M&A Strategy and Valuation, Oct 3 and 4 - 2012

Course Organised in co-operation with
Eureka Financial Ltd

3/4 October 2012

Prof Scott Moeller,
Director, M&A Research Centre, Cass Business School, London

MERGERS, ACQUISITIONS AND
DIVESTITURES
1
© Scott Moeller, 2012

PROGRAMME OVERVIEW
 Objectives
 Identify key value drivers
 Understand the process of M&A
 Assess the needs and benefits of M&A for a company and therefore the
right and wrong reasons to do a deal
 Understand synergies and how to quantify them
 Learn the different methods of M&A valuation and pricing, and the
appropriate application of these methods
 Understand M&A due diligence
 Analyse alternative deal structures

 We will achieve this through the extensive use of
 Real life examples of transactions (case studies)
 Discussion amongst all participants
 Break-out groups

© Scott Moeller, 2012 2
Course organised in co-operation with Eureka Financial Ltd

COURSE PROGRAMME

 Day 1: Morning: Reasons for doing deals, funding and exit
requirements, risk and regulation.
 Day 1: Afternoon: Deal process, deal teams, strategy, due
diligence and negotiation, post-deal integration

 Day 2: Morning: Financial engineering (deal structuring,
financing, pricing vs valuation, covenants)
 Day 2: Afternoon: Synergies and summary case study.


M&A FACTS
30% Probability
3% Deals that are
hostile
that a US
Fortune 1000
company will
91% US deals over
$100 million
pursue a
significant
that were
merger in any
challenged in
one year
£174 Amount each
deal
court

million contributes to
the UK
economy 31% Likelihood a
hostile target
company will
remain
12% Chance of
being made
independent redundant
following an
19.8% UK Deals with
suspicious
acquisition
trading pre-
deal
37% Deals in
emerging
markets

9 40% of deals
don’t complete
months within this
time after
announcement

© Scott Moeller, Business School, Towers Watson, Cornerstone Research, Bernstein Research, J.P. Morgan
Sources: Cass 2012

Day 1
Mergers, Acquisitions & Divestitures

Morning, Session 1

INTRODUCTION AND DEAL DRIVERS


IT’S NO LONGER TRUE THAT MOST DEALS
FAIL…
 ‘Headlines’ focus on failures
 The press and many boards still believe this
 Yes, it was once true:
1987 McKinsey 116 acquisitions 61% failed
. Porter 56% of all acquisitions get sold off

1996 Mercer/ 150 deals 57% failure rate / 30% had 'substantial' losses
Business Week
. Economist 150 acquisitions 70% failed to meet expectations
. McKinsey 160 acquisitions Only 12% accelerated their growth
1997 Sirower 168 mergers Only 20% return in 4 years
1998 A. T .Kearney 115 mergers 58% added no value
1999 McKinsey 77% fail to yield expected synergies
2001 KPMG 118 acquisitions 70% created no value / 31% destroyed value

2004 BCG 277 deals 64% destroyed value for acquirers’ shareholders


STUDIES SINCE 20071 SHOW DEALS NOW SUCCEED
MORE OFTEN THAN FAIL…

1
© Scott Moeller, 2012 School, Towers Watson, McKinsey, BCG
Sources: Cass Business

QUARTERLY PERFORMANCE OF COMPLETED DEALS

10.0

8.5

8.0

The line below (2.5pp) shows the The red line below (2.4pp)
median-adjusted performance of all shows the median-adjusted
6.0 acquirers throughout the period. performance of all acquirers
5.1
4.9 over a three year rolling
4.3 period.
Percentage Points

4.3
4.0 4.0 4.1
4.0
3.1
2.5
2.1 2.2
2.0
2.0 1.5

0.0
-0.4
-1.0 -0.8
-2.0

-2.8 -2.7

-4.0
Q1 2008

Q2 2008

Q3 2008

Q4 2008

Q1 2009

Q2 2009

Q3 2009

Q4 2009

Q1 2010

Q2 2010

Q3 2010

Q4 2010

Q1 2011

Q2 2011

Q3 2011

Q4 2011

Q1 2012

Q2 2012

Q3 2012
Sources: Towers Watson / Cass Business School

MIDDLE EAST M&A ACTIVITY
 Slow in 2012: Only 20 deals in H1 vs 42-57 annually in 2007-11
 Megadeals:
 Qatar Telecom’s $2.2 billion purchase of the remaining 48% of Wataniya
(August) and 60% for Asiacell of Iraq for $1.5 billion (June)and Qatar Petroleum’s
partial sale of Industries Qatar for $3.9 billion (August)
 National Bank of Kuwait / Boubyan Bank for $2.1 billion (June)
 Average size of deal <$100 million when above excluded
 Why?
 Only 6 deals in H1 into the region vs 10-15 in each of past three years
 Only 5 deals in H1 out of the region vs 13-16 annually in past three years
 But within Middle East is strong.
 For the first time, investment in the region exceeded outbound investment.
 But reasons to be optimistic as the principal GCC sectors are poised for
activity: Financial, Real Estate, Industrials, Energy & Power, even if TMT now
appears strongest.

9

MIDDLE EAST M&A ACTIVITY:
QUARTERLY ACTIVITY ESPECIALLY STRONG COMPARED TO
2011
$10,000 300
$9,000
$8,000 250
$7,000 200
$6,000
$5,000 150
$4,000
$3,000 100
$2,000 50
$1,000
$0 0
Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3
2010 2010 2011 2011 2011 2011 2012 2012 2012

Deal Value ($ mm) No. of Deals
Source: Zephyr

M&A MATURITY
Country Index 1 Yr 2 Yr Country Index 1 Yr 2 Yr
Scor Δ Δ Scor Δ Δ
e e
1 USA 85 0 0 20 United Arab 72 -1 6
Emirates
2 Singapore 84 0 0
45 Qatar 61 -5 0
3 United 82 0 1
Kingdom 59 Saudi Arabia 58 -2 7
4 Hong Kong 81 0 3 62 Bahrain 57 1 1
5 South Korea 81 0 0 64 Kuwait 56 0 -6
6 Germany 80 0 -3 65 Egypt 56 1 0
7 Canada 80 0 -1 66 Oman 56 -1 9
8 France 80 0 3 67 Iran 55 0 -10
9 China 79 1 4 73 Jordan 52 1 -3
10 Japan 79 2 -1 78 Lebanon 51 4 7
11

M&A MATURITY SCORE AND FACTORS FOR KUWAIT

Kuwait
70% 67%
60% 60%
60% 56%
52%
50%
43%
40%

30%

20%

10%

0%
CASS MARC M&A REGULATORY AND ECONOMIC AND TECHNOLOGICAL SOCIO-ECONOMIC INFRASTRUCTURE AND
MATURITY SCORE POLITICAL FINANCIAL ASSETS

Opportunity: Economic and Financial Factors (Development of Equity market and availability
of Domestic Banking Credit)
Threat: Technological (High Technology Exports 15%)

12

MIDDLE-EAST MATURITY INDEX
CASS MARC M&A REGULATORY ECONOMIC AND INFRASTRUCTURE
Country name TECHNOLOGICAL SOCIO-ECONOMIC Ranking
MATURITY SCORE AND POLITICAL FINANCIAL AND ASSETS
United Arab
72% 78% 66% 63% 70% 83% 20
Emirates
Turkey 64% 61% 54% 56% 79% 68% 37
Qatar 61% 73% 65% 41% 61% 66% 45
Saudi Arabia 58% 70% 53% 53% 68% 46% 59
Bahrain 57% 63% 63% 39% 58% 63% 62
Kuwait 56% 60% 67% 43% 60% 52% 64
Oman 56% 73% 50% 43% 56% 56% 66
Jordan 52% 59% 60% 50% 35% 56% 73
Lebanon 51% 37% 59% 59% 51% 50% 76
Syria 42% 38% 45% 35% 49% 42% 97
Iraq 36% 16% 53% 13% 44% 57% 115
Yemen 29% 36% 26% 29% 41% 15% 139

Kuwait is ranked among the top 100 countries in the world and with a score
above average (53%) in the Middle East Maturity Countries.

4

KUWAIT: VOLUME AND VALUE TRACKER

500 469
450

400 380

350

300 266 278
241
250

200
153
138 133
150 115
100100 98
100
54 49 53
50 24 32
7 17 8
-
Q1 2010 Q2 2010 Q3 2010 Q4 2010 Q1 2011 Q2 2011 Q3 2011 Q4 2011 Q1 2012 Q2 2012
MARC M&A Volume Tracker MARC M&A Value Tracker

4

KUWAIT: VOLUME AND VALUE
9 14000
8 12000
7
10000
6
5 8000
DOMESTIC DOMESTIC
4 6000
3 INWARD INWARD
4000
2 OUTWARD OUTWARD

1 2000

0 0
2005 2006 2007 2008 2009 2010 2011 2012 2005 2006 2007 2008 2009 2010 2011 2012

Domestic deals in Kuwait peaked in the year 2007 and 2009

4

KUWAIT: VOLUME BY INDUSTRY

Volume (%)
25%
20%
15%
10%
5%
0% Volume (%)

Top 3 Deals in Kuwait
Date Announced Acquirer Name Acquirer Nation Target Name Target Nation Value ($mil)

30/09/10 Zain Group Kuwait Emirates Telecommun UAE 13,028
Dow Chemical Co-
13/12/07 Petrochemicals United States Petrochemical Inds Kuwait 9,500

02/03/07 Wataniya Kuwait Qtel Qatar 3,801
4

GLOBAL M&A WAVES…
$ trillions (announced)
5.0
4.7

4.5 4.3

4.0 3.8
3.6
3.5

3.0 2.9 2.9
2.8 2.7

2.5
2.2 2.2 2.2
2.0 2.0
2.0 1.9 1.9

1.5 1.3
1.2 1.2

1.0 0.8 0.9
0.6 0.7
0.5 0.6
0.5 0.4 0.5 0.4 0.4
0.2 0.2 0.3
0.1 0.1
0.0

Source: Sanford Bernstein, Thomson Financial
© Scott Moeller, 2012 Course organised in co-operation with Eureka Financial Ltd

M&A PARADOX
 Most mergers fail, but few companies succeed without acquiring
or merging.
 Can you be a large organisation without having made acquisitions?
 Is organic growth sufficient to become a leading player?

 Management’s challenge:
'How can you reconcile the low odds of deal success with the need to
incorporate mergers into the growth strategy.'
Or…

Best Practice to make deals successful


THREE COMPONENTS TO AN M&A DEAL

Should we do a deal?
With whom? Strategy

For how much will they sell?
How structured? Price
What can we afford?

How?
Post‐merger Integration


SOURCES OF DEAL ERROR:
RESPONDENTS CITING EACH REASON AS THE PRIMARY SOURCE OF
ERRORS IN THE M&A PROCESS

Source: Corporate Executive Board, 2012


CONSIDER FIRST THE ALTERNATIVES TO M&A


THREE PRE-REQUISITES FOR BUYING

There are 3 pre-requisites for an acquisition to take place
 The target must have a “valuable” business to offer
 The target must be owned by people who accept losing control
 There must be compatible price expectations on both sides (buyer
and seller)


PUBLIC AND PRIVATE DEALS

 There is a fundamental distinction in mergers & acquisitions
between
 Public take-overs
 Private acquisitions
 A public takeover offer occurs
 When an offer is made for a publicly listed company
 By any other person or company (whether listed or unlisted)
 Any other M&A deal is ‘private’


PUBLIC DEALS

 A public deal is likely to have
 A fixed timetable
 Minimum pricing levels
 High documentation requirements
 High publicity requirements
 Many rules and regulations, especially from the exchange on
which the target has its primary listing


PROGRESS OF A PUBLIC ACQUISITION (BUY-SIDE)

BuyCo: BuyCo:
•needs to grow •appoints advisers
•decides to grow by •identifies acquisition
acquisition criteria

BuyCo: BuyCo:
•agrees valuation/pricing •identifies specific target(s)
•agrees other terms •approaches specific target

BuyCo: BuyCo:
•carries out due diligence •launches public offer, or
•arranges finance & •signs S&P agreement
structure
Course organised in co-operation with Eureka Financial Ltd Ltd
Course organised in co-operation with Eureka Financial

PLANNING PROCESS
 Planning incorporates the acquisition goals and objectives

 These include one or more of the following:
 Market share
 Transaction synergies; cost or growth
 Industry diversification (vertical integration)
 Remove competition
 Gain control of strategic resources/skills
 Market penetration

 Beware other factors!
 Management ego
 Advisers (transaction based fees)


SUCCESSFUL M&A PROGRAM STEPS

 1. Manage pre-acquisition phase
 Instruct staff on secrecy requirements
 Evaluate your own company
 Identify value-adding approach
 Understand industry structure, and strengthen core business
 Capitalise on economics of scale
 Exploit technology or skills transfer


PRE-ACQUISITION PLAN
 Management
 Small companies do not have management slack
 Management role cannot be delegated
 Soft issues

 Deal size
 Look for economies – not too small unless a bolt on
 Affordability

 Measure risk tolerance
 Operating
 Financial
 Strategic



 2. Screen Candidates
 Identify knockout criteria
 Decide how to use investment banks and other
advisors
 Prioritise opportunities

 Look at public companies, divisions of companies
and privately held companies


SCREEN TARGETS
 Concentrate on four key areas
 Right industry
 Right size
 Right fit
 Right price

 Refine the list
 Absolute deal breakers
 Potential deal breakers
 Desirable but lacking essential criteria

 Reduce to one or two candidates
 Remember lions eat first!


EXAMPLE OF SCREENING CRITERIA

 Market segment
 Product line

 Profitability

 Degree of leverage

 Market share

 Willingness of owners to sell … but remember,
‘everyone has their price!’


M&A OPPORTUNITIES: TARGET COMPANIES
 Need value chain integration - e.g. dependent on supplier - vertical integration
 Benefit from greater efficiency - avoid cutthroat competition, achieve production or
distribution efficiencies
 Company has weak financials - flat earnings, overleveraged
 Has several businesses that have no synergies - some growth, some flat Company
has businesses with incompatible cultures - or two different companies with
compatible cultures
 Company is in sector with overcapacity - benefit from consolidation
 Company wants to buy competitor who could end up in a rival’s hands
 Company wants to do an IPO but is not suitable - e.g. not in a “hot” business, or the
size is insufficient
 Companies in the same line of business, but with P/E differentials
 Conglomerate discount - company is undervalued in the market and would be worth
more if some businesses were hived off
 Owner wants to retire



 3. Value remaining candidates
 Know exactly how you will recoup the takeover
premium
 Identify real synergies

 Decide on restructuring opportunities

 Decide on financial engineering opportunities


WHERE WILL THE VALUE COME FROM?

Gains from merger

Synergies Control

Top line Bottom line Financial Business
restructuring Restructuring
(M&A)



 4. Negotiate
 Decide on maximum price and stick to it
 Understand background and incentives of the other
side
 Understand value that might be paid by a third
party
 Establish negotiation strategy

 Reach mutual agreement

 Conduct due diligence


NEGOTIATION STRATEGY
 Select the team
 Small is best
 Establish roles
 Continuity is essential

 Have clear objectives
 Deal breakers
 What is negotiable
 List of ‘give-aways’ that can be conceded

 Deal with the organ grinder not the monkey
 Match seniority and experience

 Representations and warranties
 Disclosure
 Sale and purchase agreement


FIRST RULE OF NEGOTIATION

‘You pick the price and I pick the
terms…
And I always will win.’



 5. Manage post merger integration
 Move as quickly as possible in making and
announcing decisions
 Carefully manage the process


FAILURE CAN START AT THIS POINT IN THE DEAL

 Process failures
 Lack of management and financial resources or
experience
 Failure to plan early for the integration
 Wrong (or no) advisors

 Commercial failures
 Poor information about target (‘due diligence’)
 Industry changes
 Unfamiliarity with industry characteristics
 Acquiring the wrong company


KEYS TO SUCCESS

 Soft issues
 Management (existing and new)
 Cultural issues
 Communication

 Hard issues
 Strategic evaluation
 Evaluation of the synergies
 Post-deal integration planning
 Due diligence process
 Advisors
 Price


Day 1

Morning, Session 2

SPECIAL ISSUES, INCLUDING REGULATION AND
RISK


SELLERS: PRIVATE TRANSACTIONS

 Private sales of companies are usually the result of one or more of
the following factors
 An owner/manager of a private company wishing to cash out
 A change in strategy by a parent company
 As an alternative to a flotation (perhaps to realise higher value
and/or to make a clean break)
 The company has good prospects but requires new investment to
realise them



 Three major types of private auctions from the Seller’s
viewpoint
 Public/open auction (also known as an ‘open auction’)
 Limited private auction (‘prioritised auction’)
 Bilateral negotiation (‘negotiated sale’)



 Public/Open Auction
 Useful
 For “trophy” assets
 Where unlikely to be confidentiality issues
 Advantages
 Demonstrates to shareholders that best price achieved
 Largest possible market of potential buyers
 Disadvantages
 Embarrassing if it fails
 Puts off some buyers
 Effect on staff morale, suppliers, customers
 Risk of price effect since competitors will see information
 Can sometimes lead to “loss of control” by seller



 Limited Private Auction
 Approach to limited number of parties

 Useful where limited identifiable market of potential buyers

 Advantages
 Usually maintains good level of confidentiality
 Less (public) embarrassment on failure
 Disadvantages
 Skill required to build up “feeding frenzy”
 LPAs often become OPAs (One Party Auctions)!



 Bilateral Discussions
 Useful

 For highly confidential issues, such as critical client lists,
intellectual property, production method, etc
 Where very few potential purchasers due to product, size,
competition, etc
 Advantages

 Can be quicker than open/limited auction

 Reduced effect on staff, customers, etc

• Disadvantages

 Exclusivity rarely in Seller’s interest



 After decision to sell, there are four main stages of the process
 Preparation (including Pricing)
 Stage 1: The “Long List”
 Stage 2: The “Short List”
 Stage 3: The “Preferred Bidder”


STAGES OF A PRIVATE SELL-SIDE

Stage 1 Stage 2 Stage 3
Universe Short List Preferred
of Buyers of Buyers Bidder

Buyers

Confidentiality Data room, Exclusivity,
What
Agreement, Meet management, Due diligence
they get
Information Site visits
Memorandum
What Indicative Exchange /
they want Final Offers
Offers Completion 48


Preparation

 Preparation of Confidential Information Memorandum
 Purpose
 Contents [shorter is better?]
 Responsibility
 “Health warning”/disclaimer



Stage 1: The “Long List”

 Preparation of universe of potential purchasers
 Drawing up the list
 Horizontal/vertical buyers
 MBO team?
 Other financial buyers
 Previous approaches
 Separation of long list into “Tiers” or the “A-List” and the “B-List”
 Approval of client to list



Stage 1: The “Long List”
 Confidentiality agreements
 Usual terms
 Whose letterhead? (seller’s or buyer’s)
 Dealing with larger purchasers

 Distribution of information memorandum
 Use recorded delivery
 Identification numbers for info memo (control)
 Contents of the package
 Covering letter: purpose and terms



Stage 2: The “Short List”
 Selection of shortlist for second stage
 Why have a shortlist?
 Factors to get on the shortlist
 Keeping the others warm

 Distribution of further information
 Either
 Each buyer gets information specifically asked for?
 Each buyer gets all information asked for in aggregate?



 Establishment of document/data room
 Where?
 “Rules of engagement”
 Co-ordination of visits by buyers
 How many rooms?
 Geography of the room(s)
 Developing trend: the Virtual Data Room

 Management meetings and “site” visits
 “Meet the management”
 Preparation of management?
 Formal presentations or informal meetings?
 Financial adviser monitors questions and answers
 Site visits
 Financial adviser accompanies buyers, tries to look interested



 Receipt of final/second round offers
 By fax?
 By letter?
 By e-mail?



Stage 3: The “Preferred Bidder”
 Selection of winner/ “preferred bidder”
 Factors for selection
 First telephone call
 Notification to losers
 Preferred bidder gets
 Exclusivity (if requested)
 Due diligence exercise (limited)
 Negotiation of Sale & Purchase Agreement
 Usual terms
 Major negotiating points
 Representations and warranties
 Restrictive covenants
 Escrow arrangements



Stage 3: The “Preferred Bidder”
 Execution of Contract
 Satisfaction of conditions
 Regulatory
 Financing
 Shareholder approval
 Completion
 Press announcement (if required or desired)
 Letter from vendor to major customers of SaleCo (“purchaser’s comfort
letter”)



Pre-transaction: Preparation:
•Appointment of advisers •Preparation of documents
•Indicative sell-side valuation •Dealing with deal-busters

Stage 2: Stage 1:
•Selection of shortlist •Drawing up list of buyers
•Data room,site visits,meetings •Distributing info memo

Stage 3: Completion:
•“Preferred” bidder selected •Vendor gets consideration
•Negotiation/execution of S&P •Buyer gets SaleCo



 Indicative timetable
- Preparation and Pricing 4 - 6 weeks
- Stage 1: The “Long List” 3 - 4 weeks
- Stage 2: The “Short List” 3 - 4 weeks
- Stage 3: The “Preferred Bidder” variable


Day 1

Afternoon, Session 1

STRATEGY: DEAL TEAM, TARGET SCREENING
AND DUE DILIGENCE


KEY SHARE OWNERSHIP THRESHOLD LEVELS
(EXAMPLE FROM THE UK)

Shares of Target Consequences
0.5%+ If target is in offer period, all dealings by a 1%+ shareholder to be disclosed

3%+ Acquirer must disclose level of shareholding to target

10% If target is a bank, FSA approval required for change of control

10%+1 10%+1 shareholder has ability to prevent compulsory acquisition of its stake

25%+1 25%+1 shareholder has ability to block special resolutions

30% Mandatory offer triggered

50%+1 Minimum level of acceptances for an offer to be successful under the Takeover Code

50%+1 50%+1 shareholder has ability to carry ordinary resolutions in a general meeting -
effectively equals control

75%+1 75%+1 shareholder has ability to carry special resolutions in a general meeting

90% (dependent) Compulsory acquisition of minorities (otherwise known as a “squeeze-out”)


MANDATORY OFFER LEVELS
Australia 20% Malaysia 33%
Austria 30% Netherlands 30%
China 30% New Zealand 20%
Dubai (DIFC) 30% Nigeria 30%
Finland 30% Norway 33.3%
France 33% Portugal 33%
Germany 30%
Romania 33%
Greece 33.3%
Russia 30%
Hong Kong 30%
Singapore 30%
India 25%
Indonesia 50%
South Africa 35%
Ireland 30% Sweden 30%
Italy 30% Switzerland 33.3%
Japan 33.3% United Kingdom 30%
Kuwait 30% USA none

Source: Allen & Overy (10/12/2008)

TIMETABLE ISSUES (IN THE UK)
The Bid Timetable
Date Event
Day before day of announcement Irrevocable undertakings (if any) obtained
Day of announcement (“A”) 8.00 am: Offer announced (including all its terms and conditions)
Up to 28 days after A (“D”) Offer document posted
D + 21 First closing date
D + 22 By 8.00am: If offer unsuccessful at the first closing date, Offeror
announces the level of acceptances and that the offer is being extended
for, normally, 14 days

D + 39 (timetable extended on Latest date for release of new information by the target
request of the Panel if merger
control condition not satisfied by
now)
D + 42 First date for withdrawal of acceptances
D + 46 Latest date for the posting of revised offers: if a revision is to be
made, Offeror announces revision of its offer and extension to 1.00 pm
on D + 60 and posts a new offer document


TIMETABLE ISSUES (IN THE UK) (CONTINUED)

D + 60 1.00 pm: Last time for receipt of acceptances counting towards
fulfilment of the acceptance condition

By 5.00 pm: Offeror announces whether it has received sufficient
acceptances to declare its offer unconditional as to acceptances. If
not, offer lapses; if so, offer normally declared wholly unconditional or
declared unconditional as to acceptances (e.g. if regulatory conditions
still outstanding)

D + 74 Latest date for the posting of consideration to those shareholders who
accepted the offer on or before D + 60, assuming the offer
becomes wholly unconditional on that day
D + 81 Day by which conditions (other than the acceptance condition)
must have been fulfilled or waived
D + 95 Latest date for the posting of consideration to shareholders assuming
the offer becomes wholly unconditional on D + 81
3 months after last day on which Normal cut-off for serving squeeze-out notices under Section 979 of
offer can be accepted the Companies Act 2006
Date of squeeze-out notice + 6 Acquisition of relevant minority shareholdings
weeks


COMPETITION LAW
 Competition law covers (in particular): mergers,
anticompetitive agreements (including cartels) and abuse
of a dominant position

Example: EU rules on level of dominance –
 Presumption of anticompetitive at 40%
 Indication at 25% market share (referral)


TAXABLE VS. NON-TAXABLE DEALS

 The basic tax rule in mergers:
 Exchanging stock = non-taxable transaction
 Cash or Debt = taxable

 In practice, it is more complicated
 Specialised tax advisors usually required


Day 1

Afternoon, Session 2

STRATEGY: CROSS BORDER / NEGOTIATION /
POST-DEAL


Advisors and their Roles

‘The only source of knowledge is
experience.’
Albert Einstein


DIFFERENT ADVISORS IN A DEAL

Investment Bank
Legal Accounting
General
Human Funding
Management Tax IT Specialist Others
Resources Bank
Consultants


A SERIAL ACQUIRER EXAMPLE: THE GE DEAL
TEAM
IT / Systems
Legal /
Finance / Tax Intellectual
Property

Deal Team
Leader HR
• Strategy
Compliance • Communications
• Culture

Operational Commercial
• Risk • Sales & Marketing
• Services & Processes • eCommerce
• Quality • Sourcing


FINANCIAL ADVISOR(S)
 Financial advisor role
 Gives general financial advice
 Drafts some, coordinates all documentation
 Controls other advisors and the client/directors
 Advises on target valuation and deal pricing
 Manages overall strategic direction of the offer
 Lend its good name to the transaction

 There may be two financial advisors
 Investment bank (advisory and possibly underwriting)
 Lending bank (funding: short-, medium-, long-term)

 Increasingly the financial advisor will play both roles, and also the
stockbroker role

 Financial advisor role differs depending on whether representing the bidder
or target.


INVESTMENT BANKERS WITH BIDDERS
 Finding acquisition opportunities, e.g. locating an acquisition target.
 Evaluating the target from the bidder’s strategic and other perspectives;
valuing the target; providing ‘fair value’ opinion.
 Devising appropriate financing structure for the deal, covering offer price,
method of payment and sources of finance.
 Advising the client on negotiating tactics and strategies or, in some cases,
negotiating deals.
 Collecting information about potential rival bidders.
 Profiling the target shareholders to ‘sell’ the bid effectively; helping the
bidder with presentations and ‘road shows’.
 Gathering feedback from the stock market about the attitudes of financial
institutions to the bid and its terms.
 Identifying potential ‘show stoppers’, such as antitrust investigation and
helping prepare the bidder’s case in any regulatory investigations.
 Helping prepare offer document, profit forecast, circulars to shareholders
and press releases, and ensuring their accuracy


INVESTMENT BANKS WITH TARGETS
 Valuing the target and its component businesses to negotiate a
higher offer price; providing fair value opinion on the offer.
 Helping the target and its accountants prepare profit forecasts.
 Arranging buyers for any divestment or management buyout of target
assets
 Getting feedback concerning the offer and the likelihood of its being
accepted
 Negotiating with the bidder and its team.
 If the bid is hostile or unsolicited:
 Crafting effective bid resistance strategies
 Finding white knights or white squires to block hostile bid.
 Monitoring target share price to track potential bidders and
provide early warning to target of a possible bid.


DEAL ADVISORY FEES
ANNOUNCED TARGET FINANCIAL
ANNOUNCED TARGET ACQUIRER TOTAL VALUE ADVISER FEE %
(M) ($ IN MILLIONS)

27 Jan 2012 Solutia Eastman Chemical $4,501 $14.3 0.32%
18 Apr 2012 Catalyst Health Solutions SXC Health Solutions $4,167 $25.0 0.60%
30 Jan 2012 Thomas & Betts ABB $3,867 $21.5 0.56%
19 Mar 2012 AboveNet Zayo Group $2,147 $16.3 0.76%
7 Jan 2012 Inhibitex Bristol-Myers Squibb $2,065 $21.5 1.04%
12 Mar 2012 Zoll Medical Asahi Kasei $2,063 $8.4 0.41%
9 Feb 2012 Taleo Oracle $1,838 $20.0 1.09%
21 Feb 2012 CH Energy Fortis $1,443 $6.2 0.43%

30 Jan 2012 Pep Boys-Manny Moe & Jack Gores Group $1,009 $7.8 0.77%

26 Jan 2012 Micromet Amgen $902 $15.0 1.66%
13 Mar 2012 Great Wolf Resorts Apollo Global Management $744 $5.2 0.70%
10 Apr 2012 X-Rite Danaher $626 $8.9 1.42%

6 Feb 2012 SureWest Communications Consolidated Communications Holdings $521 $7.1 1.36%

5 Mar 2012 Archipelago Learning PLATO Learning $324 $5.5 1.70%
7 Mar 2012 Transcend Services Nuance Communications $302 $4.3 1.42%
17 Jan 2012 Convio Blackbaud $272 $5.0 1.84%
16 Apr 2012 Dreams eBay $167 $2.7 1.62%
3 Feb 2012 Swank Randa $81 1.3% 1.65%
19 Mar 2012 Adams Golf Adidas $72 $2.2 3.06%
27 Feb 2012 Access Plans Aon $70 $2.1 3.00%

© Scott Moeller, 2012 announced between 1 January
Acquisitions and divestitures and 30 April 2012 where fees have been disclosed
Source: Bloomberg Course organised in co-operation with Eureka Financial Ltd

INVESTMENT BANK FEE LEVELS
Relationship between
Deal Size and Fee Level
3.50%

3.00%

2.50%
Fee Percentage

2.00%

1.50%

1.00%

0.50%

0.00%
0 500 1000 1500 2000 2500 3000 3500 4000 4500 5000
Deal Value ($ millions)

Acquisitions and divestitures announced between 1 January and 30 April 2012 where fees have been disclosed
Source: Bloomberg

LAWYERS
 Draft legal agreements and documents
 Draft ‘back end’ of offer and defence documents
 Give tax advice (sometimes)
 Handles competition concerns, if any, and other
regulatory issues
 Gives general corporate and regulatory advice
 Verification and (legal) due diligence
 May negotiate (or renegotiate) senior management and
other employee contracts.


ACCOUNTANTS
 Produce numbers as required
 3 year track record for offer document (not
required for offeree document)
 Profit forecast (but note their role)

 Give tax advice (when lawyers don’t)
 Take on bulk of due diligence
 Sometimes have specialist consultancy roles

76

GENERAL MANAGEMENT CONSULTANT
 Can advise at any point in the deal
 For smaller acquisitions, may include some of the roles noted for
investment bankers

Example: Services provided by Accenture
 Training:
 M&A Strategy and Pre-Deal Workshop
 Due Diligence Workshop
 What to do:
 Pre-deal Playbook
 Clean Room Playbook (when providing information during due diligence)
 Synergy Playbook
 Divestitures Playbook
 Merger Integration Playbook
 Toolkits (specifics):
 Merger Integration Toolkit

77

PUBLIC RELATIONS ADVISOR
 Helps with selling message

 Corporate ‘logo’ / spin

 Organises PR campaign
 Press briefings
 Presentations
 Media events

 But…don’t let them out alone

78

IN-HOUSE M&A CORE COMPETENCY
 Corporate Development group
 Usually populated with transfers from other areas of the company
 Can be a feeder to the divisions, especially related to deal integration
 Staff who can perform well in an uncertain and chaotic environment often
with extreme pressures on time and performance
 Sees the deal through from start to post-merger integration, often including
execution

 Deal Process and Integration Playbook
 Tools developed that are unique to the company
 Metrics for all phases of the deal
 Anticipates potential trouble areas
 Incorporates learning from one deal to another
 Links corporate strategy and SWOT analysis to the acquisition plans

79

KEY ELEMENTS OF IN-HOUSE M&A

Clear and compelling M&A Merger Integration Playbook Merger Integration Unit
Strategy

• Create/refine acquisition strategy • A set of diagnostic tools and • The Merger Integration Unit
“Why buy?” repeatable processes that is should bring together people who
tailored to the company’s can perform well in a chaotic,
• Assess strategic needs and gaps acquisition needs uncertain merger environment
relative to current business.
• Includes customized integration • A Core Integration Management
• Determine where and how methodologies, performance team will be responsible in
acquisitions may close Corporate metrics, tools, and templates realising the synergies and is also
and / or Business Unit gaps given a voice in synergy
• Includes diagnostic to assess a estimation of new deals
deal’s complexity and likely
integration trouble spots to identify
what must be integrated
successfully

Source: ‘The Role of M&A in Driving Convergence: Further Data Points’ (Accenture, March 2007)


Strategy

‘In preparing for battle I have always found that
plans are useless, but planning is indispensable.’
Dwight D. Eisenhower (1890–1969)


STRATEGIES FOR REALISING VALUE
 Categories of seller
 Private individuals – family firms, entrepreneurs
 Commercial – corporates of all sizes
 Financial – PE house, venture capital

 Rationale for selling
 Financial exit
 Diversification
 Generate liquidity
 Family retirement planning or dispute resolution
 Inderperformance
 Lack of strategic fit
 Tax strategy
 Opportunism

82

DEVELOPING AN ACQUISITION STRATEGY

 Define your acquisition objectives
 Establish specific acquisition criteria
 Focus on the company’s “wish list”: Is it the right
target?
 Is the market going to like the deal? Why?
 What is the business vision that justifies it?
 How much dilution in the buyer’s stock price will there
be?
 What will it take after the deal to make it work?

83

DISPOSAL ERRORS

 Process failures
 Lack of planning
 No grooming
 Separation issues ignored
 No sell-side due diligence
 Unreasonable price and terms expectations
 Wrong marketing approach

 Commercial failures
 Failure to identify a company that should be sold
 Wrong strategy – flotation, joint venture, PE house

84

TYPICAL LOSING PATTERN FOR MERGERS

 Targets are screened on the
basis of industry and company
growth and profitability
 Pressure is building to do a
deal
 Unrealistic synergies are
included in DCF analysis
 Negotiation concludes at a high
premium
 Post acquisition, the synergies
are found to be unachievable
 Company share price falls with
negative external comment
85

REASONS FOR MERGERS AND ACQUISITIONS

 There are good and bad reasons for acquiring another
company

 At its core, the headline communications
demonstrate:
 Expansion
 Synergistic gain
 Financial factors, including investment (e.g., private equity
returns)

 But - unfortunately - other motives may also provide
the impetus

86

WHY DO A DEAL?
Good Questionable: Bad:
But still risky Russian Roulette ‘Betting the farm’
•Improve target company •‘Big is Better’: Roll-up •Hubris / Managerialism
performance strategy
•Management •Reduce competition •Pure diversification
•Operating synergy •Reactive to industry changes
•Financial synergy (‘me-too’ deals) •Hide internal problems
•Prevent a competitor from
•Remove excess capacity from doing the same deal
the industry •Taxes
•‘Shake things up’: Redefine
•Accelerate market access for the industry
the buyer or seller •Undervaluation / ‘Buying
cheap’
•Get skills, technologies, IP •Opportunism: ‘Because it’s
faster or at a lower cost than available now’
building. •Shareholder pressure
(usually a major shareholder)
•Pick winners early •Public relations benefits
•Advisor recommendation
(being sold a deal)

Source: McKinsey (2010) / lecturer
87

IDENTIFYING COMPANY STRATEGY

 Acquirer must know its own existing core competences
and therefore its gaps
 …to be filled in through acquisitions
 Desired competences must be kept in mind throughout the
M&A process: planning, screening, due diligence and
negotiation

 Acquirer’s familiarity with the target and industry will
assist in the communications with the target once
negotiations have begun
 Reducing uncertainty
 Assisting in retaining key personnel

88

STRATEGIC JUSTIFICATION:
SIX QUESTIONS TO EVALUATE
1. Sound Strategic Assessment?
 Value-creating potential of the acquisition
 Transfer of skills must meet three conditions:
 Similar enough to be meaningful
 Activities lead to competitive advantage
 Skills represent a significant source of competitive advantage
 Possible mistakes: considering the target only and not the combined firm, static
analysis and not the industry’s future

2. Shared View of Purpose?
 Without a shared understanding of the strategic role of the acquisition, there will
be no clarity for the integration
 Possible destruction of value

3. Clear view of the sources of Benefits and Potential Problems?
 Identify potential risks, and alternatives to mitigate those risks
 Consider that proponents of the acquisition will downplay the risks in 'selling' the
idea to senior management

89

STRATEGIC JUSTIFICATION:
SIX QUESTIONS TO EVALUATE
4. Consideration of Organisational Conditions?
 Synergy is more than cost control and technical integration
 Key factor is who will manage the various departments in the 'new'
organisation

5. Plan for Implementation Timing?
 Planning for the process, not just the end-point
 Milestones need to be set

6. Maximum Price Set?
 Must set 'walk-away' price so that all the benefits will not be bid away
in the heat of the process
 Pricing is dynamic, and will change as market conditions and better
information becomes available

90

LINKING STRATEGY TO SELECTION:
10 GUIDELINES
1. Pay for the past, consider the present but buy the future
• Evaluate the business on expected future performance after you buy it

2. Buy a good business and make it great
• Buying a mediocre business at a low price is more expensive than
buying a good business at a fair price

3. Ingredients are nothing without a recipe
• Can you put the parts of the business together at a reasonable cost?

4. Fall in love with the cashflow not the product
• Remain objective

5. Stick to your knitting
• Do what you do best
91

LINKING STRATEGY TO SELECTION:
10 GUIDELINES
6 Autopilot
• Can the business run on its own so that you can concentrate on driving
the profits?

7 What holds the gold?
• Where are the hidden values?

8 Can we sell the deal?
• You must be enthusiastic about the business and able to sell the idea to
others

9 Identify and evaluate what is missing
• Sometimes the smallest improvements yield remarkable results

10 Timing and cost
• How long will it take to implement and how much will it cost?

92

EVALUATE THE STRATEGY: TOOLS
 Competitive position
 Porter’s Five Forces analysis

 Resource analysis
 7M’s

 Product/market strategy
 Ansoff matrix

 Long term strategic impacts
 P.E.S.T.E.L. analysis

 S.W.O.T. summary

93

USING INDUSTRY STRUCTURE ANALYSIS: PORTER
BARRIERS TO ENTRY
Questions:
Do barriers to entry exist?
How large are the barriers?
Are they sustainable?
Potential Actions:
Acquire to achieve scale in
final product or critical
component
Lock up supply of critical
industry input
SUPPLIERS CUSTOMERS
Questions: Questions:
Is supplier industry Is the customer base
concentrating? concentrating?
Is supplier value/cost Is value added to
added to end product high, COMPETITIVE customer end product
changing? high, changing?
ADVANTAGE
Potential Actions: Potential Actions:
Backward - integrate Create differentiated
product
Forward - integrate

SUBSTITUTES
Questions:
Do substitutes exist?
What is their price/
performance?
Potential Action:
Fund venture capital and
joint venture to obtain key
skills
Acquire position in new
segment
94

THE 7 M’S MODEL

 Analysing strategic resources
 Materials
 Machines
Where is the competitive
 Method advantage?
 Manpower
How to integrate?
 Management
How to retain?
 Markets
 Money

 Relates as well to the due diligence
95

ANSOFF DEVELOPMENT MATRIX

Product
Present New
Market

Market Product
Present
penetration development

New Market
Diversification
development

96

S.W.O.T. PLUS P.E.S.T.E.L. ANALYSIS

Political Economic Social Technology Environmental Legal

Strengths

Weaknesses

Opportunities

Threats

97

Due Diligence

‘Know thy enemy and know thyself; in a
hundred battles you will never be in peril.’
Sun Tzu 400-320 BC

98

PRE-SALE PLANNING

 Vendor due diligence
 Advantage for vendor or purchaser?
 Identify deal breakers – pre- and post-closing

 Grooming and separation issues

 Close down marginal activities

 Control the deal – no surprises

 Information memorandum and due diligence
package

99

SOME THOUGHTS ON DUE DILIGENCE

Needs to start before the deal is announced
•But most active period is when the deal is public

Led from the top…
•But needs to involve all divisions and staff at all levels
•Outside experts
Issues of public vs non-public information
•Assume that anything disclosed WILL be public
•Non-disclosure agreements
Methods used:
•Initial information memorandum
•Virtual data rooms
•Physical data rooms

100

M&A Strategy and Valuation, Oct 3 and 4 - 2012

M&A Strategy and Valuation, Oct 3 and 4 - 2012

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