M&A Flashcards
What are the reasons that a company would want to perform an M&A?
There are three main reasons to do this:
1. the whole is greater than the sum of its parts, 1 + 1 = 3, you acquire a business that is complimentary to your own. This is due to synergies
- more control over the product / overall process.
- cost saving measures: fixed costs and staff costs, finance costs.
- sales channels
- This allows you to get patents, key personnel, business practises etc from the other company.
Rolex acquires bucherer or Take 2 acquires zynga (mobile team).
- Defensive M&A: protect from your competitor acquiring them, loss of talent, patents to the other side, out competed by other rival.
Take 2 acquires zynga (mobile team) to protect against microsoft. Apple acquires beats by Dr Dre.
- PE or LBO: To buy a company with a growth potential and help improve management and effeciency then sell the company in a few years for a profit to the right buyer.
cadburys was acquired by a PE firm then sold to Mondelez in 2010.
What is a merger & acquisition?
This is the consolidation of companies into a single entity.
What is the typical company lifecycle and when is it a target for an M&A?
- development phase: little to no money, startup
- growth phase: starting to generate revenue and be profitable
- mature phase: profitable and lots of competition
- decline phase: starts to burn cash and lose profits
startup: no money to acquire others but could be a good target for a VC firm or for a larger company to grab the patents, expertise and innovation. Bolt on acquisition.
growth: are great targets for larger companies. A growth firm is still unlikely to acquire others but could be acquired.
maturity: the phase when mergers of equals begins to occur. reduce competition and deal wit over capacity. LBOs could also occur at this stage as well.
decline: these are acquired for access, patents, brands, know how, historical relationships and distribution access.
What are the three main types of M&A processes?
private M&A: 1/2 parties, no competition, no urgency, often avoided as the probability of a sale is less likely. Usually done when there is a clear business owner.
listed firm M&A: Direct tender, can be a hostile or friendly takeover. Often an acquisition premium is paid. It is much easier to value a listed firm. If a qualified majority is purchased you can squeeze out the rest.
Auction M&A: lots of competition, the firm has a number of interested parties, high likelihood of a sale.
How does the private transaction take place?
- confidentiality agreement
- process letter - essential elements of the transaction
- due diligence: financial, tax and commercial
- virtual and onsite
- negotiate and sign
This can be initiated by the buyer or the seller.
How does the auction process take place?
- invite multiple bidders and establish competition: sell side driven process.
- hire the investment bank
- prepare a vendor due diligence
- prepare a teaser document - summarize
- confidentiality if interested
- information memorandum: overview, financials, product portfolio and management.
- declare interest
- process letter: DD access, timing and valuation range.
- buy side due diligence - establish recurring vs non recurring
- binding offer
- buyer shortlist
- negotiate - price, function of the business afterwards.
How does acquiring a listed firm take place?
The process varies depending on if the takeover is hostile or friendly. negotiate with CEO and board of directors.
Friendly:
1. confidentiality
2. process letter
3. valuation with premium
4. due diligence access - higher confidentiality
5. tender offer
6. board of directors express
if 90% accept then the others can squeeze out
Hostile:
1. bidder makes a tender offer
2. get a controlling equity interest
3. replace board of directors and CEO.
What is the difficulty of pricing in an M&A?
Establishing the fair value of the company and maximising the profits of the buyer. The buyer has to take on the assets and the liabilities of the company.
Value of the underlying business has to be clear.
Equity vs enterprise value
Equity is the value of the firms shares, enterprise value is the equity + net debt.
valuation: DCF, trading multiples, transaction multiples, LBO analysis and market price if on the stock exchange.
What are the different payout options in an M&A?
The types of consideration:
Equity - cash
Stock in the company
a mix of the two
an earnout - achieve milestones.
What price difference typically is a deal breaker?
5-10% is the max, larger than that is likely to break the deal.
Greater than 5-10% usually requires an earn out, if the target achieves certain metrics the seller gets more money.
What are the main types of buyers?
Corporate and financial buyers. Corporate buyers are looking at the long term, to unlock synergies and help grow in their industry. Financial buyers include: VC, PE and LBOs, shorter term, resell again later.
What are the positives and negatives of earn-outs?
pros: seller keeps upside, seller remains involved.
cons: measuring criteria is hard, subject to external events.
