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M&A Process
M&A Process
M&A Process
Business
Plan
Acquisition
Plan
Search
Screen
First
Contact
Due
Diligence
&
Negotiatio
n
Even for an established player already operating in a certain space, this exercise
can be conducted every couple of years or so to determine whether to refocus /
disengage from a particular segment
Industry Analysis
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Competition
among
Existing Firms
Bargaining
Power of
Customers
Degree of
Government
Regulation
Potential for
New
Entrants
Potential for
Substitute
Products
Bargaining
Power of
Suppliers
Industry
profitability
Global
Exposure
Bargaining
Power of
Labour Force
External analysis (customers, current competitors, potential entrants, substitute products, and suppliers)
Internal analysis (strengths and weaknesses as compared to the competition)
Key questions:
Do our strengths enable us to pursue opportunities identified in the external analysis?
Do our weaknesses make us vulnerable to the threats identified in the external analysis?
Example: Automotive industry
If our targeted customer values fuel efficiency, do our strengths enable us to produce high quality fuel
efficient cars better than our competition?
To what extent do our strengths help us satisfy our customers needs better than the competition?
To what extent do our weaknesses make us vulnerable to losing customers?
External analysis (customers, current competitors, potential entrants, substitute products, and suppliers)
Internal analysis (strengths and weaknesses as compared to the competition)
Opportunities/threats (from external and internal analyses)
Summarizing strengths and weaknesses versus opportunities and threats using a SWOT matrix
Example: Amazon.in
Opportunity is to be perceived as the preferred online retail department store by 100 crore
Indians
Threat is the existence of online retailers like Flipkart, Snapdeal and increasing consolidation from
offline retailers
External analysis (customers, current competitors, potential entrants, substitute products, and suppliers)
Internal analysis (strengths and weaknesses as compared to the competition)
Opportunities/threats (from external and internal analyses)
Business vision/mission
Business Strategies (cost, differentiation, focus, or some combination)
Implementation strategy (selected from a range of options)
Solo ventures or go it alone
Merger or acquisition
Alliances (including JVs, partnerships, and licensing)
Minority investments and
Asset swaps
Strengths
Weaknesses
Strategic Options
Solo venture
Partner
Acquire
Solo venture
Partner
Acquire
Exit business
Adobe: Makes web design tools (e.g., Acrobat, Flash, and Creative Suiteincl. Photoshop and
Illustrator) and sells customers perpetual licenses
Targeted Markets/Spaces1: Web designers, online retailers, and media firms (e.g., News Corp)
Omniture: Makes software capable of tracking how users utilize web sites (e.g., tracking page
views); users pay monthly fees to subscribe to service
Targeted Markets/Spaces: Online retailers, advertisers, and media firms
At $3 billion in annual revenue, Adobe 10 times larger than Omniture
Both firms losing revenue
Adobe faced difficulty in upgrading existing clients and adding new clients due to recession
Omniture revenue erosion reflected introduction of free analytical software by Google and
reduced advertising spending due to recession
Note markets or spaces consist of customers with homogeneous needs
Plan has to address 3 different types of risk that any acquisition brings:
Operating risk Higher the amount of diversification, higher the operating risk
Financial risk Risk posed by the acquisition to shareholder value, credit rating
Overpayment risk - dilution of EPS or a reduction in its growth rate resulting from paying
significantly more than the economic value of the acquired company.
Labor costs: The target firm should be nonunion and not subject
to significant government regulation.
objectives)
Timetable
Defined by activity completion dates, deliverables (what is to
be achieved), and individual (s) responsible for satisfying
objectives
Determine maximum size of acquisition in terms of P/E. sales, cash flow, purchase price, etc.
Assess internal management capabilities (Can acquirer continue to manage current businesses as well as
integrate the acquired firm?)
Timetable
Resource/capability review
Management preferences
Search plan
How the search process will be initiated and carried out
Key search criteria include industry/geographic area and maximum
size of acquisition
Relatively few criteria used to avoid limiting list of potential targets
objectives)
Timetable
Resource/capability review
Management preferences
Search plan
Twotostep
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At this stage, buyers are normally presented with a bare-bones teaser document
which provides high level business and financial details about the target
In addition to the industry and maximum size of transaction used in the search
process, additional criteria could include:
Market segment
Product line
Profitability
Degree of leverage
Market share
Cultural compatibility (e.g., AOL/Time Warner)
strategy depends on
Size of target
Whether target is publicly or privately held
Acquirers timeframe for completing transaction
Trust and relationship building when time is not critical
Discussing value
Preliminary legal documents:
Confidentiality agreements
Term sheets
Letter of intent
Profiling
Target
Market &
Firm
If Not
Interested,
styles
Walk
Away1
First
Contact
Decision:
Proceed to
Closing or
Walk Away
Negotiation Process
Alternatively, the potential buyer could adopt a more hostile approach such as initiating a tender offer to achieve a majority stake in the target firm.
Concurrent activities:
Refining valuation
Deal structuring
Conducting due diligence (buyer, seller, and lender)
Developing the financing plan
Due Diligence
Exhaustive review of records and facilities and typically continues throughout the negotiation phase
DD is typically a cross-functional exercise involving participation from different teams across Sales, HR,
marketing, engineering, finance, legal and senior management oversight
The purpose of due diligence is
Eliminate possibility of fraud
Ascertain the correctness of information already furnished by the seller
Validate assumptions made in the business case
Get finer understanding of the synergies possible post acquisition
Refine communication and outreach plan for customers / suppliers / employees per interaction with senior
management
Understand and minimize any cultural differences between the firms
Buyers can require sellers to address any issues uncovered during due diligence or provide
representations and warranties in legal documents so as to protect the buyers from any future fallout
Due Diligence
Objectives:
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Validate preliminary valuation assumptions (e.g., growth, cost,
productivity, etc.)
Identify additional sources/destroyers of value (i.e., those
providing upside potential & fatal flaws)
Activities:
Detailed legal (e.g., contracts) and financial record reviews
Management interviews (consistency in questions asked)
Site visits (e.g., inspect equipment, inventory, etc.)
Customer and supplier interviews
Terms
Non Disclosure Agreement (NDA): a legalcontractbetween at least twopartiesthat outlines
confidential material, knowledge, or information that the parties wish to share with one another for
certain purposes, but wish to restrict access to or by third parties
Letter of Intent (LOI): A short contract which usually signifies intent of the acquirer to proceed
with a transaction and is usually non-binding on both parties
Term Sheet: Term usually used in the Venture Capital world where it outlines conditions for
financing a start-up firm, including:
(a) amount raised, (b) price per share, (c) pre-money valuation, (d) liquidation preference, (e) voting rights,
(f) anti-dilution provisions, and (g) registration rights
Data Room
Data Room is a virtual or a real conference room where all financial, business and asset related
records of the target are maintained and made available to the buyers agents during the due
diligence process
In case the data room is made available online or via a website Virtual Data Room (VDR)
Typical contents of a VDR include:
Business plans
Financials for the last few years and past completed quarters
Typical contracts customer, supplier, employee
Shareholder agreements
Billing records
Tax paid certificates
Statutory compliances etc.
Form of Payment
Tax Considerations
Accounting Considerations
Acquisition Vehicle
Post-Closing Organization
Legal Form of Selling Entity
Consideration structures
Debt free/cash free deals
Deferred consideration
Earn-outs
Locked box structures
Typical SPAs also include language around Conditions Precedent, representations & warranties,
damages for breaches of warranties, indemnities, non-compete agreements etc.
Where C, PVS and PVND represent Cash, PV of acquirer stock, and PV of acquirer debt issued to seller
Decision to acquire Autonomy, which focused on intelligent search and data analytics solutions, was
announced along with a strategic shift to abandon HPs tablet computer and consider getting out of the
personal computer business
HP CEO Leo Apotheker wanted to use Autonomys business to transform H.P. from a low-margin producer of
printers, PCs and other hardware into a high-margin, cutting-edge software company (essentially follow
IBM and Dells lead)
Deal valued Autonomy at around 13 times 2010 revenue
September 2011 - HP board fires Apotheker amid reports of growing unpopularity and rumours of
a spin-off of its PC business
Meg Whitman is appointed as CEO
April 2012 - Autonomy boss Mike Lynch leaves, along with a number of other Autonomy employees
November 2012 HP announces a write-down of $8.8 billion related to the acquisition, with over
$5 billion due to alleged accounting irregularities
Autonomy had been extensively shopped around till HP took the plunge
Oracle had taken a closer look earlier, had decided that even at $6 billion, the company was overvalued
Oracle had passed on the deal since questions were raised about the accounting and authenticity of the
revenue figures
Questions remain as to whether the HP board had even sanctioned a fairness opinion or whether
the most basic form of valuation, a DCF, was done and if so, using what assumptions
In fact, it later emerged that Catherine Lesjak, the then CFO of HP, had opposed the deal internally
and tried to persuade the board that the deal was not in the best interests of the shareholders
So the question remains, why did HP massively overpay on an acquisition and fail to do due
diligence given that the target was well-known for having financial issues?
Phase 8: Closing
Obtain all necessary consents:
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Shareholder
Regulatory (e.g., state and federal)
Third party (e.g., customer, lender, and vendor)
Assigning Customer and Vendor Contracts
Complete definitive agreement
Purchase price
Payment mechanism of the purchase price, modalities, timelines for payment etc.
Allocation of purchase price
Used in a asset sale, where purchase price is allotted to the assets being
purchased, as a result of which the assets are revalued and buyer can record a tax
gain from the resulting increased D&A
Phase 8: Closing
Assumption of liabilities
Buyer normally assumes all known and unknown liabilities in a share purchase deal unknown liabilities are
covered by reps & warranties
Covenants
Covenants are agreements by the parties about actions they agree to take or refrain from
taking between signing the definitive agreement and the closing. For example, the seller may
be required to continue conducting business in the usual and customary manner
Phase 8: Closing
Closing conditions
Indemnification
Reimbursement of the other party for a loss incurred following closing for which they
were not responsible. The definitive agreement requires the seller to indemnify or
absolve the buyer of liability in the event of misrepresentations or breaches of
warranties or covenants. Similarly, the buyer usually agrees to indemnify the seller
Loan documents
Agreements may also contain language stating that agreement is void if buyer
cannot arrange for financing of the transaction, although a breakup fee is usually
involved in that case
GE Capital Vendor Financial Services bought Chase Manhattan Banks leasing business
Hybrid acquisition - parts of which fit into one or more existing businesses while other parts stand alone or
become joint ventures
Communication
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An effective communication plan will address employees, customers, vendors
Communication is best done face to face
Employee retention (e.g., retention bonuses)
Senior managers of the target company that the buyer chooses to retain are asked to
sign employment agreements as a condition of closing
Use of Bonuses, stock options, and enhanced sales commission schedules
Honeywell and GE both have a structured post closing evaluation process involving a 30 day, 90 day and 360 day
presentation to the executive management board which consists of the CEO
Integration planning
Developing communication plans
Creating a new organization
Developing staffing plans
Functional integration
Integrating corporate cultures
Deal made it the nations second largest supermarket chain, with more than 1,000 stores
In the first quarter of operation, combined operating profits fell 15% to $185 million, despite an increase in sales of
1.6% to $8.98 billion
Albertsons proceeded to update the Lucky supermarket stores that it had acquired in California and to combine
the distribution operations of the two supermarket chains
Albertsons substantially underestimated the complexity of integrating an acquisition of this magnitude
Spent about $90 million before taxes to convert more than 400 stores to its information and distribution systems as well as to
change the name to Albertsons
By the end of the year following closing, Albertsons stock had lost more than one-half of its value.
Customers:
Under-commit and over-deliver
Acquisition-related customer attrition
Meet commitments to current customers
Suppliers: Develop long-term vendor relationships
Investors: Maintain shareholder loyalty by presenting a compelling vision.
Communities: Build strong, credible relationships
Functional Integration
Due diligence data revalidation: Verify assumptions
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Performance benchmarking: Compare actual performance with industry best practices
Functions
Manufacturing and operations (facility consolidation)
Information technology (90% of acquirers combine operations)
Finance (implement internal controls and financial reporting)
Sales (implementing cross-selling frequently a challenge)
Marketing (avoid brand confusion)
Purchasing (potential 10-15% reduction in purchasing costs)
Research and development (set priorities consistent with strategy)
Human resources (decentralizing hiring & training; centralize benefits administration,
management systems and planning)
Boosting assets under management from $400 billion to $650 billion, making it the sixth largest money
manager in the world
Cultural divide separating the two firms represented a potentially daunting challenge
A major motivation for the acquisition was to obtain the well-known skills of the elite Pimco money
managers to broaden Allianzs financial services product offering
Pimcos money managers stated publicly that they wanted Allianz to let them operate independently, the
way Pimco existed under their former parent, Pacific Mutual Life Insurance Company
Allianz had decided not only to run Pimco as an independent subsidiary but also to move $100 billion of
Allianzs assets to Pimco.
Moreover, most of the top managers have been asked to sign long-term employment contracts and have
received retention bonuses
Joachim Faber, chief of money management at Allianz, played an essential role in smoothing over cultural
differences. Led by Faber, top Allianz executives had been visiting Pimco for months and having quiet
dinners with top Pimco fixed income investment officials and their families
The intent of these intimate meetings was to reassure these officials that their operation would remain
independent under Allianzs ownership.
Company posted six quarterly losses and took more than $4.5billion in write-offs, while its stock
plummeted more than 60%
Heavy competition from the Chinese, especially Huawei, prompted heavy discounting and further hit to
profitability
Most of the damage was because of the wide difference in the cultures of the two companies
Alcatels entrepreneurial culture as opposed to Lucents centrally controlled cultures
Also, the company had miscalculated the ease with which layoffs and cost cutting could be
achieved in France, which is highly protective of its workforce and has tougher labour laws
As a result, Lucent employees went on the defensive assuming that they would be fired first, since the
French employees could not be touched
This combined with a slowing economy, rabid competition and rapidly changing industry landscape
ensured that the Alcatel Lucent merger was never a success
In April 2015, Nokia acquired Alcatel Lucent for an all stock deal worth ~$16.6B
Things to remember...
Post-closing integration is a critical phase of the M&A process
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Integration can be viewed as a process consisting of six activities
Except in highly complex situations, combining companies should be done quickly to
Minimize key employee, customer, and supplier turnover
Eliminate redundant assets, and
Achieve returns expected by shareholders
Successfully integrated M&As are those whose management candidly and continuously
communicate a clear vision, set of values, and unambiguous priorities to all stakeholders
Unlike M&As, integrating business alliances is usually a lengthy process because of shared
control and the overarching need to gain consensus on key decisions