M&A Process: Process Letter, MoU, Due Diligence, Contracts

Question 1

What is M&A?

Answer 1

M&A can be considereded any process where the ultimate beneficial ownership, and the respective control of a firm, are transferred from a subject (or a group of subjects) to another.

Question 2

What are the parties that engage in an M&A deal?

Answer 2

1. Bidder (acquiring company, acquires control of teh target)
2. Target (acquired company, is being purchased by the bidder and sold by the seller)
3. Seller (is the one selling the target, losing control of the company. Gets money from the bidder for selling the target)

Question 3

What are the two types of players involved in M&A?

Answer 3

1. Strategic: Bidder is a corporate which executes the M&A transaction to accomplish its own corporate objectives
2. Financial: Bidder is a Financial Investor (PEs, HFs, the management etc.) looking for a targeted financial return.

Question 4

What are the three structures of an M&A transaction?

Answer 4

1. Statutory Merger: Target is merged into bidder and ceases to exist
2. Acquisition of Target: Target continues to exist as a subsidiary of the bidder
3. Acquisition of Assets: Target’s Assets transferred to the Bidder

Question 5

What are the three considerations in an M&A transaction?

Answer 5

1. Cash: Bidder pays Seller(s) in cash
2. Equity: Bidder pays Seller(s) with its own shares, in exchagne of the shares of the Target
3. Mixed: Bidder pays Seller(s) with a mix of cash and its own shares

Question 6

What are the two types of financing for an M&A transaction?

Answer 6

1. Debt Financing: Consideration is financed through cash on balance sheet or raising debt
2. Equity Financing: Consideration is financed raising equity (e.g. Rights Issue)

Question 7

What is the two statuses of the Target in an M&A transaction?

Answer 7

1. Private: Target is sold through a private transaction, between Bidder and Seller(s)
2. Public (Tender Offer): A public offer to buy shares is made by the Bidder directly to Target’s shareholders

Question 8

What are all the parties that are involved in an M&A?

Answer 8

1. Target
2. Seller
3. Buyer
4. Financial advisors
5. Legal advisors
6. Accounting advisors (auditing firms)
7. Other experts

Question 9

What is Due Diligence?

Answer 9

• A process by which a buyer or investor gains comfort about the company or assets it is acquiring or investing in and the relative price they are willing to pay for it
• Comprehensive review of a business, its financial position, legal issues, prospects and major risks
• Identification of major risks, exposures, and potential synergies
  Bottom line: Is the business what it appears to be?

Question 10

What was the structure of the illy minority share sale process?

Answer 10

1. Key documentation preparation
   * Info prepared include:
   - Audited histricals/Financials DD report
   - Legal DD report
   - Business plan review
   - List of investors to be approached and engagement strategy
2. Education
   * Public statement regardin the company’s intention to look for a minority partner
   * Provided selected investors with
   - NDA
   - Short-form teaser (max 10 pages) to market the business
   - Largely public information
   - Non financial forecasts
3. Phase I - First Round
   * Long-form teaser (max 50 pages)
   - To include high level financial forecasts
   - Very limited and efficient interaction with managment and Q&A sessions
   * Proposed governance term-sheet
4. Phase II - Second Round
   * Draft SPA and Shareholder Agreement
   * DD package
   - Financial DD report
   - Legal DD report
   - Management presentation
   - VDR, Expert sessions to address investor Q&A
   - Current trading update

Each round the number of companies participating as buyers decreases

Question 11

What are the key takeaways from the ILLY Sale Process

What makes a sell side process successful

Answer 11

1. Detailed Preparation
   * Know well the client company
   * Understand strengths and weaknesses
   * Full alignment with key management team
   * Highlight upsides/”hidden” pocket value
2. Have Clear Objectives
   * Full alignment with clients on the process and on target valuation
   * Highlight pros and cons of scenarios
   * Communicate clearly key areas of risk and uncertainty
3. Extensive Partners Pre-Screening
   * Define a clear set of parameters based on the identified objectives
   * Clearly communicate to all stakeholders goals and expectations
   * Created a shortlist of pre-qualified and commited bidders
4. Hire Top Advisors, Small Group, Clear Responsibilities
   * Identify key decision makers within the organization
   * Full alignment among advisors
   * Cooperate on key themes
5. Know Your Buyers and Pressure Points for Each
   * Understand buyers’ position
   * Identify key drivers
   * Prepare meetings amond parties
6. Competition Helps to Maximize Valuation
   * Organize final phase to maximise number of parties involved
   * Maintain highest level of confidentiality
   * Link negotiation to governance and future strategic opportunitie