4. M&As’ Process
Was the justification for buying the
target firm based on a sound business
strategy?
M&A as a business growth strategy?
Mergers and acquisitions are not
considered a business strategy but
rather a means of implementing a
corporate organizational structure
Corporate-level strategies
Generally cross
business unit
organizational lines
Business-level strategies Pertain to a specific
operating unit
Implementation strategy
The way in which the firm
chooses to execute the
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rather a means of implementing a
business strategy
The business plan articulates a mission
or vision for the firm and a business
strategy for realizing that mission for all
of the firm’s stakeholders.
Stakeholders include such constituent
groups as customers, shareholders,
employees, suppliers, lenders,
regulators, and communities
Implementation strategy
Functional strategies
chooses to execute the
business strategy
Detail major function
that will support the
business strategy
Contingency plans
trigger points
real options
Specify actions taken as
an alternative to the
firm’s current business
strategy
Contingent on certain
events occurring
A number of alternatives
5. The M&As process consists of 10 identifiable phases
How the potential acquirer initiates first contact depends on the urgency
of completing a transaction, the size of the target, and the availability of
intermediaries with highly placed contacts within the target firm.
If the target is interested in proceeding, a letter of intent formally defining
the reasons for the agreement, responsibilities of the two parties while
the agreement is in force, and the expiration date is negotiated.
M&As’ Process – cont’
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the agreement is in force, and the expiration date is negotiated.
Confidentiality agreements covering both parties also should be
negotiated.
There is no substitute for performing a complete due diligence on the
target company.
Integration planning is a highly important aspect of the acquisition process
that must be done before closing. Without adequate planning, integration
is unlikely to provide the synergies anticipated by, at the cost included in,
and on the timetable provided in the acquisition plan.
6. M&As’ Process – cont’
1. Business Plan
2. Acquisition Plan
3. Search
4. Screen
5. First Contact
Pre Purchase Decision Activities
Phase 1. Develop a strategic plan for the entire business (Business Plan).
Phase 2. Develop the acquisition plan supporting the business plan (Acquisition
Plan).
Phase 3. Actively search for acquisition candidates (Search).
Phase 4. Screen and prioritize potential acquisition candidates (Screen).
Phase 5. Initiate contact with the target (First Contact).
Phase 6. Refine valuation, structure deal, perform due diligence, and develop
financing plan (Negotiation).
FOCUS
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5. First Contact
6. Negotiation (Purchase
Decision)
Refine
Valuation
Structure
Deal
Perform
Due
Diligence
Develop
Financing
Plan
Decision:
Close or
Walk Away
7. Integration Plan
8. Closing
9. Integration
10. Evaluation
Post Purchase Decision Activities
Phase 7. Develop plan for integrating the acquired business (Integration Plan).
Phase 8. Obtain necessary approvals, resolve post closing issues, and execute
closing (Closing).
Phase 9. Implement post closing integration (Integration).
Phase 10. Conduct post closing evaluation of acquisition (Evaluation).
FOCUS
7. M&As’ Process – cont’
Meeting of possibly takeover
parties
Confidentiality agreement and
stand-still agreement
Letter of Intent
In short,
M&As process as a series of largely
independent events, culminating in
the transfer of ownership from the
seller to the buyer
In theory, thinking of the process as
1
2
3
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Due diligence investigation
Negotiating the SPA
Closing
In theory, thinking of the process as
discrete events facilitates the
communication and understanding
of the numerous activities required
to complete the transaction
The process can be condensed into
six events as short-form from phase
5-6-7-8
4
5
6
8. 1. Meeting of possibly takeover parties
Possible initiated by investment bankers
Deliberations high within the companies
Forming of M&As/takeover teams by the parties (consisting
of i.e. of lawyers, accountants and finance experts)
M&As’ Process – cont’
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In this step, the approach suggested for initiating
contact with a target company depends on:
Discussing Value
The size of the company (publicly or privately held)
The acquirer’s timeframe for completing a
transaction
9. 2. Confidentiality agreement and stand-still agreement
Confidentiality agreement: all provided information and the
upcoming merger itself are confidential information
Stand-still agreement: the bidder is prohibited to buy or sell
shares in the target during the takeover process
M&As’ Process – cont’
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Stand-still agreement: the bidder is prohibited to buy or sell
shares in the target during the takeover process
A confidentiality agreement (also called a
nondisclosure agreement) is generally mutually
binding, in that it covers all parties to the transaction
The agreement should cover only information that is
not publicly available and should have a reasonable
expiration date
10. 3. Letter of Intent
The governing document for the deal that the potential acquirer can show to
prospective financing sources go-shop provisions
Some pages with guiding principles or a large document with detailed
agreements (e.g. manner of determining the price or the conditions precedent to
the takeover or the break up fee)
The LOI may create legal liabilities if one of the parties is later accused of not
negotiating in “good faith”
M&As’ Process – cont’
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negotiating in “good faith”
The LOI generally stipulates the initial areas of agreement:
The rights of all parties to the transaction
Certain provisions protecting the interests of the parties
Such conditions could include:
Access to all of the seller’s books and records
Having completed due diligence
Obtaining financing
Approval from boards of directors, stockholders, and regulatory bodies.
However, the LOI could result in some legal risk to either the buyer or seller if the deal is
not consummated.
11. 4. Due diligence investigation
Due diligence means severe diligence (very hard work - an
expensive and exhausting process) and is the investigation of the books
of the target by the takeover team of the bidder (they look for unpleasant surprises,
like polluted soil or large unknown debts, the sum of customer-market share, assets,
etc.) (legal, economic, and tax)
Conclusions are stated in due diligence report
M&As’ Process – cont’
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due diligence report
9
Due Diligence is the process of validating assumptions underlying valuation, it
involves three primary reviews:
(1) a strategic, operational, and marketing review conducted by senior
operations and marketing management
(2) a financial review directed by financial and accounting personnel
(3) a legal review conducted by the buyer’s legal counsel
The seller can determine if the buyer has the financial wherewithal to finance
the purchase price.
12. 5. Negotiating the SPA (Shares Purchase Agreement)
Provisions regarding the price, way of payment (e.g. in cash or shares),
conditions precedent (permission of authorities or corporate bodies like
shareholders) and representations and warranties Covenant!
Representations: certain described facts or circumstances that are true according to the
seller and target (they are liable in case of incorrectness) E.g. the captive market
(represented by number of LIS-productive > 15 Millions, if Not correct (i.e. LIS-productive <
15 Millions)- seller is liable.
M&As’ Process – cont’
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15 Millions)- seller is liable.
Warranties: the target and seller take the responsibility for certain known facts (e.g. target
will pay for the possibly damages in a started court procedure)
“Reps and warranties” are intended to provide for full disclosure of all information germane to the transaction.
They typically cover the areas of greatest concern to both parties. Areas commonly covered include the following:
corporate organization and good standing
capitalization
financial statements
absence of undisclosed liabilities
Current litigation
Contracts
title to assets
taxes and tax returns
no violation of laws or regulations
employee benefit plans
labor issues
insurance coverage
13. M&As’ Process – cont’
6. Closing
Signing of the share purchase agreement and relating documents by the parties
Relating documents: e.g. shareholder resolutions and board resolutions SPA and
documents in binder (closing binder/bible) and each page initialed by the signing
parties
The satisfaction of the conditions negotiated determines whether a party to the
agreement has to go forward and consummate the deal
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agreement has to go forward and consummate the deal
and then … champagne
14. Closing may be complicated by the number of and complexity of the documents
required to complete the transaction. In addition to the agreement of purchase and
sale, the more important documents often include the following:
1) Patents, licenses, royalty agreements, trade names, and trademarks.
2) Labor and employment agreements.
3) Leases.
4) Mortgages, loan agreements, and lines of credit.
5) Stock and bond commitments and details.
6) Supplier and customer contracts.
M&As’ Process – cont’
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6) Supplier and customer contracts.
7) Distributor and sales representative agreements.
8) Stock option and employee incentive programs.
9) Health and other benefit plans (must be in place at closing to eliminate lapsed coverage).
10) Complete description of all foreign patents, facilities, and investments.
11) Insurance policies, coverage, and claims pending.
12) Intermediary fee arrangements.
13) Litigation pending for and against each party.
14) Environmental compliance issues resolved or on track to be resolved.
15) Seller’s corporate minutes of the board of directors and any other significant committee
information.
16) Articles of incorporation, bylaws, stock certificates, and corporate seals.
16. Once the acquisition appears to be operating normally, evaluate the actual
performance to that projected in the acquisition plan
Success should be defined in terms of actual to planned performance
Too often, management simply ignores the performance targets in the
acquisition plan and accepts less than plan performance to justify the acquisition
How to measure M&As success?, many questions should be asked!
Post M&As Evaluation
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How to measure M&As success?, many questions should be asked!
Six month after the M&As;
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?
What can be done to ensure that the same mistakes are not made in
future acquisitions?
17. Post M&As Evaluation – cont’
How to measure M&As success?, many questions should be asked!
Twelve month after the M&As;
is the business meeting expectations?
If not,
what can be done to put the business back on track?
Is the cost of fixing the business offset by expected returns?
Are the right people in place to manage the business for the long term?
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Are the right people in place to manage the business for the long term?
Twenty-four month after the M&As;
does the acquired business still appear attractive?
If not,
should it be divested?
If yes,
when and to whom?
18. Many approaches can be used to ensure and evaluate the M&As’ successfulness, for
instance, Integration Management Office (IMO).
This approach introduced by PricewaterhouseCoopers in 2008 , since then according
its survey, only 44% of deals were considered to be a “financial success”, and even
less, just 38%, were considered an “operational success”.
3 Phases for IMO:
Phase-1:
Post M&As Evaluation – Integration Management Office
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Phase-1:
Set the course
Plan for day-one
Design the future state
Phase-2:
Execute 100 day plan
Create Detailed integration plan
Phase-3:
Maximize value through future state implementation
19. Post M&As Evaluation – Integration Management Office – cont’
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20. Post M&As Evaluation – Integration Management Office – cont’
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The IMO plans the degree of integration
after evaluation of several key factors.
21. To conduct M&As with higher rate of success, there are a number of rules (tools)
should be followed. Further, since M&As are often accompanied with risks, the rules
to be following should be interacted with the way its quantify risks.
One of many tools is the Post Merger Integration (PMI), studied by Deloitte
Development LLC-2010.
According to PMI, success isn’t based on share prices, but on the extent to
which targets like; cost synergies, cross selling or know-how transfer were
met.
Post M&As Evaluation – Post Merger Integration
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met.
However, for a true merger success, reaching these targets alone isn’t enough.
Factors like implementation costs going over budget or key personnel leaving
the company in droves may result in major delays, even as key targets are attained.
Thus PMI has extended the definition of success to include criteria such as
Implementation efficiency and social compatibility:
its relationship with employees (i.e. example, employee participation, working
hours, pay, health and social security benefits, etc.)
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22. Post M&As Evaluation – Post Merger Integration – cont’
PMI consists of identification 300 factors that affected the Merger integration, and
can be compressed as 35 key factors as inherent risk during the process.
For instance:
The quality of financial figures:
P/L (Pro Forma Balance Sheet)
Liquidity Ratio (assets to debt)
Leverage Ratio (debt to assets/cash)
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Leverage Ratio (debt to assets/cash)
Activity Ratio
Profitability Ratio (ROA, ROE, ROI)
Operationalized execution plan viability
Organizational and management structural differences
Changes at the managerial level
The integration manager’s experience
Limited human resource capacity
23. Post M&As Evaluation – Post Merger Integration – cont’
Statistically, PMI condensed these 35 factors into four categories of risks:
Synergy
Structure
Quality of financial figures
Complexity of synergy goals
Execution plan viability
Business process heterogeneity
Org. & Mgt struct. Diff.
People
Project
Financials
Time horizon
KPIs
Synergy targets
Synergy sources
Implement speed
Working steps
Planning horizon
Feasibility
Spans of control
Approval
Profit-center
Cost-center
Remuneration
Products
Customers
Regions
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Synergy Structure
Project People
Execution plan viability
Business process heterogeneity
Lacking expertise
Limited human resource capacity
Realignment at the executive level
Changes at a managerial level
Extent & direction of downsizing
Feasibility
Plausibility
Regions
Output ratio
Steering Committee
Mgt. Background
PMI expertise
Team leader
Employees
Steering Committee
Integr. Manager
Team leader
Project incentives
Redundancies
Nomination
External hires
Redundancies
Relocations
Redundancies
Balance
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24. Post M&As Evaluation – Post Merger Integration – cont’
Synergy Structure
Project People
High Risk Medium Risk Low Risk Very Low RiskVery High RiskRisk’ Categories
Synergy Structure
Success Rate 75%
Type-A “Mikado”
Success Rate 27%
Occurrence:
35%
17%
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Project People
Synergy Structure
Project People
Synergy Structure
Project People
Success Rate 27%
Type-B “Dominos”
Success Rate 17%
Type-C “Poker”
Success Rate 1%
Type-D “Russian Roullete”
17%
32%
16%
25. Post M&As Evaluation – Post Merger Integration – cont’
Further, PMI conduct such a survey regarding their myths formulas of success during
the implementation of M&As:
No.1: “The faster, the better!”
No.2: “National mergers are less risky than cross-border mergers!”
No.3: “Employee resistance is the greatest barrier to integration!”
No.4: “Soft factors are more important than hard factors!”
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No.4: “Soft factors are more important than hard factors!”
What do you percept about that myths?
We aren’t talking about past history, lets the recent data figure out!