220 likes | 325 Views
Implementation: Search Through Closing --Phases 3-10. A man that is very good at making excuses is probably good at nothing else. —Ben Franklin. Course Layout: M&A & Other Restructuring Activities. Part I: M&A Environment. Part II: M&A Process.
E N D
A man that is very good at making excuses is probably good at nothing else. —Ben Franklin
Course Layout: M&A & Other Restructuring Activities Part I: M&A Environment Part II: M&A Process Part III: M&A Valuation & Modeling Part IV: Deal Structuring & Financing Part V: Alternative Strategies Motivations for M&A Business & Acquisition Plans Public Company Valuation Payment & Legal Considerations Business Alliances Private Company Valuation Regulatory Considerations Search through Closing Activities Accounting & Tax Considerations Divestitures, Spin-Offs & Carve-Outs Takeover Tactics and Defenses M&A Integration Financial Modeling Techniques Financing Strategies Bankruptcy & Liquidation Cross-Border Transactions
Current Learning Objectives • To Provide Students with an understanding of • how to conduct an acquisition search, to screen potential candidates, and to make initial contact with potential targets • the four concurrent activities within the negotiation phase and how they interact to determine purchase price, and • the importance of pre-closing planning and post-closing execution
The Acquisition Process • Phase 1: Business Plan • Phase 2: Acquisition Plan • Phase 3: Search • Phase 4: Screen • Phase 5: First Contact • Phase 6: Negotiation • Phase 7: Integration Plan • Phase 8: Closing • Phase 9: Integration • Phase 10: Evaluation
Phase 3: Initiating the Search • Two step procedure: • Establish primary selection criteria (e.g., industry and maximum size of transaction) • Develop search strategy to identify potential targets using computerized databases; directory services; legal, banking, and accounting firms; and the Internet. • Brokers and finders: • A broker has a fiduciary responsibility to either the seller or buyer. • A finder introduces both parties without representing either party. • Fee structures are normally negotiated and may include a basic fee, a closing fee, and an “extraordinary” fee (i.e., fees paid if closing delayed due to obtaining antitrust approval, a hostile takeover, etc.) • Put everything in writing
Phase 4: The Screening Process • As a refinement of the search process, screening involves increasing the number of selection criteria to reduce the list of potential candidates. • 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)
Phase 5: First Contact • The appropriate approach strategy depends on • Size of target • Whether target is publicly or privately held • Acquirer’s 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
Phase 6: Viewing Negotiation as a Process If No, Walk Away1 Perform Due Diligence Profiling Target Market & Firm First Contact Structuring the Deal Form of Acquisition Form of Payment Tax Considerations Accounting Considerations Acquisition Vehicle Post-Closing Organization Legal Form of Selling Entity Develop Financing Plan/ Structure Decision: Proceed to Closing or Walk Away If Yes, Initiate Negotiations Refine Initial Valuation Negotiation Process 1Alternatively, the potential buyer could adopt a more hostile approach such as initiating a tender offer to achieve a majority stake in the target firm.
Phase 6: Negotiation • Negotiating strategy • Initially determine areas of agreement and disagreement • Solve the easiest areas of disagreement first • Establish and maintain trust throughout the process • Concurrent activities: • Refining valuation • Deal structuring • Conducting due diligence (buyer, seller, and lender) • Developing the financing plan
Key Deal Structuring Considerations • Form of Acquisition • Form of Payment • Tax Considerations • Accounting Considerations • Acquisition Vehicle • Post-Closing Organization • Legal Form of Selling Entity
Phase 6: Buyer Due Diligence During Negotiation • Objectives: • 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
Determining the Purchase Price • Total consideration (TC): PVTC = C+ PVS+ PVND Where C, PVS and PVND represent Cash, PV of acquirer stock, and PV of acquirer debt issued to seller • Total purchase price (TPP) or enterprise value (EV): PVTPP = PVTC+ PVAD Where PVTPP, PVTC, and PVAD = PV of total purchase price, PV of total consideration, and PV of assumed debt • Net purchase price (NPP): PVNPP = PVTPP+ PVOAL- PVDA = (C+ PVS+ PVND+ PVAD) + PVOAL- PVDA Where PVOAL and PVDA represent PV of other assumed liabilities and PV of discretionary assets.
Reliable Appliances, a leading manufacturer of washing machines and dryers, acquired the stock of competitor, Quality-Built, which had been losing money during the last several years for $100 million in cash. Reliable also assumed $20 million (present value = $18 million) of Quality-Built’s outstanding long-term debt. To help minimize losses, Quality-Built reduced its quality-control expenditures and began to purchase cheaper parts. Quality-Built knew that this would hurt business in the long run, but it was more focused on improving its current financial performance in the month’s prior to being sold. Reliable Appliances saw the acquisition as a way of obtaining market share quickly at a time when Quality-Built’s market value was the lowest in 3 years. Quality-Built had been selling its appliances with a standard industry 3-year warranty. Claims for the types of appliances sold tended to increase gradually as the appliance aged. Quality-Built’s warranty claims’ history was in line with the industry experience and did not appear to be a cause for alarm. Not surprisingly, in view of Quality-Built’s cutback in quality-control practices and downgrading of purchased parts, warranty claims began to escalate sharply within 12 months of Reliable Appliances’ acquisition of Quality-Built. Over the next several years, Reliable Appliances paid out $15 million in warranty claims. The intangible damage may have been much higher because Reliable Appliances’ reputation had been damaged in the marketplace. 1. What was the purchase price paid for Quality-Built? 2. Why was it important to Quality-Built to improve its current financial performance? 3.How should Reliable Appliances have been able to anticipate this warranty problem from its due diligence of Quality-Built? 4. How could Reliable have protected itself from the outstanding warranty claims in the definitive agreement of purchase and sale? 5. In what sense had Reliable’s reputation been damaged? Due Diligence and Negotiation
Discussion Questions • Identify several criteria that might be used to select a manufacturing firm as a potential acquisition target? A financial services firm? A hi-tech firm? • Describe how the various activities that occur concurrently during the negotiation process affect the determination of the final purchase price for the target. Be specific.
Phase 7: Developing the Integration Plan • Use due diligence to determine post-closing sequencing of events necessary to realize potential savings and revenue enhancements • Resolve contract-related transition issues in purchase agreement • Employee payroll and benefit claims processing • Seller reimbursement for products shipped before closing for which payment not received • Buyer reimbursement for vendor supplies/services received before closing for which payment had not yet been made • Ensure contract closing conditions include those necessary to facilitate integration (e.g., employee contracts, agreements not to compete) • Develop post-merger integration organization consisting of both target and acquirer managers to • Build a master schedule of what should be done, by whom and by what date • Establish work teams to determine how each function and business unit will be combined • Establish post-closing communication strategy for all stakeholders
Phase 8: Closing • Obtain all necessary consents: • Shareholder • Regulatory (e.g., state and federal) • Third party (e.g., customer, lender, and vendor) • Complete definitive agreement • Purchase price • Allocation of purchase price • Assumption of liabilities • Representations and warranties • Covenants • Closing conditions • Indemnification • Loan documents • Etc.
Phase 9: Implementing Post-Closing Integration • Communication plans (e.g., consistent and continuous) • Employee retention (e.g., retention bonuses) • Satisfying cash flow requirements (e.g., deferred maintenance expenditures) • Employing best practices (e.g., competitor or similar business) • Cultural issues (e.g. joint work teams, co-location of acquirer and target employees)
Oracle Integrates Sun Microsystems Following closing its acquisition of Sun in early 2010, Oracle must rationalize and consolidate Sun’s manufacturing operations and substantially reduce the number of products the firm offers. Fewer products will mean less administrative and support overhead. Furthermore, Oracle has introduced a “build to order” mentality rather than a “build to inventory” marketing approach. With a focus on “build to order,” hardware is manufactured only when orders are received rather than for inventory in anticipation of future orders. By aligning production with actual orders, Oracle expects to reduce substantially the cost of carrying inventory; however, it does run the risk of lost sales from customers who need their orders satisfied immediately. Oracle also intends to pare the number of suppliers in order to realize savings from volume purchase discounts. Historically, Oracle has been a more “bottom line” and less bureaucratic firm than Sun. Discussion Questions: 1. What specific challenges do you believe Oracle will face in its efforts to integrate Sun Microsystems? 2. What do you believe Oracle should do to overcome each of these challenges? Be specific.
Phase 10: Conducting Post-Closing Evaluation • Don’t change performance benchmarks • Ask the difficult questions • Learn from mistakes
Discussion Questions • What is the purpose of the buyer and the seller performing due diligence? What other parties might want to perform due diligence on the target firm? • Describe the financing plan. In what sense is it a “reality check?” • Of the various activities conducted during post-closing integration, which do you believe is the most important and why?
Things to remember... • The search phase involves using relatively few criteria to identify potential targets, while screening involves narrowing the list by employing more criteria • How first contact is initiated depends on target size, availability of intermediaries with contacts in target, and time criticality • Actual purchase price determined during the negotiation phase • Integration planning must be done before closing when buyer has greatest leverage with the seller • Closing involves completion of final documentation, obtaining necessary approvals, and resolving remaining transition issues • Post-closing integration focuses on effective communication to all stakeholders, employee retention, and identifying and resolving immediate cash flow needs • Post-closing evaluation provides opportunity to learn what worked and what didn’t