M&A Sale Process

1. M&A Sale Process Chapter 6

2. Objectives • discuss appropriate vocabulary used in deal process • examine difference between process for auction and process for negotiated sale • introduce types of valuation methods used • discuss stages in auction process • organization and preparation • first round • second round • negotiations • closing

3. Key Vocabulary • sell-side advisor • buy-side advisor • broad auction • targeted auction • negotiated sale • strategic buyer vs. financial buyer • teaser / pitch book • confidential information memorandum (CIM) • definitive agreement

4. Valuation Paradigm • Remember value creation! The most important part of any comparison of alternatives should be their impact on shareholder’s wealth. • need to determine if growth being projected is sustainable • internal growth vs. inorganic growth • growth alternatives • contractual relationships – licensing agreements, co-marketing agreements, joint purchasing agreements, franchising • strategic alliance • joint venture • minority investment

5. Restructuring and Sale • lengthy process • Boone and Mulherin (2002) found median length of targeted restructuring is 345 days • finds that investor reactions to initial and subsequent announcements are significantly positive • motives for restructuring • adverse effects of industry turbulence • need to get out of unattractive businesses • other motives????

6. Ways to Restructure or Sell • sale of minority interest or joint venture interest • divestiture – types: • partial sale of assets • LBO • liquidation • carve out • spin off • tracking stock • financial recapitalization

7. Organization and Preparation • Identify seller objectives and determine appropriate sale process • Perform sell-side advisor due diligence and preliminary valuation analysis • Select buyer universe • Prepare marketing materials • Prepare confidentiality agreement

8. Organization and Preparation • Identify seller objectives and determine appropriate sale process • What are seller’s priorities in sale? • How large a group of buyers does seller want to target? • Are there any time constraints? • process timeline and detailed “roadmap” drafted with idea of targeted timeframe for launch, initial bids, closing

9. Organization and Preparation • Perform sell-side advisor due diligence and preliminary valuation analysis • due diligence by sell-side advisor • gather information to best position target to potential buyers • view financial projections from mgt from perspective of potential buyers • due diligence: • think like an investor • choice between narrow and broad-scope due diligence • be fact-based but make knowledge-oriented decisions • short concise reports for mgt but leave a significant “paper trail”

10. Marketing Documents • for a firm trying to sell itself, they will prepare 2 types of documents early on • teaser – quick synopsis of firm and why it might be attractive to potential buyers • confidential information memorandum (CIM) – more detailed information about seller including financial information and possibly future financial projections

11. First Round • Contact prospective buyers • negotiate and execute CAs with interested parties • Distribute CIM and Initial Bid Procedures letter • Prepare management presentation • Set up data room • Prepare stapled financing package • Receive initial bids and select buyers to proceed to second round

12. CIM & Initial Bid Procedures Letter • buyers may engage buy-side advisors at this time to help with valuation of the target and to determine financing alternatives • they will also help determine initial offer • initial bid procedures letter – sent to prospective buyers after CIM is provided • date and time when written but nonbinding bids must be received

13. Confidentiality Agreement • information differs depending on whether process is auction or negotiated sale • commits buyer to hold in confidence all nonpublic information received from target and to use it for no purpose other than making the transaction • outlines information to be provided and the way through which it will be accessed • agreement may even commit buyer not to disclose publicly the merger negotiations without approval of the target • agreement will enable target to seek injunctions in event information is misused or about to be disclosed • sometimes prevents buyers from soliciting to hire target employees for a certain period of time • standstill agreement and restrictions on clubbing

14. Initial Documents • topics covered may include: • retention of advisors • confidentiality information • exclusivity of information • termination of process • standstill • term sheet • letter of intent (LOI) • documents and information included within will differ depending on whether we are discussing an auction or negotiated sale

15. Financing Package • through investment bank or “partner” a pre-packaged financing package may be tentatively “offered” during the initial round • gives potential buyers an idea of what the minimum package is available for financing • no requirement for buyer to use this – can put together better package on his own if possible • financing package generally prepared by “independent” advisors to put together viable financing structure to buy the firm

16. Second Round • conduct management presentations • facilitate site visits • provide data room access • distribute final bid procedures letter and draft definitive agreement • receive final bids

17. Definitive Agreement • The definitive agreement is a risk management device focused only on the completion of the transaction. • Deal Mechanics • Representations and Warranties • Pre-Closing Commitments • Other Agreements • Closing Conditions • Termination Provisions • Indemnification • if litigation occurs after the transaction, provisions here must explain to the court who committed to doing what and with what consequences

18. Negotiations and Closing • Negotiations • evaluate final bids • negotiate with preferred buyer(s) • select winning bidder • render fairness opinion • receive board approval and execute definitive agreement • Closing • obtain necessary approvals – regulatory and shareholder • financing and closing

19. Valuing Firms • Think like an investor • Intrinsic value is unobservable; we can only estimate it • An opportunity to create value exists where price and intrinsic value differ • So many estimators, so little time – it helps to have a view • Exercise estimators of intrinsic value to find key value drivers and bets • Think critically; triangulate carefully • Focus on process, not product • When in doubt, see Rule #1 Bruner (Applied Mergers and Acquisitions)