Advanced Corporate Finance

Lorenzo Parrini

May 2017

1
Introduction
Course structure

Course structure
3 credits – 24 h – 6 lessons

1. Corporate finance

2. Corporate valuation

3. M&A deals

4. M&A private equity

5. IPOs

6. Case discussions

2
Lesson 3 M&A Deals

3
Lesson 3 Summary

1 M&A Overview
Introduction
M&A scenario Global
M&A scenario in Italy

2 M&A Process

3 Negotiation

4 Closing

5 Post merger integration

4
M&A Overview
Introduction
An M&A transaction is usually a pooling of economic interests, often achieved by combining two
companies
It’s a complex and iterative process involving multiple skills set:

Finance

Multi languages/multi
cultural/multi time Tax and Legal
zones

Execution/
M&A Strategy
Process Management

Tactics Accounting

Stock Market

5
M&A Overview
Introduction
To correctly define extraordinary operations it’s necessary first of all to analyze three aspects which can
variously combine

Promoter of the
operation Financier
(external/internal)
(financial/strategic)

Nature of the
financial tool
(debt/equity/hybrid)

The term M&A is usually improperly used referring to all corporate finance operations.
However it would be suitable to narrow down the term to:

o Acquisitions/divestitures
o Contributions
o Mergers/joint ventures that involve third parties
o Corporate reorganizations (mergers/spin off between group companies)
o Privatizations

6
 M&A Overview
Introduction
Features of an M&A operation can be significantly influenced by the promoter of the operation

Industrial Investment
Public investors
operators company
Strategic investor Financial investor
perspective perspective
Shareholders Funds Merchant bank

Strategic investor Financial investor

 Usually a competitor or a company which operates in  Usually PE funds, investment company or financial
the same supply chain or commercial network holdings

 Prevalence of motivations relative to business strategies  Prevalence of motivations related to value growth in the short
period (3-5 years)
Market share/ Market leadership
Financial source injection to finance the business
development/restructuring
Economies of scale
Optimization of the financial structure
Horizontal/vertical integration
Buy & Build
Commercial synergies (channel, sales mix, etc.)
Productive synergies or synergies related to Cash generation
complementary use of the resources
Structure efficiency Exit opportunities

7
M&A Overview
Introduction
Financial sources used for financing company’s activity can be classified by:
 financing tool nature;
 financier nature
Nature of the Financier
External Internal
bank side market side

Traditional bank Bond loan Shareholders loan

debt Mini bond
• short term
Debt • medium-long term
Structured finance Structured finance
Project Financing Securitization

Mezzanine Convertible B.L. Participation financial

Nature of the Financing tool

Hybrid B.L with warrant tools

Hybrid
Participating
financial tools

Ownership Equity Self financing

(Private Equity / Venture
Capital/ IPO/ new strategic
Shares (shareholder’ s
Equity capital increase)
investors)
Warrant Warrant

8
M&A Overview
M&A scenario Global
Global M&A - Prices and Volumes (2011 - 2016)
7.000.000 120.000
6.500.000 110.000
6.000.000 100.000
5.500.000 90.000
5.000.000
4.500.000 80.000
4.000.000 70.000
3.500.000 60.000
3.000.000 50.000
2.500.000 40.000
2.000.000 30.000
1.500.000
1.000.000 20.000
500.000 10.000
0 0
2011 2012 2013 2014 2015 2016

Deal value ($mln) #deals

M&A Western Europe - Prices and Volumes (2011 - 2016)

1.800.000 30.000
1.600.000
25.000
1.400.000
1.200.000 20.000
1.000.000
15.000
800.000
600.000 10.000
400.000
5.000
200.000
0 0
2011 2012 2013 2014 2015 2016

Deal value ($mln) #deals 9

Source: Zephyr (Bureau van Dijk) "Global, FY 2016"
M&A Overview
M&A scenario in Italy (1/3)
M&A in Italy - Prices and Volumes (2007 - 2015)
700
140 583
543 600
120 495
459
500
100 381
329 340 400
80
279
60 300
197
40 200

20 100
148 56 34 20 28 26 31 50 56
0 0
2007 2008 2009 2010 2011 2012 2013 2014 2015
Deal value (€mld) #deals

Domestic M&A - Prices and Volumes (2007 - 2015)

60 400
350
50 285
256 256 252
300
40
186 205 250
30 158 200
149
117 150
20
100
10
50
60 24 13 7 7 17 14 10 14
0 0
2007 2008 2009 2010 2011 2012 2013 2014 2015
Deal value (€mld) #deals
10
M&A Overview
M&A scenario in Italy (2/3)
M&A Cross border - Foreign countries on Italy (2007 - 2015)
30 250
202 201
25 200
20
150
116 109
15 106
91
82 83 100
10
38
5 50
28 12 7 10 18 7 13 27 32
0 0
2007 2008 2009 2010 2011 2012 2013 2014 2015
Deal value (€mld) #deals

M&A Cross border - Italy on Foreign Countries (2007 - 2015)

121 123
60 130

50 97 110
89
90
40 63 70
62
70
30 47
42
50
20
30
10 10
60 20 13 2 3 2 4 13 10
0 -10
2007 2008 2009 2010 2011 2012 2013 2014 2015
11
Deal value (€mld) #deals
M&A Overview
M&A scenario in Italy (3/3)
M&A breakdown by sector of the Bidder (€ mln)
41 33 87 76 105 103 99 114 29 33 70 54 82 81 52 27 17 22 #deals

13,9
12,0
11,3 11,3 10,7

7,0 7,3
5,5 5,0 4,5 3,9
3,4 3,5
2,8 2015
2,0
1,0 1,1 2014
0,0

Energy & Utilities Financial Services Consumer Markets Industrial Markets Stock Market Technology Media Private Equity Support Services & Private Investors
& Telecomm Infrastructure

M&A breakdown by sector of the Target (€ mln)

52 49 70 54 163 174 134 174 - - 93 81 - - 70 38 - - #deals

20,4

14,1
12,4 11,8
10,0
6,8 7,5 6,2
5,5 5,0 5,1 2015
1,5 2014
- - - - - -

Energy & Utilities Financial Services Consumer Markets Industrial Markets Stock Market Technology Media Private Equity Support Services & Private Investors
& Telecomm Infrastructure

12
Lesson 3 Summary

1 M&A Overview

2 M&A Process
Phases of an M&A Deal
M&A deals: Buy side - Sell side
M&A documents
Configuration of the sell process

3 Negotiation

4 Closing

5 Post merger integration

13
M&A Process
Phases of an M&A deal
M&A process checkpoint:
Targeting
 Blind profile (teaser)
Preliminary contacts  Non disclosure agreement
 Information memorandum
 Business plan Preparatory activities
 Valuation (range of value)

Non Binding Offer

Short list of potential counterparts

Competitive Auction/ Process Private negotiation*

limited checkpoint (one-to-one)

Vendor due diligence Letter of intent

Binding offers (SPA can be attached) Due diligence

Counterpart selection

Signing of Acquisition agreement

Closing
Notes: It’s more frequent in case of industrial investors, in particular in the circumstance that the seller (buyer) has since the beginning of the process a clear idea
of the selected counterpart for specific strategic or personal reasons.

14
M&A Process
M&A deals: Buy side - Sell side

Buy side
Pre-Deal Deal Execution Post Deal

• Strategic Direction • Speed of execution • Integration

• Deal Origination • Competing against other bidders • Customer retention
• Buying from Private Equity • Governance and cost • Measuring value
• Auction process • Identifying and evaluating risks and • Optimizing value
• Managing Price rewards • Key Learning
• Ownership structure • Synergy benefits
• External environment • Competition clearance
• Financing • Organization structure
• Managing the SPA process

Sell side
Pre-Deal Deal Execution Post Deal

• Deal origination • Price maximisation • Clean break

• Strategic positioning • Speed of execution • Customer retention
• Auction process • Process control • Measuring value
• Carve out • Minimising business disruption • Key Learnings
• Confidentiality • Governance and costs
• Transitional Service level Agreement • Pensions
• Early issues identification • Rewarding management on exit
• Building a business case • Managing the SPA process

15
M&A Process
M&A documents
After the Targeting activities the Company’s Advisor draws up some documents to start the first contacts
with potential investors

Blind profile (Teaser) Non disclosure Agreement Information Memorandum

A teaser is a blind profile of When a counterpart wants to Information memorandum

the target company that is proceed on the contact it’s contains more complete and
sent to players that seem to necessary to draw up a legal specific information about the
be interested in the operation contract through which the target Company, as well as
(or supposed to be on the parties agree not to disclose personal data. It’s useful to
basis of facts and confidential information give:
information available) covered by the agreement

 Reference market  Confidentiality of given  Detailed Company

 Activity information Profile
 Main financial data  Ban of using  Company’s market
information in someone position
personal interest  Company’s economic
 Ban of submitting job and financial situation
proposal to  Company’s potentialities
management

16
M&A Process
M&A documents
Teaser
At the beginning of an M&A process the target Company’s Advisor draws up a short anonymous description of its
business to test the market interest in the operation

The blind Profile (Teaser) is sent to companies that could potentially be interested in the operation to test the
opportunity of carrying on the operation

Typical contents of a teaser are:

 Company headquarter (“Made in Italy”)

 Ownership structure (anonymous)
 Products short overview
 Company activity
 Main financial highlights

17
M&A Process
M&A documents
Non Disclosure Agreement (Confidentiality Agreement )
In the common praxis the seller is likely to be required to provide some information about the business to prospective
buyers/target companies before the beginning of detailed negotiations.

Unless and until a binding sale and purchase agreement has been entered into, a seller will almost certainly
want to keep confidential the fact that the business is “for sale” and the fact that discussions/negotiations are
taking place with one or more interested buyers.
:
• It may unsettle its employees
• It can impact on relationships
with customers
• It can impact on relationships
with suppliers
.
Confidentiality Agreement can be: Confidentiality Agreement Contents:

Unilateral: when only one part undertakes the non-

disclosure duty.
• Parties of the agreement
• Definition of what is confidential
Mutual: when the parties undertake the non-disclosure duty • Items excluded from what must be
one to another and vice versa kept confidential
• Term of the confidentiality
• Term the agreement is binding

18
M&A Process
M&A documents
Information Memorandum
When a formal auction process is undertaken, the seller needs to make sure that the same information is given to all
prospective buyers

Information Memorandum
Normally prepared by seller’s lead advisor on the basis of information provided by the seller

Typical sections of an Info memo are:

 Investment Opportunities
 Company profile and Milestones
 Company structure
 Business model
 Market overview and competitive strategy
 Plants and logistics
 Products and commercial network
 Details about main relevant data (revenues
breakdown by sector/product/area, ABC clients
and suppliers, etc.)
 Corporate Governance and personnel
 Financial highlights (historical trend and forecast)

19
M&A Process
Configuration of the sell process

Range of values of the

Tratt operation
Process complexity

Competitive Auction

Opportunities & threats

Selective Auction  High level of control on information and
data
 The potential buyer has to show a strong
will of closing the operation in a quite short
period and at an adequate value
 The seller is in a weaker negotiating
position

Opportunities & threats

 Opportunity to keep a competitive pressure on buyers
through the preparation of a Vendor Due Diligence
 Good control on information and operation timetable
 Quite flexible process Private
 Maximization of the sale price (seller) Negotiation
 Pretty short time

Confidentiality level

20
Lesson 3 Summary

1 M&A Overview

2 M&A Process

3 Negotiation

Letter of Intent
Due Diligence

4 Closing

5 Post merger integration

21
Negotiation
Letter of Intent
It’s a fundamental step of the M&A process, when the parties write down the terms of the transaction.
It’s a moral, more than legal, commitment for the parts to respect the agreement.
 Innominate contract, not specifically regulated Obligation of confidential treatment of information (commitment sanctioned even by
by the civil code confidentiality agreement)
 Pre-contractual document that usually doesn’t
bind parties, except for: Contingent exclusive (Seller obligation to not carry on other negotiations for an
established stretch of time, defined in the same letter)

Contingent stand still clauses (Seller obligation to not conduct any operation that
go beyond company’s ordinary activities)

Letter of Intent’s contents are not peremptorily defined. Its aim, indeed, is to define the main aspects of the negotiation
that will be refined with the Sell and Purchase agreement (SPA)

Contracting parties

Object of negotiation

Valuation methods for price determination

Purchase price (related to Due diligence outcome)

Way of payment (with other contingent kinds of reward)

Essential elements for the closing of the operation

 Seller’s guarantees about company status
 Post- acquisition governance 22
Negotiation
Due Diligence

Verifying the presence of elements that don’t allow to realize the investment
Aim
or (more likely) that require reviews and revisions of one or more
contractual conditions (price, guarantees, etc.)

It’s the first phase of due diligence process. The

investor directly collects information about the target
“Light” Due diligence company, through site visits, meetings with
entrepreneur, management and experts

It’s a subsequent phase, conducted by external

advisors, which realize careful inspections on behalf
“Heavy” Due diligence of the investor, testing different aspects of the target
Company

23
Negotiation
Due Diligence
“Heavy” Due diligence

Accuracy and extension of “Heavy” Due Diligence depend on

Company
dimension

Specific Business
factors complexity

Heavy DD
Investor
experience Investment
in target sector features
(PE)
Investment
relevance

24
Negotiation
Due Diligence
Commercial DD
(Market- Product
Analysis )

Financial DD Legal DD
(Analysis of (Analysis of legal
financial aspects) aspects )

Target
Company
Operational DD Tax DD
(Operative (Analysis of fiscal
analysis) aspects )

Environmental DD
(Analysis of
environmental aspects)

Due Diligence main objective is to verify historical results and to analyze the consistency and reliability of
Business Plan development forecasts.

Business DD Integrated DD
25
Negotiation
Due Diligence
Commercial, Operational e Financial Due Diligence are very integrated activities necessary for M&A
transactions

Check validity of
historical/actual
data
FINANCIAL DUE OPERATIONAL Analysis of cost
DILIGENCE DUE DILIGENCE of sold

(FDD) (ODD)
Analysis of
historical trend

Analysis of
strategic COMMERCIAL
programs Analysis of fixed
DUE DILIGENCE costs

Competitors
(CDD)
benchmarking

Individuation of
Business non-core
performance activities
review

 Commercial DD: External performance Analysis [Market] and control of the consistency of BP commercial assumption;
 Operational DD: Internal performance Analysis [Company] and control of the consistency of BP operative assumption;
 Financial DD: Historical performance Analysis and control of reported data.

26
Negotiation
Due Diligence
Area Typical Questions Aims and benefits
 Is the strategy sustainable ?
 Is the market in a growth phase?
 What is competitors’ behavior? Historical and forward analysis
 Is the business well positioned in reference markets?  Check of the consistency between
CDD  Which threats could emerge? expected results and market context;
 What’s the reference regulatory context?  Check of business plan sustainability
 Do new markets exist? and reliability.
 Are margins sustainable?
 Is the Business Plan sustainable?

 What has been company’s historical operative performance?

 What’s the cost structure related to this performance? Historical and forward analysis
 Are the assumptions at the base of BP correct?
 How do improvement plans react to sensitivity analysis?  Identification of operative performance;
ODD  Is there consistency between the timing of BP results and the  Valuation of performance improvement
assumptions? plans
 Have been some areas liable to improve efficiency ignored?  Identification of additional
 Are there other opportunities to improve company improvement opportunities
performance?
 Which are current economic and financial business
performances? Historical analysis
 Is accounts’ classification consistent with reference accounting
 Qualitative and quantitative analysis of
standards?
FDD assets, liabilities and incomes, for the
 Are there non recurring items or normalized items? purpose of verifying economic and
 Are funds adequate? financial results and potential liabilities
 Are there overestimation elements of Equity?

27
Negotiation
Due Diligence
Legal, Tax and Environmental Due Diligence are ancillary activities that refine Due Diligence process to
valuate every single aspect of M&A transactions

LEGAL DUE TAX DUE

DILIGENCE DILIGENCE Risk analysis
(LDD) (TDD)

Identification of
potential liabilities
ENVIROMENTAL
DUE DILIGENCE
(EDD)
Definition of main
Rep & Warranties

28
Negotiation
Due Diligence
Area Typical Questions Aims and benefits

 Have tax returns been correctly presented? Historical analysis

 Have been taxable incomes correctly determined?
 Check of company fiscal aspects, in
 Is the company up to date with payments? particular it focuses on tax litigations,
TDD  Is the company in relationships with “black list” Countries? tax liabilities and contingent tax
 Are there current/potential tax litigations with financial benefits (definition of rep and
authorities? warranties).

 Are there current/potential litigation risks?

Historical and forward analysis
 Does the Company respect current regulations?
 Does the Company respect intellectual property rights?  Check of any possible legal matter,
LDD  Has the Company correctly edited/updated account books? that could impact on company’s value
and/or on the draft of the purchase
 Are company’s relationships with employees/agents correctly
agreement (definition rep and
regulated ?
warranties)
 Has the Company lent financial guarantees?

 Do factories and plants operate in accordance with current

regulations?
 Does the Company respect regulation about health and work Historical and forward analysis
safety?
EDD  Do environmental liabilities and/or related risks exist?  Check of company’s compliance with
 Do dangerous materials and substances exist? current regulations and environmental
 Does the Company respect current regulation concerning impacts of company’s activity.
waste management, water resources management, ground
safeguard and air pollution?

29
Negotiation
Due Diligence
Data Room

Data Rooms are part of the Due diligence procedure.

It represents the place where physically/virtually the due diligence documents are.
Its aim is to consent the proposed bidders to analyse the confidential documentation related to target Company.

Virtual Traditional
data room data room

 Virtual data rooms are web-sites reserved to the players of the specific transaction, which through a password or an
access key can display the documents.
 Traditional data rooms are a physically secure room, continually monitored, normally in the vendor’s offices (or those
of his lawyers), which the bidders and their advisers will visit in order to inspect and report on the various documents
and other data made available.

30
Lesson 3 Summary

1 M&A Overview

2 M&A Process

3 Negotiation

4 Closing

From value to price

SPA
Closing
Different kinds of M&A deals

5 Post merger integration

31
Closing
From value to price
Restated net
Analogical value Intrinsic value
worth

Stand Alone
Operating value
Cost Synergies

Key risk Price/Exchange Synergies net of

Financial mapping and Ratio proposed implementation
quantification costs
by buyer to seller
Revenue
Technical (tax, Synergies
legal, Transaction
environment..) background

Buyer’s Negotiation Regulatory

objectives environment environment

Contrasting objectives of buyers and sellers

32
Closing
SPA
M&A transaction ends with a Sale and Purchase Agreement (SPA) regulated by art 2556 and following of
Italian Civil Code
On the basis of art. 2556 C.C., the Sale and Purchase Agreement:
 must be proven in writing and draft in the form of public deed or private deed certified by a notary
 the notary must register the contract in the term of 30 days in the company registration list, and he must refer the
agreed price and company’s details to the commissioner contractor’s personal data,

Even if it doesn’t have a specific form, SPA usually contains following data:

Contractor’s personal data Conditions related to contract’s suspension/ resolution

Deal structure Regulation of put&call options

Price settlement (conditions, timetable, earn out clauses)

Ancillary and specific clauses
and payment methods

Assets and liabilities transferred Declarations and guarantees

Seller obligation to not realize relevant changes at the

Shareholder’s agreements (attached to contract)
transferred company before the closing

Ancillary contracts (properties rent, subordinate

Seller’s competition ban (art. 2557 CC)
employment partnerships , etc.)

33
Closing
Closing
Term sheet /Letter of Intent

SPA Signing

Suspending conditions

SPA Closing
(contingent N° of purchased shares
addendum)

Contract that regulates all Guarantees

aspects of the deal, as:

Shareholder’s agreements

Way-out Partnership
regulation regulation

34
Closing
Closing
Despite the SPA is drawn up after due diligence it’s essential to protect the buyer from the risk of economic
losses resulting from past management and occurred before the closing.

The seller includes in the agreement some declarations and guarantees

In general in the agreement it’s provided an indemnification obligation for the purchaser, related to company’s
previous liabilities and contingent liabilities that should occur, with regard to to the situation of the company resulting
from declarations and documents attached to the agreement.

Nature of contingent liabilities can be:

Social Work legislation
Fiscal Financial
Security related

Legal Environmental Civil Resp.

Guarantees
(usually time and amount limited – allowance and ceiling)
 Real: guarantee (usually at first request)
 Escrow account (part of the price paid is related to determined conditions)

Even the seller usually asks for guarantees for the amount yet to be collected (also contractual guarantees)

35
Closing
Closing
An important feature of SPA are pre-closing covenants, or promises to do/not do something during the
period between the signing of the SPA and the closing

Two types of covenants

Positive Negative
Positive covenants obligate the seller or Negative covenants restrict the seller
the buyer to take certain actions prior to from taking certain actions prior to the
the closing. closing without the buyer’s prior
consent.

They can include: They can include:

 allowing the buyer full access to the  not changing accounting methods or
seller’s books, records, and other practices
properties;  not entering into transactions or incurring
 obtaining the necessary board and liabilities outside the ordinary course of
stockholder approvals; business or in excess of certain amounts;
 obtaining the necessary third party  not paying dividends or making other
consents; and distributions to stockholders;
 making the required governmental filings  not amending or terminating contracts;
and obtaining the required governmental  not making capital expenditures;
approvals  not transferring assets;

M&A deals usually contain also several conditions to closing: certain obligations that must be fulfilled in order to legally require
the other party to close the transaction, such as corporate approvals, governmental filings.

36
Closing
Closing - Partnership discipline

Governance Regime of shares outstanding

• Corporate Governance composition: Lock-up clause

- Management Designation
- Board of Directors Designation
Drag along clause
- Board of Statutory Auditors Designation

• Veto right and BoD exclusive topics regulation

• Decision deadlock regulation Tag along clause
• Bad leaver clause
• Non Competition agreement
Sell option (Minority shareholders)

Stock option plan First bid right

37
Closing
Different types of M&A deals

Type of transaction

Asset purchase Stock purchase

Acquisition (sale) Acquisition (sale)

Cash
of assets of shares
Payment

Contribution of shares or
Stock Contribution of assets
merger

38
Lesson 3 Summary

1 M&A Overview

2 M&A Process

3 Negotiation

4 Closing

5 Post merger integration

Types of integration
Problems of integration

39
Post merger integration
Types of integration
M&A deals can configure different kind of integration:

Horizontal Vertical Conglomerate

Has same Has different

Is a supplier
products/services products/services

Has same margin of Has different

Target Is a distributor
business customers

Is a customer

Protection of the
Sector knowledge Spread risk
supply chain

Rationale Margins that would

be lost

Often deals are called

horizontal even if they
are not (same clients) Conglomerates suffer the
Notes “diversification discount”
10-15% on average
More anti-trust issues

40
Post merger integration
Types of integration
All synergies in a deal can be classified as

Financial Operative Commercial

More financial Commercial

Cost Synergies Revenue Synergies
sources network

«The Magnificent There may be Revenue

 Bigger companies Synergies in a deal, such
 Geographical
seven»:
have more expansion
 Central administrative as:
possibilities to obtain  Increased sales  New products
overheads
financial sources than  Increased prices  Sales mix
 Manufacturing/produc
smaller ones  Increased number of
tion capacity
 Purchasing Power units sold at higher
 Research and prices
development
 Advertising
 Distribution
 Selling and marketing

Consequences: for same value different buyers may have different synergies, hence different prices

41
Post merger integration
Types of integration
In general through M&A operations companies hope to benefit from the following aspects:

• Mergers usually mean reduction of staff members from accounting, marketing

and other departments.
“Staff reductions” • Job cuts will also include the former CEO, who typically leaves with a
compensation package.

• Bigger company placing the orders can save more costs.

• Mergers also translate into improved purchasing power
“Economies of scale” • Placing larger orders, companies have a greater ability to negotiate prices with
their suppliers.

• By buying an innovative smaller company with unique technologies, a large

“New Know-how” company can maintain or develop a competitive edge.

• Mergers allow companies to reach new markets and higher revenues

“New Market” • Mergers may expand companies distribution offering new sales opportunities.
• Mergers can also improve a company's ability to raise capital than smaller ones

42
Post merger integration
Problems of integration
Problems with synergies

Prediction Achievement Costs

 Human nature and buyers’  Target management often  Synergies have a cost that
nature leaves is often
 Increase of predicted  Buyers often see the underestimated/ignored:
synergies as «deal crisis» acquisition as the end of - Redundancy
approach the transaction rather than - Property
- Sunk costs the beginning - Environmental
- Sunk management time  Five of the seven operative  Costs come before savings
- Buyer’s ego costs synergies require job  There is often the possibility
 Lack of reliable information cuts, so there may be of negative synergies
political, social and
regulatory difficulties

43