Mand a toolkit synergies

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Mand a toolkit synergies

  1. 1. M&A TOOLKIT Valuation: Synergies© 2007-2013 IESIES Development Ltd. All Ltd. Reserved © 2007-2013 Development Rights All Rights Reserved
  2. 2. The value creation of the deal is the difference between the price paid and the value of the business bought by the acquirerDEAL VALUE CREATION$m 50 800 250 150 750 600 550Current Market Acquisition Price Paid Value creation Value to Value of Base businessCapitalisation Premium acquirer synergies value © 2007-2013 IES Development Ltd. All Rights Reserved
  3. 3. Corporates focus on creating value in M&A through synergy; private equity through buying below true valueWAYS TO CREATE VALUE IN M&A 1) Target is under-valued by owners •Distressed sale •Stock market imperfect •Unsophisticated seller Private Equity 2) Target is under-managed •Poor management incentives focus •Non-core business •Wrong CEO 3) Synergy: Reduced costs •Elimination of overlaps •Economies of scale •Overheads •Purchasing Corporate focus 4) Synergy: Increased revenue •Selling new products to existing customers •Selling existing products to new customers •Improved processes 5) Financial Engineering •Reduced cost of capital Private •Cash tax reduction Equity focus © 2007-2013 IES Development Ltd. All Rights Reserved
  4. 4. You need to build the cashflow positives and negatives into your synergy modelSYNERGIES TO BUILD INTO YOUR MODEL • Cost savings • Revenue synergies (cross-selling) - Step-change (e.g. take existing product into new distribution network) - Long term higher growth (e.g. full solution for customer) • Cost to realise synergies (e.g. redundancy payments; IT investment; asset closure; advisor costs; transaction costs) • Negative synergies (e.g. loss of customers; distraction) © 2007-2013 IES Development Ltd. All Rights Reserved
  5. 5. Include the timeframe to realise and assign a probability to each synergy CREATING A SYNERGY “MAP” Duplicated Shared Cross-selling “Soft” functions Shared facilities Cross-selling operating new synergies (e.g. (e.g. factory existing activities products/ (e.g. know- corporate rationalisation) products (e.g. sales) solutions how) reporting) High probability Low probability Realised within 1 year 3+ years to realiseSource: “When to walk away from a deal”, HBR © 2007-2013 IES Development Ltd. All Rights Reserved
  6. 6. Your synergy assumptions will appear quantified in your cashflow projection QUARTERLY CASHLOW $m 250 200 150 100 “AS-IS” 50 FORECAST - Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4YYDDMM Syndicate Case_name © 2007-2013 IES Development Ltd. All Rights Reserved 5
  7. 7. Negative synergies will reduce cashflow, especially during integration QUARTERLY CASHLOW $m 250 200 NEGATIVE 150 SYNERGIES 100 50 - Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4YYDDMM Syndicate Case_name © 2007-2013 IES Development Ltd. All Rights Reserved 6
  8. 8. Typically, investment is required up-front to realise synergies QUARTERLY CASHLOW $m 250 200 INVESTMENT TO REALISE COST 150 SAVINGS 100 50 - Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4YYDDMM Syndicate Case_name © 2007-2013 IES Development Ltd. All Rights Reserved 7
  9. 9. Cost savings will be a step-change in cashflow QUARTERLY CASHLOW $m 250 200 COST SAVINGS 150 100 50 - Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4YYDDMM Syndicate Case_name © 2007-2013 IES Development Ltd. All Rights Reserved 8
  10. 10. Fast expansion of distribution will cause a step-change in cashflow too QUARTERLY CASHLOW $m 250 STEP-CHANGE 200 CROSS-SELLING 150 100 50 - Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4YYDDMM Syndicate Case_name © 2007-2013 IES Development Ltd. All Rights Reserved 9
  11. 11. An increase in long term growth from cross-selling will ramp up QUARTERLY CASHLOW $m 250 LONG TERM HIGHER GROWTH FROM 200 CROSS SELLING 150 100 50 - Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4YYDDMM Syndicate Case_name © 2007-2013 IES Development Ltd. All Rights Reserved 10
  12. 12. An increase in long term growth from cross-selling will ramp up QUARTERLY CASHLOW $m 250 200 150 100 50 - Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4YYDDMM Syndicate Case_name © 2007-2013 IES Development Ltd. All Rights Reserved 11
  13. 13. Remember that there will be negative synergies as well as positive synergies to include in your valuation Can 1 + 1 = 1.5?POSSIBLE NEGATIVE SYNERGIES •Disruption to both businesses while management is busy integrating; competitors take advantage •Suppliers act to reduce dependence on retailer, so offer less support and develop alternative channels •Reduced future store growth – e.g. Local government will grant permission for 1 new store/city, not 2 •Loss of customer loyalty if CP brand goes •Expensive investments e.g. integrating IT •Overlapping stores; cost to shut down •Culture clash – key processes disrupted •Key people leave © 2007-2013 IES Development Ltd. All Rights Reserved
  14. 14. Add up all the synergies and deduct the negative synergiesDCF VALUATION$m 3 4 2 5 77 5 15 12 60 60 "As Is" Value Synergy 2 Synergy 3 One-off cost Negative Valuation Value Likely Current Hypothesis synergies "to us" creation premium Market Cap opportunity © 2007-2013 IES Development Ltd. All Rights Reserved

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