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M&a for CFOs What you Don't Know Could Kill Your Deal

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The Presentation content includes an update on the M&A market; legal and accounting best practices for acquiring or being acquired; insights from finance professionals who have closed recent deals; …

The Presentation content includes an update on the M&A market; legal and accounting best practices for acquiring or being acquired; insights from finance professionals who have closed recent deals; and an interactive discussion of M&A trends and best practices. These insights will come from seasoned practitioners and experts on corporate M&A How you run a variety of operations - including, accounting, finance, legal and other areas – can make a significant difference in your company’s ability to attract a potential buyer.

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  • 1. Event Sponsors © 2011 Proformative. Proprietary and confidential
  • 2. Welcome to ProformativeProformative is the largest and fastest growing online resource forsenior level corporate finance, treasury, and accounting professionals.An ad-free, noise-free community of more than 350,000 CFOs,Controllers, Treasurers and related professionalsA resource where corporate finance and related professionals excel intheir careers through: Uniquely valuable, online Peer Network Direct subject-matter-expert advice Valuable Features and ResourcesAll of it completely free and noise-freeCheck it out at www.proformative.com © 2011 Proformative. Proprietary and confidential
  • 3. THE RESOURCE FOR CORPORATE FINANCE, ACCOUNTING & TREASURY PROFESSIONALSThe Legal View On M&A PreparednessGabor GaraiFoley & Lardner LLP
  • 4. Identify the Target Business• Buyer or seller?• Is the target business in a separate entity?• Who owns the assets used in the target business?• Do shareholders or other affiliates provide services or employees to the target business?• Is the target business in a heavily regulated industry? © 2011 Proformative. Proprietary and confidential
  • 5. Identify the Target’s Owners• Is the target owned by: – Corporate seller – PE fund – Family / founders• Why does owner want to sell? – Change in corporate direction – Financial need – PE Fund lifecycle – Generational issues• What are key sale drivers? – Money – Politics – Management (or lack thereof) – Fear / risk – Age• How do these translate into ―price‖ offered? © 2011 Proformative. Proprietary and confidential
  • 6. First Contact: How Do the Parties Meet?• For an experienced buyer, this may occur before attorneys are brought in• For an inexperienced buyer or seller, intermediaries should be involved at this stage• The role of bankers and lawyers• Romancing the buyer – Understand motivations – Speed and certainty – Reputation – Style and culture• NDA – Definition of proprietary information and exclusions – Non-solicitation – Trading © 2011 Proformative. Proprietary and confidential
  • 7. Plan Your Deal Team• Company – Senior management – Identify those with authority to direct the professionals – Company specialist• Outside professionals – Attorneys – Investment bankers – Accountants – Others• Define working relationships/responsibility of in-house vs. outside attorneys – Skill – Capacity – Cost © 2011 Proformative. Proprietary and confidential
  • 8. Letters of Intent / Term Sheet• Non-binding vs. binding• Binding provisions – Exclusivity – Disclosure of confidential information – Expenses – Good faith negotiations – Access to information – Termination• What is the purpose and benefit?• Who drafts the purchase agreement? – Control – Cost containment – Negotiating strategy © 2011 Proformative. Proprietary and confidential
  • 9. Structure of the Transaction• Stock Sale – Transfer of shares – All assets and liabilities automatically transfer• Asset Sale – Transfer of individual assets and liabilities – Permits carve-outs• Merger – Assets and liabilities transfer by operation of law – Forward vs. reverse triangular merger• Importance of flexibility – Substance should dictate structure – We can create desired outcome with any structure – Risk vs. value © 2011 Proformative. Proprietary and confidential
  • 10. Issues Affecting Deal Structure• Tax planning – ―Form over substance‖ means that tax planning often determines structure – Doing your target a favor: understand its tax attributes• Transferability of permits and contracts• Insulation from liability• Dissenting shareholders• Customers and vendors © 2011 Proformative. Proprietary and confidential
  • 11. Due Diligence• Due diligence in the process of investigation• Purpose of due diligence: – Identify issues affecting the deal structure – Identify and deal with problems before they are discovered by the other side – Provide information for disclosure schedules• Applies to buyer and seller• Review business from perspective of – Financing needs – Consolidation – SOX compliance• What’s beneath the fresh paint• Different approaches depending on type of seller © 2011 Proformative. Proprietary and confidential
  • 12. Common Problems• Key employees• Intellectual property rights• Title to assets• Validity/transferability of permits and contracts• Affiliate transactions• Customer and supplier relationships• Pending litigation and other contingencies• Environmental• Poor documentation• Disclosure schedule• Letter of Intent vs. reality © 2011 Proformative. Proprietary and confidential
  • 13. Financing Considerations• Earn-out – Certainty of collection – Post-closing issues• Financing post-closing indemnification claims• Bank financing – What will the bank require? – Financing contingency• Seller notes• Escrows © 2011 Proformative. Proprietary and confidential
  • 14. Think About What Comes Next• Transition services and integration – Seller agrees to provide services to buyer after closing for a limited time – Accounting services, human resources, employee benefits, information technology, etc.• Non-competition agreements• Incentives © 2011 Proformative. Proprietary and confidential
  • 15. Possible Deal-Specific Concerns• Public companies/securities laws• Cross-border transactions• Unionized labor• Regulatory matters• Other industry-specific issues © 2011 Proformative. Proprietary and confidential
  • 16. Post-Closing• Integration of the new business and its employees (clients generally do this without lawyers): – Human resources/benefits – Customers – Suppliers – Name changes – Other transition issues• Closing Binders on CD/DVD © 2011 Proformative. Proprietary and confidential
  • 17. General Tips• Be organized• Be patient• Develop a risk allocation philosophy to guide you through the deal• Be actively involved in the deal process © 2011 Proformative. Proprietary and confidential
  • 18. Thank You© 2011 Proformative. Proprietary and confidential
  • 19. THE RESOURCE FOR CORPORATE FINANCE, ACCOUNTING & TREASURY PROFESSIONALSBeing prepared: The accounting and financial reportingobstacles to realizing deal valueDan KabatPartner, Transaction ServicesPwC
  • 20. Current deal environment about to get morechallenging?• Corporations look cash rich – over Increasing storm clouds on horizon: $1 trillion in cash • Financing market getting difficult,• Deal environment was robust and particularly high yield market, growing for past year spreads on corp debt up significantly• Companies looking for ways to • Can PE compete in higher interest increase growth rates rate environment – International deals – particularly • European debt issues remain in emerging markets – Brazil, worrisome and unresolved India, China • US and Euro growth slowing again – Bolt-on’s and tuck-ins – fill product / geographic gaps – R&D alternative Middle market deals continuing, bigger deals never came fully back and may• Financing market very favorable past struggle 6-12 months….short memories © 2011 Proformative. Proprietary and confidential
  • 21. What’s expected at every stage of the transaction Typical transaction order of events Select potential Develop Manage and Prepare Circulate buyers to Transition execute preliminary financial conduct data Service separation financial information/ room visits; Agreement plans across information/ business deliver Draft contract (TSA) people, sell side due summary to management and deal requirements process, Public capital diligence buyers presentations negotiation and costing systems raisingDevelop Address Prepare data Perform due Negotiate Develop plans Purchase Post-closingdivestitures separation room and diligence for price and key for separation agreement adjustmentstrategy; requirements; management selected terms across signed; buyer completionreach tentative structure presentation; buyers; functions financingdecision to alternatives; prepare conduct audit needsdivest carve-out historical (if required) addressed; financial financials for transaction matters; taxes; carve-out closed IT, ops, etc… © 2011 Proformative. Proprietary and confidential
  • 22. Performing more seller diligence has greatest favorable impact on deal success2011 PwC Divestiture webcast polling result: 452 votes receivedQuestion: Using your divestiture experience as a reference, which of thefollowing do you feel would have MOST favorably impacted one or more ofyour deals, closed or not? 12% Performing more seller diligence or pre-sale 37% preparation 19% Having more bidder(s) for the deal(s) Providing more detailed information to buyers for their due diligence 31% Having audited financial statements available for the divestiture © 2011 Proformative. Proprietary and confidential
  • 23. Largest value deterioration occurs in the diligencephases2011 PwC Divestiture webcast polling result: 468 votes receivedQuestion: From your transaction experience, where have you seen the largestrisk of value deterioration for the seller? During the dataroom/initial 12% due diligence phase 29% During the final due diligence 14% Contract drafting/negotiations/TSA 17% Post-closing adjustment 28% mechanisms After the initial discussion but before distribution of an information memorandum © 2011 Proformative. Proprietary and confidential
  • 24. Value leakage can occur if key considerationsare not addressed 2010 Divestiture Survey results: Timing Key takeaways for divestitures Deal Transitional financials • More time consuming - over matters half say they take 20% or longer to complete • Greater info and access Separating Key required - 75% say buyers Governance infrastructure & Obstacles & process were requiring more or extensive additional operations In a Sale information. • Audited financials are important - - 76% say audits Employee Audit/reporting are more important or critical related matters requirements Structure © 2011 Proformative. Proprietary and confidential
  • 25. Common process challenges and deal issues• Timing – Difficulties sustaining value • Governance & process – Is timeline realistic? – Insufficient allocation of resources and capital – Accumulating the required information for pro for divestiture and separation effort forma, Offering Doc, data room, etc. – Divesture leader seniority in company – Delays in selling process reduce negotiating – Accountability / Compensation for critical leverage resources – Surprises from buyer due diligence reduce – Complexity in coordinating dependencies prices across teams, functions and geographies – Loss of deal ―momentum‖ – Disorganized process, bankers limitations – Overall project management - centrally run process (from beginning to end)?• Creating appropriate deal financials • Creating appropriate deal financials – Historical results may not reflect information (continued) relevant to buyer – Is there a need for audited information – impact – Sellers struggle to reconcile GAAP vs deal of lower level of materiality financials vs internal #s – Need for audited information to support – Determine basis of presentation financing – Identifying the appropriate accounting records – Accumulate KPI’s and other operating data that and data gaps is consistent with deal based financial – Building projections and bridge various information and overall story historical and pro forma financials © 2011 Proformative. Proprietary and confidential
  • 26. Common process challenges and deal issues (cont.)• Structure • Separating infrastructure & – Planning should consider most likely operations alternatives and anticipate impact of mid- – Complexity in separating systems, data stream change (stock vs assets, inclusion / confidentiality and shared services exclusion of parts) – Local regulatory requirements and Asset – How will business extraction work? If a buyer segregation doesn’t want it all, can you pull apart the – Difficulty in negotiating ownership of IP and information? ongoing joint commercial relationships – Understand retained liabilities and reserves – Dependencies on third parties to execute – Consider potential Tax implications for both contract consents and assignments buyer and seller – Understanding change in control provisions• Employee related matters • Transitional matters – Ensure appropriate motivation to get – Difficulty in identifying transition requirements transaction completed for both divested and and developing cost effective TSA retained personnel – Underestimating stranded costs and timeline – Management’s role pre/post deal required to unwind – Employee selection and necessary employment – Lost cost synergies to buyer and seller. Co- agreements sourcing other purchasing, etc. – Identify and assess employee-related – Complexity in reorganizing and revitalizing exposures, costs and deal-issues remaining company operations – Equity and benefit plan conversion/transition – HR shared service delivery © 2011 Proformative. Proprietary and confidential
  • 27. Making the sale of your business successfulStrategy Maximize value Management & executionHave a strategy in place to Assess financial and operational Process and governance toassess portfolio, market, and information to identify potential coordinate activities acrossrelated strategic issues. issues, transition service people, functions, and agreements, and alternative tax geographies. structures.• Formal portfolio optimization • Approach the deal from the • Create a dedicated divestiture process with regular, metric-driven buyer’s perspective by performing management team portfolio reviews and support from due diligence before buyers get • Prepare for dual-track the C-suite involved transactions or other alternative• Validate the case for separation • Identify and correct any significant outcomes• Understand the market value of operational issues • Control negotiation of certain the business • Ensure data provided to buyers is contract language including post• Timing, price, and ease must be consistent and forecast is credible closing adjustment mechanisms in balanced and prioritized and supported by the historical order to protect the seller• Be prepared to answer key results • Coordination and execution of questions around why the asset is • Evaluate working capital and other data room for sale, reasons it has been items that will be considered for • Anticipate critical buyer requests underperforming, and why it post closing adjustment • Address internal financial should do well outside the mechanisms reporting requirements for Company • Consider all of the various tax and discontinued operations accounting structures available • Anticipate the need for audited • Develop key transition service carve-out financial statements agreements analysis • Negotiate upfront to limit negative impact on deal value © 2011 Proformative. Proprietary and confidential
  • 28. Thank You© 2011 Proformative. Proprietary and confidential
  • 29. THE RESOURCE FOR CORPORATE FINANCE, ACCOUNTING & TREASURY PROFESSIONALSM&A: The Journey, The Destinationand The Hazards on the Way Paul Burmeister Partner, Tatum
  • 30. Which is the greater tragedy: the journey that goes awry, or the journey that never begins?© 2011 Proformative. Proprietary and confidential
  • 31. Agenda• Why?• What?• Who?• How?• Deal Killers• Causes of Failure © 2011 Proformative. Proprietary and confidential
  • 32. Why? Buyer Seller Why are you buying? Why are you selling? • Technology • Liquidity Event • Market Share • Retirement/intergenerational • Synergies transfer • Growth prospects • Portfolio adjustment • Profit improvement opportunitiesWhat are the value drivers?© 2011 Proformative. Proprietary and confidential
  • 33. What? Buyer Seller What are you buying? What are you selling? • Stock versus assets • Stock versus assets • Selected assets/selected liabilities • Selected assets/selected • Intangible property liabilities • Income stream/quality of earnings • Intangible property • Income stream/quality of earnings© 2011 Proformative. Proprietary and confidential
  • 34. Who? Buyer Seller Who is coming with the deal? Who is buying you? • Strength of management team • Compatibility between buying • Gaps-and plan to fill them and selling teams • Roles post-sale • Gaps-and plan to fill them© 2011 Proformative. Proprietary and confidential
  • 35. How? Buyer Seller How are you buying? How is the buyer paying you? • Financing…and what it does to your • Financing…and what it says balance sheet about the buyer • Cash vs. stock • Cash vs. stock • Earnouts… • Earnouts…© 2011 Proformative. Proprietary and confidential Decision Phase.…. Execution Phase….. Implementation Phase….. Post-Sale Phase
  • 36. How? Part 2Buyer SellerHow will you run the business once How will you be part of theyou’ve bought it? business once you’ve sold it?• Integration must start when the deal • Integration isn’t just for buyers is a gleam in the buyer’s eye • If you want to be part of the• Integration ends…never future, demand a seat at the• This is no place for amateurs or the integration table faint of heart • This is no place for amateurs or the faint of heart © 2011 Proformative. Proprietary and confidential
  • 37. 4 Key Steps To Realize Define Goals Define strategy and goals for acquisition, focusing on integration feasibility as key target screening criterion Plan and Execute Due Perform the Integration Diligence Merge operations, Identify challenges to processes, cultures to value realization, realize strategic and including risks, financial objectives integration and transition issues Plan the Integration Create plan to address integration issues and risks so as to realize intended value© 2011 Proformative. Proprietary and confidential
  • 38. Step 1: Define Goals• M&A strategy should rest on analysis of current competitive position and future objectives – Define future state and gaps with current state; choose acquisition candidates that best fill gaps• Develop revenue and cost model for combined organization as an integral step in evaluating each potential target• Assess cultural fit• Define key success factors to realize value• Develop ―threshold‖ pro-forma assumptions and business forecast © 2011 Proformative. Proprietary and confidential
  • 39. Step 2: Plan and Execute Due Diligence• Goal is to verify that the value you are paying for is actually there• Due diligence involves: financial due diligence, operational due diligence; legal due diligence, technology due diligence, people due diligence• Review acquiree’s strategy and operations to validate assumptions built into the valuation• Test assumptions about how the new combined business will operate and its projected sales, cash flows, margins• Execute due diligence – Build thorough understanding of target company via review of relationships with customers, vendors, regulatory agencies, etc. – Identify and document transition issues to be addressed in post-deal integration © 2011 Proformative. Proprietary and confidential
  • 40. Step 3: Plan the Integration• Integration process should begin as soon as target is identified and come into sharper focus as deal is finalized• Concentrate on issues raised during due diligence that threaten value realization• Ensure members of acquisition team and key managers understand valuation assumptions and their role in realizing them• Create transition steering committee and larger functional team• Define work plan for transition steering committee• Focus on integration risks that could impede realization of value: quantitative/ tangible and qualitative/ intangible risks © 2011 Proformative. Proprietary and confidential
  • 41. Step 4: Perform The Integration• Revalidate all assumptions and integration plans developed since the deal was first considered• Execute essential Day One activities: – Control – Communications – Governance• Develop integration plans by function: – Activities – Names – Dates• Drill down in the organization and hold managers responsible• Speed is of the essence—delay drives failure © 2011 Proformative. Proprietary and confidential
  • 42. Deal KillersBuyer Seller• Unrealistic demands on the seller • Unrealistic demands on buyer -Due diligence -Price (relying too much on wishful -Terms & conditions thinking and distorted multiples) - Reps & warranties -Terms & conditions• Unrealistic expectations -Reps & warranties -Smaller companies not as well prepared as • Bad financial and legal preparation and you might wish advice• Unprepared for integration • Unprepared for integration © 2011 Proformative. Proprietary and confidential
  • 43. Causes of Failure Buyer • Economic conditions: seldom the real cause • Inadequate due diligence • Wrong target/wrong acquirer • Unrealistic expectations  unrealistic pricing • Poor integration -Lack of leadership commitment -Lack of management commitment -Lack of resources © 2011 Proformative. Proprietary and confidential
  • 44. Key Points To Remember 1. Focus on the key drivers for realizing the value you envisioned for the deal 2. Move quickly and decisively to retain key people and communicate logic of the deal to employees, customers and other stakeholders 3. Don’t underestimate problems of integrating the two organizations but insist everyone focus on the future—not on ―how we used to do things‖ 4. Drive the integration effort deep into the organization, holding managers responsible for achieving specific goals © 2011 Proformative. Proprietary and confidential
  • 45. Whether you are a buyer or a seller• Understand your company: what you provide; how it is different; who it benefits and why; what your revenue and profit model is; who your competitors are; what industry dynamics are changing; the capital available to you, etc. etc.• Run detailed projections on an on-going basis and test them for ―worst case‖ scenarios• Find outside advisors who understand your industry• Look at ALL alternatives• Err on the side of caution• Adjust your expectations re: timing; valuation; execution success © 2011 Proformative. Proprietary and confidential
  • 46. Thank You© 2011 Proformative. Proprietary and confidential
  • 47. Panel Discussion and Q&A© 2011 Proformative. Proprietary and confidential
  • 48. We will send you a follow-up survey and wouldappreciate your feedback.Please join us at www.proformative.com to ask anyadditional questions you may have and to continuethis conversation with your peers and the expertsyou heard from today. Proformative Contact John Kogan CEO jkogan@proformative.com © 2011 Proformative. Proprietary and confidential
  • 49. Event Sponsors © 2011 Proformative. Proprietary and confidential