Veritas Financial Group

1. Veritas Financial Group Introduction to the Financial Universe Week 2 – Mergers and Acquisitions

2. cash Corporation Investors securities reinvest Secondary markets dividends, etc. Cash flow tax Government Today’s discussion Review from last week / Today’s focus

3. Today’s Agenda – M&A • What are Mergers and Acquisitions? • Why do companies enter M&A deals? • How do they pay for these deals? • Case Example: Kraft-Cadbury deal • What role does the investment bank play in M&A transactions? • How do companies figure out how much to pay?

4. Retail Banks Commercial Banks Refresh: Intro to the Banking System Investment Banks* Universal Banks

5. Arranging Financing Advising on M&A Introduction to the Banking System • Client: • Corporations • Financial Sponsors • Services • Advising Buyer • Advising Seller • Client: • Corporations • Financial Sponsors • Governments • Large non-profits • Services • Equity • Debt • Convertible Securities

6. M&A: What is it? • An acquisition takes place when one company acquires a smaller one • A merger takes place when two companies or relatively equal size form one larger company. • Under current law, all mergers are technically acquisitions. • One company is always the “surviving” company, even if it is a merger of equals.

7. Why complete a M&A deal? Source: Wikipedia

8. Assets = Liabilities + Shareholders Equity What are they actually buying? Shareholders Equity = Assets – Liabilities The Big Picture: - Mergers and Acquisitions enable a company to get ownership of another company - There are many reasons a company might want to do this

9. Public Companies Private Companies Clarification: Public versus Private • Refers to Equity Ownership • Equity, in the form of shares, is split up and listed in a stock exchange • Shares are made available to the public • The ‘shareholders’ own a small piece of the company If own voting shares, get a vote on corporate affairs • Also refers to Equity ownership • Equity is owned in chunks by founders, individuals, investors • Ownership is more concentrated and controlled • Not traded on the stock market

10. Clarification: Public versus Private M&A can be done in many forms: • A public company with another public company • A private company ‘taking over’ or merging with a public company • A public company ‘taking over’ or merging with a private company • A private company and a private company • An acquisition by an investment firm

11. Why complete a M&A deal? • Financial Reasons • Investment will produce attractive return • Strategic Reasons • Growth • Access to new markets • Access to new products • Synergies • Cost and revenue • Eliminate competitors Source: Wikipedia

12. Revenue Synergies • Allow the merged company to take in more money than the sum of the two prior companies, all at the same costs. • Example: Bank of America buys MBNA (credit card firm) • BofA markets cards in its branches, so revenue increases with only a minimal increase in costs.

13. Overly Simplified Hypothetical • BofA sells no credit card products • MBNA has 1 million credit accounts • BofA buys MBNA and sells MBNA legacy products to BofA customers using existing branches, tellers, etc. • BofA subsequently sells 500,000 cards. • This is a revenue synergy.

14. Cost Synergies • Allow the merged company to reduce costs below the total costs of the two prior companies, but without experiencing a drop in revenue. • Example: Coca-Cola buys Vitaminwater • Coca-Cola shuts down/sells Vitaminwater distribution network • Coca-Cola then uses its existing distribution and marketing network to sell Vitaminwater products. • Goal: eliminate redundancy.

15. Question If a company is worth $10 billion, would you ever pay $15 billion for it?

16. Synergies and the Deal Premium • Deal Value - Market Value = Deal Premium • A deal premium may be due to synergy potential • If the company is worth $10 billion, but the synergies are worth $5 billion, as long as the company pays less than $15 billion, it will come out ahead.

17. Synergies and Deal Premium: Illustration

18. How do companies pay for M&A deals? • Stock • Better for shareholders if there is confidence in the deal • Shareholders expectations still high • Cash or Debt • Better for shareholders if the deal is shaky • Easier to close if there is opposition • Difficult to raise cash • Most deals are paid by both shares-issuance and cash

19. Case Study: Kraft and Cadbury • Largest European food and beverage deal on record • Why might Kraft and Cadbury want to merge? Synergies! • Cadbury has strong growth in emerging markets, like India and Latin America. • Kraft (Oreo cookies and Philadelphia cream cheese) derives over half its sales from the mature North American market

20. Case Study: Kraft and Cadbury • Kraft was advised by Lazard, Citi, Deutsche Bank and Centerview Partners • Cadbury was advised by Goldman Sachs, Morgan Stanley and UBS. • The Deal: • The cash-and-stock agreement • Valued each Cadbury share at 840 pence • Split between 500p of cash and 0.1874 new Kraft shares

21. Role of Banks in M&A Transactions • Primary role of banks is to advise clients on both sides of deals • Valuation • How much should we pay? How much should we accept? • Price depends on synergies. • Bankers spend months scouring the ‘books’ for synergies. • Consultants often assist with synergies and PMI • Banks also help arrange financing

22. The Pitchbook • Main output from Bankers • Can Include: • Executive Summary • Bank’s Experience • Market and Company Positioning • Valuation • (Potential Buyers) • (Financing)

23. Valuation • Three common ways to analyze ‘value’ • Generally all three are taken into account • Discounted Cash Flow (“DCF”) • “Present Value” of how much cash this company generate in the future • Comparable market values (“Comps”) • What are peers trading at? • Past transactions multiples • How much have another companies paid in the past?

24. What is a DCF? Discounted Cash Flow: A way of valuing an asset or company through the concept of time value of money Would you rather have a dollar today or a dollar tomorrow?

25. What is present value? Would you rather have a dollar today or a dollar tomorrow? • You should always value a dollar today over a dollar tomorrow • This is because something might happen before you get the dollar tomorrow • So, dollars in the future are worth less than a dollar today • If you want to give me dollars in the future, I will need to be compensated somehow for taking on this risk This is the concept behind “present value”

26. What is a DCF? Every DCF analysis needs two things: Projected cash flows A discount rate

27. What is a DCF? • Let’s go to the Excel…

28. What is a DCF? • To get to the present value, you need a discount rate • A discount rate is interest rate used to calculate the present value of the cash flows • Rate of compensation that you need to receive be willing to have money in the future versus receiving it today • The discount rate can be subjective • Weighted Average Cost of Capital (WACC) • Capital Asset Pricing Model (CAPM) • Market based

29. Leading Investment Banks for M&A Bulge-Bracket Firms2010 Global M&A League Tables • Goldman, Sachs & Co. • Bank of America Merrill Lynch • JPMorgan Chase & Co. • Morgan Stanley • Citi Boutique Firms • Lazard • Greenhill & Company • Perella Weinberg • Moelis & Company • William Blair

30. Why are the largest private equity deals in 2011 so much smaller than they were in 2007? • Many of the biggest PE deals in the last two years have been in the healthcare industry, why do you think that is? • Carlyle and H&F paid a 30% premium for the stock, why do you think they feel comfortable doing this? In the News: PPD LBO