Merger & Acquisition Approach

XYZ M&A Introduction

Objectives

• The purpose of this module is to allow new ACs and Consultants to:

– obtain a background understanding of M&A

– understand what XYZ does/doesn‟t do in an M&A project

– review basic analytical tools required in different M&A projects at

XYZ

– develop,through an exercise, an important basic analytical skill

often used in M&A projects

2
XYZ M&A Introduction
Agenda

• Trends in M&A
• Guiding Principles for Successful M&A
• XYZ Approach
• Case Examples
– screening
– due diligence
– sale
• Exercise on Synergy Calculation
• Typical Watchouts
• Key Takeaways

3
XYZ M&A Introduction
Agenda

• Trends in M&A
• Guiding Principles for Successful M&A
• XYZ Approach
• Case Examples
– screening
– due diligence
– sale
• Exercise on Synergy Calculation
• Typical Watchouts
• Key Takeaways

4
XYZ M&A Trends
Drivers of M&A Activity
Macro-
Strategic Financial Other
economics

• Economy boom or • Gain share • Improve capital • Greed

recovery • Eliminate markets evaluation of • Ego
• Over-capacity in competitive threat acquirer
an industry • Capture operating –meet growth
• Cheap money opportunities, e.g., targets
• Industry scale efficiencies –reduce portfolio
consolidation • Leverage existing risk
• Globalization business systems • Invest idle cash
–forward/backwar
d integration
–start-up
alternative
• Diversify/balance
portfolio
• Retire excess
industry capacity

5
 XYZ M&A Trends
M&A Activity - U.S. vs. Europe
European and US M&A activity is experiencing similar positive trends.

800 $759

CAGR
$B 700 $641 (1992-1997)

600 Europe 21%

500 US 41%
$434

400 $343
$361
$339
$295
300 $265
$241 $230
$220
$193
200 $145
$161 $163$157
$137$136 $133
$112
$91
100 $52

0
1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997

Note: Transaction Value (including Net Debt of Target). Excludes split-offs. Europe
includes 50 major countries 6
Source: SDC
XYZ M & A Trends
M&A Activity

• M&A activity has grown rapidly in nominal dollar terms, peaking in the U.S. in the
late 1980s, and then matching those levels last year
• The ferocious merger activity of the late 1980s was driven in large part by the “easy
money” afforded by the junk bond market. This resulted in huge, often
unsubstantiated, premiums being paid for companies without regard to the value
creation opportunities presented (or not presented, as the case may be) by the
operations/underlying business of the target
• Growth in merger activity since 1992 has coincided with the economy’s recovery
from recession
• Recent M&A activity benefiting from:
– extended economic health with little recessionary pressure on horizon
– a resulting corporate demand for growth
– increase in international M&A activity as companies pursuing global strategies
• Since late 1997, U.S. and European markets have experienced the resurgence of
junk bonds to facilitate the execution of deals getting larger and larger

7
XYZ M&A Trends
M&A Activity by Country 1996/97
US market dominates the global M&A activity.

$1,200B
$1,028
1997
1996

$1,000B

$800B
$687
Billions of Dollars

$600B

$400B
$215

$170
$152

$200B
$88
$81

$67

$57

$42
$38

$37

$34

$22
$19

$14
$0B
USA UK Germanic France Benelux Scandanavia Italy Spain
Countries
Percent
change: 50% 41% 110% 31% 50% 14% 79% 57%

Note: Represents announced deals 8

Source: SDC
XYZ M&A Trends
US M&A Activity by Seller Industry
(1992-97)
Value and volume of transactions vary across industries. For example, in the
US, computer software and service industries tend to do many small deals.
Telecommunications, broadcasting and leisure and entertainment have high
transaction size.
8,000
500
Transactions
Aggregate (line)
400
Offered 6,000
Value
($ BN)
300
(bars)
4,000

200

2,000
100

0 0

9
Source: SDC ( March 98)
XYZ M&A Trends
Multiples Paid for Acquisitions
Over the last five years, the prices paid for acquisitions have been increasing, and
reinforces the need for in-depth due diligence and analysis to ensure a fair price.

EBIT Multiples Paid for Acquisitions

10

9 8.6
Average
7.8
EBIT 8 7.4 7.2 7
Multiple 7 6.5
6.1
6 5.4
Financial Buyers
5
Strategic Buyers
4

0
1988-89 1992-93 1995 1996

10
Sources: The BUYOUTS Yearbook, XYZ Analysis.
XYZ M&A Trends
Acquisition Success Rates
The majority of acquisitions have been deemed failures.

Percent of Acquisitions Failing* in First Five Years

80% 75%

70% 67%

60%
50% 50%
Percent of Total

50%

40%

30%

20%

10%

0%
Survey of XYZ & Harvard London
CFOs Company Business School Business
Study School

Notes: Failure defined as earnings less than cost of capital and/or subsequently divested. 11
XYZ M&A Trends
Common Reasons for Failure
• Poor strategic fit
–combination does not provide competitive advantage
–lack of understanding of the business
• Overpay
–imperfect information/wrong valuation
–too optimistic in forecasts/synergies
–unforeseen industry downturn/emerging technology
–auction environment; failure to set/stick to „walk away‟ price
–CEO/management ego
revenue growth vs. profitability
emotion vs. analysis
• Poor post acquisition integration
–inadequate planning
–failure to exploit revenue/margin potential
–disrupted relations with customers, employers and suppliers
–culture clash; failure to involve „acquired‟ people

Strategic, financial and operating causes

12
XYZ M&A Trends
Glossary
Merger • The legal combination of two (or more) formerly independent entities
Acquisition • The acquisition by an independent entity of a control stake in another
entity. This is usually achieved by acquiring more than 50% of shares for
a public company
Divestiture • The sale or closure of a particular entity
LBO • Leveraged buy-out: An acquisition made possible financially by large
issuance of debt, making the new entity highly “leveraged” or “geared”
(i.e., with a high ratio of debt to equity)
Private Equity Firms • Investment firms managing private funds by running business portfolios
Junk bonds • Bonds (or debentures, or coupon debt) issued by an entity without a
credit rating or with entities with “non-investment grade” rating
Credit Rating • Financial markets use the service of credit rating firms such as Standard
& Poor‟s and Moody‟s to determine entities‟ credit worthiness (i.e., the
ability for an entity to pay back their debt). Ratings are allocated from
AAA or Aaa (highest) to C (lowest)
– Entities with Investment Grade Ratings (AAA down to B) are
considered stable
– non-investment Grade entities (below B) present an investment risk
(e.g., third world countries, highly leveraged companies)

13
XYZ M&A Introduction
Agenda

• Trends in M&A
• Guiding Principles for Successful M&A
• XYZ Approach
• Case Examples
– screening
– due diligence
– sale
• Exercise on Synergy Calculation
• Typical Watchouts
• Key Takeaways

14
XYZ M&A
XYZ believes that a clear and disciplined approach to
the acquisition process is vital to ensure success.
Proactive Strategic
Thinking
Principles: • Acquisitions are made to improve
the strategic position of existing
businesses or add to the core
competencies of the corporation
• Assess impact of acquisitions on
long-term shareholder value
• Use acquisition as a vehicle to
accelerate growth in key business
units
Activities: • Define business segments
• Diagnose key competencies
and any skill gaps
• Analyze market dynamics
• Study cost of acquisition
versus organic growth
Principles
Guiding Principles
(1 of 2)
Screening
• Look for all companies that
potentially strengthen the
corporation
• Don't allow a "transaction"
mentality to dominate the process
• Look for targets that present best fit
in terms of:
– relatedness
– impact on market position
• Examine key success factors of
potential targets
• Examine competitive position of
client vs. competitive bidders
15
XYZ M&A Principles
Guiding Principles
XYZ believes that a clear and disciplined approach to (2 of 2)
the acquisition process is vital to ensure success.

Execution Capture Full Value

Principles: • Make better decisions • Clearly communicate corporate vision

upfront through careful due to target
diligence • Begin integration process as early as
• Strive to identify "deal possible
breaker" issues as early as • Be objective to ensure a fair decision-
possible making process
• Use information and insights • Create a set of short-term and long-
to provide confidence in term objectives
making a bid

Activities: • Quantify all potential • Provide a blueprint for capturing full

synergies and cost savings potential value
• Examine margin and • Support managerial integration team
revenue forecasts
• Evaluate management of
target

16
XYZ M&A Principles
Strategy and M&A
Acquisitions at both the corporate and business unit level need to be thought
of as an integral part of a company's growth strategy.
• Corporate objectives
– growth and financial targets
– competitive arena
• Corporate strategy
– strategic position
– management of resources

Growth through
• Business unit objectives corporate acquisitions
– business definition
– growth and financial targets
• Business unit strategy
– strategic position
– key success factors
– sustainable competitive advantage

Growth through
business unit
Organic growth acquisitions

17
XYZ M&A Principles
Strategic Framework

The focus of strategic M&A activity should be in areas where there is the highest
value creation opportunity as well as the strongest parenting advantage.

High

Focus

Value
Creation
Opportunity

Low
Low High
Parenting Advantage
“Is value to our client higher than value to other parents?”

18
 XYZ M&A Principles
M&A Value Creation Opportunities
M&A value can arise from generating the full value of an undervalued entity
or by adding value to under performing assets.

Buy cheap Add value

Take advantage of Spot new market Generate

inefficiencies in the trends early synergies
market

19
XYZ M&A Principles
Critical Issues
XYZ assimilates the strategic process with
acquisitions by focusing on four key areas.

(I) Relatedness (II) Strategic Strength (III) Market Dynamics

• Cost sharing • Strength of key • Market growth

competitors
• Customer sharing • Technology changes
• Relative cost position
• Competitor overlap • Product substitution
• Strengths and
• Experience sharing weaknesses of acquirer • Barriers to exit and entry

• Supplier and buyer

power

(IV) Value: Resolving these issues allows an accurate evaluation of a company

20
XYZ M&A Principles
Success Criteria - Diagnostic Tool
The ability to improve the strategic position of the acquirer, and grow
or complement its existing competencies are keys to success.

RMS III) Market Dynamics

>1.5x
(Relative Market Share)
(II) Strategic Strength

Growth >
RMS 10%
1.5-1.0x Growth 5-
10%
Growth <5%
RMS
<0.5x

Low <25% Medium 25-50% High >50%

Relatedness (I) (Experience and/or Cost Sharing)

(IV) Value Accurate evaluation based on NPV vs. Market Price

21
XYZ M&A Principles
Success and Market Share
Acquisitions that increased market share
substantially were consistently more successful. Incidence
of success
Incidence
of outright
80% failure
73%
70%
70%
61%
58%
60%

50%
43%
Percent

40% 35%

30%
18% 19% 18%
20%

10%
3%
0%
< 5% 5-10% 10-25% 25-50% 50%+

Market Share Bought

Sources: Porter (33 Large U.S. Corps.; Management Interviews) 22

XYZ M&A Principles
Market Impact of Announced Transactions*
The stock market rewards companies that make
related and/or focused acquisitions.
10.0%
Average Percent Price Increases

0.1
5.0%

0.0

0.0%

(5.0%)

(10.0%)
(0.1)

Definition: Unrelated Related Focused

• Minimal cost • Medium degree of cost • Significant amount of activity and
overlap between overlap cost overlap between acquirer and
acquirer and • Target derives >70% target
target of revenues from • Target complements existing
same business as product line and adds to core
acquirer competencies of acquirer
Note: * Two weeks before compared to one week after announcement 23
Source: Industry Literature Review, XYZ Analysis
XYZ M&A Principles
Examples of Failures
The M&A landscape is littered with unsuccessful acquisitions which (1 of 2)
failed to adhere to the core guiding principles.
Transaction Acquisition
Industry Acquirer Target Value Thesis Reason for Failure
Consumer Quaker Snapple $ 1.7B • Leverage • Inadequate due diligence
Goods Oats distribution – growth cycle not well
channels understood
– brand strength
overestimated
Entertain- Sony Columbia $ 4.8B • Own up stream • Inadequate due diligence
ment Matsushita MCA $ 6.1B contents for – over valued synergies
downstream • Strategically flawed and
hardware poor integration

Finance Sears DeanWitter $ 6.7B • Build a "one- • Inadequate due

stop" financial diligence
supermarket – limited cross-sell
potential
Amex Shearson $ 900MM • Expand • Poor integration
distribution – culture clash
capabilities

24

Sources: Industry literature; XYZ Analysis.

XYZ M&A Principles
Examples of Failures
(2 of 2)
The M&A landscape is littered with failures which failed to adhere to
the core guiding principles.
Transaction Acquisition
Industry Acquirer Target Value Thesis Reason for Failure

Retail Allied Federated $ 6.5B • Expand • Inadequate due

geographically diligence
– overvalued
potential
synergies and
brand value

Technology/ AT&T NCR $ 7.5B • Technology/ • Strategically flawed

Telecommu- telephony – few synergies
nications integration between computer
hardware and
telephony
• Poor integration
Novell WordPerfect $ 1.4B • New market entry • Poor integration
– culture clash

Sources: Industry literature; XYZ Analysis. 25

XYZ M&A Principles
Examples of Successful Acquisitions
However, many companies have created enormous value through (1 of 2)
successful acquisitions.
Transaction Acquisition Reason for
Industry Acquirer Target Value Thesis Success
Consumer Cadbury Dr. Pepper/ $ 2.0B • Expand geographic • Careful due diligence
Goods Schweppes 7-Up distribution – increased scale and
presence as a global
player
Financial First Data First $ 6.6B • Obtain scale • Well-managed integration
Services Financial economies – integration of credit card
Management processing services of
consumer and
commercial sides
Wells Crocker $ 1.07B • Expand • Careful due diligence
Fargo geographical reach and integration
and leverage back- – capture of
office synergies and cost
savings
Food Tyson Holly $ 1.4B • Extend product line • Good strategic fit
Farms and due diligence
– capture of cost-
sharing potential
Sources: Industry literature; XYZ Analysis
26
 XYZ M&A Principles
Examples of Successful Acquisitions
However, many companies have created enormous value through (2 of 2)
successful acquisitions. Transaction Acquisition Reason for
Industry Acquirer Target Value Thesis Success
High Cisco Stratacom $ 4.5B • New technology • Well-managed integration
Technology – closeattention to
culture match; open
communication of
strategic vision
Healthcare Columbia HCA $5.7B • Build national • Good strategic fit and due
healthcare group diligence
– capture of cost-sharing
and scale economies
Manufacturing Crown, Cork Carnaud $ 3.9B • Expand geographic • Good strategic fit and
& Seal (French) reach and leverage due diligence
product strengths – strong
understanding of
market dynamic to
improve strategic
position
Transportation Union Pacific Chicago & $ 1.1B • Expand geographically • Good strategic rationale
North Western – pre-emptive strategic
Transportation move to maintain
Company strategic position

Sources: Industry literature; XYZ Analysis 27

XYZ M&A Introduction
Agenda

• Trends in M&A
• Guiding Principles for Successful M&A
• XYZ Approach
• Case Examples
– screening
– due diligence
– sale
• Exercise on Synergy Calculation
• Typical Watchouts
• Key Takeaways

28
XYZ M&A XYZ Approach
Key Activities
XYZ's approach to acquisitions follows a series of key steps.

• Should an acquisition strategy be pursued?

• What sector or region?
Strategy

•The best candidate based on

Acquisition target screen
attractiveness and availability

• Validate screening assumptions Due diligence

Bid structure Integration

•The right price and negotiations Target valuation
pre-planning

• Getting full value Integration

29
 XYZ M&A XYZ Approach
M&A Value Chain
XYZ has considerable experience in the different skill sets needed at
different stages in the acquisition process.

Acquisition
Due Diligence Valuation Integration
Screening

Objective: • Identify potential candidates • Make better decisions • Understand full strategic • Implement strategic vision for
which present best fit in upfront value of acquisition merger that gives direction and
terms of: • Provide agenda for post- candidate impetus for change
– relatedness acquisition change • Definitive actions and role
– impact on market • Improve success in closing definitions to speed integration
position deal process

XYZ Activities: • Industry profile
• Target screening
• Target approach
• Business/strategic review • Quantify current operating • Pre-planning
– market trends value, stand alone – combined cash flows
– customers and suppliers operating improvements, • Transition plan
– competitors and potential synergies • Cost reduction
– costs, technology • Revenue enhancement
– valuation/full potential
assessment

Common • Drawing up incomplete list of • Non-identification of "deal • Ignore market dynamics •Reluctance to interfere in
Pitfalls: candidates breaker" issues and competitor impact on operations of acquiree
• Use of screen process to • Misunderstanding of cost future cash flows
develop a strategy savings and upside • Taking management
opportunities projections at face value

30
XYZ M&A
XYZ provides a neutral, third-party view and analysis on the primary strategic
and financial issues.
Acquisition
Screening
Investment Banks: • Comb for potential
acquisition candidates based
on availability
• Utilize contacts to build a
wide list of potential targets
Accounting Firms*: • Look for potential acquisition
candidates based on
availability
• Use contacts to build list of
potential targets
XYZ's Role: • Determine targets based
on corporate objectives
and strategies
• Identify acquisitions that
enable the acquirer to:
– penetrate new markets
– acquire capabilities
– gain scale advantage
– improve relative
market position
Notes: *Consulting branches of Big Six Accounting Firms.
Due Diligence
• In tandem with
accountants, analyze
financial projections based
on managerial input
• Limited external research
– largely dependent on
managerial projections
• Analyze quality of
customer and supplier
base
• Look for potential cost
savings and upside
synergies
• Understand market
dynamics to better
project market and
company growth
objectives
XYZ Approach
XYZ and Other Advisors' Role
Valuation Integration
• Value based on prices of • Little or no direct input in
comparable businesses post-merger activities
recently bought or sold
• Multiple of earnings/cash
flow, assets
• Value based on prices of • Little or no direct input in
comparable businesses post-merger activities
recently bought or sold
• Construct a basic DCF
model
• Construct a discounted • Active involvement in
cash flow model that transition plan, cost
values stand alone, reduction and revenue
operating improvements enhancement
and potential synergies opportunities
• Provide a reality check on • "Hands-on" driver of
market valuations change process to realize
full value of merged entity
31
XYZ M&A XYZ Approach
Roles and Responsibilities
XYZ is an integral part of a dedicated team of M&A professionals.
100%
Investment Banks
• Market • How, what • Price • Support as • Presentation to
valuation and when to • Terms needed board
80% say
XYZ
• Prospectus
•
Percent of Professional Time

Other
document-
ation
60%

40% • Support as
Lawyers • needed
Legal Due
diligence

• Non-offer • Scripts • Presentation to

• Screening • Portfolio • Intrinsic • How, what letter • Due both boards
20% • Letter of
study • Norm bands cash flow and when to • Terms diligence comfort
• Key issues valuation say • Due diligence
investigation • Scripts

Accountants • Pro formas

0%
Identify Due Valuation Development Develop Negotiate Board Implement
candidate Diligence approach offer and approvals
deal
structure

32

848704a2d01-19
 XYZ M&A XYZ Approach
Acquisition Screening
Finding potentially attractive targets is the critical first step in an M&A process.

Acquisition
Due Diligence Valuation Integration
Screening

Objective: • Identify potential candidates which

present best fit in terms of:
– relatedness
– impact on market position

XYZ • Industry profile

Activities: • Target screening
• Target approach

Common • Drawing up incomplete list of

Pitfalls: candidates
• Use of screen process to develop a
strategy

33

848704a2d01-20
XYZ M&A XYZ Approach
Acquisition Screening
Inadequate screening of candidates is commonplace. (Common Mistakes)

Objective: • Review all potential candidates and determine which ones

present the best fit in terms of:
– relatedness
– impact on market position

Common • Drawing up an incomplete list of candidates, excluding

pitfalls: divisions of large companies and very small companies
• Using the screening process to develop the strategy
• Saying
– "We can't buy it because..."
– "They have turned us down before"
– "The government won't approve it" or
– "It's family/state/competitor/or big company owned"
• Making the wrong contact at the target company
• Being impatient with acquisition process
• Assuming "no" really means "no"

34
XYZ M&A XYZ Approach
Candidate Screening Process
XYZ's approach to screening involves careful analysis of the market,
competitors and the target.

Broad screen Fine screen Thorough analysis

Focus of Market position Relatedness Value creation

analysis:

Screening • Industry sector • Key success factors • Stand-alone value of

criteria: • Company size • Competitive position synergies/
• Company growth (costs/customers) performance
• Market share • Opportunity for improvement potential
• Financial performance synergies • Management/cultural
considerations

Objective: • Rapidly narrow down • Provide shortlist of • Detailed assessment

universe of candidates of remaining
companies candidates

35
XYZ M&A XYZ Approach
Screening Criteria
The XYZ approach to screening evaluates the market dynamics
and the target's performance and fit with the acquirer. Partial examination

Complete examination

Screen Market Attractiveness Market Position Overlap Value Creation

Key Relative Stand-alone Key Availability

Growth Industry Success Relative Market Financial Success of Value of
Size Rate Concentration Factors Size Growth Share Competitor Customer Cost Performance Factors Benefits Relatedness

Broad

Fine

Thorough

36
 XYZ M&A XYZ Approach
Due Diligence
XYZ goes beyond financial analysis to assess fully the competitive
position of the target, and identify "deal breaker" issues .

Acquisition
Due Diligence Valuation Integration
Screening

Objective: • Make better decisions upfront

• Provide agenda for post-acquisition
change
• Improve success in closing deal

XYZ Activities: • Business/strategic review

– market trends
– customers and suppliers
– competitors
– costs, technology
– valuation/full potential assessment

Common Pitfalls: • Non-identification of "deal breaker" issues

• Misunderstanding of cost savings and upside opportunities
37
XYZ M&A XYZ Approach
Approach to Due Diligence
XYZ minimizes the risks of acquisitions with a thorough approach to due diligence.

• Provide access to the XYZ world network to support pre-letter

of intent go/no-go decisions
• Conduct exhaustive due diligence study of industry and
company dynamics:
– identify key cash flow drivers
– quantify margin and revenue growth forecasts
– quantify cost reduction potential
– identify "deal breakers" and/or "red flags" causing bid
adjustments
– identify and quantify all upside opportunities
• Identify and evaluate potential exit options

• Assist in securing financing through development and

presentation of objective, third-party business analysis

• Create blueprint for Full Potential strategy

• Generate enthusiasm and momentum for the deal

within the target company

38
XYZ M&A XYZ Approach
Typical Due Diligence Issues
(1 of 2)
A well-designed due diligence process involves answering a series of key
questions.

Business What business is the target in? Who are the current and
Definition: potential competitors?
Market Overview: Is this an attractive industry from size, growth, supplier power,
regulatory environment, business concentration and profitability
perspectives? Is this the right time to buy?
Key Success How do you make money in this business today and in the
Factors: future?

Company How well positioned is the target company? (market share,

Overview: management, products, company performance, customer
stability/defections, etc...)

Customer What are key purchase criteria and how does our target perform
Evaluations: relative to competitors? How might this change in the future?

39
XYZ M&A XYZ Approach
Typical Due Diligence Issues
(2 of 2)

Competitor What strategies are key competitors pursuing? How successful

Review: are they?

Operations: How well managed is the business? Where can the company
improve margins and returns?

Growth: What is the potential growth? Are there follow-on acquisitions

available?

Valuation: How much is the company worth on a stand-alone basis? How

much value can be created?

Exit Strategy: When applicable, is there a clear exit strategy?

40
XYZ M&A XYZ Approach
Typical Due Diligence Activities
Understanding of market dynamics, strategic fit, and company performance
requires an in-depth external and internal review.

External Assessment Internal Assessment

• Blind interviews with customers, competitors, • Interviews with target company's

suppliers and market experts conducted by management in:
experienced, business-minded group – marketing/sales
members – finance/accounting
• Exhaustive review of market research reports, – operations
company profile information, articles, – etc.
publications and other publicly available • Comprehensive review of target
sources company's customer base, personnel
• Analysis of above information to determine: and operations
– overall market growth potential • Analysis of above information to
– customer segmentation determine:
– relative performance of target company vs. – market share projections
competitors based on customer needs – potential margin changes
– vulnerability in value chain (including – relative cost position
distribution channels) – salesforce effectiveness
– potential operational improvements

41
 XYZ M&A XYZ Approach
Valuation
XYZ's valuation process quantifies the full strategic value of an acquisition to
ensure that the client can price with comfort and confidence.

Acquisition
Due Diligence Valuation Integration
Screening

Objective: • Understand full strategic

value of acquisition
candidate
XYZ • Quantify current operating value,
Activities: stand alone operating
improvements, and potential
synergies
Common • Ignore market dynamics and
Pitfalls: competitor impact on future cash
flows
• Taking management projections at
face value
42
XYZ M&A XYZ Approach
The Value Creation Process
XYZ's approach to valuation encompasses three distinct steps that closely
examine the historical and future financial performance of the target.

200% • Investment banking focus

Financial deal – leverage/gearing
Percent of 180% structure – type of financial products used
Current • Integration opportunities
Market Value 160% – expanded distribution
(Debt and Synergies – plant consolidation
Equity) 140% – eliminate redundant R&D
– purchasing leverage
Stand alone
120%
operating • Better management of assets
Premium – plant best demonstrated practices
improvement
100% – reduced manufacturing complexity
– outsourcing/move off shore
80% – reduced working capital
Current
60%
Market value
operating • Stand alone cash flow
of debt and – domestic demand
value – import penetration
40% equity
– current market share
– price per unit
20% – variable cost per unit
– fixed costs (R&D, advertising, etc.)
0% – capital expenditures
Current market Maximum potential
value value

Difference between purchase price and post-

integration value to client represents
value creation opportunity
43
 XYZ M&A XYZ Approach
Valuation Roadmap
The valuation process must answer a set of key questions
regarding capabilities, synergies, and strategic fit.

Develop Core Value Target as

Value Potential Develop Required
Business Stand Alone
Synergies Capital Structure
Expectations Business
XYZ Role: XYZ Role: XYZ Role: XYZ/Investment Bank Role:
•Five year cash flow forecast • Detailed financial due diligence • Overall fit with strategy • Combined cashflow forecasts
•Critical areas of sensitivity – historical financial analysis • Cost reduction potential – acquirer
– market growth activity – future protections – fixed – target
– key customers/ products • DCF analysis – variable – synergies
– cost reduction • Comparable analysis • Revenue synergies
– capital expenditures • Other potential buyers – positive Investment Bank Role:
– strategic – negative • Possible financing sources
– financial • Customer and competition – equity
• Other options response – secured debt
– spin-off • Non-recurring costs – cashflow loans
– liquidation – seller financing
– etc.

• Development of conservative case • How much is the target worth • How much is the target worth • Can we afford it?
requirements provides basis for to the seller? to us? • Does the increase risk make
analyzing debt capacity sense?

Related • Cash flow • Investment appraisal

BVU • BDP • Cash flow
Modules: • Industry analysis
• 3Cs
• RCP

44
XYZ M&A XYZ Approach
Valuation Potential Synergies
A key component in the valuation process is to quantify, as best as possible,
any upside opportunities on both the revenue and cost side.

Bottom-Line
Improvement

Cost Reduction
(“Hard synergies”)

Revenue Enhancement
Variable Fixed
(“Soft” Synergies)
• Examination of sales • Purchasing • Manufacturing
distribution channels • Labor productivity • Sales & Marketing
• Product cross-selling • Manufacturing efficiency • Distribution
• Other benefits •G & A
• Consumer and trade
spending efficiencies
• Transportation efficiency

Assessed during due diligence

45
 XYZ M&A XYZ Approach
Integration
XYZ can assist in the integration process and maximize the value of the target.

Acquisition
Due Diligence Valuation Integration
Screening

Objective: • Implement strategic vision for merger

that gives direction and impetus for
change
• Definitive actions and role definitions
to speed integration process
XYZ • Pre-planning
Activities: – combined cash flows
• Transition plan
• Cost reduction
• Revenue enhancement
Common • Reluctance to interfere in operations
Pitfalls: of acquiree

46
XYZ M&A XYZ Approach
Importance of Integration
The ability to successfully integrate acquired companies is ranked
the most important factor influencing acquisition success.

100%
90%

80%
Degree of Importance

70%

60%
50%
40%

30%
20%

10%
0%
Ability to Evaluation Management Prior Compatibility Price
integrate of abilities of experience of paid
company acquisition company making management
candidate acquired acquisitions styles

Sample: 200 CEO's 47

Sources: Wall Street Journal

XYZ M&A XYZ Approach
Integration - Key Success Factors

• Early planning
• Take control swiftly
• Constant communication
• Ensure retention of key managers
• Aggressive sharing of corporate vision
• Respect for people and culture
• Adopt merger principles
– fact-based and fair decision making

– objectivity

– two-way communication

48
XYZ M&A XYZ Approach
Integration - Develop Short - and Long-Term Objectives

Explicit expression of corporate

mission/vision by CEO

Long-term objectives

• Articulate immediately when control is taken

• Gives organization focus for new direction
• Maintains impetus for change

Short-term objectives

• Driven by due diligence and valuation

• Reality check
• Directs Transition Team in first weeks
after the merger

Top-down consistent approach

49
XYZ M&A XYZ Approach
Typical Timeline
Integration is a complex process that must be done
quickly to produce tangible results.
(weeks) 0 2 4 6 8 10 12 14 16 18 20

• Preplanning 1 3 5 7 9 11 13 15 17 19
– future cash flows
– industry analysis
– due diligence
• Strategy
• Transition Plan
• Communication Plan
• Culture Integration
• Finance Plan
– debt structure
– capex
– compensation
• Cost Reduction
– distribution – purchasing
– production – sales
– overhead
• Revenue Enhancement Plan
– cross-selling
– cross-marketing

50
XYZ M&A XYZ Approach
Integration - Develop Short - and Long-Term Objectives
The acquisition premium paid can only be justified by making swift
changes. Yet there is a reluctance to interfere in the management and
operations of the target.

Real/perceived
performance shortfall

Acquiree morale declines The "hands-off" doom loop Acquirer becomes impatient
and attrition increases and storms acquiree

Morale collapse at acquiree

51
XYZ M&A Introduction
Agenda

• Trends in M&A
• Guiding Principles for Successful M&A
• XYZ Approach
• Case Examples
– screening
– due diligence
– sale
• Exercise on Synergy Calculation
• Typical Watchouts
• Key Takeaways

52
XYZ M&A Case Example - Prepress
Screening/ Due Diligence
(1 of 2)

Client: • Prepress's base business is the market

leader in the high-end electronic imaging
market

Situation: • Prepress has historically enjoyed high

margins and been able to remain market
leader

Complication: • Prepress base business is facing price

pressure from low-end systems.
• With $300MM of cash available, Prepress is
looking for growth opportunities to sustain
superior growth rates

Recommendation: • Assess core competencies of Prepress

relative to the competition and identify
potential acquisitions

53
XYZ M&A Case Example - Prepress
Screening/ Due Diligence
(2 of 2)

XYZ • Strategic assessment of core competencies

activities: relative to the competition
• Identify "long list" of industries to discuss
with client
• Prioritize "long list" in terms of industry
attractiveness in order to narrow to 3-5
industries
• Screen for new acquisitions in higher growth
industries

Result: • From “long list" of industries and discussion

with client, attractive industries were selected.
• Within designated industries, XYZ identified
financially attractive targets that matched
Prepress's strategic focus.

54
XYZ M&A Case Example - Prepress
Search Criteria
Along with the client, XYZ developed a set of criteria with
which to evaluate different industries.
Information Output Companies that Competitor Prepress Another
Capture, and Devices Purchase Industries Customers Prepress
Potential Industries Dissemination Computer Industry
Components,
Add Value, and
Remarket

Recording products X X X
Duplication products X X X X X
Data enhancement/ X X X X X
manipulation/editing devices
Data management (storage and X X X X
retrieval) devices
Transmission originators X X
Transmission carriers/controllers X X
Transmission receivers ("dumb') X
Intelligent digital processing X X X X
systems
Interactive digital systems X
Office automation/high potential X
customers

55
XYZ M&A Case Example - Prepress
In-depth Screening
After selection of the criteria, each industry was analyzed to determine its
attractiveness and potential fit with Prepress's existing business.

Is the industry Do we offer a value-

attractive? added proposition?
• Systems orientation • What drives industry's profitability?
• What other technologies does this industry interface • What do we bring to the table?
with? Could our capabilities strengthen
• Customers the industry?
– Who are they?
– How do they buy? (channels, predictability)
• Could this industry serve as a
– What do they buy? platform to enter other markets?
• Competitors • Can we create a new system?
– Who are they?
– What is their share of their market?
– How important is this industry to them?
• Industry trends/dynamics
– How cyclical/predictable is the industry?
– How profitable is the industry?
– What is the average selling price per component?
– What is the percent value-added?
• Viable acquisition candidates
– Is one of "top 3" players "buyable"?
– Are they profitable?

56
XYZ M&A Case Example - Prepress
Magnetic Resonance Imaging (MRI)
(1 of 2)
The MRI industry was selected based on its attractiveness and potential fit
with Prepress.
Industry Attractiveness:
Market Size: – $1.4B, worldwide (second largest medical imaging segment)
Growth rate: – 9.1% (fastest growing segment)
Systems – Value-added system, but most manufacturers just sell component
orientation:
Customers: – Medical market
Competition: – Fragmented - over 200 equipment suppliers worldwide
– Major players in X-ray, CT, SPECT, and PET do not dominate MRI
Industry
trends/dynamics: – ROS historically 9%, weak 3% now
– Highly competitive with intensified price cutting
– Anticipate industry consolidation and merging of manufacturing,
product development, and distribution functions

Attractive
57
 XYZ M&A Case Example - Prepress
Magnetic Resonance Imaging (MRI)
(2 of 2)
The MRI industry was selected based on its attractiveness and potential fit
with Prepress.
Prepress Value-added Proposition:
Similarity to – Same workflow
pre-press: – Similar manufacturing (value-added resale of high-technology
components linked by proprietary software and customer circuit
boards or chips)
Linkage to – Color imaging becoming increasingly valued system feature
other – Signifies major move into medical imaging market
industries: – Complements current client printer medical market strategy
– Entry vehicle to data storage industry
– No linkage to non-medical/other markets
Prepress – System similarity (modular design, user-friendly, upgradeable, high
synergies: quality)
– Sales process similarity (system sell, proven ROI benefits)
– Customer need similarity (high resolution images, low maintenance,
strong price-value relationship)

Attractive
58
 XYZ M&A Prepress
MRI: Market Segment Competitors
Industry segments were classified and measured to identify potential targets.

$100M

$80M
Total: $1.4B
$550M $500M $150M Players:
100%
A
Estimated
Percent of B
1993 80 C
Market % I
G
(1993 D
Dollars)
F H E
60 I F
% E E
H
G
H
C G
H
40 H
D I
% G
E I
Others
B G
C
D
20 F
% C
B B
A E
B
A
A
0%

OB/GYN

Peripheral
vascular

Other
Radiology Cardiology

59
 XYZ M&A Case Example - Prepress
MRI: Industry Dynamics
The MRI market was then examined further in order to identify opportunities.

Attractive Unattractive

Track record: • Dedicated players dominate • G had (5.6%) ROS

market – what's driving losses?
– make money
– increasing sales
– focused R&D expenditures
Macro-environment: • Offered by more hospitals (75%) • Increasingly restrictive global
than any other digital imaging government regulations for
technology medical spending and
• Majority of hospital CFOs operate reimbursement
MRI profit centers
Industry trends: • Ultra high-technology R&D • Aggressive price-cutting
– leverage super-computer • Intensive competition
advances
– engineer for low cost, compact
size, long-term reliability
• Shake-out imminent

60
 XYZ M&A Case Example - Prepress
MRI: Target Acquisition Candidates
After the creation of a market map, individual companies were
assessed for their viability as an acquisition.

Viable
Acquisition Not Viable
Candidate

Company Revenue Market Value

Medical Imaging Division of Large Market Share
A $170MM $200MM Parent Company Too Small
•I •D • H •O
$165MM $100MM
B •G •E • K •P
$150MM $100MM •C • L •Q
F
•J • M •R
•K • N •S

61
XYZ M&A Introduction
Agenda

• Trends in M&A
• Guiding Principles for Successful M&A
• XYZ Approach
• Case Examples
– screening
– due diligence
– sale
• Exercise on Synergy Calculation
• Typical Watchouts
• Key Takeaways

62
XYZ M&A Case Example - Sand
Due Diligence/Valuation
Client: • A UK-based mining and minerals division of a
diversified company
Situation: • Acquirer has limited opportunities for internal
growth and is seeking growth through acquisition
Complication: • Target ("Ferret") purchased a divested division
from the client several years ago. Initial
hypothesis is that the target is a good acquisition
at the right price
Recommendation: • Industrial sand division was divided into 5
segments by end-user. Based on growth rates in
individual segments, target firm was valued at
approximately $100MM
XYZ • Market growth projections
activities: • Market share determination
• Assessment of possible synergies with acquiring firm
• Competitor analysis
• Analysis of business expansion opportunities
• Independent EBITDA forecast
Result: • A competitor bid was accepted
63
XYZ M&A Case Example - Sand
Industry Overview
Every market segment has been volatile. Only the frac segment has grown
significantly, but it is still below its 1985 peak.

14000
CAGR
12000 (1970-1993)
Volume ('000s Metric Tons)

Glass 0.1%
10000

8000

6000 Foundry -1.0%

4000

Abrasives 1.3%
2000
Frac 8.5%

0 Fillers -5.6%
1970
1971
1972
1973
1974
1975
1976
1977
1978
1979
1980
1981
1982
1983
1984
1985
1986
1987
1988
1989
1990
1991
1992
1993
64

Sources: U.S. Bureau of Mines

XYZ M&A Case Example - Sand
Value Chain
Regional presence is crucial for both whole grain segments. The distribution
cost is the largest part of the frac and foundry whole grain segments.

Manufacturers
Extraction Processing Margin Distribution

End-User Price

Foundry ManufctresMargin D
i
st
ri
but
i
on $40
Whole
Extracion
Procesing

grain:

Foundry $150-250
E
x
t
ra
ct
i
on P
r
oc
es
s
in
g D
i
st
ri
but
i
on

ManufctresMargin
Resin coated:

Frac E
x
t
ra
ct
i
on P
r
oc
es
s
in
g M
a
n
u
M
f
a
a
c
r
g
t
u
i
n
r
er
s
D
i
st
ri
but
i
on $20-25
Whole Grain:

Frac Resin M
a
nu
f
act
ur
er
s $160-240
E
x
t
ra
ct
i
on P
r
oc
es
s
in
g Mar
gi
n D
i
st
ri
but
i
on
coated:

0
% 2
0
% 4
0
% 6
0
% 8
0
% 1
0
0%

Notes: In percent of end user price

65
Sources: Ferret's budget; Customers Interviews
 XYZ M&A Case Example - Sand
Market Map by Sub-Segment

$170M $164M $100M $99M

$20M $34M
$141M $29M $86M $78M $47M $24M $29M $37M $35M $10M
100% Other
Other Others Total:

Others
Ferret
Others

Norton/Alcoa
s Other

Fairmount Minerals
Percent Ferret Genstar $570M
Ferret
of Total Others The Morie Co.

Foster
Dixiez
Unimin
80% U.S.
Ferret Silica

Stanblast
Ferret Other
Oglebay Norton Oglebay
Norton Unimin
The Morie Co.

Borden
60% Borden Other

U.S. Silica Badger

Carbo Ceramics
U.S. Silica The Morie Co. Mining
U.S. Silica

Reed Minerals
40%

Unimin In-House
resin U.S.

Ferret
coated Silica U.S. Silica
20% Unimin Unimin
Unimin
The
Morie Co
Fairmount
Minerals Ferret

0%

Coal Slag
Coated
Resin

Fillers and
Extenders

Slag
Sand

Copper
Silica
Performance

Ceramics
Primary Whole Resin- Whole

Other
Glass Glass Grain coated Grain

Glass Foundry Proppants Abrasives

Note: 1995 estimated figures except for Abrasives (1992 figures) 66

Ferret Abrasive share excludes Uniwest
Source: Tucker Anthony and U.S. Silica Information Reports
XYZ M&A Case Example - Sand
Industrial Sand Market Overview

Summary
• The overall silica sand industry has been notably cyclical with flat
volume growth over the past twenty-five years; downturns generally
track broader economic slowdowns

• Each market segment of the silica sand industry is volatile and only frac
has shown significant long-term volume growth: However, frac volume
is still below its 1985 peak

• Real industry revenues have fallen by 1.6% since 1980

• Real revenues per ton have fallen by 0.5% since 1980

• Extraction, manufacturing and distribution should be viewed as different

businesses with unique returns, customers and competitors

• Future environmental and health risks appear to be limited - regulations

limiting access to and use of silica sands are not expected to become
more burdensome in the near future
67
XYZ M&A Case Example - Sand
Summary
Ferret's Position

• Strong historical growth has been due to acquisitions and internal growth

• Ferret has focused primarily on the foundry and frac segments which
account for over 60% of its contribution

• Profitability and cash flow (as a percent of sales) have recovered from 1993
levels, but are still well below 1991 peaks

• Customers generally regard Ferret favorably - Ferret has been aggressive

in increasing revenues per ton and is perceived by customers as being
higher priced

• Because of high distribution costs, competition in most product lines is

geographically limited and varies across Ferret's locations and market
segments

• Ferret's key competitors do not own captive distributors - the key

competitor in resin-coated sands, Borden, has no extraction capabilities

• Ferret has significant unutilized manufacturing capacity, but extraction

capacity will be exceeded if the Bridgman permit is not renewed
68
XYZ M&A Case Example - Sand
Investment Rationale
Communication to investors regarding the acquisition of Ferret
should focus on five key points:
• Growth in client's existing markets is limited
– products
– geography
• The US market is very large and is about to undergo the next phase of change
– out-sourcing of foundry resin-coating processes
– growth in frac sands
– cyclicality provides opportunity to consolidate in downturns
• Dramatic change has occurred in the US market since client's exit
– consolidation
– shakeout of many competitors
– emergence of Ferret
• Ferret has taken advantage of the industry environment to compile a very attractive
combination of reserves and manufacturing capabilities
• Ferret represents an attractive platform for future growth
– product synergies (#1 worldwide leader in silica proppants for the oil & gas industry)
– further US acquisitions
– international expansion: Mexico, South America, Pacific Rim
– diversification across national economic cycles

69
XYZ M&A Case Example - Sand
Valuation Summary
Based on different scenarios a $100MM bid was made.

Worst Case Base Case Best Case

CAGR (1995-2000)

Sales -0.1% 3.8% 8.4%

GP -1.4% 3.1% 7.9%
EBIT -7.5% 2.7% 11.3%
Operating Cash Flow 1.4% 8.1% 14.3%

DCF (@12%) $64.9MM $91.3MM $123.0MM

Notes: Assumes no growth perpetuity 70

Sources: XYZ model

XYZ M&A Introduction
Agenda

• Trends in M&A
• Guiding Principles for Successful M&A
• XYZ Approach
• Case Examples
– screening
– due diligence
– sale
• Exercise on Synergy Calculation
• Typical Watchouts
• Key Takeaways

71
XYZ M&A Case Example - AMD
Summary
(1 of 2)
Situation: • The client, a global asset management company with over $50B under
management, was losing market share across its businesses
• XYZ was approached to assist in developing a strategy to achieve profitable
growth

Approach: • Phase I focused on defining the current state of the current business and its
environment
– in depth analysis of the client‟s markets, channels and customers
established that client was losing share in many markets and was being out-
invested by competitors in core markets
– detailed profitability analysis across products, channels and markets
identified that only four businesses in the clients portfolio of 15 were making
significant contribution to group profits
• In Phase II, joint XYZ/client teams were formed in each business to develop
detailed five year business plans. The plans included required investment,
potential strategic moves and resultant profits, enabling the full potential of
each business unit to be determined on a comparable basis
• The individual business plans were integrated to quantify the overall opportunity
for the company. Corporate-level strategic options were then identified,
detailed and valued

72
Source: XYZ & Company Experience Centre
XYZ M&A Case Example - AMD
Summary
(2 of 2)
Conclusion: • After detailed evaluation of strategic options, a decision was made to sell the
Asset Management Division (AMD) business. The asset management company
required significant investment in order to achieve profitable growth, and the
parent company was able to achieve higher returns by investing in other
businesses within its portfolio
• XYZ continued to support the client through the sale process by
– developing the offer memorandum, the business forecast and the
management presentation
– identifying the best new parent and quantifying their full-potential price
– supporting the bid negotiations

Impact: • The division was successfully sold, realizing $500M more in value from the
transaction than the parent would have been able to extract from the business
through continued ownership.

73
Source: XYZ & Company Experience Centre
XYZ M&A Case Example - AMD
Profitability by Business

The client‟s profits were concentrated in three businesses.

US$ 100M
Cumulative
Profit
80

60

40

20

0
A C E G I K M O Total
B D F H J L N P
Business Unit
Source: XYZ & Company Experience Centre 74
XYZ M&A Case Example - AMD
Asset Management Strategy
A successful strategy for the Asset Management business is:
• Acquire to obtain • Declining market • Too late
performance for strategy
wholesale channel • Acquire to build
US • Expand into new dominant position
channels or sell
Geography

• Rationalise range • Acquire to build • Develop

• Invest to grow position in UK and alliances to
Europe offshore funds Germany prepare for
• Acquire UK retail • Focus on Offshore launch
fund manager funds in Europe

• Organic growth of • Acquire to • Develop to

offshore funds build position prepare for
Asia
across Asia • Build alliance launch
• Build alliance in in Japan
Japan • Exit Australia
• Exit Australia

Retail Institutional 401K/DC

Product

The Asset Management Business would need to embark on an

aggressive and capital intensive acquisition program to build
dominant and sustainable positions in core markets.

Given the risk involved, selling the Asset Management division was recommended

75
Source: XYZ & Company Experience Centre
XYZ M&A Case Example - AMD
Management Selling Presentation (1)
The XYZ team helped the management prepare the selling presentations to the
investors.
LGT Asset Management
A Member of Liechtenstein Global Trust
Asset Forecast

Asset growth is forecast to come from across the business.

AMD

100
Assets
($ Millions) 78
2 3
2 2
75 7 1
6
56

50

25

0
1997 AInst. Retail
B C D
Inst. Retail EInst. Retail
F G
Frankfurt 2002
US Europe Asia

Note: 1997 is based on 10+2 forecast 99

76
Source: XYZ & Company Experience Centre
XYZ M&A Case Example - AMD
Management Selling Presentation (2)

Core EBITDA Forecast

EBITDA is forecast to reach $200M over the next 5 years.

250 $ 20 M
$ 15 M
Core
EBITDA $ 201 M
($ Millions) 200 $ 116 M
$ 201 M
($ 39 M)
150

100 $ 88 M

50

0
1997 Revenue IT Productivity CDSC Other 2002
EBITDA Growth Investments Improvement Reduction EBITDA

Note: 1997 is based on 10+2 forecast

Other includes bonus adjustment from profit sharing scheme ($35M) 106

Source: XYZ & Company Experience Centre 77

XYZ M&A Case Example - AMD
Bidder Evaluation
Detailed analysis of likely integration benefits identified „Company C‟ as
the parent that would put the highest value on the client‟s business.

2,000
Net Present
Value Strategic Premium
Revenue Synergy
$1,529M $1,538M
1,500 $1,486M

$1,248M
Cost
Synergy $985M
1,000 Bain Cost
Adjustment**

500 Management
Plan*

0
Company A Company B Company C Company D Company E

Notes: *Includes XYZ Revenue adjustment of ($254M) to reflect forecast fee rate decline
78
**XYZ Cost adjustment varies across bidders to reflect strength of management in cost reduction
NPV calculated using 5-year 14% discount rate and $561 M terminal value
XYZ M&A Case Example - AMD
Bidder Evaluation - Model
The analysis combined a re-evaluation of AMD business, a synergy
analysis by bidder and an estimation of strategic premium which bidders
would be ready to pay.
AMD Purchase Value by Buyer All figures in US$M
Key Assumptions
Discount Rate 14% percent
Tax rate 25% percent
Pay off equivalent 1 year
AUM 54.5 Billion
Price adjustment (3%) percent on top of -1%
Stand
Valuation A B C D E
alone
AMD Plan 1,090 1,090 1,090 1,090 1,090 1,090
Revenue Adjustment (254) (254) (254) (254) (254) (254)
Cost Adjustment 157 157 157 157 94 78
% achieved 100% 100% 100% 100% 60% 50%
XYZ upside to client plan 157 157 157 157 157 157
Cost cut 49 49 49 49 49 49
Cost cut % 17% 17% 17% 17% 17% 17%
Cost synergies - 288 342 505 262 11
Cost cut - 67 79 116 60 5
Cost cut % - 28% 33% 48% 25% 2%
Revenue Synergies - 105 114 - 36 -
New markets - - 114 - - -
Brokerage - 105 - - 36 -
Strategic Premium - 100 80 40 20 60
Maximum Value 992 1,485 1,528 1,537 1,247 985
Difference from highest (545) (52) (9) - (290) (552)
Percent of AUM 1.8% 2.7% 2.8% 2.8% 2.3% 1.8%
Percent in bid 86% 73% 70% 73% 77% 84%
Base plan 90% 90% 90% 90% 90% 90%
Price Adjustment 100% 100% 100% 100% 100% 100%
Operating Improvement 80% 80% 80% 80% 80% 80%
Cost synergy 50% 50% 50% 50% 50% 50%
New Markets synergy 10% 10% 10% 10% 10% 10%
Brokerage Synergy 40% 40% 40% 40% 40% 40%
Strategic Premium 50% 50% 50% 50% 50% 50%
'Realistic' Bid 852 1,088 1,074 1,124 957 825
Difference from highest (272) (37) (50) - (167) (300)
Percent of AUM 1.6% 2.0% 2.0% 2.1% 1.8% 1.5%

79
 XYZ M&A Case Example - AMD
Synergy Methodology
Synergies from merging AMD with a potential bidder can be evaluated by
examining each segment of the value chain separately.

Corporate Overhead
Business Unit Overhead

Manufacturing Administration Marketing

• Function • Corporate Centre • Investment Management • Administration • Marketing and sales • Business Unit Overhead
• Description • Central Management Human • Investment Managers • Portfolio accounting • Retail Marketing teams • Office costs
Resources Economists Fund administration Client Servicing teams IT support
Finance Dealers Transfer agencies Institutional Marketing Local HR
Audit Research & support teams Local accounting

• Rationale • Combining to similar sized • Investment management • Administration is mix of • Combining under one • Combining facilities enables
companies should result in teams are largely fixed cost. systems and variable labour. brand eliminates ad spend closure of offices and
significant economies of Two operations with Can rationalise centres and and rationalisation of economise of scale
scale. Anticipate significant identical teams should be systems; some impact on marketing teams amongst support functions
savings able to „cherry-pick‟ headcount
managers
• Impact • 80-90%
(Cost savings on • 50-80% • 50-60% • 50-75% • 80-100%
smaller operation)

80
 XYZ M&A Case Example - AMD
Business Unit Synergies - Company C

Client Company C Synergy

Location Office Overhead Office Overhead
Size Description of activities Rationale
Costs ($M) Size Saving

North America
• New York
• San Francisco Retail client sales & service Close Company C office

• Toronto Acquired Canadian operation in 1996 (5 offices) Rationalise office

• Other Major operations in Houston, Atlanta (c400) & Denver Opportunity to reduce number of
(c400) centres
Regional offices in Boston, Louisville, Dallas, Miami, Portland

Europe
• London Regional head office Fold into Alban Gate

• Frankfurt Marketing office (opened 1997) Close Company C office

Offshore admin in Luxembourg
• Dublin Merge operations
Offices in Paris, Milan (1996), Netherlands (1996) ,
• Rep offices Jersey and Prague
Remove duplication e.g Netherlands

Asia
• Hong Kong Marketing team, investment management (c50 people) Merge operations

• Tokyo Marketing team, investment management Merge operations

• Sidney Rep office Merge operations

• Singapore Rep office Merge operations

Combine rep offices in Taipei

• Rep offices Taipei (1988), Bermuda, Buenos Aires (1996)

81
XYZ M&A Case Example - AMD
Manufacturing Synergies - Company C

Client Company C Synergy

Asset Class Assets Staff Costs Staff Comments Cost Rationale
($B) ($M) Saving

Equity
• Global 1 5? London / US offices? Adopt AMD team
• US 25 66 Houston, Denver, Boston Close Chancellor operation
• UK 2 5 London Combine both in one location
• Germany 1 17 London (?) Adopt AMD team ?
• Europe 4 11 London (?) Adopt AMD team ?
• Asia 5 25 Hong-Kong Combine both in one location
• Australia 1 4 Hong-Kong (?) Adopt AMD team ?
• Japan 2 10 Tokyo Combine both in one location
• Emerging markets 2 3 London (?) Adopt AMD team ?

Fixed Income
• Global 3 5 London Combine both in one location
• US 11 30 Houston, Denver, Boston Close Chancellor operation

Other
• Alternative Assets 12 No impact
• Other 3 No impact
• Realty Houston, Denver, Boston No impact

82
 XYZ M&A Case Example - AMD
Product Synergies - Company C

Client Company C Synergy

Business / Product Range Assets Marketing Admin Cost
Market Command
$B Cost $M Cost $M Saving

Funds
• US • US Mutual funds • 68 funds; intermediaries & direct ($94B) Consolidate operations

• Canada • Canadian mutual funds • 14 funds through intermediaries ($1B) Consolidate operations

• UK • UK Unit Trusts / Inv. Trusts • 23 Unit trusts ($7B) Consolidate operations

• Germany • German retail funds • None (?) Consolidate operations

• Europe • Offshore funds • Offshore funds to F, I & NL ($2B) Consolidate operations

• Hong Kong • Offshore funds • Funds in Hong Kong / Taiwan ($4B) None

• Australia • Australia unit / master trusts • None (?) None

• Japan • Japan investment trusts • 33 Investment Trusts ($2B) Consolidate operations

Segregated
• US • Discretionary accounts • US pension funds ($45B) Close Chancellor operation
• Europe • Discretionary accounts • UK pension funds (across Europe?) None
• Asia • Discretionary accounts • Small Hong-Kong pension operation Close AMD operation
• Japan • Discretionary accounts • Japan pension accounts Consolidate operations

Defined • 401K operation incl. admin ($33B)

Contribution

83
 XYZ M&A Case Example - AMD
Soft Synergies - Company C

Client Company C AUM Synergy

Business / Product Range Upside
Market Rationale

Funds
• US • US Mutual funds • 68 funds; intermediaries & direct ($94B) Share channels e.g. wirehouses
• Canada • Canadian mutual funds • 14 funds through intermediaries ($1B) Best product through both channels
• UK • UK Unit Trusts / Inv. Trusts • 23 Unit trusts ($7B) Best product through both channels
• Germany • German retail funds • None (?) None
• Europe • Offshore funds • Offshore funds to F, I & NL ($2B) Best product through both channels
• Hong Kong • Offshore funds • Funds in Hong Kong / Taiwan ($4B) Best product through both channels
• Australia • Australia unit / master trusts • None (?) None
• Japan • Japan investment trusts • 33 Investment Trusts ($2B) Limited

Segregated
• US • Discretionary accounts • US pension funds ($45B) AMD international product through Company C relationships
• Europe • Discretionary accounts • UK pension funds (across Europe?) Limited; strengthen pan-European operation
• Asia • Discretionary accounts • Small Hong-Kong pension operation Limited
• Japan • Discretionary accounts • Japan pension accounts Limited

Defined • 401K operation incl. admin ($33B)

Contribution

84
XYZ M&A Introduction
Agenda

• Trends in M&A
• Guiding Principles for Successful M&A
• XYZ Approach
• Case Examples
– screening
– due diligence
– sale
• Exercise on Synergy Calculation
• Typical Watchouts
• Key Takeaways

85
 XYZ M&A Exercise
Background

• XYZ was hired to help a Private Equity Fund which wanted to get
involved in consolidating the Garden Furniture industry (see note) in the
UK
– the purchase of 2 companies and the realization of synergies
between them is expected to create significant value above the
investment required
• One of the major exercises in this project involved quantifying the net
value creation arising from synergies between potential target
companies
• The approach followed by the team is shown in the Approach slide

86
Note: This exercise is based on a real case. However, for confidentiality purposes, the actual industry has been disguised
XYZ M&A Exercise
Background
Most players in the Garden Furniture industry create value along the
following “value chain.”

Corporate Activities

Sales &
Purchasing Manufacturing Distribution
Marketing

• Raw materials • Factories are • There are 5 major • The Garden

include mainly typically located channels Furniture market is
across the UK national
– wood – DIY shops
– plastic – specialist
retailers
– builders
merchants
– private
– public

87
XYZ M&A Exercise
Approach
Having selected 4 candidates, synergies were evaluated between
each combination of 2 players to determine the optimal scenario.

Potential
Selection Synergy Integration of
Sources of
Process Evaluation Results
Synergies

• Select key • Analysis of the • Evaluation of • Integration of

consolidation potential and hard and soft synergy valuation
players based on specific sources synergies for results
first cut: of synergies: each combination • Conclusions on
– size – hard of 2 candidates best potential
– product mix – soft consolidation
– geographic mix – soft-soft
– availability

already done, 4 focus of the exercise

candidates
selected
(S,P,B and G)
88
 XYZ M&A Exercise
Background - ROS/RMS

Given the large number of players performing with low relative channel
share, there exists potential for consolidation in the industry.
25%
R² = 74% £ 60M
Return on
1997
Sales 20% Revenues
(Operating
Profit/
Turnover) 15%

Leader
10%

G S
5%

P B

0%

(5%)
0.1 0.2 0.5 1 2 5

Relative Channel Share*

*Note: Relative Channel Share is the weighted average relative market share by channel; 89
ROS based on three year average to 1996/97, as available
Source: FAME; Company Accounts; Information Memoranda; MBD Report; XYZ analysis
XYZ M&A Exercise
Background- Revenue by Product

Available players with a focus on Garden Furniture were selected.

£85.1M £21.1M £105.2M £35.0M
100%

Percent of Other Click Here for

Other Other
Total Sales Other Back-up
80%

60%

Garden
40% Garden Furniture Garden
Furniture Garden
Furniture Furniture

20%

0%
S P B G

Note: There is no overlap between players other than Garden Furniture 90

Sources: Information memorandum

XYZ M&A Exercise
Question 1 - Typical Sources of Synergies

Using your knowledge of synergies, fill in types of synergies that

should be considered for hard, soft and soft-soft synergies.

Hard Soft Soft-Soft

• Raw material • •
purchasing
• •
•
• •
•
• •
•
• •
•

91
XYZ M&A Exercise
Answer 1 - Typical Sources of Synergies

Hard Soft Soft-Soft

In-Market At Centre
• Raw Material Purchasing • Portfolio clout • Best Practice • Leveraging scarce
Sharing specialist management
• Manufacturing • Avoiding talent at the Centre
Rationalisation e.g., plant margin erosion • New Product
closure due to higher Development • Leveraging scarce local
power to knowledge
• Distribution consolidation buyers • New business
development
• Sales & Marketing • Improved
– media purchasing category
– salesforce efficiency management

• Headquarters/Overhead
sharing

92
XYZ M&A
For this example, the following specific sources of synergies were identified.
Hard
• Consolidation of salesforces
• Consolidation of distribution
• Reduction in corporate and
regional overheads
• Consolidation of research and
development functions of
overlapping products
• Raw materials purchasing
savings
• Rationalisation of production
of overlapping product
Exercise
Sources of Synergies
Soft
Channel Portfolio
Complementarity Strengthening
• Volume enhancements • More powerful portfolio
– in each distribution
addresses the balance
channel, the weaker
versus major distributors
allowing consolidation to
player will benefit
from the other
redefine customer
relationships to
player‟s distribution
– realize cost efficiencies
strength
– resist price pressure
• Enhanced distribution – grow share
penetration – invest more/account
– maintain more
consistent prices
• Growing share of account
93
XYZ M&A Exercise
Question 2 - Hard Synergy Quantification Example - S+P

Taking the example of the combination of S and P, we want to evaluate the

hard synergies achievable. The purpose of Question 2 is to use the
attached data to fill in the template below.
Cost Synergy (£ 000s)

• Manufacturing £

• Materials Purchasing £

• Distribution £

• Sales & Marketing £

• Headquarter Consolidation £

Total £
94
 XYZ M&A Exercise
Question 2 Data - Hard Synergy Quantification Method
Brainstorming, “rules of thumb” and competitive interviews often
enable one to get a good sense of basic input to the synergy model in
terms of cost synergies.
Materials Sales & Headquarters
Manufacturing Distribution
Purchasing Marketing Consolidation

Sources of consolidate increase raw improve smaller consolidate reduce smaller

Integration manufacturing material player's smaller player's player's back
Savings facilities purchasing distribution cost in sales & marketing office
dependent on leverage overlapping in overlapping
current capacity channels channels
utilisation

Target Cost 5% 2% 10% 50% 80%

Savings

Applied To combined entity combined entity smaller entity, by smaller entity, by smaller entity
channel channel

Key Data Input sales by product* sales by product* sales by channel sales by channel sales by channel

Timing of
Realisation 3 years 1 year 1 year 3 years 3 years
Delay **

Note: * In this exercise, players product sales overlap in garden furniture

** For this exercise, full impact on today‟s EBIT is considered, rather than full NPV 95
calculation
Source: XYZ experience; Industry interviews
 XYZ M&A Exercise
Question 2 Data - Candidates’ Cost Profiles

The analysis of company accounts and other information available

allowed the team to find the cost structure of each candidate.
£85M £21M £105M £35M
100%
Percent Operating Profit
of Total
Other Overhead
Sales Administration Click Here for
80% Sales & Marketing Back-up Data
Distribution

60% Manufacturing

40%

Raw
Materials
20%

0%
S P B G

Note: Sales and cost information are best estimates for 1997/98 96
Source: Company accounts; Information memorandum; FAME; XYZ analysis
 XYZ M&A Exercise
Question 2 Data - Candidates’ Distribution Profile

The 4 potential candidates‟ distribution profiles vary significantly.

£85 M £21 M £105 M £35 M

100% Click Here for
Sales % Back-up Data
Social

80%

Private
60%

Builders Merchant
40%

Specialists
20%

DIY
0%
S P B G

Note: Sales and cost information are best estimates for 1997/98 97
Source: Company accounts; Information memorandum; FAME; XYZ analysis
XYZ M&A Exercise
Question 2 - Methodology

Cost synergies are to be realized in areas of duplication between the current

activities of the businesses to be combined.

Input
Overlapping manufacturing, purchasing

Overlapping costs of distribution, sales and

marketing

Dual head-office Synergy

How much synergy is
Related Costs expected from combining
both entities?
Assumptions
Based on interviews and XYZ
experience, how will synergies be
realized

Note: Detailed analysis may be required depending on the need of the case. This would include a detailed 98
cost analysis e.g., cost of employees per function, factory cost breakdown, factory locations, etc
 XYZ M&A Exercise
Answer 2 - Hard Synergies Model Example S+P

S+P Cost
Area of synergy S cost* P cost* combined cost Synergies Reduction Applied to
Production 11,047 2,388 12,999 650 5% combined entity
Materials 34,745 7,520 40,889 818 2% combined entity
Distribution 8,486 1,948 8,505 195 see below
Selling & Marketing 3,437 789 3,299 395 see below
Admin 2,636 607 2,713 486 80% smaller entity
TOTAL 2,543

Distribution 8,486 1,948 195

split by channel (based on revenue split) using % split of revenues

DIY 364 - 0 10% smaller entity, on a channel-by-channel basis
Specialists 2,893 140 14 10% smaller entity, on a channel-by-channel basis
Builders Merchant 364 140 14 10% smaller entity, on a channel-by-channel basis
Private Contract 3,062 1,485 149 10% smaller entity, on a channel-by-channel basis
Social 1,803 183 18 10% smaller entity, on a channel-by-channel basis

Selling & Marketing 3,437 789 395

split by channel (based on revenue split) using % split of revenues

DIY 147 - - 50% smaller entity, on a channel-by-channel basis
Specialists 1,172 57 28 50% smaller entity, on a channel-by-channel basis
Builders Merchant 147 57 28 50% smaller entity, on a channel-by-channel basis
Private Contract 1,240 601 301 50% smaller entity, on a channel-by-channel basis
Social 730.5 74.0 37.0 50% smaller entity, on a channel-by-channel basis

Note: Costs for Garden Furniture have been prorated to total sales cost breakdown for cost by 99
channel, percentage of revenue by channel was used
XYZ M&A Exercise
Question 3 - Soft Synergy Quantification

Again using S + P combination, the question is to evaluate the potential

soft synergies as shown below. Use attached data for this question.

(£ M)

Channel
Complementarity:

Portfolio
Strengthening:

100
 XYZ M&A Exercise
Question 3 Data - Soft Synergy Quantification Method
Revenue benefits will depend on each player‟s relative distribution
strength in each channel. XYZ experience enabled the team to
quantify the impact of a combined distribution on the revenues.

C
h
ann
e
l Por
t
fo
l
io Por
t
fo
l
io
S
t
r
ong C
o
mp
l
eme
n
ta
ri
t
y S
t
r
eng
t
hen
i
ng S
t
r
eng
t
hen
i
ng
(
20
%) (1
%) (2
%)

Player 1 Relative C
h
ann
e
l Por
t
fol
i
o Por
t
fo
l
io
Distribution M
e
d
iu
m C
o
mp
l
eme
n
ta
ri
t
y S
t
r
eng
t
heni
ng S
t
r
eng
t
hen
i
ng
Strength (
10
%) (
0.
5%) (1
%)

C
h
ann
e
l C
h
ann
e
l
W
e
a
k N
o
Up
l
i
ft C
o
mp
l
eme
n
ta
ri
t
y C
o
mp
l
eme
n
ta
ri
t
y
(
10
%) (
20
%)

W
e
a
k M
e
d
iu
m S
t
r
ong
A
p
p
l
i
e
d
t
o
b
ot
h
p
l
a
y
er
s Player 2 Relative
Distribution Strength
A
p
p
l
i
e
d
t
o
s
ma
l
l
e
r
p
l
ay
e
r
o
n
l
y

Note: Sales and cost information are best estimates for 1997/98 101
Source: Company accounts; Information memorandum; FAME; XYZ analysis
 XYZ M&A Exercise
Question 3 Data - Revenue Uplift Quotes
Revenue uplift would be achieved in combining businesses for 2 major
reasons, depending on the specific situation: channel complementarity or
portfolio strengthening.

Channel "Our current focus is on only a few channels. The obvious growth for
Complementarity: us would be to start going into others, but only if we had good access
to them"
–Operations Manager, Competitor

Portfolio "Competitor X are very well known, and their brand has been a key lift
Strengthening: for its acquired company"
–Sales Director, Retailer

"I think G believe that by buying [target] some of their reputation could
rub off onto G’s own [products]... [target] is a good name"
–Marketing Manager, Competitor

Note: Sales and cost information are best estimates for 1997/98 102
Source: Company accounts; Information memorandum; FAME; XYZ analysis
XYZ M&A Exercise
Question 3 Data - UK Market Map
(1997)
The UK market for Garden Furniture is mainly channelled through DIY stores.

G £23M
S
£353M £135M £120M £70M £51M Total = £750M
100%
Other Other
B
Percent of
Total Other Other
80 P
P
B Other
60 B G P

S
P
40 S

S
Leader G
20
S

0
DIY Specialists BMs Private Other
Public

103
XYZ M&A Exercise
Question 3.1 - Relative Distribution Strength
In order to select the appropriate type of soft synergies and potential sales
uplift, you would need to determine the relative distribution strength of each
candidate, by channel.

S P B G Key
Strong
DIY
Medium
Specialists
Weak
BMS

Private

Public

104
XYZ M&A Exercise
Answer 3.1 - Relative Distribution Strength

Looking at the market map gives a straightforward answer to the relative

distribution strength of each candidate. In a less simple case, RMS could be
used by channel.

S P B G Key
Strong
DIY
Medium
Specialists
Weak
BMS

Private

Public

105
 XYZ M&A Exercise
Answer 3 - S+P - Soft Synergy - Answer
Using the soft synergy assumption framework and knowing each player‟s
relative distribution strength, it is simple to calculate the incremental revenue
due to synergy in the combined entity.
Type of S Revenue* P Revenue* Synergy
S Strength P Strength
Synergy Base (£000s) Base (£000s) (£000s)

DIY None – – –

Channel complementarity
Specialists 29,987 1,061 106
10% uplift for smaller
player

BMS None – – –

Private Portfolio strengthening 366

25,382 11,236
1% uplift on total combined

Public Channel complementarity

10% uplift for smaller 14,950 1,381 138
players

Total
610
244
– Channel complementarity
366
– Portfolio strengthening

Note: Revenues have been pro-rated to the share A Garden Furniture Sales 106
 XYZ M&A Exercise
Summary Answer - S+P Combination

14 Not quantified
EBIT £0.3 M £0.3 M £13 M
£0.6 M £0.5 M Revenue Uplift
(£ M) £0.7 M
12
£0.8 M Cost Savings
£10 M
10
P

8
30%
6 Combined EBIT
Entity
Cost Savings Revenue Uplift Uplift
S
4

0
1. 2. 3. 4. 5. 6. 7. 8. 9.
Pre- Materials Production Salesforce & Headquarters Portfolio Channel Other Strategic Post-Synergy
Combination Purchasing Scale Scale Benefits Distribution Consolidation Strengthening Complementarity Benefits Realization
EBIT Benefits Consolidation EBIT

Key Drivers: •Overlapping •Production •Overhead •Sales in each •Sales in each •Other •Reality check
materials costs for all costs for channel overlapping benefits against rules
purchasing overlapping overlapping increased due channel –qualitative of thumb
costs reduced products geographical to product improved due (capability
reduced sales of all complimentarity to increased sharing,
products market knowledge
reduced presence transfer,
etc.)

107
XYZ M&A Exercise
Consolidation Benefits - UK Market Map
(S+P)
A combination of S+P would dominate the public
channel but have minimal presence in DIY.
G £23 M
S+P Total =
£353 M £135 M £120 M £70 M £51 M £750 M
100%
Percent Other Other
B
of Total
Other Other
80%

B Other
60% B G

Other
S+P

40%
S+P
S+P
Leader G
S+P
20%

0%
DIY Specialists BMs Private Other
Public

108
 XYZ M&A Exercise
S+P - ROS/RMS

Consolidation of S+P‟s positions would create significant ROS improvement

thanks to the realization of synergies.
25%
R² = 74% £ 60M
Return on
1997
Sales 20% Revenues
(Operating
Profit/
Turnover) 15%

S+P
Leader
10%

G
5% B

0%

(5%)
0.1 0.2 0.5 1 2 5

Relative Channel Share*

*Note: Relative Channel Share is the weighted average relative market share by channel; 109
ROS based on three year average to 1996/97, as available
Source: FAME; Company Accounts; Information Memoranda; MBD Report; XYZ analysis
 XYZ M&A Exercise
Summary of Two-Company Combinations
Analysis of all combinations enabled the XYZ team to highlight the best
consolidation option. The S and B combination shows the highest hard as well as
soft synergy potential. However, the difference of value created in each
combination is limited. A close analysis of the practical aspects of each
combination and ease of implementation is required as a next step.
Percent Change in
Operating Profit S P B G

S 26% 31% 28%

P 23% 3% 25% 28%

B 27% 4% 25% 1% 27%

G 25% 3% 26% 2% 24% 3%

Hard Synergy Soft Synergy

*Notes: More refined synergy analysis using the measure of product complementing was used in the project, which makes figures 110
different from that of the exercise
XYZ M&A Exercise
Back-Up Data

Total Revenue Breakdown

(£000s) S P B G
Total Sales 85,140 21,110 105,200 35,040

Cost breakdown
Production 13,370 3,420 17,730 3,940
Materials 42,050 10,770 55,770 18,450
Distribution 10,270 2,790 11,600 4,580
Selling & Marketing 4,160 1,130 4,500 1,860
Admin 3,190 870 3,700 1,420
Other 3,040 830 3,600 1,350

Total Garden Furniture Revenues 70,350 14,740 77,130 27,100

Revenue Breakdown by Channel

S P B G
DIY 4% 0% 90% 5%
Specialists 34% 7% 7% 65%
Builders Merchant 4% 7% 0% 30%
Private Contract 36% 76% 3% 0%
Social 21% 9% 0% 0%
Total Revenues (£000s) 85,140 21,110 105,200 35,040

111
XYZ M&A
Agenda

• Trends in M&A
• Guiding Principles for Successful M&A
• XYZ Approach
• Case Examples
– screening
– due diligence
– sale
• Exercise on Synergy Calculation
• Typical Watchouts
• Key Takeaways

112
XYZ M&A
Typical Watchouts
(1 of 2)

Screening: • Always start with an exhaustive list. Do not eliminate candidates

before applying rigorous screening criteria

• Remain open minded about companies‟ availability. For instance,

do not take a “no, we are not for sale” quote a definite non-
availability

Due diligence: • Typical analysis includes a thorough company “check-up” using

the complete range of basic XYZ strategic tools, from internal and
external perspectives

113
XYZ M&A
Typical Watchouts
(2 of 2)
Valuation: • Full value quantification should include three steps:
–stand alone value: assuming current performance going forward. This
takes into account market dynamics factors
–stand alone operating improvement (or full potential): additional value
created by managing the entity better, e.g., according to BDPs
–integration opportunities: valuation of synergies (cost/“hard” synergies
and revenue enhancement/“soft” synergies) generated by the
combination of two businesses
Integration: • Carefully thought-of integration process is a major factor of success in
M&A
• Key success factors include early planning, constant communication,
retention of key managers, aggressive sharing of corporate vision,
respect for people and culture
• Short-term objectives should be consistent with long-term goals
• Swift changes are required and acquirer should avoid falling in the
“hands-off” doom loop (drop in performance, pressure on acquiree,
morale collapse at acquiree, lower performance…)
114
XYZ M&A
Agenda

• Trends in M&A
• Guiding Principles for Successful M&A
• XYZ Approach
• Case Examples
– screening
– due diligence
– sale
• Exercise on Synergy Calculation
• Typical Watchouts
• Key Takeaways

115
XYZ M&A
Key Takeaways
(1 of 3)

Trends: • M&A activity has been booming over the past decade
and has become a major part of corporate activities

• Failure rate remains high however, driven by poor

strategic fit, integration failure and overpayment.
Prices (usually as earnings multiple) have been on the
increase, making adequate consulting support
increasingly important to the M&A process

116
XYZ M&A
Key Takeaways
(2 of 3)

Guiding • M&A should be thought of as an integral part of a company‟s growth

Principles: strategy
• A clear and disciplined approach is vital to ensure success, including
proactive strategic thinking; careful screening, due diligence and
execution process; clear definition of full value
• M&A opportunities should be prioritised against the value creation
potential vs. parenting advantage
• In order to ensure accurate evaluation of a company, the critical
issues to consider are:
–relatedness: how much synergy can be generated by the merger?
–strategic strength: what is the full potential performance of the
acquiree?
–market dynamics: how attractive is the underlying industry? Will
the acquiree provide privileged access to an attractive sector?

117
 XYZ M&A
Key Takeaways
(3 of 3)
Approach: • Major steps in an M&A in which XYZ may be involved are:
–strategy development: should an acquisition be pursued? in which sector
or region?
–target screening: who is/are the best candidate(s) based on
attractiveness and availability?
–due diligence: how comfortable are we with the screening hypothesis?
–valuation: what is the full value of the entity? what is the right price for it?
–integration: how will we ensure that full value is achieved?

• XYZ role is complementary rather than competing with other advisors‟ role:
–XYZ focuses on strategic issues and full value quantification
–investment banks concentrate on the financial aspects of the deals:
market-related information gathering and analysis, valuation, deal
financial structuring, production of information memorandum, etc.
–lawyers deal with legal matters, including due diligence at the time of the
transaction (confirming that the information memorandum reflects reality,
for instance)
–accountants are occasionally involved in the deal structuring

118