Mergers and Acquisitions for Private Companies An introduction by:
What will be covered Why do sellers sell? Accounting due Should you buy? diligence More questions to ask Legal due diligence before buying Types of deals The Mergers and Post-merger Acquisitions process integration Basic negotiation Some important strategies reminders Resolving valuation differences
Why do sellers sell? Retirement Sale of part of Need additional company to fund expertise to take growth company to the next Accessing level accumulated wealth Divesting a division or Buying out a partner product line Paying off debts Industry changes Operational troubles
Why is it important to know why sellers sell? 1. Knowing common reasons why sellers sell may indicate whether a particular company is a potential target for acquisition.2. Sellers motivation to sell affects the potential sale price. 3. Knowing sellers motivation may also highlight potential issues post-merger and acquisition. Query: As you think about your suppliers and competitors, would any of them be motivated to sell based on any of the common reasons for sale?
Should you buy? Strengthen market Eliminate competition position Enhance offering Turnaround to make IPO money Access to customer Complementary for base cross-selling New capabilities and Geographic technologies expansion Business Economies of scale transformation
Points to ponder:Have you previously acquired a company? Inhindsight, was it for a good reason? Why or why not?If you were considering to acquire a companypresently, what would be your reason for doing so?
More questions to ask before buyingThe previous reasons relate to corporate/business unit strategies. In addition to those reasons, you need to consider: a. Is the target company the best candidate? b. Can the deal be made at the right price? c. Is it the best way to structure? (in terms of shares, assets, contracts, etc)
The mergers and acquisitions process The M&A Process c.f. Human Relations Targeting Flirting Mutual non-disclosure Dating Negotiation Courting Valuation Proposing Term sheet/ LOI Engagement Due diligence Trial period? Agreement Marriage Integration Staying married
Basic negotiation strategies Know your position relative to the Always leave room for yourself and other the other side to step down without losing face. Dont issue Assess your Best Alternative to a unnecessary ultimatums unless Negotiated Agreement (“BATNA”) you are ready to stand by it. and that of the other side Be aware of silent needs, interests Assess your Worst Alternative to a and wants, of the decision-makers, Negotiated Agreement (“WATNA”) as well as their influencers and and that of the other side professional advisers. Only deal with decision makers- Be comfortable with long periods of check for their mandate silence. Use “if...then”“If I concede to your request, then would you in turn...” Practice active listening. Listen for the unspoken messages.
Resolving valuation differences between seller and buyer Make payments over Use share swaps instead time instead of of cash immediately. Retain the seller as a Agree to earn-outs for consultant seller (i.e. seller gets Provide a bonus for the value he wants based on seller to remain in the future revenues, profits, company etc) Agree to value on a future year Undertake a partial buy- out
Be aware that there are at least 2 types of due diligence Accounting due diligence Legal due diligence
Accounting due diligence Financial/accounting info Material commitments to key (whether made on same staff, suppliers and basis/principles? Statutory filings customers done? Bank signatories and safeguards?) Valuation of properties and Debts equipment Statutory contributions and Insurances tax compliance (EPF, SOCSO, Transfer pricing issues PCB, corporate taxes, customs and excise- laws may render directors liable for company liabilities, so important to make sure in order)
Legal due diligence NDAs Compliance to laws and legal obligations (tax, environment, Corporate info (capitalisation, employment, conditions of shareholding, directorship, contracts and titles) authorisation, good standing, structure, subsidiaries, affiliates) Intellectual property (ownership, registration) Contracts and MOUs (employees, suppliers, customers, Pending litigation, claims and creditors, banks, share options, contingent liabilities powers of attorney) Insurances (validity and Inventory (ownership, risks) subsistence, inventory, real estate, Real estate, machinery and machine and equipment, all risks, others) equipment (ownership, encumbrances) Regulatory requirements for operations (licences and permits, subsisting breaches, renewals and conditions)
Common types of deals1. Sale and Purchase Agreement – purchaser shares of target company2. Asset Purchase Agreement – purchase assets of target company, not shares. Liabilities not assumed.3. Joint Venture Agreement – acquire business of target company but not company itself nor its assets4. Non-compete Agreement – restrain selling owners from competing with new owners. Purchase of business with goodwill is one of three statutory exceptions allowing a non-compete under the Contracts Act 19505. Non-Disclosure Agreement – prohibition against disclosure of terms of deal 6. Employment/Service or Consulting Agreement – engage selling owner for purposes of integration, technology transfer, extension of non- compete or future earn-outs
Important clauses for shareholder agreements Role of each shareholder Decision making process- by majority, super-majority or Representation on the board, require consensus for certain chairmanship and casting decisions? vote Right of first refusal for Management rights shares Access to documents and Ways for shareholders to exit accounts Valuation of shares upon Control of bank signatory intended exit Control of rights issues (can Call and put options- may be be used to dilute minority used as dispute resolution shareholders) process Dividend policy
Post-merger integration Have an integration External plan in place communications (integration of Finance systems systems and integration employees) IT integration Ensure all announcements are managed Training plan Customer visits
Some important reminders Term Sheet/ LOI is only the Do not lose sight of who is start of the process. Deals the decision maker of the are not done even with the other side, and what is Term Sheet/LOI signed. his/her motivation Be prepared with your Do not withold material documents for due diligence information- there may be process. legal repercussions Do not just demand. Justify Do not announce the deal the valuation you want. before it is really done If there are problems in your Do not call employees, financial statements, admit customers or suppliers of the them. They would be seller without prior discovered anyway. permission
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