MA and Investment Banking Lecture 7 BuySide MA
M&A and Investment Banking Lecture 7 – Buy-Side M&A 1
Buy-Side M&A The Process: Buy-Side vs. Sell-Side Roles and Activities Best practice How to play the M&A game today 2
Buy-Side M&A Process, Roles, Activities and Best Practice 3
The Process: Buy-Side vs. Sell-Side Week 1– 6 Preparation Sell-side Perspective Define key objectives Kick-off meeting Define project timetable Identify potential investors Internal due diligence Draft information memorandum Draft process letter Prepare data room Buy-side Perspective Seek intelligence Review competitive landscape Consider pre-emptive bid Consider potential partnership Select advisors 4 Week 7– 10 First round Approach potential investors Receipt of expressions of interest Distribute information memoranda and phase 1 process letter Q&A sessions Receipt of indicative offers Review teaser and Shortlisting send preliminary expression of interest Review IM and send preliminary questions list Identify key due diligence items Assess preliminary valuation range Financing requirements / alternatives 1 st round non binding offer Send indicative offer Week 11– 15 Week 16–? Due Diligence Negotiations Closing Distribute legal documents Data room visits Management presentations Q&A process Site visits Receive final offers Analyse final bids Tactics Contract negotiations Signing and announcement Prepare relevant filings Conditions to closing Closing Review vendor due diligence documents Data room visits Management presentation Q&A process Site visits Confirm / refine preliminary valuation range Financing requirements / alternatives Final binding offer / Board approval Send final offer Tactics Contract negotiations Signing and announcement Prepare relevant filings Conditions to closing Closing
Key Facts Role of Advisors Bankers Lawyers Overall co-ordination and point of contact for the process Assist acquirer in conducting detailed valuation analysis of the target based on information obtained during due diligence Conduct other relevant financial analysis Assist in due diligence; e. g. evaluation of the business and financial performance Monitor competitive landscape / provide intelligence Evaluate transaction structure and financing Develop negotiation strategy and be the interface for negotiations with seller Work with lawyers to review contractual documentation Negotiate NDA with seller 5 Accountants Analysis of appropriate transaction structures Review vendor due diligence reports and conduct accounting, tax and financial due diligence (historical and forecast financial information) Participate in target’s due diligence and Q&A sessions Participate in due diligence and selected Q&A sessions with target Conduct anti-trust analysis Analyse tax implications of possible transaction structures Review of legal due diligence reports and key legal documents Participate in contract negotiations / Mark-up draft sale agreement Draft management term sheet / agreement, if appropriate Review / negotiate financing agreements, if applicable Participate in potential discussion with regulators Prepare anti-trust fillings for submission postsigning Assess net debt and debt -like adjustments to Enterprise Value Assist in mark-up of schedules to sale and purchase agreement Prepare pre and postclosing financial statements with seller’s advisors, if required Other Advisors Market consultants Carry out market research Sign off business plan Insurance advisors Review target’s insurance arrangements Pension advisors Valuation of pension liabilities Environmental consultants Participate in site visits Conduct EHS due diligence Identify potential environmental / hidden liabilities
Selected Key Workstreams Responsible Develop financing structure Obtain binding financing commitments to be submitted along with final bids Define hedging strategy Buyer Investment Bank Structuring Analysis and transaction structuring to optimise tax position Determine optimal acquiring entity Valuation Deliver fully diligenced bid, except for review of “black-box” information to be made available post-final bids (if applicable) Key due diligence areas: Finance, Accounting & Tax Legal Commercial Technology / operations Insurance HR Pension Environmental, Health & Safety Valuation (headline value) and net debt and debt-like adjustments Key workstreams: Standalone operating model Synergy analysis Merger analysis Analysis of net debt and debt-like items Interlopers Financing / Hedging Due Diligence Objective and Key Tasks Seek intelligence and review competitive landscape Develop interloper analysis 6 Buyer Accountants Lawyers Consultants Investment Bank Buyer Accountants Lawyers Investment Bank Buyer Investment Bank Accountants Investment Bank Buyer
Selected Key Workstreams (Cont’d) Anti-trust Management / Employees Objective and Key Tasks Identify key employees to retain Develop strategy to approach employees and retention objectives Develop concrete proposal and discuss it with management before final bid Management term sheet agreed and executed at signing Buyer Lawyers Investment Bank Obtain Board / Executive Committee approvals ahead of final bid submission Buyer Prepare offer letter Buyer Investment Bank Lawyers Develop integration plan Buyer Draft transaction announcement, investor presentation and Q&A Buyer Investment Bank Investor Communication / PR Internal Approval SPA Define SPA strategy Prepare mark-up of SPA and schedules Offer Letter Buyer Lawyers Integration Develop anti-trust analysis and determine requirements for anti-trust filings and expected timeline Draft anti-trust filings Responsible 7
Recommended Rules of Conduct in Auction Processes Popular Misconceptions General Reality r It’s all about winning ü It’s about making a sound decision r Being aggressive asserts authority ü Being patient and disciplined is key r Any Buyer is critical to the auction process and therefore enjoys bargaining power ü Almost up to the end of an auction, the Seller is king r It’s a Buyer vs. Seller situation ü It’s a Bidder vs. Competitive Bidders vs. Seller situation Recommended rules of conduct to be followed throughout an auction process Be humble Be disciplined Remain rational Be patient - Bargaining power will shift 8
Auction Processes Best Practice Preparation Initiate planning process as soon as acquisition opportunity becomes known Use all the available information to determine level of interest in the Target Interact with Seller’s advisers during the early stages of the process Reinforce interest, establish rapport and agree communication channels Select (relatively small) internal project team based on relevant knowledge/skills and ensure available throughout process Hire advisors early on Indicative Bid Submission Key objectives To be admitted to the second round of the auction process To gather intelligence with respect to the strength of the auction process To avoid setting the high end of the valuation range received by the Seller Comply with Seller’s bidding instructions (format/contents) Demonstrate commitment to process Clearly state strategic rationale Have the letter signed by a senior person Indicative value to be based on Information Memorandum projections Give credit to management forecasts - subject to due diligence Avoid bidding low and begging for admission to second round Praise management (may see parts of the offer letter) if appropriate 9
Auction Processes Best Practice (Cont’d) Due Diligence Final Bid Submission Foster process discipline - follow the process rules set by the Seller with a view to building trust Prepare a quality presentation to introduce Buyer’s firm and representatives to the Target’s management team during management presentation – exploit management bias if possible Foster mutual challenging between internal project team, investment bankers and other advisers Anticipating likely SPA deal terms early on will be relevant for determining the scope of the due diligence Essential to keep an eye on materiality when conducting due diligence; resources (time & people) are scarce Push for due diligence meetings (as opposed to written responses to due diligence questions) Identify potential integration issues at an early stage and review them with Target’s management Ensure that due diligence findings are duly integrated into valuation model Assess quality of Target’s management beyond top management Identify key employees to retain and secure involvement post-acquisition before signing / Clearly outline differentiation factors and prepare “attractive” package in light of the Seller’s announcement preferences Price / valuation (net proceeds for the Sellers) Certainty of completion Speed of execution SPA Opportunities for management post-transaction Clearly justify any price differences vs. indicative proposal Leave room for modest increase in offer when submitting proposal If appropriate, include clear, precise list of items subject to confirmatory due diligence Tackle obvious issues proactively (e. g. anti-trust issues) Consider requesting “bid clarification” meeting as a cover to start negotiation 10
Auction Processes Best Practice (Cont’d) Negotiation and Signing 11 Be ready to move swiftly to signing post-final bid submission Have negotiation team readily available to enter intensive negotiation phase on short notice If required, plan final Board meeting to seek final approval so as to not delay the process Provide clear and reasonably broad mandate to own negotiating team to ensure effectiveness Use senior contacts/relationships if/when appropriate, but sparingly and only if properly briefed Try to negotiate sensitive issues as late as possible in the process (when the bargaining power is shifting from the Seller to the Buyer) Prepare public announcement/press release carefully (too often done at the last minute) Maintain momentum post-signing to get to closing as soon as possible
M&A Process How to play the M&A game today 12
How to play the M&A game today Key Trends General M&A activity primarily driven by Balance sheet management – need to de-leverage through sale of non-core assets Satisfaction of regulatory/competition clearance requirements Combinations with compelling strategic logic, but where timing is critical Process Sellers increasingly unable to impose strict processes on bidders, including accelerated timetables, limitations on diligence access, requirement for submission of SPA mark-up pre final bids Merits of auctions put in question given risk of ‘failed auction’ and unwillingness to share sensitive information with high risk of no outcome Greater willingness to pursue opportunistic, bilateral discussions with motivated buyer (potentially granting a period of exclusivity) Bespoke processes prevalent (e. g. narrow auctions, bilateral negotiations, ‘piggybacks’, non-auctions, staggered dual tracks) Sellers tailoring assets to fit buyer requirements Increasing demand for exclusivity 13
How to play the M&A game today (Cont’d) Key Trends Due Diligence more thorough and time consuming (VDD increasingly necessary but insufficient) Expanded timetables not atypical: 4– 5 weeks for first rounds and 6– 8 weeks for second rounds Sellers more attentive to due diligence preparation costs driven also by uncertainty of closing Fully fledged VDDs less frequent also due to the of lack of sponsors activity More ‘tailored due diligence reports’, e. g. carve-out reports and reports addressing specific due diligence issues or specific buyers’ interests More materials seen in the form of ‘white paper’ reports Buyers ‘Balance of power’ still with buyers Fewer potential buyers in the market, generally Strategic players focused on existing operations, and potentially balancesheet constrained Decrease in sponsor activity (particularly for larger assets) given financing constraints, albeit activity increasing in recent months Heightened execution risk and depressed valuation levels prompting sellers with no immediate need to sell to await a return to ‘normal’ market conditions 14
How to play the M&A game today (Cont’d) Key Trends Financing still one of the key issues in getting a transaction done Increase in vendor financing (e. g. Barclays / i. Cap). Key items to be taken into account are Impact of a change-of-control in the vendor financing triggered upon an exit Ranking amongst external financing and other intercreditor arrangements that will need to be put in place Some private transactions being negotiated / signed subject to financing in cases where a protracted competition review period is anticipated (i. e. in order to ‘start the clock’) Negotiation Tactics Value guidance deferred until later stages given performance risk Seller-drafted SPAs more balanced; reluctance to alienate bidders Sellers more likely to preserve confidentiality of processes given uncertainty of outcome Use of other strategic alternatives to generate competitive tension (e. g. demerger, spin-off, restructuring etc. ) 15
How to play the M&A game today (Cont’d) Key Trends SPA 16 Increasingly ‘buyer friendly’ Representations, warranties and indemnities Broader range of reps and warranties, e. g. financial statements, disclosure of contracts, permits and licenses, taxes, litigation, undisclosed liabilities Specific disclosures as liability carve-outs rather than complete data room Longer survival periods Higher indemnity caps (up to 100% of transaction value) Escrows and bank guarantees as additional forms of protection Price adjustments Return to post-closing accounts (rather than a ‘lock-box’ mechanism) driven by greater uncertainty as to the target’s financial performance and by buyers’ desire for a full audit review at close of the transaction Termination rights Increasing requests for business MACs Increasing protection against seller's potential bankruptcy, e. g. More interest in asset deals / cross-liabilities for carve-outs Focus on clawback rights of receivers
References Bruner, 2004. Applied Mergers and Acquisitions. Wiley Finance: chapters 30, 31 Miller, E. L. J. , 2008. Mergers and Acquisitions: A Step-by-Step Legal and Practical Guide. Wiley: chapter 2 17
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