Professional Documents
Culture Documents
An Acquisition is a set of activities aimed at taking a stake in (or selected assets of) a company in exchange for cash or stock
A Divestiture is a set of activities aimed at selling a stake in (or selected assets of) a company in exchange for cash or stock
Merger: combination of two or more companies, in which the acquiring company absorbs the
largely by debt
Spin-off: the parent creates a new legal subsidiary and distributes shares it owns in it to its
current shareholders
Subsidiary offering: the parent issues a portion of the stocks of a subsidiary to the public IPO: first sale of stock by a private company to the public Restructuring: corporate restructuring/debt-financial restructuring Capital increase: without pre-emptive rights in favour of third-party Joint Ventures: industrial agreements
OK II. Search and Selection of Alternative Options III. Selection of a Small Number of Targets (Short List)
NO
Define the main features of the ideal target company Set timeline and budget Market analysis
Search of potential targets First screening and ranking of the potential targets Approach letter
First contacts with target companies Choice of the seller objectives Analysis of the information on the target companies (information memorandum)
Negotiations Letter of intent (LOI) Planning of the process (up until closing) Non binding/binding offer
Contract negotiations Preliminary agreement Due diligence Closing In case of failure in the negotiation, search for another target
OK I. Define the Strategy and Search Potential Buyers II. First Contacts, Confidentiality Agreement and Blind Profile
NO
Define the main objectives of the deal: time and price Market analysis
Search of potential buyers Approach letters Teaser and Confidentiality Agreement Prepare Information Memorandum and Business Plan
Reception of the offers from potential buyers Binding/non binding [buds] Analysis of the documents and choice of the best offer
Contract negotiations Preliminary agreement Due diligence Closing In case of failure in the negotiation, search of another buyer
Economics Prospects
Partner Selection
Due Diligence
Negotiations
Governance
Structuring
Documentation
Organisational Benefits
When the selection process is structured, you follow a specific process: Definition of the main parameters for research (industry, size, performance, geographical market) Use of databases to identify all the potential targets Search of additional business (better description of the business and of the main products) and economic (ratios) information Long-list for a first screening process and ranking of the possible targets
The identification of the acquisition target is a complex task, affected by the kind of acquirer and the objective to be pursued Many different kind of buyers Strategic buyer Financial buyer Hedge fund Sovereign Wealth Funds
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Objectives for the Acquirer: higher market share, synergies, product extension, international growth Objectives for the Target Divesting non-strategic assets Deleverage Objectives for the Target Exit and investment return Objectives for the Target Monetize value due to lack of financial resources or succession problem
Buyer Financial Objectives for the Acquirer: invest in high growth/return companies (high exit-multiples) Objectives for the Target Divesting non-strategic assets in very short timeframe Objectives for the Target Exit and investment return Rotate investment portfolio Objectives for the Target Plan exit from the Company Capital injection Internationalization
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Strategic Buyer Create value for shareholders (share price increase and distributed dividend) Medium Long-Term
High Short-Medium Term (35 years to maximise IRR) Minority stake with influence Joint control for larger deals High: usually high sub-investment grade Involved in the management of the Company with specific attention to financial aspects Low because of pressure over returns
Leverage
Management
Price Paid
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Acquisitions occur for several reasons: Deal with overcapacity through consolidation in mature industries Acquire/roll-up competitors in geographically fragmented industries Expand into new products or markets Acquire know-how Move beyond industry boundaries
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Overcapacity M&A Key Features: typical of mature industries with excess capacity Strategic Objective: reduce capacity and duplication and create a more
efficient operation
Risks: cultural differences, need to impose the acquirers culture and processes quickly (high execution risk) Better When: target firm is smaller than the acquirer and/or company
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Geographic Roll-up M&A Key Features: typical of industries/markets at an earlier stage in life
cycle/underdeveloped; acquirer holds on to the target companys resources but imposes its own processes
Strategic Objective: achieve economies of scale and scope to build
industry giants
Risks: if cultural differences, use carrots not sticks (low execution risk) Better When: target firm is smaller than the acquirer (succession, access
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Product or Market Expansion M&A Key Features: they can involve both medium and big companies Strategic Objective: extend companys product line Risks: cultural differences and governmental regulations (medium execution risk) Better When: target firm is much smaller than the acquirer and/or the
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M&A as Know-How Acquisition Key Features: typical of high-tech and bio-tech companies Strategic Objecting: acquisition as substitute for in-house R&D, to build a
market position quickly, detailed economic benefit analysis, faster time to market
Risks: cultural differences, risk of loosing key people (medium execution risk) Better When: acquirer has industrial-strength evaluation processes, to be
sure to buy first-class businesses; executives are in charge of the integration (high-visibility assignment)
Example: LVMH - Bulgari (acquisition of brand and know-how in watches
and jewels)
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Industry Convergence M&A Key Features: radical reconfiguration of an industry whose boundaries are
disappearing
Strategic Objective: take advantage of changing environment and
technology
Risks: wrong assumption and hypothesis (very high execution risk) Better When: the unproven hypothesis about industry boundaries proves
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Business plan reliability Proper choice of the valuation method to be used (cash flows, market/precedent multiples) Identification of the proper terminal value Choice of the discount rate Consider potential consequences for the potential buyer, such as:
Synergies Cannibalisation
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Valuation Drivers
In M&A all these factors play a key role in determining the valuation of the target company
Competitive Tension
Deal Momentum
Tax Benefits
Market Conditions
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From a financial point of view, for an acquisition to be economically convenient for the buyer, the current value of future cash flows (PV), minus the financial debt of the target company (D), has to be higher than the acquisition price (P) to be paid to the seller, net of the costs of the deal itself (C)
PV - D P + C From a seller point of view the deal is convenient if the current value of future cash flows (PV), minus the financial debt of the target company (D), is lower than the acquisition price (P), net of the costs of the deal itself (C)
PV - D P + C This is very reasonable, but that means that the estimates of the assets value have to be different for the deal to succeed
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Strategic Factors
Importance for the Companys general strategy Existing and rationale of each transaction alternative Competitive scenario
Market Factors
Negotiation Factors
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Valuation Framework
Fundamendal Valuation
Financial Synergies
Cost Synergies
Revenue Synergies
Potential Price
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Premia Paid EMEA Public Targets vs. NTM P/E MSCI Europe (1)(2)(3)
All Transactions Premia Paid (%) 100 NTM P/E MSCI Europe (x) 30
80
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60 49
56 46 44 42 36 33 29 28 25 24 25 29 36 37 32
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45 12
40
37
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0 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 YTD
Premia Paid
Source
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The return that investors could earn on another investment with similar risk
Value creation, when the returns on the investment exceed the required rate 1
of return
Value destruction, when the investment returns fall short of the return rate 2
required by investors
Value conservation, when investors earn exactly the required rate of return 3
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Target shareholders benefit from Substantial premium paid by the bidder Increasing sophistication of takeover defenses Competitive situations
Bidder shareholders: statistically, studies have proved that returns are either negative or slightly negative, due to the increase in purchase premiums, unless significant synergies are generated in the deal
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There is high closeness/ complimentarity in terms of industrial focus between the target and the buyer Favour knowledge transfer across divisions Creates critical mass to face the competition Exploits better transparency and monitoring through internal
capital markets Managers are properly motivated and rewarded Practical Suggestions
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