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Steps in M&A

Steps in M & A Deal

1. 2. 3. 4. 5. 6. 7. 8. 9. 9 10. 11. 12.

Decision to acquire /merge Define Financial Chest ( Money at Hand/ Tied Up) Identify Target Company Preliminary Review Due Diligence ( Technical, Financial & Tax, Legal) Structuring a Deal Negotiations Fixing a Price (Value) Entering into a MOU Entering into final agreements - Closure Payment of Consideration Post Merger Activities

Decision to acquire /merge

Deciding the Strategy
Entry Ford-M&M Fiat-PAL DCM-Daewoo, M Benz-Telco Extending Markets Bharti- Zain/Warid, HDFC Bank CBOP -LKB ICICI Bank-Sangli/BOM/BOR Driving earnings

Decision to acquire /merge

Strategy
Expanding product and service lines Asian Paints- Hawcoplast/ Berger International Zydus Cadilla German Remedies Blocking/Buying Competition Coke- Parle/ Bottling Plants HLL- Dollops/Kwality/Milkfood Market Share UB- Shaw wallace, Pfizer- W th Pfi Wyeth, Abbot- NPIL/Solvay, HLL- TOMCO/LAKME Synergies/Diversification
Mercator- Coal Mines/Ship Management Companies

Getting Board Concurrence

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Define Financial Chest

Cash In Hand Internal Accruals Funding
Debt Equity (Strategic) FPO

Identify Target Company

Research the market
Technology Improvement Complementary Skills/Products Supplementary Skills/Products Brands

Develop Target List Some mergers create synergies because the firm can either cut costs or use the combined assets more effectively ff ti l Marketing gains
Advertising Distribution network Product mix

Preliminary Review
Based on Information in Public domain Check whether prima facie the Co/product suits/complements/supplements Short List Prospects after review

Initial Due Diligence

Review company literature and business profile to d determine if the company i a strategic fi and is i h i fit d meets strategic objectives of acquirer. Review recast financial summaries Schedule meetings with the short list of target companies

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Meet with Selected Companies

After list has been narrowed to a very few good prospects, Be discussions. B prepared t meet with and enter serious di d to t ith d t i i Review company financial statements and business profile. Review valuation information. Review company information, sales literature, and available information. Meet with target company management and tour company. Determine if this target company is a strategic fit and if it meets your acquisition criteria. Meet with your shareholders and decision makers, review target companies and make go/no-go decision.

NDA/Letter of Intent or Initial Term Sheet

Next step is to prepare a NDA/ Letter of Intent (LOI) or Initial Term Sheet Outline the basic terms of your offer Asset vs Stock Sale

Detailed Due Diligence

Technical Legal Management/General Financial & Taxation

Technical Due Diligence

Description of manufacturing processes (hardware, software, communications, other); ft i ti th ) Need for know-how, technological transfer and licensing required; Suppliers of equipment, software, services (including offers); Manpower (skilled and unskilled); Infrastructure (power, water, etc.); Transport and communications (example: satellites, lines, receivers, transmitters);

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Technical Due Diligence

Raw materials: sources, cost and quality; Relations with suppliers and support industries; Import restrictions or licensing (where applicable); Sites, technical specification; Environmental issues and how they are addressed; Leases, special arrangements; Integration of new operations into existing ones (protocols, etc.)

Legal
Ownership of the firm. Court registration documents. Copies of all protocols of the Board of Directors and the General Assembly of Shareholders. Signatory rights backed by the appropriate decisions. The charter (statute) of the firm and other ( ) incorporation documents.

Legal
Copies of licences granted to the firm. A legal opinion if any regarding the above licences. A list of lawsuit that were filed against the firm and that the firm filed against third parties (litigation) plus a list of disputes which are likely to reach the courts. Legal opinions regarding the possible outcomes of all the lawsuits and disputes including their potential influence on the firm.

Management DD
Points regarding the political, legal (licences) and competitive environment. d ii i A vision of the business in the future. Development of new products or services The strengths and weaknesses of the competitors relative to the firm. Missing information regarding the markets, the clients and the competitors. The pricing strategy (how is pricing decided.

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Management DD
Marketing and advertising campaigns (including cost estimates) - broken by market and by media. Distribution of the products. Customer after-sales service (hotline, support, maintenance, complaints, upgrades, etc.). Customer loyalty (example: churn rate and how is it monitored and controlled).

Financial & Tax DD

Last 3 years income statements of the firm or of constituents firm, merger. of the firm if the firm is the result of a merger The statements have to include: Balance Sheets; Income Statements; Cash Flow statements; Audit reports Cash Flow Projections and the assumptions underlying them. them Tax Assessments/Litigations Statutory Compliance Hidden Liabilities

Controls Check
Accounting systems used; Methods to price products and services; Payment terms, collections of debts and ageing of receivables; Introduction of international accounting standards; Monitoring of sales; Monitoring of orders and shipments; Keeping of records, filing, archives; Cos accounting sys e ; Cost accou g system; Budgeting and budget monitoring and controls; Internal audits (frequency and procedures); External audits (frequency and procedures); The banks that the firm is working with: history, references, balances.

Structuring
One of the most crucial elements of a M&A transaction Objective of structuring a transaction is to optimize / maximize achievement of interests of all concerned parties in full parties, compliance with the law

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The Need for Structuring

Quite often the structure of a transaction can be very critical to the conclusion of the deal Synchronizing the interests of each party
Seller may want initial payment maximization Buyer may want risk minimization

Structuring of Consideration
Typical variables
(Initial) Sale consideration Deferred/annual payments depending on performance (such as royalty) Pricing of any subsequent exit (Put Option) Management compensation, non compete, etc g Selling/purchase price of the products Committed dividends Sharing of transaction costs, etc.

Transaction costs Business considerations

Capital structure, financing needs, etc.

Government policy & regulations

Sectoral caps on FDI Takeover code

Transaction Support
Ensuring Value Creation at all stages
Transaction Business Scope Consideration Transaction Structure Management Funding Structure Warranties Closing Arrangements

Structuring : Dynamics
Structuring Aspect S i A Impact Areas

Strategic Business Need

Transaction Elements

Mode of Transaction Transaction Vehicle Consideration Management issues

Transaction costs Income Tax Stamp duty Structure Regulatory compliance NPV of consideration Control Time

Target Search

Target Cultivation

Business Evaluation

P r o c e s s

Presenting the Story right

Financial Evaluation

What is the fair EV; WalkAway

Regulatory compliance check / solutions

LBO vs Equity

Mitigating contingent risks

Preliminary Offer

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Transaction Support
Ensuring Value Creation at all stages
Transaction Business Scope Consideration Transaction Structure Management Funding Structure Warranties Closing Arrangements

Negotiations
Negotiation Committee Have set of meetings Finalize value

Transaction Elements
Negotiations

MoU Due Diligence

Risk Assessment

P r o c e s s

Definitive Agreement

Implement

Fixing a Price (Value)

Negotiations would lead to Price decision Entering into final agreements Closure

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Payment of Consideration
Cash Stock Mix Present or Future

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Post Merger Activities

Integration Business functions (reliable IT); Human resources (motivation of employees to adopt introduced changes); Management (operations of the target company); corporate governance and companies culture (open communication in a timely manner at all levels of the organization).

General Rules
Do not rely on book values alone the market provides information about the true worth of assets Estimate only incremental cash flows Use an appropriate discount rate Consider transaction costs these can add up quickly and become a substantial cash outflow

Why M & As fail..

Research has conclusively shown that most of the mergers fail to achieve their stated goals. g Some of the reasons identified are:
Corporate Culture Clash Lack of Communication Loss of Key people and talent HR issues Lack of proper training Clashes between management Loss of customers due to apprehensions Failure to adhere to plans

Finally..........
M&A deals are a means to an end; do NOT lose sight of the end Need to Question the Basic Principle Create Value Value Creation happens thru numerous elements, not just price Structuring is as critical as, if not more than, other facets like valuation Transactions are entered into in Good Faith; Agreements protect you when that is breached