Lec 2 - Steps - in - M - & - A - Deal

Steps in M & A Deal
Steps in M&A
l Decision to acquire /merge
l Define Financial Chest ( Money at Hand/ Tied Up)
l Identify Target Company
l Preliminary Review
l Due Diligence ( Technical, Financial & Tax, Legal)
l Structuring a Deal
l Negotiations
l Fixing a Price (Value)
l Entering into a MOU
l Entering into final agreements - Closure
l Payment of Consideration
l Post Merger Activities
Decision to acquire /merge
l Deciding the Strategy
l Entry
l Ford-M&M
l Fiat-PAL
l DCM-Daewoo,
l M Benz-Telco
l Extending Markets
l Bharti- Zain/Warid,
l HDFC Bank – CBOP -LKB
l ICICI Bank-Sangli/BOM/BOR
l Driving earnings
Decision to acquire /merge
l Strategy
l Expanding product and service lines
l Asian Paints- Hawcoplast/ Berger International
l Zydus Cadilla – German Remedies
l Blocking/Buying Competition
l Ultratech- Jaypee Group (Cement)
l Coke- Parle/ Bottling Plants
l HLL- Dollops/Kwality/Milkfood
l Market Share
l UB- Shaw wallace,
l Pfizer- Wyeth,
l Abbot- NPIL/Solvay,
l HLL- TOMCO/LAKME
l Synergies/Diversification
l Mercator- Coal Mines/Ship Management Companies
l Getting Board Concurrence
Define Financial Chest
l Cash In Hand
l Internal Accruals
l Funding
l Debt
l Equity (Strategic)
l FPO
Identify Target Company
l Research the market
l Technology Improvement
l Complementary Skills/Products
l Supplementary Skills/Products
l Brands
l Develop Target List
l Some mergers create synergies because the firm
can either cut costs or use the combined assets
more effectively
l Marketing gains
l Advertising
l Distribution network
l Product mix
Preliminary Review
l Based on Information in Public domain
l Check whether prima facie the Co/product
suits/complements/supplements
l Short List Prospects after review
Initial Due Diligence
l Review company literature and business profile
to determine if the company is a strategic fit and
meets strategic objectives of acquirer.
l Review recast financial summaries
l Schedule meetings with the short list of target
companies
NDA/Letter of Intent or Initial
Term Sheet
Next step is to prepare a NDA/ Letter of Intent
(LOI) or Initial Term Sheet
l Outline the basic terms of your offer
l Asset vs Stock Sale

Detailed Due Diligence
l Technical
l Legal
l Management/General
l Financial & Taxation
Technical Due Diligence…
l Description of manufacturing processes (hardware,
software, communications, other);
l Need for know-how, technological transfer and
licensing required;
l Suppliers of equipment, software, services (including
offers);
l Manpower (skilled and unskilled);
l Infrastructure (power, water, etc.);
l Transport and communications (example: satellites,
lines, receivers, transmitters);
Technical Due Diligence
l Raw materials: sources, cost and quality;
l Relations with suppliers and support industries;
l Import restrictions or licensing (where applicable);
l Sites, technical specification;
l Environmental issues and how they are addressed;
l Leases, special arrangements;
l Integration of new operations into existing ones
(protocols, etc.)
Legal…
l Ownership of the firm.
l Court registration documents.
l Copies of all protocols of the Board of Directors
and the General Assembly of Shareholders.
l Signatory rights backed by the appropriate
decisions.
l The charter (statute) of the firm and other
incorporation documents.
Legal
l Copies of licences granted to the firm.
l A legal opinion if any regarding the above
licences.
l 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.
l Legal opinions regarding the possible outcomes
of all the lawsuits and disputes including their
potential influence on the firm.
Management DD…
l Points regarding the political, legal (licences)
and competitive environment.
l A vision of the business in the future.
l Development of new products or services
l The strengths and weaknesses of the
competitors relative to the firm.
l Missing information regarding the markets, the
clients and the competitors.
l The pricing strategy (how is pricing decided.
Management DD…
l Marketing and advertising campaigns (including
cost estimates) - broken by market and by
media.
l Distribution of the products.
l Customer after-sales service (hotline, support,
maintenance, complaints, upgrades, etc.).
l Customer loyalty (example: churn rate and how
is it monitored and controlled).
Financial & Tax DD
l Last 3 years income statements of the firm or of constituents
of the firm, if the firm is the result of a merger. The statements
have to include:
l Balance Sheets;
l Income Statements;
l Cash Flow statements;
l Audit reports
l Cash Flow Projections and the assumptions underlying them.
l Tax Assessments/Litigations
l Statutory Compliance
l Hidden Liabilities
Controls Check
l Accounting systems used;
l Methods to price products and services;
l Payment terms, collections of debts and ageing of receivables;
l Introduction of international accounting standards;
l Monitoring of sales;
l Monitoring of orders and shipments;
l Keeping of records, filing, archives;
l Cost accounting system;
l Budgeting and budget monitoring and controls;
l Internal audits (frequency and procedures);
l External audits (frequency and procedures);
l The banks that the firm is working with: history, references,
balances.
Structuring
l One of the most crucial elements of a
M&A transaction
l Objective of structuring a transaction is

to optimise / maximise achievement of
interests of all concerned parties, in full
compliance with the law
The Need for Structuring
l Quite often the structure of a transaction can be
very critical to the conclusion of the deal
l Synchronising the interests of each party
l Seller may want initial payment maximisation
l Buyer may want risk minimisation
l Transaction costs
l Business considerations
l Capital structure, financing needs, etc.
l Government policy & regulations
l Sectoral caps on FDI
l Takeover code
Structuring of Consideration
l Typical variables
l (Initial) Sale consideration
l Deferred/annual payments depending on
performance (such as royalty)
l Pricing of any subsequent exit (Put Option)
l Management compensation, non compete, etc
l Selling/purchase price of the products
l Committed dividends
l Sharing of transaction costs, etc.
Structuring : Dynamics
Structuring Aspect Impact Areas
•Transaction costs
•Income Tax
•Mode of Transaction •Stamp duty
•Transaction Vehicle Structure •Regulatory compliance
•Consideration •NPV of consideration
•Management issues •Control
•Time
Transaction Support
Ensuring Value Creation at all stages
Transactio Closing
Consideratio Transactio Managemen Funding
n Business Warranties Arrangement
n n Structure t Structure
Scope s
Strategic Transaction Elements

Business
Need
Target Search
P
Presenting
Target r
the Story
Cultivation o right
c
e
Business
Evaluation s
s
What is the Regulatory Mitigating
Financial fair EV; compliance LBO vs contingent
Evaluation “Walk- check / Equity risks
Away” solutions
Preliminary
Offer
Negotiations
l Negotiation Committee
l Have set of meetings
l Finalise value
Fixing a Price (Value)
l Negotiations would lead to Price decision

l Entering into final agreements – Closure
Payment of Consideration
l Cash
l Stock
l Mix
l Present or Future
Post Merger Activities
l Integration
l Business functions (reliable IT);
l Human resources (motivation of employees
to adopt introduced changes);
l Management (operations of the target
company);
l corporate governance and companies culture
(open communication in a timely manner at
all levels of the organization).
General Rules
l Do not rely on book values alone – the
market provides information about the true
worth of assets
l Estimate only incremental cash flows
l Use an appropriate discount rate
l 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.
Some of the reasons identified are:

v Corporate Culture Clash
v Lack of Communication
v Loss of Key people and talent
v HR issues
v Lack of proper training
v Clashes between management

v Loss of customers due to apprehensions
v Failure to adhere to plans

Finally..........
M&A deals are a means to an end;
They are a step in the process to reach the end (Goal)
Do all M&A’s “Create Value”
Value Creation happens through 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

Lec 2 - Steps - in - M - & - A - Deal

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Lec 2 - Steps - in - M - & - A - Deal

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Steps in M & A Deal

l Asset vs Stock Sale

l Objective of structuring a transaction is

Structuring Aspect Impact Areas

Strategic Transaction Elements

l Negotiations would lead to Price decision

Some of the reasons identified are:

v Loss of Key people and talent

v Lack of proper training

v Clashes between management

v Failure to adhere to plans

Do all M&A’s “Create Value”

Value Creation happens through numerous elements,

Structuring is as critical as, if not more than, other facets like

Transactions are entered into in Good Faith;

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