diligence the people involved Lawyers every business is a pool of of legal rights and obligations, in addition to assets, liabilities and a brand, therefore, the lawyers ensure what that pool is made up of; furthermore, the lawyers help discover the impact that the transaction will have on such pool Accountants and Auditors the accounting staff tells how much the business is worth and the auditors certify that the financial statements related to the business are accurate Regulation and compliance experts ifthe business is subject to a regulation whatsoever, those experts have a deep understanding of the regulations and of how to comply with them (procedures, policies, etc.) Other experts help understand and point out all the issues of the other areas relevant to the business: technology, product, customers, environment, etc. 27
THE DEAL PROCESS Valuation The valuation activity is aimed at setting the price (or the exchange ratio) of the transaction There are many different valuation methods, and each is more or less applicable to different companies, therefore it s very important to know when and how to apply each, some of these methods are: trading comparables: analysis of the stock market prices of companies with similar activities useful method to evaluate listed companies transaction comparables: analysis of the value assigned to similar companies in similar transactions discounted cash flows: analysis of the capacity of a business to throw off cash in the forseeable future useful method to evaluate companies with stable cash flows 28
THE DEAL PROCESS Valuation Control Premium: when a transaction is aimed at acquiring the majority stake of a company, this stake has a higher value than a small, noncontrolling stake therefore the control merits a premium over the valuation of the company Synergy and integration costs: if the transaction is driven by the creation of synergies or integrations between the companies involved, their costs must be taken into account with an accurate cost/benefit analysis Future profitability: a business is not only worth for its actual profitability, but even more for the profits it will yield in the forseeable future 29
THE DEAL PROCESS Consideration Mergers The shareholders of the incorporated entity receive shares of the incorporating entity pursuant to the exchange ratio The exchange ratio is given by the relation between the values of the involved companies determined through the valuation process Acquisitions The buyer pays the purchase price in cash and/or in shares or other assets The purchase price is determined through the valuation process 30
THE DEAL PROCESS Balancing the financing sources for the acquisition Equity Debt 31
THE DEAL PROCESS Integration Integration between businesses is the most important drive to an M&A transaction, and the greatest determinant of its success or failure Integration planning work must be implemented well in advance Integration of these key issues often leads to cost savings and improvements to a better efficiency: Operations Supply chain Employees Technology Products Customers 32