7) M&A Flashcards
What is m and a
consolidation of companies
why are companies potentially worth more if they combine?
synergies
how is M and A efficient?
fixed costs are shared, resources are already in place
what is defensive m and a
buying target so competitor won’t, or buying competitor directly
when is an m and a deal likely to occur in a company’s lifecycle
what is a bolt on acquisition
acquisition of smaller firm
what is a common M an A transaction during maturity stage
merger of equals
what are the three types of M and A processes
1) negotiate with single buyer
2) negotiate with multiple buyers (auction)
3) listed firm
pros and cons of private transaction? (M and A)
pro: quick process
cons: no competition, no sense of urgency for buyer
pros and cons of public transaction (M and A)
pro: perception of competition increases price, increases urgency, easier negotiations
cons:
how many bidders are the aim for public transaction M and A?
3-5
pros and cons of listed firm? (M and A)
pros) valuation is easy as it is traded publicly , buyers pay premium on top of listed price to convince shareholders to sell
cons) company traded on stock exchange, information leakage is problem, bidder can contact firms management directly, complex mechanisms due to fragmented ownership
hostile vs friendly takeover
friendly takeover: management approval of acquisition listed firm
hostile takeover: management does not approve of takeover of listed firm
what are the steps of private transaction m and a
1) confidential agreement
2) a process letter
3) due diligence process
4) virtual due diligence
5) on side due dillegence
6) negotiation and signing
what factors go into process letter
1) timing
2) valuation tange
3) due diligence access
what are the steps of M and A auction
1) decision to sell
2) hire investment bank
3) hire big four firm for due diligence
4) prepare a teaser document
5) confidentiality agreement
6) information memorandum
7) declare interest in bidding process
8) process letter
9) buy side due dillegence
10) binding offer
11) buyer shortlist
12) negotiation and closing
what is a teaser document
company summary, doesn’t include name for confidentiality
what goes in to information memorandum
1) business overview
2) financials
3) management team
4) product portfolio
5) market positioning
6) name
what goes in to process letter
1) timing
2) valuation range
3) due diligence access
4) other details
steps for m and a for listed firm (friendly)
1) confidentiality agreement
2) process letter
3) valuation with premium
4) due dillegence access
5) submit tender offer (public)
6) board of directors express approval
steps for m and a for listed firm (hostile)
goal: acquire control of majority of shares and replace the board
difference between equity and enterprise value
equity = value of shares
enterprise value = equity + net debt
how to value a company
1) DCF
2) Trading multiples (Comparison with other listed firms)
3) Transaction multiples (Comparison with recent deals)
4) LBO Analysis (Valuation for LBOS)
5) Market Price (Consider the targets market value when listed)
corporate buyers vs financial buyers
corporate buyer
- firms operating in the same industry (or related industry)
- strategic rationale
- long term focus
- interest in managing target
Financial buyers
- focus on cash flow generation
- 5-7 year horizon
- (VC, PE, LBO)
- hire board of representatives
what is an earn-out
payment conditioned on achieving pre determined milestones
what is the amount paid in an m&A transaction called
consideration
what are some payment options
cash/stock/earn out mechanism
pros of earn outs
seller keeps upside
seller remains involved
cons of earn outs
hard to measure earn out criteria
performance can be subject to external events
