Mergers & Acquisitions

Course Overview:

This three day seminar covers all aspects of buying and selling private companies and management buy-outs.

The first day covers all aspects of creating shareholder value through the pursuit of a successful M + A strategy has been shown to be a far from risk-free activity. Buyers overpaying or using inappropriate financing methods can lead to destruction of value and in some cases financial distress.

The topics covered includes risk and return, valuation, process, investigation and integration as a practical guide to identifying and negotiating acquisitions.

The second day focuses on selling a company to achieve a vendor’s target price is frequently a time-consuming and complex process. In addition to the legal and accounting considerations there are issues of presentation, timing and tactics that are important elements of the campaign to close a successful sale.

The topics covered includes practical steps that are required to plan, negotiate, and close a successful sale. Valuing the business to be sold and the effective presentation of the commercial attractions of the business are key elements, as are choosing the appropriate advisers and running a competitive auction.

The third day covers the sale of companies to management teams backed by Private Equity investors, using a leveraged financing of the acquisition, has become an increasingly common feature of the corporate scene. Whilst appearing simple to arrange, there are complex elements to a successful transaction.

This topics covered includes the principles and practicalities involved in arranging and negotiating a management buyout. In addition to the legal issues to be addressed, the use of bank debt and other financial instruments is examined in the context of developing a workable structure for the deal.

Course Content:

Day 1:

The Drivers of Growth

• Shareholder value
• The company life cycle
  • The importance of directors recognising the value curve
• Risk and return
  • Relating risk to the life cycle phase of the company / target
• Product market growth and decline
  • Evaluating niches, substitutes, value in innovation

REVIEW: Comparison and contrast of the lifecycle of three different companies, highlighting how success or failure with acquisitions has determined their fate

• ICI
• Debenhams
• GKN

Growth through Acquisition

• Assessing the alternatives
  • Investment
  • JV
  • Acquisition

DISCUSSION: Advantages and disadvantages of each approach

• Determining the acquisition
  • Market objectives
    • Consolidating a fragmented market
    • Building the value proposition
  • Management issues
    • Assessing cultural fit
  • Price parameters
    • Knowledge of comparative deals
  • Opportunity cost
    • Is it a “now or never” deal

REVIEW: The Ansoff Matrix, a handy way to categorise potential risks in acquisition strategies

• Pitfalls to avoid
  • Realism of synergies
    • Risks of prediction, cost and achievement
  • Accounting standards
    • Who is the auditor, what principles are followed
  • Judging forecasts
    • Scepticism rules

Valuing the Target

• The accounting approach
  • NAV
  • dividend yield
  • P/E
  • EV
• The cash flow approach
  • DCF
  • Terminal value
  • Forecasting problems
  • Relevance to young / early stage companies

EXERCISE: Using different metrics to value a business

• Other factors
  • Target’s history
  • Recurring revenue
  • Intellectual property
  • Customer list

CASE STUDY: Reviewing company information to arrive at a value, taking into account qualitative and strategic factors

The Acquisition Process

• Establishing acquisition criteria
  • Target size and affordability
  • Potential synergies
  • Market / competitor impact
  • Regulatory factors
  • Shareholder impact
• Due Diligence
  • Investigation prior to offer
    • Public sources
    • Private sources
• Verification
  • Contracts
  • Accounts
  • Pensions
  • Employee disputes
  • Litigation

CASE STUDY: Reviewing summary information on a company to determine which areas need investigation and who should have responsibility for the task

Acquisition Integration

• Success / failure factors
• The importance of the integration team
• Earn outs and accounting issues
• Incentivising key managers
• Establishing clear reporting lines

Day 2:

How to Achieve the Highest Price and the Best Terms

• Typical Mistakes in Disposals
  • avoid them with a carefully designed strategy
• Reasons for Selling
  • a corporate advisor must understand the seller’s objectives
• Planning for Success –
  • appropriate procedures for all stages of the transaction
• Categories of Seller
  • family firms,
  • entrepreneurs,
  • large commercial or private equity

What is the Company Worth?

• Fundamental Questions
  • Is the company saleable?
  • Is it the right time to sell it?
• Common Misconceptions –
  • the value of sweat & toil;
  • the search for a premium buyer
• NAV, DCF, Enterprise Value
  • how they interlink
  • how they should be used
• Valuation by Comparison
  • PERs,
  • the efficient market theory
  • shortcut valuations

The Importance of Pre-Sale Planning

• Appointment of Advisers
  • why use advisers?
  • what do they offer?
• Disclosure to Advisers
  • what sellers should tell their corporate advisers
• Engagement Letter –
  • scope,
  • extent,
  • authority
  • access
• Agreeing the Fees
  • time,
  • fixed,
  • percentage of consideration (sliding scale)
• Reasons for ‘Sell side’ Due Diligence
  • keeping control of the deal
• Preparing the Management & Staff
  • directors,
  • the marzipan layer
  • junior employees
• Grooming
  • accounting systems,
  • separation issues
  • individual problems
• Information Memorandum
  • health warning,
  • transaction procedure,
  • objectives
  • content

Meeting Potential Purchasers

• Identifying Likely Candidates
  • determine the hit list:
  • rifle shot,
  • shot gun
  • auction
• Confidentiality Letter
  • does it provide any protection?
• Letter of Intent – what comfort does it give?
• Heads of Agreement
  • only use them for specific purposes;
  • otherwise avoid them

Detailed Negotiations

• Preparatory Tactics
  • deciding how to handle positive and negative disclosures
• Arguments on Valuation
  • price reductions for smaller companies,
  • unquoted companies
• Sale & Purchase Agreement
  • the purpose of representations,
  • warranties & indemnities
• Limiting the Seller’s liability
  • negotiating de minimis,
  • caps,
  • time limits & mitigation
• Exclusivity
  • when to give it and when to take it away
• Earn-Outs
  • designing an appropriate formula to include buyer’s and seller’s refinements
• Service Contracts & Consultancy Agreements
  • which to choose and why
• Avoiding Unprofessional Tactics
  • over-excitement can destroy a reputation

Finalising the Deal

• Caveat Vendor
  • guarding against change of control or liquidation
• Completion Accounts
  • when and why they are used;
  • principal mechanisms
• ‘Locked Box’ Transactions
  • when is the box locked
  • who takes the ongoing risk
• Completion
  • a simple formality
  • negotiating through the night?

Day 3:

The Growth of Private Equity and Leveraged Buyouts

• Academic rationale for the use of leverage
  • Modigliani/Miller theory
  • Michael Milken’s research
  • Growth of shareholder activism
    • Reviving under performers
  • Changes in company law
  • The development of the European high yield bond and securitisation markets

The Principles of Leveraged Finance

• The use of debt to drive equity values
  • Cash flow management
    • Reducing debt to drive equity value
  • Operational improvements
    • Building “need to have”
  • Incentivisation of management
    • Getting rich together
  • Cash-capture clauses

Exercise: Good or Bad LBO?

Discussion of recent transactions to see which ones the attendees would do, and what lessons can be learned about elements of success or failure

• Structuring the transaction
  • Target IRR
    • Assessing the return appropriate to the risk
  • Assessing debt capacity
    • Forecasting future cash generation
  • Senior / mezzanine debt mix
    • Judging asset values
  • Forecasting exit values
• Consideration of non-bank finance
  • High-yield bonds
    • Terms and size of issue
  • Second lien debt
    • Too much debt?
  • PIK finance
    • Saint or sinner?
  • Vendor loan notes
    • Making the deal look good

Case Study: Based on information provided attendees are tasked with structuring the finance for an MBO. Answers are discussed to identify the critical elements in the financing

• Legal elements
  • Warranties and indemnities
    • Investor protection
  • New Memo & Arts
    • Incorporating P.E. control elements
  • Tag along and drag along
    • Control of the exit
  • Veto rights for private equity
    • Control of management
• Management
  • Jensen and Meckling agency theory
    • Why buyouts work
  • The envy ratio
    • Management incentivisation
  • Agreeing the ratchet
    • Carrot and stick
  • Good leaver / bad leaver provisions
    • Covering under performance

Exercise: Agreeing the terms of the envy ratio

Identifying and Closing a Good Transaction

• Ideal company characteristics
  • The three golden rules
• MBO / MBI
  • Assessing management strength
• Meeting vendors’ expectations
  • Structuring the deal
• Avoiding conflicts of interest
  • Recognising the risks of multi-layered financing
• Due diligence
  • Investigation and verification
• Tie-in with contract terms
• Structuring the debt appropriate to the business

Discussion: How to finance the acquisition of Manchester United. The Man U accounts are reviewed with the object of deciding how to finance its acquisition. Answers are compared to the actual result.

• Exit
• Control by P.E. house
• IPO
• Second round financing
• Trade sale
• The “living dead”