M&A Process

Question 1

What is the role of an investment bank in M&A? Why do businesses not just do it themselves?

Answer 1

Sell-side investment bankers are brought in to manage the sale process and to ensure that a favourable result is achieved

Question 2

When running a sell-side M&A process, why would you do both an accretion/dilution model and an LBO analysis?

Answer 2

Work out how much a strategic would pay and how much a sponsor would pay

Question 3

Why is an auction likely to lead to a substantial positive impact on value received by the seller?

Answer 3

Variety of factors related to the creation of a competitive environment

Question 4

Difference between broad and targeted auction?

Answer 4

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

Question 5

What is a definitive agreement?

Answer 5

The thing that is signed with the winning bidder

Question 6

Why may a strategic be able to pay more than a sponsor?

Answer 6

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

Question 7

What are the two main marketing documents for the first round of an auction process?

Answer 7

Teaser and CIM

Question 8

Why are codenames used in M&A processes?

Answer 8

Maintain confidentiality of the company and the process

Question 9

What marketing document comes before a confidentiality agreement?

Answer 9

Teaser

Question 10

What is the point of a teaser?

Answer 10

Inform buyers and generate sufficient interest for them to undertake further work and potentially submit a bid

Question 11

What is contained in a teaser?

Answer 11

Brief one/two page synopsis, including a company overview, investment highlights, and summary financial information

Question 12

What is a CIM?

Answer 12

Detailed written description of the target that serves as the primary marketing document for the target

Question 13

What is an alternative to a CIM?

Answer 13

A CIP, confidential information presentation

Question 14

What are the 6 very common sections in a CIM?

Answer 14

Executive summary
Investment considerations
Industry overview
Company overview
Operations overview
Financial information

Question 15

What is a confidentiality agreement?

Answer 15

Legally binding contract between the target and prospective buyers that governs the sharing of confidential company information.

Question 16

When is a confidentially agreement signed?

Answer 16

Typically signed alongside receiving the teaser, before the party receives further information (such as the CIM)

Question 17

How will the first round of an auction process run?

Answer 17

• 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

Question 18

How long are interested parties given after the CIM has been distributed?

Answer 18

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.

Question 19

How can you tell if a party is properly interested in the transaction?

Answer 19

Typically, those that are most interested engage invesment banks as M&A buy-side advisors or financing providers and consultants

Question 20

When preparing the management presentation, what will also be decided?

Answer 20

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

Question 21

What is the final bid procedure letter?

Answer 21

Outlines the date and guidelines for submitting a final, legally binding bid package.

Question 22

What is a definitive agreement?

Answer 22

Legally binding contract between a buyer and seller detailing the terms and conditions of the sale transaction.

Question 23

What sort of things would be in the definitive agreement?

Answer 23

• 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

Question 24

What are the benefits of issuing debt or equity?

Answer 24

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

Question 25

What is an analysis at various prices (AVP) analysis?

Answer 25

Looks at the implied transaction multiples based on the premium paid to current share price

Question 26

What is a contribution analysis?

Answer 26

Depicts the financial “contributions” that each party makes to the pro forma entity in terms of sales, EBITDA, EBIT, net income, and equity value.

Question 27

How does an M&A model and an LBO model relate?

Answer 27

M&A model is a derivation of the LBO model, but with two separate operating models

Question 28

What are the two most common types of credit statistics?

Answer 28

Leverage ratios (e.g. debt/ebitda) and coverage ratios (e.g. EBITDA/interest)

Question 29

For a 100% stock transaction, how can you tell if the deal will be accretive?

Answer 29

If acquirer has higher P/E ration than acquired company.