1.

The Basics of Mergers and Acquisitions

Understanding Key Terms
Why Bad Deals Happen to Good People
Why Do Buyers Buy, and Why Do Sellers Sell?
 Examples of organic growth are hiring additional salespeople, developing new products,
and expanding geographically.
 example of inorganic growth is an acquisition of another firm, something that is often
done to gain access to a new product line, customer segment, or geography.
 What Is Private Equity?
Private equity is an alternative investment class and consists of capital that is not listed
on a public exchange. Private equity is composed of funds and investors that directly
invest in private companies, or that engage in buyouts of public companies, resulting in
the delisting of public equity.

What Is a Divestiture?
A divestiture is the partial or full disposal of a business unit through sale, exchange,
closure, or bankruptcy. A divestiture most commonly results from a management
decision to cease operating a business unit. A divestiture may also occur if a business
unit is deemed to be redundant after a merger or acquisition, if the disposal of a unit
increases the sale value of the firm

 Merge Pros:
o enter a new market, add a new product line, or increase distribution reach.
o Gain a trend of a given industry such as rapid technology changes, or changes in
consumers’ preferences in food and beverages.
o need to transform a firm’s corporate identity (In 2003, the video game company
Infogrames, for example, gained instant worldwide recognition by acquiring and
adopting the old but famous Atari brand)
o need to spread the risk and cost of R&D
o means of developing an international presence and expanding their market
share.
o it is less expensive to buy brand loyalty and customer relationships than it is to
build them.
WHY BAD DEALS
HAPPEN TO GOOD PEOPLE
Classic mistakes include:
 a lack of adequate planning,
 an overly aggressive timetable to closing
 a failure to really look at possible post-closing integration problems
 and, worst of all, projecting synergies to be achieved that turn out to be illusory.
 WHY DO BUYERS BUY,
AND WHY DO SELLERS SELL?
• Common Seller Motivations
1.     The desire to retire
2.     Lack of successors
3.     Business adversities
4.     Inability to compete
5.     Lack of capital to grow
6.     Inadequate distribution system
7.     To eliminate personal guarantees or
other personal obligations
8.     No ability to diversify
9.     Age and health concerns
10. A particular amount of money is
needed for estate planning
11. Irreconcilable conflict among owners
12. Losing key people or key customers
• Common Buyer Motivations
1.     The desire to grow
2.     Opportunity to increase profits
3.     Desire to diversify
4.     Value-driven acquisition strategy
5.     Buying up competitors
6.     Using excess capital
7.      Achieving new distribution channels
or efficiencies
8.     Diversifying into new products or
geographic markets
9.     Particular people, existing businesses,
or assets are needed
10. Access to new or emerging
technologies
11. Need to deploy key people or
resources efficiently
12. Strategic fit between buyer and
seller’s current operations
2.
Preparing for the Dance: The Seller’s Perspective
Conducting a Thorough EOTB Analysis
Preparing for the Sale of the Company
Common Preparation Mistakes
Other Considerations for the Seller
Getting Deal Terms and Structure That Fit the Seller’s Objectives, Personal
Needs, and Post-closing Plans
1. Preparing for the Dance: The Seller’s Perspective
Why companies are sold? We mentioned above motivations for both seller and buyer,
we list some others below:
a. Glass ceiling. The owner has taken the growth and development of the business
as far as it can go
b. Burnout. Running a business full-time can be very demanding, and not everyone
can sustain these pressures for a long period of time.
c. Serial entrepreneurship. Some entrepreneurs are well qualified to build
businesses to a certain level, but then prefer to sell them and use the proceeds to
build other businesses rather than take the existing company to the next level
d. Estate planning. When there is no family member as a successor
2. The Selling Process and Seller’s Decisional Path
1. Reaching the Decision to Sell
   1. Understanding Your Motivations and Objectives
   2. Building the Foundation for Value
   3. Timing and Market Factors
2. Getting the House in Order
   1. Assembling Your Advisory Team
   2. Legal Audit and Housekeeping
   3. Identifying and Inventorying Your Tangible and Intangible Assets
   4. Establishing Preliminary Valuation Ranges
5. Preparing the Offering Memorandum
6. Estate and Exit Planning
3. Marketing Strategy
1. Targeting Qualified Buyers
2. Use of Third Party Intermediaries
3. Narrowing the Field of Candidates
4. Choosing a Dance Partner
1. Selecting the Most Qualified and Synergistic Candidate (or Financial Candidate,
depending on your objectives)
2. Preliminary Negotiations
3. Execution of Confidentiality Agreement
4. Preliminary Due Diligence
5. Fighting It Out
1. Execution of More Detailed Letter of Intent or Memorandum of Understanding
2. Extensive Negotiations and Strategic Adjustments
3. Structuring the Deal
4. Accommodating the Buyer’s Team for Legal and Strategic Due Diligence
5. Doing Due Diligence on the Buyer
6. Preparing for the Closing
1. Preparation and Negotiation of the Definitive Legal Documents
2. Meeting Conditions to Closing
3. Obtaining Key Third Party Consents
7. THE CLOSING: Post-closing Issues
1. Monitoring Post-closing Compensation/Earn-Outs
2. Facilitating the Post-closing Integration Plan
3. Post-closing Challenges—See Chapter 13.
 3. Conducting a Thorough EOTB Analysis
EOTB: Eyes Of The Buyer, which should be done by the seller and its advisory team. To
step on buyer’s shoes and find the opportunity that the buyer will get or problem will be
solved, EOTB should be based on no sacred cows (no old ideas or leaders to be followed
while they are not in right track)
4. Preparing for the Sale of the Company
The preparation process should always begin with a strategy meeting of
all members of the seller’s team. It is the job of this team to:
a. Identify financial goals of the transaction
b. Understand pricing range of the business according to market dynamics
c. Determining the logical buyers of the business ( and why seller’s business and
what it will add to the buyer)
d. Identify legal and financial hurdles(obstacles) to a success of the transaction
e. Draft offering memorandum
f. Prepare action plan list
g. Identify how and when prospective buyer will be contacted
Steps:
1- Selecting seller’s team
2- Action plan
3- Market dynamics and valuation
4- The target list
5- Legal Audit
6- Preparing offering memorandum
7- Getting the house in order
8- The game plan
Now we will discuss each step as mentioned above:
1- Selecting seller’s team
The team includes advisors capable to aid the seller in the transaction, such as
investment banker, certified public accountant and legal counsel
To be able to:
A. Understand financing issues may be faced by the buyer CPA
B. Know tax implication on the seller on and after the transaction CPA
C. Have experience in merge and acquisition and have access to potential
buyer investment banker.
D. The legal counsel role includes
a. Corporate housekeeping: such as cleaning up corporate records
b. Negotiation and preparation of letter of intent (LOI)
c. Negotiating definitive purchase agreements with the buyer’s counsel
d. Working with the seller and the CPA in connection with certain post-
closing and estate- and tax-planning matters
Confidentiality agreement: should contain
A. Definition of Confidential Information.
B. Use of Confidential Information
 C. Permitted Disclosure
D. Proprietary Rights
E. No License or Right to Reproduce
F. Noncompetition.
G. No Further Obligation
H. No Waiver
I. elimination.
J. Entire Agreement
2- The Action Plan
It is done by deal team with consideration of appropriate duration (normally takes 6
months)
3- Market dynamics and valuation
it is critical to understand the current market dynamics affecting the potential
valuation range for the business and if the acquisition will be hot (when it is a sector
with potential rise in share price, and support optimistic valuation) or cool (vice versa
of hot)
after the recession, reaching funds became more difficult which affected M&A
so, the seller should consider below in the current economic context:
A. Satisfaction of lending source (which buyer counting on to get finance)
B. Valuation to be reasonable
C. a buyer’s ability to close the deal is typically more valuable than the money
that is brought to the table.
4- The target list
a. Generate a target list of companies that may be interested in the selling entity
b. determining which companies are a relatively straightforward exercise.
c. applying a logical filter to reduce the list to a more focused set of buyers.
5- The legal Audit
 It is to get the company ready for the buyer’s analysis and due
diligence investigation.
 it is critical to identify and predict any problems that will be raised by the
buyer and its counsel.
 The goal is to find the bugs before the buyer’s counsel discovers them for you
 For example, now may be the time to resolve any disputes with minority
shareholders, complete the registration of copyrights and trademarks, deal
with open issues in your stock option plan, or renew or extend your favorable
commercial leases. may also be a good time to set the stage for the prompt
response of those third parties whose consent may be necessary in order to
close the transaction, such as landlords, bankers, key customers, suppliers, or
venture capitalists.
Showing the potential for better long-term performance could earn
you a higher selling price, as well as assist the buyer in raising the
capital needed to implement the transaction.
 6- Preparing the offering memorandum
Offering memorandum is a gathering of initial materials to be given to potential
buyers and their advisors, it should include:
Executive summary Sales, marketing, and growth strategy

Market opportunity Competitive landscape

History
Business overview
Products, services, and pricing
Current ownership profile
Property, plant, and facilities
Manufacturing and distribution
 
Management team and organizational overview
Risks and litigation
Historical financial information
Normalized or recast financial data (with footnotes)
Projected financial performance
Future growth opportunities
Supplemental materials

7- Getting the house in order

such as preparation of board and shareholder minutes and maintenance of regulatory
filings. Once the transaction process has been started, things move very quickly.
There is rarely time to deal with housekeeping matters during this process.
8- The Game Plan
Many approaches can be followed as formal auction which required standard
materials to be sent to the prospective buyers, but this approach is not preferred by
many buyers, so it may close the door for such buyers.
Another less formal approach can achieve better yields as the investment bankers can
access to many prospective buyers, so materials may be tailored to convince each
party.
Another approach is through references relations between CEOs.
5. Common Preparation Mistakes
a. Impatience and indecision
Impatience is to be too anxious to sell ( wants to sell rapidly) will affect the
price submitted by the buyer, while to be in case of indecision (takes too long
time for decision) you will lose the opportunity.
b. Telling others at the wrong time
You have to be sure from who knows what, when, how and why. As telling key
people early may have prompted them to try to stop the deal. That is not only at
level of employees but also customers, vendors, shareholders…etc.
c. Retaining third-party transactions with people you’re related to.
If you have any relation with any, those employees should follow you when deal
is secured.
d. Leaving loose ends: such as minority shareholders, you should buy their
ownership or agree that you will sell together. To avoid the derail of the
transaction.
e. Forgetting to look in your own backyard: if you checked the key customers,
vendors or even employees, you may find the buyer
 f. Deluding yourself or your potential buyers about the risks or weaknesses
of your company. Don’t deceive yourself or the buyer to avoid losing credibility
6. Other Considerations for the Seller
1. The Importance of Recasting
recasting shows how your business would look if you reflected normal figures on
financial statements as if the company is public (as most of private company try to
minimize revenue and profits), so seller to recast for last 3 years’ data and to exclude
owner personal expenses and owners relatives salaries and to adjust salaries to the
market levels.
2. Selling the pro forma: as selling price depends on the 5YP. Which considers growth
and other elements
3. Price vs. Terms: many sellers focus on prices rather than terms which is a mistake.
4. Prequalifying Your Buyers: you should prequalify (measure) the buyer, especially
if the relation will continue after closing the deal. In addition to that, the buyer should
meet one or more of pre-closing conditions.
7. Getting Deal Terms and Structure That Fit the Seller’s Objectives,
Personal Needs, and Post-Closing Plans.