Chapter 6- M&A Advisory – Part II Flashcards
Pitching for Sell-Side M&A Mandates:
- 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
- Although every RFP situation is different, a typical sell-side proposal will address the following items:
- Deal Team Overview with Biographies
- Executive Summary
- Relevant Credentials
- Views on Value
- Process Recommendations
- Buyers Universe
- Work Plan
- Potential Alternatives
If an investment bank is unsuccessful in an RFP process:
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
If the Board of a public company is considering launching a sale process:
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.)
Sell-Side Advisory Responsibilities- * An investment banks responsibilities vary in every transaction but the typical sell-side mandate includes the following responsibilities:
– 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
Sell-Side Process Objectives
- 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
Sale Process (2): Discrete Process & Broad Auction
- Minimize Disruption
- Timely Completion
- Certainty of Outcome
- Attractive Structure
- Maximize Value
Sell-Side Process Types
- The duration of a sale process typically depends on the number of parties contacted and their familiarity with the business
Process Types:
- Discrete
- Controlled
- Broad Auction
Discrete:
(<5 Parties)
Benefits of Discrete type:
- Very limited disclosure and less disruptive
- Minimizes “widely-shopped” stigma
- More control over process and timetable
- Preferred approach of buyers (i.e. exclusivity)
Considerations of Discrete type:
- 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
Contolled:
(5-20 Parties)
Broad Auction:
(>20 Parties)
Benefits of Controlled:
- 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
Considerations of Controlled:
- May prolong sale process due to thorough buyer identification process
- May miss interested buyers
- Typically requires credible “walk-away” alternatives to create bidding tension
Benefits of Broad Action:
- Widest exposure to potential buyers ensures that interested parties aren’t excluded
- Generates maximum value if interest exists
- Highly structured process with uniform deadline
Considerations of Broad Action:
- Confidential data must be broadly disseminated
- Considerable commitment of management time
- Possible employee disruption
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:
- Strategic Fit
- Experience or Interest in the Sector
- M&A Track Record / Ability to Execute
- Ability to Finance
- Financial Profile of the Seller
- 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
different
Strategic Buyers
- 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
Financial Buyers
- 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
Sell-Side Process Tools
*
Investment banks rely on several key marketing and legal documents to execute a successful sale process
Process Tools
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)
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
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
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
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
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
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
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
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
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)
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)
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)
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)
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
3 Approach Types:
(Friendly): Discussion / Initial Contact –> “Bear Hug” –> Unsolicited / Hostile Bid (Aggressive)
Description of Discussion / Initial Contact
Acquirer CEO calls target CEO to
discuss possibility of a transaction
Description of “Bear Hug”
Acquirer CEO calls target CEO/Board
to attempt to initiate discussions and
may include indication of key terms
Description of Unsolicited / Hostile Bid
Acquirer CEO calls target CEO/Board
immediately prior to submitting a bid
Discussion on Value of Discussion / Initial Contact
Maybe
Discussion on Value of “Bear Hug”
Likely
Discussion on Value of Unsolicited / Hostile Bid
No, but price in bid letter
Perceived Aggression of Discussion / Initial Contact
Low
Perceived Aggression of “Bear Hug”
Moderate
Perceived Aggression of Unsolicited / Hostile Bid
High
Response Timing of “Bear Hug”
Flexible
Response Timing of Discussion / Initial Contact
- Very Flexible
Response Timing of Unsolicited / Hostile Bid
- No Flexibility
CEO/Board Responsibility of Discussion / Initial Contact
Low
CEO/Board Responsibility of Unsolicited / Hostile Bid
Mandatory
CEO/Board Responsibility of “Bear Hug”
Moderate
Due Diligence of Unsolicited / Hostile Bid
- Unlikely
Due Diligence of “Bear Hug”
If preliminary agreement on terms
Due Diligence of Discussion / Initial Contact
If preliminary agreement on terms
Buyer Control of Process of Discussion / Initial Contact
Minimal
Buyer Control of Process of “Bear Hug”
Moderate
Buyer Control of Process of Unsolicited / Hostile Bid
High
Continued Dialogue of Discussion / Initial Contact
Yes
Continued Dialogue of “Bear Hug”
Yes
Continued Dialogue of Unsolicited / Hostile Bid
Possible
Acquire Toehold (<10%) of Unsolicited / Hostile Bid
Maybe
Acquire Toehold (<10%) of Discussion / Initial Contact
Maybe
Acquire Toehold (<10%) of “Bear Hug”
Maybe
Letter Submitted of Discussion / Initial Contact
Less likely
Letter Submitted of “Bear Hug”
Yes
Letter Submitted of Unsolicited / Hostile Bid
Formal Bid
Acquirer Press Release of Discussion / Initial Contact
No
Acquirer Press Release of “Bear Hug”
No
Acquirer Press Release of Unsolicited / Hostile Bid
Yes
Target Press Release of Discussion / Initial Contact
No
Target Press Release of “Bear Hug”
Unlikely
Target Press Release of Unsolicited / Hostile Bid
Likely
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
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
Considerations of: Discussion / Initial Contact
- Extends timing of transaction
- Enables target to prepare for auction
- No access to shareholders
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
Considerations of: “Bear Hug”
- Provide target with early warning
- Risk losing some time advantage
- May limit ability to conduct due
diligence
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
Considerations of: Unsolicited / Hostile Bid
- Reputational risk
- Enter into public relations battle
- Likely no due diligence
- Instigate auction process
- May be precluded from auction
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
3 Different types of offers for a Unsolicited Bid:
Opportunistic Offer (Reject and Prepare)
Competitive Offer (Proactive Response)
Pre-Emptive Offer (Exclusive Negotiations)
Description of: Opportunistic Offer
- Bid is too low or not credible
Company’s
Response of: Opportunistic Offer
- Refuse to allow bidder access to
confidential materials - Prepare for possible hostile bid
Possible Bidder Reaction of: Opportunistic Offer
- Express flexibility to improve
proposal - Launch hostile bid / approach
shareholders directly - Go away
Description of: Competitive Offer
- Bid is in a competitive range
- Likely an attractive premium, but
may not be the best alternative
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
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
Description of: Pre-Emptive Offer
- Bid represents outstanding value
relative to normal acquisition
metrics intended to negate need for
a market test
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
Possible Bidder Reaction of: Pre-Emptive Offer
Negotiate for protection from
competing bids
– Exclusivity
– Non-solicitation
– Break fees
– Right to match
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
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
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
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
- There are several factors which typically attract activist activity in a public stock, including:
- Poor Share Price Performance (Absolute or Relative to Peers)
- Perceived Opportunity to Surface “Hidden” Value
- Valuation Disconnect (Gap Between Trading and Fundamental Value)
- Known Interest from Strategic Buyers
- Inefficient Capital Allocation / Poor Returns
- Governance / Management Concerns
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
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
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
Key Excerpts from the Early Warning Report
The Triggering Event
Consideration Paid
Pro Forma Ownership
Purpose of the Transaction
