MERGERS & ACQUISITIONS

LECTURE 7, 8

THE M&A PROCESS

 Main content

 Phase 1: Building the Business Plan

 Phase 2: Building the Merger - Acquisition Implementation Plan
 Phase 3: The Search Process
 Phase 4: The Screening Process
 Phase 5: First Contact
 Phase 6: Negotiation
 Phase 7: Developing the Integration Plan
 Phase 8: Closing
 Phase 9: Implementing Postclosing Integration
 Phase 10: Conducting a Postclosing Evaluation
 Phase 1: Building the Business Plan
Develop a strategic plan for the entire business

External Internal Define a mission Set Objective

Analysis Quantitative measures
Analysis statement of financial and
Where & how to Summarizes the External nonfinancial
SWOT analysis Analysis
compete performance

Strategic controls Functional Implementation Select a

monitor actual
performance,
implement incentive
systems, take corrective
actions as necessary.
strategy strategy business
defines the roles, duty, Act independently, partner strategy
resource requirements of with others, or acquire/merge
how the business intends
each functional area with another firm
to compete
 Phase 2: Building the M&A Implementation
Plan
Resource/Capability
Plan Objectives Management Guidance Timetable
Evaluation
• Must consistent with • Internal CF in excess • management must • recognizes all of the
the firm’s strategic of normal operating provide guidance to key events that must
objectives requirements + funds those responsible for take place.
from the equity and finding and valuing • Each event should have
• Including financial & debt markets the target as well as beginning and ending
• 3 types of risk: negotiating the deal. dates and milestones
nonfinancial along the way and
objective • Operating risk
• Financial risk should identify who is
responsible
• Overpayment risk
• The timetable of
events should be
aggressive but realistic.
EXAMPLES OF MANAGEMENT GUIDANCE
PROVIDED TO ACQUISITION TEAMS
 Phase 3: The Search Process
• The first step is to establish a small number of primary selection
criteria: the industry and the size of the transaction.
Deal size is the maximum purchase price a firm is willing to pay, expressed as a
maximum P/E, book, cash flow, or revenue ratio, or a maximum purchase price
stated in terms of dollars.
• It is better to limit the search to a specific geographic area.
 Phase 4: The Screening Process
• Shorten the initial list by using secondary selection criteria

secondary
selection
criteria

Degree of Cultural
Market segment Product Line Profitability Market Share
Leverage Compatibility
 Phase 5: First Contact
 How initial contact is made depends on:
• the size of the company
• whether the potential acquirer has direct contacts with the target
• whether the target is publicly or privately held
• the acquirer’s time frame for completing a transaction.

 Getting a range in discussing value (based on due diligence, valuation…)

 Typically, parties to M&A transactions negotiate a confidentiality

agreement, a term sheet, and a letter of intent (LOI) early in the process.
 Phase 6: Negotiation
• The negotiation phase often is the most complex aspect of the
acquisition process.
• The negotiation phase consists of four iterative activities that may
begin at different times but tend to overlap:
• Conducting Due Dilligence
• Refining Valuation
• Deal Structuring
• Developing the Financing Plan
Viewing negotiation as a process
 Phase 7: Developing the Integration Plan
• Contract-Related Issues: integration planning also involves addressing
human resource, customer, and supplier issues that overlap the
change of ownership.
• Earning Trust: building credibility and trust to integrate firms
successfully.
• Choosing the Integration Manager and Other Critical Decisions: The
buyer should designate an integration manager who possesses
excellent interpersonal and project management skills.
 Phase 8: Closing
• Gaining the Necessary Approvals
• Assigning Customer and Vendor Contracts
• Completing the Acquisition/Merger Agreement: Deal Provisions, Price,
Allocation of Price, Payment Mechanism, Assumption of Liabilities,
Representations and Warranties, Covenants, Cosing conditions…
 Phase 9: Implementing Postclosing
Integration
• Communication Plans
• Employee Retention
• Satisfying Cash Flow Requirements
• Employing Best Practices
• Cultural Issues
Phase 10: Conducting a Postclosing
Evaluation
 The primary reasons for conducting a postclosing evaluation are:
 to determine if the acquisition is meeting expectations
 to undertake corrective actions if necessary, and
 to identify what was done well and what should be done better in future deals.
 Do Not Change Performance Benchmarks
 Ask the Difficult Questions:
• After 6 months, what has the buyer learned about the business?
• Were the original valuation assumptions reasonable?
• If not, what did the buyer not understand about the target company, and why?
• What did the buyer do well?
• What should have been done differently?
External consultant
External consultant fee

Success • Depend on the

success of the
fee deal

• Do not depend on
Upfront the success of the
fee deal

How to calculate the fee?

 External consultant fee
Lehman formula
• The fee formula was set by Lehman Brothers “5-4-3-2-1” from 1960s (Lehman
formula)
External consultant fee
Double Lehman formula
 External consultant fee
Double Percentage Lehman formula
 Example
A securities firm is working as an M&A consultant of a $8m deal. What
is the charged fee by the securities firm in the following case:
a. The firm is applying Lehman formula
b. The firm is applying Double Lehman formula
c. The firm is applying Double Percentage Lehman formula
 CHAPTER SUMMARY

1. Alternative Takeover Tactics

2. Alternative Takeover Defenses

3. The Impact of Takeover Defenses on Shareholder’s Value