Introduction-to-M-A PDF

Introduction to M&A
Why acquire another company?
Product-line
Synergies
extension
Deal with Acquire

overcapacity Why acquire R&D/patents
another
Defensive M&A: Gain access to
Eliminate company? new distribution
Competition channels
Increase supply- Acquire key

chain power personnel
© 365careers, 2014
M&A: Deal lifecycle and buyers
• Start-up firms are • Growth firms are very • Firms in this stage often • Companies with
often acquired for attractive for acquirers merge, in order to deal declining revenues are
their innovative ideas with overcapacity often purchased by
• Defensive M&A healthier competitors
Revenue
Mergers, LBOs who are interested in

• Start-up firms rarely
their know-how or
acquire other firms
brands
Takeovers,
Restructuring
Development Growth Maturity Decline

Time
Type of investors
Corporate Corporate Corporate Corporate

Private Equity Private Equity Private Equity Hedge Funds,
Venture Capital Specialist Funds
© 365careers, 2014
Type of M&A processes
The deal process

Confid. Info Process Due Binding Short Negotiati Tender
Teaser
agreem. Memo Letter diligence offers List on offer
Private
Transaction
Auction
Listed
target
The process usually lasts between 2-6 months. Some auctions could even last up to an year
A brief summary of the company with a short description of its business.

Teaser Often does not include the company’s name
© 365careers, 2014
The deal process

Teaser
Private
Transaction
Auction
Listed
target
An agreement not to distribute reserved information. The target needs to be

Confidentiality
assured that the access it gives to the bidders would not lead to a leakage of
agreement strategic information
© 365careers, 2014
The deal process

Teaser
Private
Transaction
Auction
Listed
target
Information A document providing a description of the target’s business, financials,

Memorandum management team, product portfolio, market positioning etc.
© 365careers, 2014
The deal process

Teaser
Private
Transaction
Auction
Listed
target
Defines the essential elements of the transaction: timing, valuation range,

Process Letter other conditions, due diligence access
© 365careers, 2014
The deal process

Teaser
Private
Transaction
Auction
Listed
target
The target firm provides access (limited or full) to its financial, tax and legal
Due Diligence documentation. Often, information about the target is provided in a data room
© 365careers, 2014
The deal process

Teaser
Private
Transaction
Auction
Listed
target
Offers made by the participants in an auction, indicating how much they are
Binding Offers willing to offer for the target. As the name suggests, these offers are binding
© 365careers, 2014
The deal process

Teaser
Private
Transaction
Auction
Listed
target
After receiving indications about possible valuation, the target and its
Short List advisors decide which participants will be left in the auction and receive due
diligence access
© 365careers, 2014
The deal process

Teaser
Private
Transaction
Auction
Listed
target
Negotiation includes various elements under consideration. The structure of

Negotiation the price, earn out mechanisms, price adjustment terms etc.
© 365careers, 2014
The deal process

Teaser
Private
Transaction
Auction
Listed
target
A tender offer is submitted to a listed firm. It is a public, open offer addressed

Tender offer to all stockholders which offers to buy their shares at a specified price
© 365careers, 2014
Valuation of target companies
Why is it necessary to perform a valuation of the target company?

Find Fair Value Approach the right
Arrange financing
of the Transaction Buyers
 Find Fair Value  Approach Bidders who  Define how much needs
could afford the firm to be financed
 Value Synergies:
Corporate buyers  Justify financing in front
of banks
 Value IRR:
Private equity
Discounted Cash Trading Transaction

Flows (DCF) Multiples Multiples
Inputs: Inputs: Inputs:
• Top line forecast for 5-10 • Comparable firms which are • Comparable firms which
years, listed have been subject to a
• Estimated cost of capital • A measure indicating transaction
• Growth rate after the operating profitability (e.g. • A measure indicating
forecast period EBITDA) operating profitability (e.g.
EBITDA)
Use a combination of them in order to

triangulate results
© 365careers, 2014
Payment options in M&A deals
Financial liabilities Special treatment of:

- • Pension obligations
Net Debt • Tax liabilities
Cash
• Litigations
Enterprise • Overdue payables
Value Enterprise value Equity paid with:
Equity -/+ • Cash
Net debt • Stock
• Deferral – “Vendor loans”, “Earn outs”
Type of
payment Cash Stock Earn-out
Advantages  Does not dilute  Aligns the interests of  Aligns the interests of
ownership new and old ownership new and old ownership
 Crystal value for seller  No need for financing  Helps to bridge expectations
Disadvantages  If cost of debt is high,  Dilutes ownership  Seller needs to monitor

could be heavy the firm post closing
 No upside from future  Subject to valuation  Seller depends on the
performance Buyer’s management
© 365careers, 2014
Financial vs. Corporate Buyers
Type of Financial Corporate

Buyer Buyer Buyer
Focus in the • Focus on cash flows, • Unlock synergies

transaction and capital gains
Investment
• 3-5 years • Long term
Horizon
Type of deal • Full Acquisition • Full Acquisition,

or consortia Merger, Joint Venture
Leverage in the • High • Medium

transaction
• Following the company • Integration of the
Management
through Board Management of the two
involvement
representatives companies
• Multiples • Synergies
Valuation • Cash flows • Growth
focus • Cost of capital • Long term view
© 365careers, 2014

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Introduction to M&A

Why acquire another company?

Deal with Acquire

Increase supply- Acquire key

Mergers, LBOs who are interested in

Development Growth Maturity Decline

Corporate Corporate Corporate Corporate

The deal process

A brief summary of the company with a short description of its business.

The deal process

An agreement not to distribute reserved information. The target needs to be

The deal process

Information A document providing a description of the target’s business, financials,

The deal process

Defines the essential elements of the transaction: timing, valuation range,

The deal process

The deal process

The deal process

The deal process

Negotiation includes various elements under consideration. The structure of

The deal process

A tender offer is submitted to a listed firm. It is a public, open offer addressed

Why is it necessary to perform a valuation of the target company?

Discounted Cash Trading Transaction

Use a combination of them in order to

Financial liabilities Special treatment of:

Disadvantages  If cost of debt is high,  Dilutes ownership  Seller needs to monitor

Type of Financial Corporate

Focus in the • Focus on cash flows, • Unlock synergies

Type of deal • Full Acquisition • Full Acquisition,

Leverage in the • High • Medium

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