M&A Process Flashcards
What is the role of an investment bank in M&A? Why do businesses not just do it themselves?
Sell-side investment bankers are brought in to manage the sale process and to ensure that a favourable result is achieved
When running a sell-side M&A process, why would you do both an accretion/dilution model and an LBO analysis?
Work out how much a strategic would pay and how much a sponsor would pay
Why is an auction likely to lead to a substantial positive impact on value received by the seller?
Variety of factors related to the creation of a competitive environment
Difference between broad and targeted auction?
Broad - maximises the Universe of prospective buyers approached; designed to maximise competitive dynamics, thereby increasing the likelihood of finding the best possible offer.
Targeted - Focus on a few clearly defined buyers that have been identified as having strong strategic fit and/or desired as well as the financial capacity, to purchase the target
What is a definitive agreement?
The thing that is signed with the winning bidder
Why may a strategic be able to pay more than a sponsor?
Strategic can realise synergies and often has a lower cost of capital than a sposnor.
Depending on the capital market conditions, a strategic buyer may also present less financing risk than a sponsor
What are the two main marketing documents for the first round of an auction process?
Teaser and CIM
Why are codenames used in M&A processes?
Maintain confidentiality of the company and the process
What marketing document comes before a confidentiality agreement?
Teaser
What is the point of a teaser?
Inform buyers and generate sufficient interest for them to undertake further work and potentially submit a bid
What is contained in a teaser?
Brief one/two page synopsis, including a company overview, investment highlights, and summary financial information
What is a CIM?
Detailed written description of the target that serves as the primary marketing document for the target
What is an alternative to a CIM?
A CIP, confidential information presentation
What are the 6 very common sections in a CIM?
Executive summary
Investment considerations
Industry overview
Company overview
Operations overview
Financial information
What is a confidentiality agreement?
Legally binding contract between the target and prospective buyers that governs the sharing of confidential company information.
When is a confidentially agreement signed?
Typically signed alongside receiving the teaser, before the party receives further information (such as the CIM)
How will the first round of an auction process run?
- Contract prospective buyers
- Negotiate and execute confidential agreement with interested parties
- To those who sign, distribute confidential information memorandum and initial bid procedures letter
- Prepare management presentation
- Set up data room
- Prepare stapled financing package (if applicable)
- Receive initial bids and select buyers to proceed to second round
How long are interested parties given after the CIM has been distributed?
Typically buyers are given several weeks to review the CIM, study the target and its sector, and conduct preliminary financial analysis prior to submitting their initial non-binding bids.
How can you tell if a party is properly interested in the transaction?
Typically, those that are most interested engage invesment banks as M&A buy-side advisors or financing providers and consultants
When preparing the management presentation, what will also be decided?
The lineup for each slide of the presentation, as well as key messages.
Bankers may also develop a list of “challenge” questions in anticipation of buyer focus areas
What is the final bid procedure letter?
Outlines the date and guidelines for submitting a final, legally binding bid package.
What is a definitive agreement?
Legally binding contract between a buyer and seller detailing the terms and conditions of the sale transaction.
What sort of things would be in the definitive agreement?
- Transaction structure (e.g. merger, stock sale, asset sale)
- Price and terms (e.g. form of consideration - cash, stock, or mixed; earnouts; adjustment to price)
There are also commitments such as covenants that will restrict the company from taking value-reducing actions or change the business, including:
- Restrictions on paying special dividends
- Restrictions on making capital expenditures in excess of an agreed budget
- In some circumstances, one party may owe another a termination fee
What are the benefits of issuing debt or equity?
Debt is better for:
- EPS accretion
- Lowering Cost of Capital
- Tax deductible
- Return on Equity
Equity is better for:
- Balance sheet flexibility
- No mandatory cash payments
- Credit rating considerations
- Lack of covenants
