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  • 1. C ORPORATE M & A D EVELOPMENT February 11, 2011
  • 2. - - Section Topic Table of Contents Page I. II.
    • Introduction
    • Transaction Considerations
    • Current State of the Market
    • General Concepts
    • Process Timeline
    • Accretion / Dilution Defined
    • Accretion / Dilution Illustration
    • Other Considerations
    • Adjustments to the Income Statement
    • Introduction / General Considerations
    • Stock-for-Stock Acquisition
    • Cash-for-Stock
    • Synergies
    • Additional Adjustments
    4 16
  • 3. - - Section Topic Table of Contents Page III. IV.
    • Traditional Deal Structures
    • Exchange Ratios
    • Collars, Caps, and Walk-aways
    • Corporate M&A Conceptual Framework
    • Sources & Uses
    • Corporate M&A Components
    • Divestitures & Joint Ventures
    • Holding Companies
    • Minority Shareholder Issues
    22 28 Appendix Valuation and Accretion/Dilution Modeling 50 V. Acquisition Integration & Case Study 35
  • 4. - - I. Introduction to Corporate M&A
  • 5. Introduction - -
    • There are several factors that are considered when a company contemplates a transaction
      • Return on investment
        • Entrance into new market
        • Acquiring new product
      • Accretion/dilution
        • Impact on shareholder value
      • “ Soft” factors
        • Competitive position
        • Brand value
      • Cost and revenue synergies
        • Complimentary products
        • Economics of scale
        • Purchasing/pricing power
        • Customer/supplier access
        • Duplicate overhead
    Transaction Considerations Note: Survey taken of executives of 150 companies across many industries and various sizes. Source: Deloitte & Touche LLP and The Deal Survey Top 3 Evaluation Criteria When Making M&A Evaluations (1 being most important) Source: Deloitte & Touche LLP and The Deal Survey Synergies in Decision Analysis
  • 6. Introduction - -
    • As the economic recovery continues, companies in many industries are relying on M&A transactions to fuel revenue and bottom-line growth.
    • M&A deal flow is experiencing an inflection point in activity.
      • Sixty percent of surveyed executives expect an increase in the average number of deals they pursue in the next 2-5 years
      • Seventy percent of surveyed executives said that, compared to today, M&A will be more important to achieving their company’s strategic goals in the next 2-5 years
    Current State of the Market Source: Deloitte & Touche LLP and The Deal Survey Annual Impact of M&A on Revenue Beyond Organic Growth (Next 2-5 years)
    • Private equity deal flow has been experiencing significant improvements as well
      • Historically attractive valuations
      • Easing credit markets
  • 7. Introduction - -
    • The acquisition of a company creates shareholder value (increases the value of shareholders’ stock) as long as the fundamental value of the Acquirer plus the present value of the synergies is greater than the purchase price.
    • Typically the Acquirer initiates the negotiations when it contacts the Target’s management to find out whether the Target is interested in a partial or total sale.
    • Once the Acquirer and Target reach agreeable terms and receive board approval, the deal is presented to shareholders for final approval.
    • When negotiations become public knowledge:
      • Companies must balance confidentiality
      • with the obligation to provide sufficient
      • disclosure to allow for due diligence
      • Companies must make sure that proper
      • disclosures are made in the event of market
      • speculation and leaks
    General Concepts
  • 8. Introduction - -
    • Below is a timeline of how a transaction may be consummated and completed.
    Process Timeline
    • The Acquirer:
    • Assesses the competitive landscape
    • Identifies potential Targets for acquisition
    • Defines issues in pursuing a transaction
    • Defines an acquisition timeline and goals
    4 to 8 weeks
    • The Acquirer:
    • Contacts potential Targets
    • Proposes and signs NDA/CA
    • Performs preliminary valuations
      • Discounted Cash Flow
      • Leveraged Buyout
      • Accretion/Dilution
      • Transaction Comparables
      • Public Trading Comparables
    Contacting Targets and Valuation Preliminary Analysis 4 to 8 weeks
  • 9. Introduction - -
    • Below is a timeline of how a transaction may be consummated and completed (part 2).
    Timeline
    • The Acquirer:
    • Drafts initial offer in an LOI
    • Begins due diligence
    • Finalizes valuation analysis
    • Business, financial, legal due diligence
    4 to 10 weeks
    • The Acquirer:
    • Finalizes due diligence
    • Negotiates transaction terms
    • Execute the definitive agreement
    • Obtains financing
    • Prepares SEC filings (if necessary)
    • Seeks regulatory approval
    • Seeks shareholder approval
    • Close the transaction
    Definitive Agreement & Finalize Transaction Indication of Interest & Due Diligence 4 to 10 weeks
  • 10. Introduction - -
    • M&A analysis (or pro forma analysis) evaluates the impact of a merger or acquisition on the income statement and balance sheet of a potential combined company
    • Key measures:
        • Accretion /Dilution in EPS
        • What amount in pre-tax synergies are required to break even?
        • Leverage / capitalization
        • Interest coverage, and other appropriate credit statistics
        • Post transaction percentage ownership
    • Evaluation Objectives:
        • Pricing capacity of Acquirer to pay for Target
        • Optimal form of consideration (cash, stock, other securities, combination)
        • Assessing affordability and bargaining positions
    How does an M&A professional evaluate the terms and price of a transaction? 1 + 1 = 3?
  • 11. Introduction - -
    • Accretion / Dilution model is used to assess the impact of an acquisition on the Acquirer’s earnings per share (EPS).
    • An acquisition is accretive when the combined (pro forma) EPS is greater than the Acquirer’s standalone EPS.
      • Example: Lets say that the Acquirer’s EPS is projected to be $2.50 next year. You want to know the impact of the acquisition of a potential Target, and determine that the pro forma EPS next year would be $2.60, $0.10 higher than if the acquisition had not taken place. The deal would be $0.10 accretive next year.
    • An acquisition is dilutive if pro forma EPS would have been lower than $2.50.
    • A transaction would be considered breakeven if there is no impact to EPS.
    Accretion / Dilution Defined Accretion: Pro forma EPS > Acquirer’s EPS Dilution: Pro forma EPS < Acquirer’s EPS Breakeven: No impact on Acquirer’s EPS
  • 12. Introduction - - Accretion / Dilution Illustration: Dilution Assumptions: Acquirer purchases 100% of Target by issuing additional stock to purchase Target shares. No premium is offered above Target’s current share price.
  • 13. Introduction - - Accretion / Dilution Illustration: Breakeven Assumptions: Acquirer purchases 100% of Target by issuing additional stock to purchase Target shares. No premium is offered above Target’s current share price.
  • 14. Introduction - - Accretion / Dilution Illustration: Accretion Assumptions: Acquirer purchases 100% of Target by issuing additional stock to purchase Target shares. No premium is offered above Target’s current share price.
  • 15. Introduction - - Other Considerations
    • Corporate M&A transactions can be financed via cash, stock, or a combination of both
        • Transactions can be financed using the stock of the Acquirer
            • Registered stock
            • Restricted stock
    • Relative considerations when Acquirer pays for Target with:
    • STOCK
    • Contributions to revenues, earnings, and cash flows
    • Stock price performance
    • Valuations of Target and Acquirer
    • Post-transaction management and Board of Directors composition
    • Stand-alone valuation of Target
    • CASH
    • Stand-alone valuation of Target
    • Pro forma impact of acquisition
  • 16. - - II. Adjustments to the Income Statement
  • 17. Adjustments to the Income Statement - - Stock-for-Stock Acquisition
    • When a company acquires 100% of its Target, the line items of both companies, including net income, are consolidated.
    • We must take into account transaction-related adjustments when modeling the pro forma income statement
    • Stock-for-Stock Acquisition:
      • The Acquirer can acquire a potential Target by exchanging its shares (stock-for-stock), paying cash (cash-for-stock), or using a combination of both (cash and stock).
      • The issuance of new Acquirer stock is a major adjustment to EPS in a stock deal.
      • In a 100% stock-for-stock acquisition, the Acquirer will issue enough shares to purchase all of the Target’s stock, thereby reducing pro forma EPS. The ratio of the Acquirer’s shares issued per Target share is called the exchange ratio.
  • 18. Adjustments to the Income Statement - - Cash-for-Stock Acquisition
    • New Acquirer Debt
      • When the Acquirer purchases the stock of a Target with cash, it will typically do so through the raising of debt. This new financing impacts the income statement in the form of incremental interest expense, which is a major adjustment to net income and EPS.
    • Refinanced Debt
      • When the Target has existing debt on its balance sheet, the Acquirer may refinance this debt. Interest expense from the existing debt must be eliminated and the new interest expense must be accounted for in the pro forma income statement.
    • Excess Cash
      • Acquirers typically use excess cash and liquid securities to finance a transaction. Since this existing cash would typically earn interest income, we must eliminate the benefit of interest income in the pro forma income statement.
    vs
  • 19. Adjustments to the Income Statement - - Synergies
    • Synergies represent cost savings or additional revenues that arise from an acquisition. The impact of synergies is to increase net income and EPS.
    • Cost Saving Synergies
      • Merging two companies can result in the elimination of overlap of workforces, PPE (plant, property, and equipment), and other unnecessary infrastructure.
    • Revenue Synergies
      • If two companies combine similar technology/intellectual property, they may be able to significantly increase revenue with new products and cross-selling opportunities.
    Revenue Costs = Shareholders
  • 20. Adjustments to the Income Statement - - Additional Adjustments
    • Options Proceeds:
    • All outstanding Target options usually vest in an acquisition.
    • In-the-money options are assumed to be exercised and the Acquirer receives option proceeds and uses them to acquire more shares.
    • When building the pro forma model, we can assume that the Acquirer will use the proceeds to buy back as many Target shares as possible (treasury stock method), or we can assume that the Acquirer will keep the proceeds as cash.
    • If the treasury stock method is assumed, we would need to reflect the diluted shares outstanding [additional shares outstanding from options – shares repurchased from options proceeds]
    • If we assume that the Acquirer keeps the proceeds as cash, we need to take into consideration the incremental interest income that is generated by cash from the proceeds.
    • Underwriting Fees:
    • When an Acquirer uses debt to finance a transaction, the fees related to the raise are capitalized and amortized over the life of the debt issuance.
    • This creates an incremental amortization expense which reduces pro forma EPS.
  • 21. Adjustments to the Income Statement - - Additional Adjustments
    • Incremental D&A, Asset Write-ups, Write-downs:
    • Assets, such as PP&E and intangible assets, are usually written-up to fair market value. Incremental D&A will be recorded thereby reducing EPS. Other assets and liabilities are also adjusted to fair market value and can also decrease/increase EPS depending on whether the assets or liabilities are written-up/written-down.
    • Deal-related Fees:
    • Include investment banking advisory fees, legal fees, and accounting fees.
    • Currently included in the calculation of purchase price (reflected in goodwill).
    • No explicit impact on EPS from these fees since they are part of purchase price.
    • New Rule – FASB has recently changed the rules on such fees. Instead of including them in the calculation of purchase price, they will be expensed as incurred on the income statement.
    • Other Adjustments:
    • In-process research & development – companies must capitalize in-process R&D instead of expensing it on the income statement.
    • Registration fees – directly netted out of equity
    • Restructuring and merger-related costs – immediately recorded as a liability
  • 22. - - III. Traditional Deal Structures
  • 23. Traditional Deal Structures - - Exchange Ratios
    • The period of time between the announcement date and the closing date of a transaction usually results in the movement in acquisition share price, and also introduces a level of uncertainty when an Acquirer pays for a Target with stock instead of cash.
    • Fixed exchange ratio or floating exchange ratio
    • The choice of a fixed exchange ratio as opposed to a floating exchange ratio (fixed value) mechanism determines whether the number of shares or the value of the shares fluctuates.
    FIXED EXCHANGE RATIO Shares issued are known; value of transaction is unknown FLOATING EXCHANGE RATIO Value of transaction is known; shares issued are unknown
  • 24. Traditional Deal Structures - - Fixed Exchange Ratio: Example
    • Fixed exchange ratio is used for converting each Target share into a set number of Acquirer shares upon closing:
    • Target has 30 million shares outstanding with shares trading at $10; Acquirer shares are trading at $20.
    • On February 5, 2008 (“Announcement Date”), Acquirer agrees that upon the completion of the deal (expected to be March 5, 2008), it will exchange 0.85 shares of its common stock for each of Target’s 30.0 million shares, totaling 25.5 million Acquirer shares.
    • Between the announcement date and the closing date, the ratio of shares will stay fixed.
    • On the announcement date, the deal is valued at 25.5 million shares * $20 per share = $510 million. Since there are 30.0 million Target shares, this implies a value per Target share of $510 million / 30.0 million = $17. That is a 70% premium over the current trading price of $10.
    • By March 5, 2008, Target’s share price jumps to $17 because Target’s shareholders know that they will receive 0.85 Acquirer shares (which are worth $20 * 0.85 = $17) for each Target share.
  • 25. Traditional Deal Structures - - Floating Exchange Ratio (Fixed Value): Example
    • Fixed value is based on a fixed per share transaction price. Each Target share is converted into the Acquirer shares and is required to equate to the pre-determined per Target share price upon closing.
    • Target has 30 million shares outstanding with shares trading at $17; Acquirer shares are trading at $20.
    • On February 5, 2008, Target agrees to receive $17 from Acquirer for each of Target’s 30.0 million shares (1 : 0.85 exchange ratio) upon the completion of the deal, which is expected to be on March 5, 2008.
    • As previously described, the deal is valued at 30 million shares * $17 per share = $510 million.
    • This value will be fixed regardless of what happens to the Target or Acquirer’s share prices. The amount of Acquirer shares that will have to be issued upon closing will change with the changing share prices to maintain a fixed deal value.
    • The floating exchange ratio is generally preferred by the Target because the issuance of a fixed value per share means the Target knows exactly how much it is being compensated.
  • 26. Traditional Deal Structures - - Collars, Caps, and “Walk-aways”
    • Collars may be included with fixed or floating exchange ratios to limit potential variability that occurs due to changes in the Acquirer’s share price.
    • Fixed Exchange Ratio Collar
    • Sets a maximum and minimum value for fixed ratio transactions.
    • If an Acquirer’s share price goes up or down beyond a specified point, the transaction turns into a floating exchange ratio.
      • Collar establishes minimum and maximum price that will be paid per Target share.
      • When above the maximum Target price level, an increase in the Acquirer share price will result in a decreasing exchange ratio (fewer shares issued).
      • When below the minimum Target price level, a decrease in the Acquirer’s share price will result in an increasing exchange ratio (more Acquirer shares issued).
  • 27. Traditional Deal Structures - - Collars, Caps, and “Walk-aways”
    • Floating Exchange Ratio Collar
    • Maximum and minimum shares issued for floating exchange ratio transactions. If Acquirer share price goes up or down beyond a specified point, the transaction will turn into a fixed exchange ratio.
    • Collar establishes minimum and maximum exchange ratio of shares that will be issued for a Target share price.
    • If below a certain Acquirer share price, exchange ratio will stop floating and will become fixed at a maximum ratio. Any decrease in Acquirer share will result in a decrease in value of each Target share.
    • If above a certain Acquirer share price, the exchange ratio will stop floating and become fixed at a minimum ratio. Any increases in Acquirer’s share price will result in an increase in the value per Target share, but a fixed number of Acquirer shares is issued.
    • “ Walk-away” Rights
    • This provision allows parties in a deal to walk away from the transaction if Acquirer’s stock falls below a certain predetermined minimum trading price.
  • 28. - - IV. Corporate M&A Conceptual Framework
  • 29. Corporate M&A Conceptual Framework - - Sources and Uses of Funds To illustrate the dynamics of an M&A transaction, bankers will create a table that highlights the sources and uses of funds.
    • SOURCES
    • Stock Issued: Companies often finance acquisitions by issuing their own shares. (Acquirer Shares in Transaction) x (Acquirer Stock Price)
    • Acquisition debt: Companies usually raise debt to pay for acquisitions.
    • Debt raised =
    • Offer value – stock issued – excess cash used
    • USES
    • Purchase of Equity: Equals Offer Value
      • Cash to Target
      • Stock to Target
    • Deal-related transaction costs
    • Debt-related financing fees
  • 30. In addition to governing accounting rules, there are also important legal and tax issues that influence the corporate M&A framework. Corporate M&A Conceptual Framework - - Corporate M&A Components Corporate M&A Accounting Legal Tax
    • Allows parties to assess
        • Pro forma financial statements
        • Accretion/dilution analysis
        • Contribution analysis
    • Regulatory approvals
        • HSR / Antitrust regulations
        • Sarbanes-Oxley contracts
    • Contracts
        • Structuring definitive agreements
    • Tax consequences when structuring a deal
        • Sale of assets
        • Sale of stock
  • 31. Corporate M&A Conceptual Framework - - Types of Corporate Mergers Aerospace and Defense Aerospace Aftermarket Supply-chain Management Consumer Products Consumer Products Customers Suppliers Competitors No relationship Competitors No relationship Vertical Merger Horizontal Merger Conglomerate Merger
  • 32. Corporate M&A Conceptual Framework - - Divestitures & Joint Ventures
    • DIVESTITURES
    • When a corporation chooses to sell off all its assets to another company, it becomes a corporate shell with cash and/or securities as its sole assets. The firm may decide to distribute the proceeds to its stockholders as a dividend and shut down completely.
    • The proceeds can also be distributed through a cash repurchase tender offer, meaning the firm makes a tender offer for its own shares using the proceeds of the asset sale to pay for shares.
    • The firm may also choose to continue to do business and use its liquid assets to repurchase other assets or companies.
    • JOINT VENTURES
    • A joint venture is another type of business combination.
    • A joint venture takes place when certain firms enter into an agreement to provide certain resources toward the achievement of a particular business goal.
  • 33. Corporate M&A Conceptual Framework - - Holding Companies
    • Aside from M&A, an acquiring company may also choose to purchase only a portion of the Target’s stock and act as a holding company.
    • If an Acquirer buys 100% of the Target, the company is known as a wholly-owned subsidiary.
    • For an Acquirer to take control of a Target, it may not be necessary to have a 51% (or greater) interest in the company.
    • For companies with a very diverse equity base, effective control can be established with a minimum of 10% to 20% of the outstanding common stock.
    • ADVANTAGES
    • Lower cost
    • Approval not required
    • No control premium
    • Control with fractional ownership
    • DISADVANTAGES
    • Not 100% ownership
    • Multiple taxation
    • Antitrust issues
  • 34. Corporate M&A Conceptual Framework - - Minority Shareholder Issues
    • A majority of shareholders must provide their approval before a transaction can be consummated.
    • A common threshold for common majority is 51%.
    • When a majority of shareholders approve the deal, minority shareholders are required to tender their shares, regardless of whether or not they approve of the deal.
    • Minority shareholders are said to be “frozen out” of their positions.
    • This requirement is designed to prevent a holdout problem, which sometimes occurs when a minority shareholder holds up the completion of a transaction unless they are compensated over and above the acquisition stock price.
  • 35. - - V. Acquisition Integration
  • 36. Closing the deal is often only the first step in the battle. To capture all of the projected post-deal synergies, public companies spend significant time executing the integration of the operations. If the integration is not done correctly, the acquisition can very well be dilutive to the company. Oftentimes, it takes two to five years (or longer) for an Acquirer to realize the synergies in combining with a Target. Management, shareholders and board members recognize the difficulties involved in integration. What is acquisition integration? Why is acquisition integration so important? When does the process occur? What are the necessary steps to complete a successful integration? - - The Deal is Closed. What now? Acquisition Integration Topics
  • 37.
    • Acquisition Integration – What is it?
    • Acquisition integration can be defined as the combining of two companies, through changes of ownership such as mergers, acquisitions and takeovers, to include their customers, organizations, processes, products and employees to form a larger, more powerful organization.
    • In simplified terms, it means making 1 + 1 = 3.
    • How is that achieved? By identifying synergies.
    • Common synergies include:
    • Revenue enhancement
    • Headcount reduction in departments with parallel capabilities (i.e. admin, it support, etc.)
    • Purchasing power and economies of scale
    • Foregoing duplicate expenses (i.e. legal, accounting, insurance etc.)
    - - Acquisition Integration
  • 38.
    • Acquisition Integration – Why is it Important?
    • Successful integration enables clients to achieve their business case objectives for doing the acquisition.
    • Enables a company to grow more rapidly.
    • However, in reality it is difficult and often unsuccessful. Common consequences of failed integration are:
    • Lost customers
    • Lost employees
    • Lost focus on core business
    • Lost image in the market place
    • Culture clash
    • All of these may result in hesitancy to do M&A deals in the future.
    - - Acquisition Integration
  • 39. Acquisition Integration – When does it Occur? Announcement - - Acquisition Integration Closing Final Negotiations “ Quiet Period” Regulatory Due Diligence Post-Acquisition Execution Right Here and… Right Here Integration Planning
  • 40. Acquisition Integration – How to Get it Right The process used for post-merger integration often differentiates experienced, successful Acquirers from value destroyers. The key is to find the right balance between speed and thoroughness. Although it is important to realize the potential synergies quickly, ideally in the first 12 to 18 months, executives often declare victory too quickly and rush to return to “business as usual,” leaving synergies unexploited. A disciplined and well-structured integration plan is vital to success. Communicate the vision and business logic of the deal – Employees and other pivotal stakeholders, including investors, must understand the strategic rationale, business objectives, and post-merger integration milestones and targets. Senior management should lead the implementation. Separate the post-merger integration from the core business – Post-merger integration needs its own organization, with a dedicated team of executives and faster than usual governance and decision-making processes. Correct allocation of resources is especially important where there are mission-critical functions. Monitor core business performance – Establish early warning systems to alert management to any falloff in revenue or profitability in the core business. - - Acquisition Integration
  • 41. Acquisition Integration – How to Get it Right (Continued) Proactively manage the soft issues – Post-merger integration isn’t just a numbers game. The process involves complex organizational and cultural changes. Identify key staff and design strategies to keep them on board as they are the value of the franchise. Handle new appointments with care. Move before the close of the deal – There are a lot of actions that can be taken in advance (prior to the close), that enable you to realize the benefits of the transaction immediately after it is finalized. Challenge decisions and assess progress after completion – During a post-merger integration, companies often make decisions on pragmatic or political grounds, resulting in inflated costs. Revisit those decisions and question their contribution to the company’s value-creation potential. When a post-merger integration is successful, the payoff can be striking. A rigorous approach may enable an Acquirer to even exceed its synergy demands and earn the shareholder’s respect and confidence in the company. - - Acquisition Integration
  • 42. Case Study - Introduction Consolidated Communications Acquires North Pittsburgh Systems, Inc. for $375.1 Million Announcement Date: July 1 st , 2007 183 days Closing Date: December 31 st , 2007 Acquirer: Consolidated Communications provides communications services to residential and business customers in Illinois and Texas. It offers a range of telecommunications services, including local and long distance service, custom calling features, private line services, dial-up and high-speed Internet access, digital television, carrier access services, network capacity services over its regional fiber optic network, and directory publishing. Target: North Pittsburgh Systems, Inc. is a local network services, including local dial tone service, custom calling features, and local private line services to residential and business customers; and network access services, which comprise access to its switched access facilities for the completion of interstate and intrastate long distance toll calls and extended area service calls, as well as access to private line network facilities for use in transporting voice and data services to interexchange carriers, cellular mobile radio service providers, and other local exchange carriers. - - Acquisition Integration
  • 43. Case Study – Acquisition Rationale - - Acquisition Integration Source: Consolidated Communication 7/2/2007 8-K SEC Filing Pennsylvania market 357 employees 63,000 access lines Superior broadband technologies Video service Local brand name equity Illinois and Texas market 1,100 employees 232,000 access lines 64,000 broadband connections IPTV technology Telemarketing services Business services
  • 44.
    • Case Study – Synergies
    • Consolidation
    • One functional organization across three markets ; increase portfolio
    • Combines to have 293,400 ILEC access lines, 66,300 CLEC access line equivalents, 72,200 DSL subscribers and 1,400 employees
    • After completion of this transaction Consolidated will be the 12 th largest telephone company in the United States
    • Obtained Verizon wireless partnership
    • Provides an advanced network
    • 99% DSL capable today, at speeds up to 10 megabits per second
    • Enables launch of IPTV
    • Leveraging scale
    • Software licenses
    • Maintenance contracts
    • Purchasing contracts
    • Reduce third party costs
    • Legal fees
    • Audit and Sarbanes-Oxley fees
    • Outsourced billing and financial system costs
    • Public company fees
    - - Acquisition Integration Source: Consolidated Communication 7/2/2007 8-K SEC Filing
  • 45. Case Study – The Transaction - - Acquisition Integration Advisors Consolidated Communications Legal – Schiff Hardin Financial – Wells Fargo North Pittsburgh Systems, Inc. Legal – Hughes Hubbard & Reed Thomas, Thomas, Armstrong & Niesen Financial – Evercore Partners Source: Capital IQ Transaction Values Total Consideration to Shareholders ($ mm) 375.13 Total Transaction Size ($ mm) 395.38 Implied Equity Value ($ mm) 375.13 Implied Enterprise Value ($ mm) 347.97 Implied Equity Value/LTM Net Income 25.0x Implied Enterprise Value/Revenues 3.5x Implied Equity Value/Book Value 3.8x Implied Enterprise Value/EBITDA 7.6x Exchange Rate 1.000 Offer Per Share ($) 25.00 Consideration to Shareholders ($ mm) 375.13 Total Cash ($ mm) 300.10 Premium (1 week Prior) 21.1% Total Stock ($ mm) 75.03
  • 46. Case Study – The Transaction (Cont.) - - Acquisition Integration 17.6% premium over market trading price on day of Definitive Agreement Not subject to collars $11.25 million break-up fee Source: Capital IQ North Pittsburgh 7/2/2007 8-K SEC Filing The Purchase Other Terms Financing Cash on hand and debt financing from Wachovia Synergies Operating synergies $7 million in 2008, $11 million in 2009 and beyond 6.0% accretive to cash flow after first full year of operations
  • 47.
    • Case Study – Execution Plan
    • Grow Revenue
    • Launch IPTV (new product)
    • Aggressively market broadband products and the triple play bundle
    • Retain Customers
    • Leverage North Pittsburgh’s new pricing/bundling strategy
    • Create “stickiness” with existing products and leverage the triple play offer
    • Build on North Pittsburgh’s initiatives by implementing the best customer care and community involvement practices from both companies
    • Improve Operating Efficiency
    • Move to centralized organization structure
    • Integrate the properties utilizing Consolidated Communications’ proven processes
    • Achieve synergies
    • Leverage economies of scale
    - - Acquisition Integration Source: Consolidated Communication 7/2/2007 8-K SEC Filing
  • 48. Case Study – Results - - Acquisition Integration
    • Operating synergies exceeded the projected $7 million for the first year
    • On track to exceed $11 million in projected synergies for the second year
    • 10% lower capital expenditures over previous year (2008 compared to 2007)
    • Rolled out most successful IPTV launch in history in Pennsylvania
    • Growth of 6.6% in Pennsylvania access lines exceeded the projected 5.0% growth
    • Management believes there are still significant opportunities to cut costs within the combined company
    • Building cash balance, considering another acquisition
    “ We'd love to do another North Pittsburgh” - Robert Curry, CEO on Nov 05, 2009 Earnings Call
  • 49. Case Study – Stock Performance - - Acquisition Integration Consolidated Communications outperformed the S&P 500 by 50% over this time period Relative Stock Performance 1-year after Acquisition to Today (January 1, 2009 -April 23, 2010) SPX closed 34.6% higher on April 23, 2010 compared to January 1, 2009 price CNSL closed 84.6% higher than January 1, 2009 price on April 23, 2010
  • 50. - - Appendix Note: The companies used as targets in these examples are fictitious and presented for illustrative purposes. Any resemblance to actual companies is unintended and purely coincidental.
  • 51. Valuation of Target Co. Valuation Methodologies
    • Comparable Company Analysis
      • Publicly-traded companies
      • Similar operating/industry characteristics
      • Apply relevant valuation multiples
    • Precedent Transaction Analysis
      • Recent transactions
      • Similar operating/industry characteristics
      • Apply relevant valuation multiples
    • Discounted Cash Flow (“DCF”) Analysis
      • Develop five-year projections
      • Exit multiple and cost of capital methodology
      • Sensitivity analysis for key assumptions
    Valuation Analysis - -
    • Accretion/Dilution Analysis
      • Develop projections for Target and Acquiror
      • Determine combined company synergies
      • Analyze transaction with respect to earnings
    *The companies used as targets in these examples are fictitious and presented for illustrative purposes only. Any resemblance to actual companies is unintended and purely coincidental.
  • 52. - -
    • The following are operating statistics for publicly traded companies in the United States
    Comparable Company Analysis Valuation Analysis Target Co.
  • 53. Comparable Company Analysis - -
    • The following are trading multiples for publicly traded companies in the United States
    Valuation Analysis
  • 54. Precedent Transaction Analysis - -
    • The following are the transaction multiples for comparable precedent transactions in the United States.
    Valuation Analysis 1 1 Transaction not included in valuation due to outlier data.
  • 55. Discounted Cash Flow Analysis - - Valuation Analysis
  • 56. Valuation Summary - -
    • Using the corresponding publicly traded company multiples and applying them to Target Co.’s LTM figures results in the following data points.
    Valuation Analysis
  • 57. Valuation Summary - - Valuation Analysis
    • Using the corresponding precedent transaction multiples and applying them to Target Co.’s LTM figures results in the following data points.
    1 US Voice & Data and Brookside Technologies transaction not included in valuation due to outlier data. 1
  • 58. Valuation Summary - -
    • Below is a sensitivity analysis of the Discounted Cash Flow Analysis using the terminal EBITDA multiple as the varying parameter.
    Valuation Analysis
  • 59.
    • Below is a football field analysis to assess the results of the valuation methodologies.
    - - Valuation Analysis Valuation Summary
  • 60. Accretion/Dilution Analysis – Acquirer Projections & Assumptions - - Valuation Analysis
  • 61. - - Valuation Analysis Accretion/Dilution Analysis – Combined Company
  • 62. - - Valuation Analysis Accretion/Dilution Analysis – Combined Company
  • 63. - - Accretion/Dilution Analysis – Sensitivities Valuation Analysis
  • 64.
    • Public Company Analysis
      • Publicly-traded companies
      • Similar operating/industry characteristics
      • Apply relevant valuation multiples
    • Precedent Transaction Analysis
      • Recent transactions
      • Similar operating/industry characteristics
      • Apply relevant valuation multiples
    • Discounted Cash Flow (“DCF”) Analysis
      • Develop five-year projections
      • Exit multiple and cost of capital methodology
      • Sensitivity analysis for key assumptions
    • Leveraged Buyout (“LBO”) Analysis
      • Develop five-year projections
      • Exit multiple and cost of capital methodology
      • Sensitivity analysis for key assumptions
    Implied Valuation of Target 2 *The companies used as targets in these examples are fictitious and presented for illustrative purposes only. Any resemblance to actual companies is unintended and purely coincidental. Valuation Analysis Valuation Methodologies - -
  • 65.
    • The following are operating statistics for publicly traded comparable companies in the United States.
    Valuation Analysis Public Company Analysis - -
  • 66.
    • The following are trading multiples for publicly traded comparable companies in the United States.
    Valuation Analysis Public Company Analysis - -
  • 67.
    • The following are the transaction multiples for comparable precedent transactions in the United States.
    Valuation Analysis Precedent Transaction Analysis - -
  • 68. (1) Assumes 38% tax rate Valuation Analysis Historical and Projected Income Statement - -
  • 69. - - Valuation Analysis Historical and Projected Balance Sheet
  • 70. - - Valuation Analysis Historical and Projected Cash Flow Statement
  • 71. - - Valuation Analysis Discounted Cash Flow Analysis
  • 72. - - Valuation Analysis Discounted Cash Flow Analysis - Sensitivities
  • 73. - - Valuation Analysis Leveraged Buyout Analysis – Sources & Uses
  • 74. - - Valuation Analysis Leverage Buyout Analysis – Transaction Adjustments
  • 75. - - Valuation Analysis Leveraged Buyout Analysis – Summary Financials
  • 76. - - Valuation Analysis Leveraged Buyout Analysis – Debt Schedule
  • 77. - - Valuation Analysis Leveraged Buyout Analysis – Returns Analysis
  • 78. - - Valuation Analysis Leveraged Buyout Analysis – Equity IRR Sensitivities
  • 79. - - Valuation Analysis Leveraged Buyout Analysis – Subordinate Debt IRR Sensitivities
  • 80.
    • By incorporating the following valuation methodologies, and aggregating the averages from all four valuation ranges, we arrive at the preliminary implied valuation range for Target 2.
    - - Valuation Analysis Preliminary Valuation Range
  • 81.
    • Below is a football field analysis to assess the results of the valuation methodologies.
    - - Valuation Analysis Football Field Analysis