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Merisis Capital Advisors Pvt. Ltd.   Mergers & Acquisitions I Syndication I Advisory     M&A – A Sellers Perspective      ...
Outline•   M&A Trends•   Rationale for an M&A•   Typical Process•   Key Issues
M&A - Trends• Earlier the confines of the larger companies and new age industries• Increasingly family businesses have rec...
Rationale                                                                          •Size    •Adding                       ...
The Process                Decoding                              Strategy               Negotiations            Closure   ...
Deal Done….I am off for a holiday!!!60% of the deal value to be recovered over the              next 2-3 years          Ke...
Payment Linked To Projected EBIDTACompany Revenue                      40 CrExpected Valuation                   60 CrActu...
Its all about the money honey!!          Focus on the fine print          Key Issue 2 : Excessive focus on figurehead     ...
Payment Linked To Projected EBIDTA       Company Revenue                        40 Cr       Expected Valuation            ...
The handshake is done - price is figured        out.. The deal’s done      Due diligence can kill the deal                ...
1. Getting Ready – Hire a banker !• Understanding what a banker will do    –   Creating the business model    –   Valuatio...
2. Understanding Intrinsic Price – Quantitative methodology                                      Price           Core Valu...
An example of the Synergy valuation
Understanding Valuation - Qualitative aspect  • It is a myth that since valuation models are quantitative,    valuation is...
4. Protecting the price1.   Create a realistic bottom up financial projection for the next 6 months and next 2.5     years...
An example of how you can go wrong                                                  Payment Linked To Projected EBIDTA•Val...
5. Focus on the nitty gritty• Deals break at due diligence stage – high percentage• Too many small issues – lower confiden...
Qualitative aspects• If it is straight sale, this is not an issue• However if it is a joint venture or a structured deal, ...
About Merisis Capital Advisors•    Merisis Capital Advisors is a leading independent investment banking advisory firm serv...
Thank Yousumir@merisis.in
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Mergers & Acquisitions by Sumir Verma

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This deck was presented by Sumir Verma in his session on Mergers & Acquisitions as a part of the TiE Investor Forum (SiG) on 26 Jine 2011.
This session was organised by TiE Mumbai.

To discuss more on this topic, please visit:
http://www.linkedin.com/groupItem?feature=&gid=1938322&type=member&item=59918453

Published in: Business, Economy & Finance
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  • Would have loved to be at this session. Unfortunately, was at TiE Bizworld teaching upcoming Entrepreneurs at Bombay International School last Saturday. Lavin: Can you please post the recording for this session on FB?
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Transcript of "Mergers & Acquisitions by Sumir Verma "

  1. 1. Merisis Capital Advisors Pvt. Ltd. Mergers & Acquisitions I Syndication I Advisory M&A – A Sellers Perspective Sumir Verma sumir@merisis.in
  2. 2. Outline• M&A Trends• Rationale for an M&A• Typical Process• Key Issues
  3. 3. M&A - Trends• Earlier the confines of the larger companies and new age industries• Increasingly family businesses have recognized M&A as a valid end to their tenure.• India continues to attract FDI who recognize the pitfalls of a green field entry strategy – – USD24.3 billion worth of inbound deals recorded during the year 2010• India is increasingly acquisitive – – 2010, most active year in terms of outbound investments for the country – 95 transactions boosted outbound deal value to USD24.6 billion• Does M&A make sense – Yes for both buyers and sellers
  4. 4. Rationale •Size •Adding •Management Control Capabilities •Management Incentive •Leveraging •Defending against Consumer Base competition •Innovation •Tax Benefits Integration / Diversification New Portfolio expansion Products Existing Consolidation Entry Strategy Existing New •Economies of Scale Markets •Expanding •Efficiencies Geographically •Higher •Buying Growth Distribution •Cross selling
  5. 5. The Process Decoding Strategy Negotiations Closure Making a note of the Valuation Structure Detailed due diligence Resolving Causal linkages M&A objective • Criteria development • Commercial due diligence • Setting up escrow • Family succession • Target Identification • Legal & regulatory due accounts • Consolidation •Initial short listing diligence • Third party guarantees • Poor financials • Selection of process (Bid • Financial due diligence • Sorting Reps & warranties • Good mkt. conditions out or one on one) • Technical due diligence Setting up agreements • Good valuations • Valuation exercise Developing negotiation • Share purchase Studying market segment • Internal v/s . External strategy agreement •Educating Client Touching base with • Analyzing deal terms • share subscription • See commercials Inv. prospects • Analyzing feedback agreement • Rivalry in the sector • Talking to prospective • Freezing on timelines • employment agreement • Benchmarking parties Documentation • supplier agreement • Market Comparisons •Taking a sense of the •Develop & finalize the • trademark agreement Study financials interest levels term sheet • Escrow agreement • Recast as mgmt. • Further information Structuring the transaction • Business plan financials sharing • All cash/Equity deal Closure • Create realistic • Gauging expected pricing •Considering the tax •Signing projections Final Short listing implications on both sides • Transfer of funds/ shares 6 weeks 8-12 weeks 8 weeks Financial Model with at least 6 Pitch doc with details Term Sheetmths. realistic forecasts like synergies,  CommercialsPitch done showing industry positioning of theAttractiveness/ Co. attractiveness clientRecast past nos. if required Cost of targetsTeaser
  6. 6. Deal Done….I am off for a holiday!!!60% of the deal value to be recovered over the next 2-3 years Key Issue 1: Understanding how deals are structured
  7. 7. Payment Linked To Projected EBIDTACompany Revenue 40 CrExpected Valuation 60 CrActual value offered by acquirer 80 Cr Year 0 Year 1 Year 2 Year 3 30 CrStructure of payment (Upfront) 10 20 20Projected Sales 70 100 120Projected EBIDTA 10.5 16 20.4 Consider such structured deals a given in most cases
  8. 8. Its all about the money honey!! Focus on the fine print Key Issue 2 : Excessive focus on figurehead price tag
  9. 9. Payment Linked To Projected EBIDTA Company Revenue 40 Cr Expected Valuation 60 Cr Actual value offered by acquirer 80 Cr Year 0 Year 1 Year 2 Year 3 Structure of payment 30 Cr (Upfront) 10 20 20 Projected Sales 70 100 120 Projected EBIDTA 10.5 16 20.4• Key points – Focus should be on considering different scenarios and testing where risks lie – For example • Sales linkage or Ebitda or a mixed formula • Aggressive ness of the projections • Sliding scale for payout or a step process • Level of Floor for Variable • Carry forward of underachievement
  10. 10. The handshake is done - price is figured out.. The deal’s done Due diligence can kill the deal Key Issue 3 : Poor Book keeping
  11. 11. 1. Getting Ready – Hire a banker !• Understanding what a banker will do – Creating the business model – Valuation – Identify the prospective buyers and connect – Negotiations – Drive the transaction – Involve lawyers, tax consultants, company secretary etc.• Complex activity – Specific knowledge of corporate finance, tax, accounting, legal regulations – Experience of negotiating and creating demand• Needs time and focus – Typically owners underestimate the time that M&As take – could stretch beyond a year – Need an external body that prevents the owner from defocusing on business – Don’t be pennywise and pound foolish
  12. 12. 2. Understanding Intrinsic Price – Quantitative methodology Price Core Value Synergy sharing Control Premium • Discounted cash flows • Cost Rationalization • Listed company • Cross Sell Typically 15%-30% of benchmarks • Enhanced Revenues Core Valuation • Multiples of Ebitda / • Is shared with the Sales/ PAT acquirer • Price to Book Value • Comparable Transactions
  13. 13. An example of the Synergy valuation
  14. 14. Understanding Valuation - Qualitative aspect • It is a myth that since valuation models are quantitative, valuation is objective • It is a matter of the buyer’s perception – reflection of his view of the industry – Reflection of his view on what will be the growth trajectory of the company • Importantly is a function of demand and supply • Finally it is about timing too – Sell high i.e. when it is doing well …Be realistic about pricing
  15. 15. 4. Protecting the price1. Create a realistic bottom up financial projection for the next 6 months and next 2.5 years 1. 2 years - this is what the payout will get linked to 2. 6 months - these are the figures the potential buyers also evaluate and build comfort2. Realistic assumptions take into account 1. Business cycles 2. Capital expenditure requirements 3. Working capital demands etc. 4. Semi variable nature of overheads3. Normalising accounts 1. Correct accounting practices 2. Correct anamolies in current financials in the projections 3. Management accounts which give a truer statement of the financials
  16. 16. An example of how you can go wrong Payment Linked To Projected EBIDTA•Valuation Offered – 2x Revenue Company Revenue 40 Cr•Payment of future installments is Expected Valuation 60 Crsubject to the company achieving Actual value offered byat least 75% of projected EBIDTA acquirer 80 Cr Year 0 Year 1 Year 2 Year 3•But the actual EBIDTA achieved isless than the minimum 30 Crrequirement. Structure of payment (Upfront) 10 20 20 Projected Sales 70 100 120•The company does not receivethe remaining three installments. Projected EBIDTA 10.5 16 20.4 Actual EBIDTA Achieved 7 9 12•It only gets 30 Cr from the entiredeal Minimum EBIDTA required to be earned- 75% of Projected 7.875 12 15.3•Actual Valuation – 0.75x Revenue Part Payment Actually Received 0 0 0
  17. 17. 5. Focus on the nitty gritty• Deals break at due diligence stage – high percentage• Too many small issues – lower confidence – Either lower valuation or – Break the deal• Advisable to do a pre due diligence exercise by hiring a professional who does a legal and financial due diligence• Examples of issues that have come up which have delayed deals – Land / Building documentation – Non adherence to standard company secretarial practices – Non payment of statutory dues – Inter se promoter shareholding issues• Also understand – The mode of sale – shares, slump sale, merger and impact – On the tax issues – stamp duty, VAT, Capital gains etc.• Some of these issues have delayed deals by over 3 months, which is risky
  18. 18. Qualitative aspects• If it is straight sale, this is not an issue• However if it is a joint venture or a structured deal, comfort with the buyer is crucial• Specially for entrepreneurs who have never worked for /with others !• More important than wringing the last cent out..
  19. 19. About Merisis Capital Advisors• Merisis Capital Advisors is a leading independent investment banking advisory firm serving the middle market companies and their owners• Founded by three investment professionals each with 15 years of corporate finance experience with complementary skills and domain knowledge• Ability to cater to a wide range of domains, client requirements and customer segments – Services : Capital Raising & M&A – Domestic & Cross-border – Capital raise ticket size : Venture Capital funding ($2-5 million) to PE Funding($5-$25 million) – Experience set : • Ability to deal with early stage entrepreneurs as well as CXOs of large corporations • Be an advisor to our clients in matters of corporate strategy and institution building • Ability to evolve Structured financing• Differentiators – Significant connects across the investment ecosystem – Funds and Intermediaries – Strong Execution and Closure capabilities – Performance culture fostering meritocracy across the company• For more information on Team, Deals and Sector coverage, please visit us at www.merisis.in
  20. 20. Thank Yousumir@merisis.in
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