7) M&A

Question 1

What is m and a

Answer 1

consolidation of companies

Question 2

why are companies potentially worth more if they combine?

Answer 2

synergies

Question 3

how is M and A efficient?

Answer 3

fixed costs are shared, resources are already in place

Question 4

what is defensive m and a

Answer 4

buying target so competitor won’t, or buying competitor directly

Question 5

when is an m and a deal likely to occur in a company’s lifecycle

Question 6

what is a bolt on acquisition

Answer 6

acquisition of smaller firm

Question 7

what is a common M an A transaction during maturity stage

Answer 7

merger of equals

Question 8

what are the three types of M and A processes

Answer 8

1) negotiate with single buyer
2) negotiate with multiple buyers (auction)
3) listed firm

Question 9

pros and cons of private transaction? (M and A)

Answer 9

pro: quick process
cons: no competition, no sense of urgency for buyer

Question 10

pros and cons of public transaction (M and A)

Answer 10

pro: perception of competition increases price, increases urgency, easier negotiations

cons:

Question 11

how many bidders are the aim for public transaction M and A?

Answer 11

3-5

Question 12

pros and cons of listed firm? (M and A)

Answer 12

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

Question 13

hostile vs friendly takeover

Answer 13

friendly takeover: management approval of acquisition listed firm

hostile takeover: management does not approve of takeover of listed firm

Question 14

what are the steps of private transaction m and a

Answer 14

1) confidential agreement
2) a process letter
3) due diligence process
4) virtual due diligence
5) on side due dillegence
6) negotiation and signing

Question 15

what factors go into process letter

Answer 15

1) timing
2) valuation tange
3) due diligence access

Question 16

what are the steps of M and A auction

Answer 16

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

Question 17

what is a teaser document

Answer 17

company summary, doesn’t include name for confidentiality

Question 18

what goes in to information memorandum

Answer 18

1) business overview
2) financials
3) management team
4) product portfolio
5) market positioning
6) name

Question 19

what goes in to process letter

Answer 19

1) timing
2) valuation range
3) due diligence access
4) other details

Question 20

steps for m and a for listed firm (friendly)

Answer 20

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

Question 21

steps for m and a for listed firm (hostile)

Answer 21

goal: acquire control of majority of shares and replace the board

Question 22

difference between equity and enterprise value

Answer 22

equity = value of shares

enterprise value = equity + net debt

Question 23

how to value a company

Answer 23

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)

Question 24

corporate buyers vs financial buyers

Answer 24

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

Question 25

what is an earn-out

Answer 25

payment conditioned on achieving pre determined milestones

Question 26

what is the amount paid in an m&A transaction called

Answer 26

consideration

Question 27

what are some payment options

Answer 27

cash/stock/earn out mechanism

Question 28

pros of earn outs

Answer 28

seller keeps upside
seller remains involved

Question 29

cons of earn outs

Answer 29

hard to measure earn out criteria
performance can be subject to external events