Mand a toolkit deal structuring

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Mand a toolkit deal structuring

  1. 1. M&A TOOLKIT Closing: Deal Structuring© 2007-2013 IESIES Development Ltd. All Ltd. Reserved © 2007-2013 Development Rights All Rights Reserved
  2. 2. You can increase value creation through smart choices on deal structuringPRIMARY DEAL STRUCTURE CHOICES • What are you buying? - Asset or share purchase? What is included/excluded? - 100%, 51% or minority position? • How are you paying? - Cash or shares? Funding? - Deferred payments? What timescale/pricing mechanism? • Where are you buying? - What legal vehicle? - Tax efficiency? IES Development Ltd. All Rights Reserved © 2007-2013
  3. 3. You can increase value creation through smart choices on deal structuring ADDING VALUE THROUGH INCLUDE/EXCLUDE CHOICES Consider buying one Division from a multinational company, e.g. Lenovo buying IBM PC Division• What do you want to include in the deal? oSupport from Corporate that is high value? (e.g. sales support) oKey corporate assets (e.g. patents, brand copyrights)• What do you want to exclude from the deal? oLiabilities? (e.g. pension, environmental) oAssets you don’t need? (e.g. US assembly plants) oSupport from Corporate that is low value to you? (e.g. HR support) © 2007-2013 IES Development Ltd. All Rights Reserved
  4. 4. One of the primary choices is whether to offer cash or sharesSHARE DEAL EQUIVALENCE Cash deal Share deal = + Rights Issue (usually new shares issued to target) © 2007-2013 IES Development Ltd. All Rights Reserved
  5. 5. Share deals and cash deals have different advantages ADVANTAGES ADVANTAGES OF A CASH DEAL OF A SHARE DEAL •Cheaper price because •Preserve net cash/debt target values cash higher position •Capture all synergies •Share some synergy risk •Value of the offer will •Shared market price risk not change during offer* •No dilution if your shares •Good for existing shareholders are undervalued if your shares are overvalued CLASS EXERCISE: Why do you think cash acquirers outperform?* If the offer is a fixed share ratio and2007-2013 specific valueAll Rights Reserved © not a IES Development Ltd.
  6. 6. One of the problems with M&A is the “information asymmetry” in a dealTHE PROBLEM WITH BUYING A USED CAR George Akerlof paper "The Market for Lemons" His basic insight was simple: If somebody who has plenty of experience driving a particular car is keen to sell it to you, why should you be so keen to buy it? This “information asymmetry” exists in M&A too © 2007-2013 IES Development Ltd. All Rights Reserved
  7. 7. Deferred payments are a tool to overcome the “information asymmetry” problem and generate “win/win” opportunitiesADVANTAGES OF DEFERRED PAYMENTS1) Provides some protection to acquirer[Especially important in China, where legal redress limited, havingthe cash in your hand improves your negotiating position if you finda problem in the company]2) Enables a deal to be negotiated despite different future performance assumptions Any other advantages? © 2007-2013 IES Development Ltd. All Rights Reserved
  8. 8. Deferred payments allow deals to be negotiated despite different valuation assumptionsEXAMPLE OF A DEAL THAT REQUIRES DEFERRED PAYMENT• Your DCF valuation model says profits will increase from $20m to $25m next year, justifying a price for the business of $275m• The seller says profits will increase to $30m next year, justifying a price of $300m for the business• Do you believe him?• Your DCF valuation model says if profits increased to $30m next year, the business would be worth $325m• How can you do a deal?• Possible deal: $150m cash plus 5 times next year’s profit• Seller happy =>gets his $300m if he is right• You are happy oif profit is $25m, you pay $275m, the right price oif profit is $30m, you pay $300m, creating $25m value © 2007-2013 IES Development Ltd. All Rights Reserved
  9. 9. Deferred payments are payments made after a deal closes subject to various conditionsDETAILS REQUIRED FOR DEFERRED PAYMENT DEALSHow long deferred? Amount of payment? •6 months? •Lump sum? •Next financial year? •Multiple of profit? What profit? •3 years time? •Independent valuation? Binding?Key terms? What is the payment for? •Conditions e.g. satisfaction •Original price (only up to 1 with Representations, year in China)? Indemnities and Warranties? •Additional equity purchase? •Rights e.g. Put/Call? •Consultancy services? •What is the problem with deferred payments conditional on future business performance? •How can the seller prevent the buyer “gaming” the calculation? © 2007-2013 IES Development Ltd. All Rights Reserved

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