Lecture 2

Question 1

How many documents are there in M&A?

Answer 1

Normally 10-20 documents, in some cases more

Question 2

What is a teaser?

Answer 2

• Generally a brief one or two-page synopsis of the target, including a company overview, key investment highlights, and summary of financial information. It also contains contact information for the bankers running the sell-side process so that interested parties may respond

Question 3

What is a NDA?

Answer 3

• A confidentiality agreement (or non-disclosure agreement NDA)
• Legally binding contract between the seller and each prospective buyer that governs the sharing of confidential information regarding the company
• Provisions governing use of information, term, premitted disclosures, return of confidential information, non-solititation hire, restrictions on clubbing, stand still agreement

Question 4

What is a process letter phase I (PL I)?

Answer 4

The process letter states the date and time the non binding offer has to be submitted.

Defines the information that should be included in the bid - buyer identification, indicative purchase price, key assumptions for purchase price, strategy / other considerations, information on financial strategy, treatment of management and employees, DD needed before BO, the timing for completing a deal, key conditions to signing and closing, approvals and authorization, identification of advisors and buyer contract information

Question 5

What is a information memorandum (IM)?

Answer 5

• A detailed written description of the target (often 50+pages) that serves as the primary marketing document for the target in an auction given out after NDA
• IMs vary in terms of format and content depending on the situation and specific circumstances
• Exceptionally, we need to prepare a modified version of the IM , when a competitor is in the bid process, and the seller may be concerned about sharing certain sensitive information
• The sell-side advisor also helps develop a set of projections, typically five years in length, as well as supporting assumptions and narrative

Question 6

What is process letter phase II (PL II)?

Answer 6

The process letter states the date and time the Binding Offer (BO) and the SPA mark up have to be submitted.

Defines the information that has be included in the bid: - purchase price details and range, mark up of SPA, evidence of committed financing, attestation to completion of DD and that offer is binding, required regulatory approvals and timeline for completion, board of directors approvals, estimated time to sign and close the transaction)

Question 7

What is a management presentation?

Answer 7

• MPs typically occurs after the Non- Binding Offer (NBO) is received and can be conducted with numerous buyers
• The presentation is made by the senior management team - CEO and CFO - and key division heads or other operational executives
• This presentation involves an in-depth discussion of topics ranging from basic business, industry, and financial information to competitive positioning, future strategy, growth opportunities, synergies (if appropriate), and financial projections
• The management presentation is often the buyer’s first meeting with the management

Question 8

Why is Managmenet Presentation important?

Answer 8

o A unique opportunity to gain a deeper understanding of the business and its future prospects
o buyers consider it part of the preliminary due diligence of a company as it usually gives them insight into the capabilities and overall mindset of the managers they will partner with
o the management team itself represents a substantial portion of the target’s value proposition
o also a chance for prospective buyers to gain a sense of “fit” between themselves and management

Question 9

How long does a typical M&A deal take?

Answer 9

3 months – 12 months

Question 10

Name the steps in the M&A process (sell-side example)

Answer 10

Organization and preparation, first round, second round, negotiations and signing and closing

Question 11

What happens during organisation and preparation?

Answer 11

• Identify seller objectives and priorities
• Perform sell-side advisor due diligence and preliminary valuation analysis
• Select buyer universe & compilation of contact information
• Prepare marketing materials
• Prepare confidentiality agreement

Question 12

Which marketing materials are given out during organisation and preparation?

Answer 12

Teaser and IM

Question 13

Name som seller objectives and priorities (5)

Answer 13

o	 value maximization
o	speed of execution
o	certainty of completion
o	confidentiality
o	how many prospective buyers to approach
o	etc.

Question 14

What happens during the first round? (8)

Answer 14

• Contact prospective buyers
• Negotiate and execute confidentiality agreement with interested parties
• Distribute Information Memorandum and initial Process Letter
• Prepare Management Presentation
• Set up Virtual Data Room
• Prepare stapled financing package (optional to maybe gain some time)
• Receive initial bids / non binding offers (NBOs)
• Analyze / compare / select buyers to proceed to second round

Question 15

What is a VDR?

Answer 15

Virtual Data Room
o location (online) where comprehensive, detailed information about the target is stored, catalogued, and made available to pre-screened bidders
o Prospective buyers can ask questions

Question 16

What happens during the second round?

Answer 16

This phase centers on facilitating the prospective buyers’ ability to conduct detailed due diligence and analysis so they can submit strong, final binding bids. This phase is exhaustive, typically spanning several weeks

(distribute final bid process letter, conduct management presentations, facilitate site visits, provide data room access, distribute draft SPA, receive binding offers)

Advisors want to maintain a competitive atmosphere

Question 17

Why do advisors want to maintain a competitive atmosphere?

Answer 17

assures that doubts/reservations from prospective buyers are clarified/explained for them to gain confidence and reflect it in the offerings while ensuring bidders move in accordance with the established schedule – pushes up price

Question 18

What happens during negotiations and signing?

Answer 18

• Analyze and evaluate final bids [ sell-side advisor + seller + legal counsel ] conduct a thorough analysis of the price, structure, and conditionality of the final bids
• Select preferred bidder(s) & negotiate with preferred bidder(s)
• Select winning bidder & receive board of directors approval
• Execute definitive agreement(s)

Question 19

What happens during closing stage?

Answer 19

• Signing not the same as closing
• Obtain necessary regulatory approvals
• Fulfilment of Conditions Precedent (CPs) - freeze conditions for the seller
• Third-party consents
• Shareholder approval
• Closing and payment

Question 20

Name two types of auctions that determine no. of investors to invite

Answer 20

Broad auction (10-100) and Targeted auction (1-5)

Question 21

What is a targeted auction?

Answer 21

A targeted auction focuses on a few clearly defined buyers that have been identified as having a strong strategic fit and/or desire, as well as the financial capacity, to purchase the target. This process is more conducive to maintaining confidentiality and minimizing business disruption to the target. At the same time, there is greater risk of “leaving money on the table” by excluding a potential bidder that may be willing to pay a higher price.

Confidentiality, timing / speed, potential business disruption, culture fit

Question 22

What is a broad auction?

Answer 22

A broad auction maximizes the universe of prospective buyers approached. This may involve contacting dozens of potential bidders, comprising both strategic buyers (potentially including direct competitors) and financial sponsors. By casting as wide a net as possible, a broad auction is designed to maximize competitive dynamics, thereby increasing the likelihood of finding the best possible offer.

This type of process typically involves more upfront organization, marketing, process points, and resources due to the larger number of buyer participants in the early stages of the process. It is also more difficult to maintain confidentiality as the process is susceptible to leakage to the public (including customers, suppliers, and competitors), which, in turn, can increase the potential for business disruption.

Competitive dynamics, price, transparency

Question 23

Name advantages of a broad auction

Answer 23

• Increases the probability that all potential bidders are contacted
• Maximizes competitive dynamics
• Decreases the probability of leaving money on the table
• Increases the probability of achieving maximum sale price
• Limits buyers negotiating leverage
• Gives Board of Directors confidence it fulfilled its fiduciary duties
• Higher transparency

Question 24

Name disadvantages of a broad auction (8)

Answer 24

• Difficult to preserve confidentiality (information leakage)
• Employee morale might be negatively affected
• Collusion among bidders
• Usually more time consuming / lengthy process
• Higher business disruption risk
• Some prospective buyers decline participation in broad auctions
• Unsuccessful outcome can create perception of undesirable asset
• Industry competitors may participate just to gain access to sensitive information

Question 25

Name advantages of a targeted auction

Answer 25

• Higher likelihood of preserving confidentiality
• Reduces business disruption
• Reduces the potential of a failed auction by signalling a desire to select a “partner”
• Serves as a “market check” for board to meet its fiduciary duties
• Speed of execution

Question 26

Name disadvantages of a targeted auction

Answer 26

• Potentially excludes non-obvious, but credible, buyers
• Potential to leave “money on the table” if certain buyers are excluded
• Lesser degree of competition
• May afford buyers more leverage in negotiations
• Provides less market data on which board can rely to satisfy its fiduciary duties

Question 27

The eight most common M&A challenges during process

Answer 27

• Preparation of compelling marketing materials
• Identification of potential deal issues / solutions
• Coaching of management / commitment from management towards the transaction
• Significant time and attention from key members of the target’s management team
• Selection of an appropriate group of prospective buyers
• Agreement on post-merger organizational chart and reporting lines (the “little boxes problem”)
• Accuracy of information provided / Business Plan assumptions / current trading
• Manage seller’s expectations (ideally in the beginning of the transaction)

Question 28

Most common M&A challenges after transaction process

Answer 28

• A transaction is always disruptive in a company, and creates insecurities  several crucial issues must be addressed during the Post-Merger Integration (PMI) process:
o Investing in a good and clear communication strategy is key
o what and how to communicate with internal/external stakeholders
o Include the teams / feeling of being part of the process boosts integration
o define a clear vision and strategy
o identify synergies and how to achieve them
o put in place a strong, dedicated and solid PMI team / clear project leadership and ownership
o draw up an integration master plan and set strategic integration priorities o track progress of the integration plan and its several agreed milestones, correcting deviations
o how to keep employees focused on customers and business during the PMI process
o how to retain key talent
o assess cultural differences