Chapter 6- M&A Advisory – Part II Flashcards
1
Q
Pitching for Sell-Side M&A Mandates:
A
- When the shareholders of a private company are considering selling, they often conduct an RFP process with a select group of investment banks that they have a strong relationship with
2
Q
- Although every RFP situation is different, a typical sell-side proposal will address the following items:
A
- Deal Team Overview with Biographies
- Executive Summary
- Relevant Credentials
- Views on Value
- Process Recommendations
- Buyers Universe
- Work Plan
- Potential Alternatives
3
Q
If an investment bank is unsuccessful in an RFP process:
A
they will typically pivot quickly and try to find a buy-side advisory mandate, however the probability of success on a buy-side assignment is significantly lower
4
Q
If the Board of a public company is considering launching a sale process:
A
they typically hire an investment bank that they consider a trusted advisor
– A broad RFP process would significantly increase the risk that the process gets leaked to the public, which can complicate the sale process (market noise, management distraction, employment uncertainty, etc.)
5
Q
Sell-Side Advisory Responsibilities- * An investment banks responsibilities vary in every transaction but the typical sell-side mandate includes the following responsibilities:
A
– Keeping a finger on the pulse of industry, M&A and financing trends to set valuation expectations for the client
– Establishing a baseline view on standalone value to aid in decision making (ie. what is the business worth if management continues to execute their plan)
– Developing marketing materials (teaser, confidential information memorandum (CIM), management presentation) and a detailed financial forecast to clearly articulate the key investment highlights to buyers
– Structuring and managing the sale process, including identifying and contacting potential buyers, managing information flow, hosting discussions between potential buyers and management and establishing a formal bid process
– Populating an online “data room” for buyer due diligence and serving as the primary liaison between potential buyers and the seller
– Reviewing proposals and helping negotiate the final terms of the deal
6
Q
Sell-Side Process Objectives
A
- A seller’s objectives and the depth of the buyers universe typically dictate the structure of a sale process
- The primary objective of most sellers is to maximize value, however there may be additional objectives that need to be considered, such as minimizing disruption or completing a transaction quickly
- A successful sale process is one that meets the objectives of the seller
7
Q
Sale Process (2): Discrete Process & Broad Auction
A
- Minimize Disruption
- Timely Completion
- Certainty of Outcome
- Attractive Structure
- Maximize Value
8
Q
Sell-Side Process Types
A
- The duration of a sale process typically depends on the number of parties contacted and their familiarity with the business
9
Q
Process Types:
A
- Discrete
- Controlled
- Broad Auction
10
Q
Discrete:
A
(<5 Parties)
11
Q
Benefits of Discrete type:
A
- Very limited disclosure and less disruptive
- Minimizes “widely-shopped” stigma
- More control over process and timetable
- Preferred approach of buyers (i.e. exclusivity)
12
Q
Considerations of Discrete type:
A
- Requires an obvious group of potential buyers
- Negotiations can drag on / lack of buyer urgency
- Difficult to create bidding tension
- Less likely to maximize value
13
Q
Contolled:
A
(5-20 Parties)
14
Q
Broad Auction:
A
(>20 Parties)
15
Q
Benefits of Controlled:
A
- High value for the business while maintaining a manageable process scope
- Indication of interest (ie. price level) required before proceeding with full diligence process
- Flexibility to change process
16
Q
Considerations of Controlled:
A
- May prolong sale process due to thorough buyer identification process
- May miss interested buyers
- Typically requires credible “walk-away” alternatives to create bidding tension
17
Q
Benefits of Broad Action:
A
- Widest exposure to potential buyers ensures that interested parties aren’t excluded
- Generates maximum value if interest exists
- Highly structured process with uniform deadline
18
Q
Considerations of Broad Action:
A
- Confidential data must be broadly disseminated
- Considerable commitment of management time
- Possible employee disruption
19
Q
Buyer Identification and Considerations: * The investment bank and the management team typically work together to develop and evaluate a
comprehensive buyers list based on the following criteria:
A
- Strategic Fit
- Experience or Interest in the Sector
- M&A Track Record / Ability to Execute
- Ability to Finance
- Financial Profile of the Seller
20
Q
- Strategic and financial buyers employ ___ approaches when reviewing acquisition opportunities and the mix
of bidders invited to consider an opportunity will impact how the process ultimately unfolds
A
different
21
Q
Strategic Buyers
A
- Can theoretically offer best ability to pay due to
synergy potential - Potential for more targeted diligence process
given in-market expertise - Can be slower to move given other priorities –
competition important to drive speed and value - Requires sharing sensitive information with
industry competitors
22
Q
Financial Buyers
A
- Includes private equity, pension funds, sovereign
wealth funds and asset management firms - Can be difficult to assess level of interest until
later in the process - Conduct comprehensive due diligence given
limited sector knowledge / experience - Typically require ongoing involvement from
existing management team post-transaction
23
Q
Sell-Side Process Tools
A
*
Investment banks rely on several key marketing and legal documents to execute a successful sale process
24
Q
Process Tools
A
Teaser
Confidentiality (CA) or Non-Disclosure Agreement (NDA)
Process Letter
Confidential Information Memorandum (CIM)
Management Presentation
Virtual Data Room (VDR)
Sale and Purchase Agreement (SPA)
25
Teaser
*
A brief overview of the opportunity and key selling points sent to prospective buyers
*
Typically includes a high-level financial snapshot of the business
*
Entices interested parties into the auction process
26
Confidentiality (CA) or Non-Disclosure Agreement (NDA)
*
Binds both parties to maintain confidentiality of the process and materials
*
Controls public disclosure and restricts discussions among competing purchasers
27
Process Letter
*
Instructions provided to potential buyers outlining what to include in their proposals
*
Key items include overview of the acquiring entity, purchase price, valuation build-up, financing sources, go-forward plans, interest approvals and due diligence requirements
28
Confidential Information Memorandum (CIM)
*
Detailed document articulating the key selling points, business plan and financial forecast to assist potential buyers in evaluating the opportunity and determining value
29
Management Presentation
*
In person presentation with management team and access to an online data room
*
Reduces transaction risk for the buyer and allows better evaluation of synergies
*
Provides management with an opportunity to impress potential buyers
30
Virtual Data Room (VDR)
*
Online data room with commercial, financial, environmental, legal, human resources, information technology and other documentation related to the business
*
Enables potential buyers to conduct due diligence on the business
31
Sale and Purchase Agreement (SPA)
*
Definitive agreement outlining all legal terms of the transaction
*
Legal counsel to prepare, typically provided to buyers advanced to second phase
32
Sell-Side Process Overview: The typical sale process takes approximately three to four months to complete and consists of 4 stages: C= Company, IB= Investment Bank, Legal Counsel = L
Preparation Stage
Approach Stage
Short-List / Due Diligence Stage
Final Negotiation / Closing Stage
33
Preparation Stage (3-4 Weeks)
* Organize process (IB)
* Collect data (C, IB)
* Identify and address key issues (C, IB)
* Determine if vendor due diligence reports are required (IB)
* Develop buyers list (IB, C)
* Prepare Process Letter, Teaser and CIM (IB, C)
* Prepare CA/NDA (L)
34
Approach Stage (3-4 WEEKS)
* Initial contact made to potential buyers (IB)
* Negotiate and sign NDA’s / distribute CIM (IB, L)
* Prepare management presentation (C, IB)
* Prepare data room (C, L, IB)
* Request / receive nonbinding expressions of interest (IB)
35
Short-List / Due Diligence Stage (3-4 weeks)
* Determine short-list of buyers (C, IB)
* Due diligence and management presentation for shortlisted candidates (C, IB, L)
* Provide draft SPA (IB, L)
* Request / receive final proposals (IB)
36
Final Negotiation / Closing Stage 3 to 4 Weeks
* Negotiate final proposals / select winning bidder (C, IB, L)
* Negotiate definitive agreements (L, IB, C)
* Execute definitive agreements (L, C)
* Closing (C)
37
Overview of Buyer Approach Strategies (Public Company Target)
* A buyer can approach a potential target in a number of ways, each implying a different level of aggression
* The target company must be prepared in the event the approach becomes more aggressive
38
3 Approach Types:
(Friendly): Discussion / Initial Contact --> "Bear Hug" --> Unsolicited / Hostile Bid (Aggressive)
39
Description of Discussion / Initial Contact
Acquirer CEO calls target CEO to
discuss possibility of a transaction
40
Description of “Bear Hug”
Acquirer CEO calls target CEO/Board
to attempt to initiate discussions and
may include indication of key terms
41
Description of Unsolicited / Hostile Bid
Acquirer CEO calls target CEO/Board
immediately prior to submitting a bid
42
Discussion on Value of Discussion / Initial Contact
Maybe
43
Discussion on Value of “Bear Hug”
Likely
44
Discussion on Value of Unsolicited / Hostile Bid
No, but price in bid letter
45
Perceived Aggression of Discussion / Initial Contact
Low
46
Perceived Aggression of “Bear Hug”
Moderate
47
Perceived Aggression of Unsolicited / Hostile Bid
High
48
Response Timing of “Bear Hug”
Flexible
49
Response Timing of Discussion / Initial Contact
* Very Flexible
50
Response Timing of Unsolicited / Hostile Bid
* No Flexibility
51
CEO/Board Responsibility of Discussion / Initial Contact
Low
51
CEO/Board Responsibility of Unsolicited / Hostile Bid
Mandatory
52
CEO/Board Responsibility of “Bear Hug”
Moderate
53
Due Diligence of Unsolicited / Hostile Bid
* Unlikely
53
Due Diligence of “Bear Hug”
If preliminary agreement on terms
54
Due Diligence of Discussion / Initial Contact
If preliminary agreement on terms
55
Buyer Control of Process of Discussion / Initial Contact
Minimal
56
Buyer Control of Process of “Bear Hug”
Moderate
57
Buyer Control of Process of Unsolicited / Hostile Bid
High
58
Continued Dialogue of Discussion / Initial Contact
Yes
59
Continued Dialogue of “Bear Hug”
Yes
60
Continued Dialogue of Unsolicited / Hostile Bid
Possible
61
Acquire Toehold (<10%) of Unsolicited / Hostile Bid
Maybe
61
Acquire Toehold (<10%) of Discussion / Initial Contact
Maybe
62
Acquire Toehold (<10%) of “Bear Hug”
Maybe
63
Letter Submitted of Discussion / Initial Contact
Less likely
64
Letter Submitted of “Bear Hug”
Yes
65
Letter Submitted of Unsolicited / Hostile Bid
Formal Bid
66
Acquirer Press Release of Discussion / Initial Contact
No
67
Acquirer Press Release of “Bear Hug”
No
68
Acquirer Press Release of Unsolicited / Hostile Bid
Yes
68
Target Press Release of Discussion / Initial Contact
No
69
Target Press Release of “Bear Hug”
Unlikely
70
Target Press Release of Unsolicited / Hostile Bid
Likely
71
Friendly vs. Aggressive Approaches – Advantages and Disadvantages
There are a number of benefits and considerations a buyer needs to consider prior to approaching a public company target about a potential transaction
72
Benefits of: Discussion / Initial Contact
* Maintain target’s business stability
* Secure cooperation of target
* Ability to conduct due diligence
* Benefit from exclusivity
* Allow for negotiated resolution of
potential conflicts
73
Considerations of: Discussion / Initial Contact
* Extends timing of transaction
* Enables target to prepare for auction
* No access to shareholders
74
Benefits of: “Bear Hug”
* Preserve option of friendly deal
* Maintain control over timeline
* Protect public-relations image if
approach ends up hostile
* Preempt auction in a friendly way
75
Considerations of: “Bear Hug”
* Provide target with early warning
* Risk losing some time advantage
* May limit ability to conduct due
diligence
76
Benefits of: Unsolicited / Hostile Bid
* Seize control of agenda
* Communicate with key shareholders
* Potentially accelerate timetable
* Attack target at time of vulnerability
* Head start on auction process
77
Considerations of: Unsolicited / Hostile Bid
* Reputational risk
* Enter into public relations battle
* Likely no due diligence
* Instigate auction process
* May be precluded from auction
78
Responding to an Unsolicited Bid (Public Company Target)
* In the event a company receives an unsolicited bid, the terms of the bid typically dictate the response
79
3 Different types of offers for a Unsolicited Bid:
Opportunistic Offer (Reject and Prepare)
Competitive Offer (Proactive Response)
Pre-Emptive Offer (Exclusive Negotiations)
80
Description of: Opportunistic Offer
* Bid is too low or not credible
81
Company’s
Response of: Opportunistic Offer
* Refuse to allow bidder access to
confidential materials
* Prepare for possible hostile bid
82
Possible Bidder Reaction of: Opportunistic Offer
* Express flexibility to improve
proposal
* Launch hostile bid / approach
shareholders directly
* Go away
83
Description of: Competitive Offer
* Bid is in a competitive range
* Likely an attractive premium, but
may not be the best alternative
84
Company’s
Response of: Competitive Offer
* If accepted, offer limited protection
* Consider undertaking a process
– Soft rejection or negotiate while
soliciting other bids privately; or
– Undertake a public auction
85
Possible Bidder Reaction of: Competitive Offer
* Express flexibility to improve
proposal
* Launch hostile bid / approach
shareholders directly
* Decline to participate in auction
process / go away
86
Description of: Pre-Emptive Offer
* Bid represents outstanding value
relative to normal acquisition
metrics intended to negate need for
a market test
87
Company’s
Response of: Pre-Emptive Offer
Board may have an obligation to
negotiate and/or to firm up bid and
let shareholders decide
– Confidentiality agreement
– Access to confidential info
88
Possible Bidder Reaction of: Pre-Emptive Offer
Negotiate for protection from
competing bids
– Exclusivity
– Non-solicitation
– Break fees
– Right to match
89
Fairness Opinions and Formal Valuations
* Increased regulatory scrutiny and the threat of lawsuits has placed increased pressure on Boards to justify their
decisions to shareholders, particularly in transactions having a material impact on the business
90
Fairness Opinion:
* Not a legal requirement - written evaluation by a
qualified financial advisor as to whether the
consideration to be received/paid in a transaction is
“fair”, from a financial point of view, to a defined set of
stakeholders
* Does not specify an actual value or range of fair value
— determines whether the consideration meets a
minimum threshold
* Fairness opinion can be provided by a financial advisor
also receiving a success fee or by an independent advisor
* Limited public disclosure generally required
– Opinion outlines scope of review, high level
assumptions and limitations
* Supporting analysis: typically only provided to the Board
or Special Committee
91
Formal Valuation – Under MI 61-1011
* Regulated requirement in certain circumstances (ie. MI
61-101) such as insider bids and other related party M&A
transactions
– Protection mechanism for minority shareholders
* Valuation determines a specific range of fair market
value for the target securities
* Can include a reference to the distinctive material
benefits to the acquirer
* Valuator must be independent and cannot receive a
success fee in connection with the underlying
transaction (avoiding any conflict of interest)
* Significant disclosure requirements
– Supporting analysis must be disclosed publicly in
shareholder documents
92
Shareholder Activism
* An activist shareholder is a shareholder that exercises their right as a partial owner to influence a corporation’s
behaviour
* An activist can be a long time shareholder who is unhappy or a recent shareholder trying to create shareholder
value quickly
93
* There are several factors which typically attract activist activity in a public stock, including:
1. Poor Share Price Performance (Absolute or Relative to Peers)
2. Perceived Opportunity to Surface “Hidden” Value
3. Valuation Disconnect (Gap Between Trading and Fundamental Value)
4. Known Interest from Strategic Buyers
5. Inefficient Capital Allocation / Poor Returns
6. Governance / Management Concerns
94
Shareholder Activism in Canada
*
There have been more than 125 public proxy contests in Canada since 2012, however this figure understates the true level of activist activity as many situations are settled privately
*
Actions by activists, particularly those with a track record of success, can have a significant impact on the market – whether warranted or not
*
Canada’s legislation provides a friendly platform that activists take advantage of to agitate for change without launching a formal proxy contest
95
Shareholder Activism in Canada (Early Warning Rules)
*
A high public reporting threshold of 10% in Canada can make it difficult to track activist movements
*
Once a purchaser directly or indirectly acquires over 10% or more of an issuer’s securities, the purchaser will be subject to the “early warning” rules
–
Upon crossing 10%, and at each 2% incremental acquisition thereafter, the “early warning” rules require a purchaser to immediately disclose its identity, shares held, purpose of their acquisition and intentions regarding future acquisitions by: (i) issuing a press release, and (ii) filing an “early warning” report with Canadian securities regulators
–
There are a number of passive institutional investors with meaningful equity positions in public companies, so not all early warning filings are an indication of activist activity
*
Early warning threshold is reduced to 5% if the target issuer is the subject of an outstanding offer or is a SEC registrant
96
Activist Investor – Example (PointNorth Capital)
*
On November 15, 2016, activist investor PointNorth Capital Inc. filed an Early Warning Report on Liquor Stores N.A., an Edmonton-based retailer of alcohol
97
Key Excerpts from the Early Warning Report
The Triggering Event
Consideration Paid
Pro Forma Ownership
Purpose of the Transaction
