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Getting it right (m&a integration and due diligence)
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Getting it right (m&a integration and due diligence)

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This panel presentation was delivered during the AM&AA Winter Conference 2001 at Las Vegas. The panel was focused on discussing the scenarios where deep due diligence is needed.

This panel presentation was delivered during the AM&AA Winter Conference 2001 at Las Vegas. The panel was focused on discussing the scenarios where deep due diligence is needed.

Published in Business , Economy & Finance
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  • 1. AM&AA  Las Vegas Conference January 17 – January 17  19 2012 January 17 – 19, 2012 Due Diligence: gHeadliners:Brett Axelrod, Esq.Brett Axelrod Esq Fox Rothschild, LLP Fox Rothschild LLPNitin Kumar, CM&AA Turnaround CEOCa S ee e ,Carl Sheeler, PhD, CBA     Business Valuations, Ltd. ,C us ess a ua o s, dMary Drury, Esq. Marquis & Aurbach Marquis & Aurbach
  • 2. Due Diligence: Selling/Acquiring Companies• FACTORS TO CONSIDER – Debt structure ‐ Timeframe – Assets & suppliers ‐ Private or public company ssets & s ssets &  Private or public company – Expenses & risks ‐ Parties’ relationships – Mgt. strengths g g ‐ Equity value and SH interests q y – Personal guarantees
  • 3. Due Diligence: Selling/Acquiring CompaniesBig Dollar Legal Mistakes g g‐ Employee issues ‐ “Stiffed” vendors‐ Tax structuring ‐ Lack of disclosure ‐ Ignoring key contracts ‐ Intellectual Property rights ‐ Junior lien holders roleLegal Structure Issues‐ Situation specific Situation specific ‐ Competitive bidders Competitive bidders‐ Speed ‐ Cost‐ Lease/contract assumption
  • 4. Acquisition Agreement vs. Due Diligence ProcessCAVEAT EMPTORCAVEAT EMPTOR”Deal PointerDeal Pointer3 main components:3 i t – Representations and warranties – Cl i Closing conditions diti – Purchase price provisions
  • 5. Acquisition Agreement vs. Due Diligence Process• Representations and Warranties Representations and Warranties • Due diligence • Risk allocation
  • 6. Due Diligence: Seller’s Disclosure Schedule• a/k/a Schedule of Exceptions a/k/a Schedule of Exceptions• Is a due diligence tool• Enables buyer to obtain information  directly from seller through process of  inquiry and response q y p
  • 7. Due Diligence: Closing Conditions Closing Conditions• “Due diligence out” Due diligence out – Results must be satisfactory to buyer or (at  least) have not identified a fact that is  least) have not identified a fact that is materially adverse to Seller’s business –SSometimes drafted as a unilateral  i d f d il l termination right of buyer—very rare in  termination right of buyer— negotiated deals. i dd l
  • 8. Due Diligence: Purchase Price Provisions Purchase Price Provisions• Can be used to fund indemnity claims of buyer Can be used to fund indemnity claims of buyer.• C h Cash consideration: id i – Cash at closing—holdbacks and escrows Cash at closing— – Future cash—earn‐outs Future cash—earn‐• Non‐cash consideration—buyer’s right to  Non‐cash consideration— setoff against notes due seller g
  • 9. Due Diligence: Company Asset Profile • Watch out for difficult‐to‐transfer assets! Watch out for difficult‐to‐transfer assets! difficult• Analyze the “assignability ” f Analyze the “assignability” of material  l h “ i bili ” of material  i l contracts• Does the acquisition transaction violate a  q contract covenant (assignment and/or others)?
  • 10. Due Diligence: Company Debt/Liability Profile  Company Debt/Liability Profile  Contingent liabilities—probability/ magnitude  Contingent liabilities—p g y/ g test.  Major areas include: – Environmental ‐ ERISA – EEOC l i EEOC claims ‐ T d fi i i Tax deficiencies – Products liability Does seller/target have bank debt? Does seller/target have bank debt? – Review covenants relating to: • Incurrence of additional LTD/capital leases / p • Change of control transactions • May trigger default unless consent is obtained
  • 11. Due Diligence: BV Expert PerspectiveDue Diligence: BV Expert PerspectiveCommon reasons for disputes:Common reasons for disputes: Pre‐ and during transaction Pre‐• Consideration of minority block of shares Consideration of minority block of shares• Failure to consider the entity IP• O ‐reliance of DCF methodology Over‐ Over li f DCF th d l Post transaction• Failure to consider impact of management• Deal structure
  • 12. Due Diligence: BV Expert PerspectiveDue Diligence: BV Expert Perspective How may capital structure influence value How may capital structure influence value How has performance been measured? What empirical support was used to support  h ii l d growth, multiple and DCF rate assumptions? How was the influence of culture measured? How was all intangible assets accounted for? g How much does management influence value?
  • 13. Due Diligence: BV Expert Perspective Due Diligence: BV Expert Perspective What is the strength and existence of processes What is the strength and existence of processes  and procedures? How are key assets measured & risk protected? What are the tax and risk considerations of  funding and asset versus stock sale?
  • 14. Making the deal work: Post Merger Integration“It is impossible to save a bad deal, but a good deal can easily turn bad due to inadequate deal can easily turn bad due to inadequateattention towards post merger integration”
  • 15. Guiding principles for acquisition  integration  Get the integration strategy right for Strategy the deal the deal  Design the programme around the Programme Design benefits case SuccessfulProgramme  Provide shape and focus through Management outstanding programme management Integration  Manage the risks to the business as Risk Management well as the programmePeople &   Rapidly engage the people in both Communications organisations
  • 16. Several Moving Parts Multiple Points of Failure Functional Integration F ti lI t ti A  unified strategy for a   (Production, R&D, Sales,  Unified entity HR etc) Financial Metrics Financial Metrics Information TechnologyPeople & Culture integration Communications Brand Protection Cost Reduction Customer Retention Customer Retention Employee Retention Change Management Regulatory Compliance
  • 17. M&A Integration: Top 5 Issues M&A Integration: Top 5 Issues• Culture• Underestimating IT• Speed of Integration Speed of Integration• Fragmented Due Diligence g g• Inadequate Communication
  • 18. Get the integration strategy right for the  dealStudies and experience  indicate that there is no ‘one approach’ for all acquisitions Spell out the rationale for the deal, the  Determine the integration  Have a clear view of the ‘end  benefits sought, along with key  benefits sought along with key approach and strategy approach and strategy game – along with the stages in  game’ – along with the stages in complexity factors the journeyBenefits Delivery $ improvement Depth       /     Degree FTE Reduction formance Extension of Level presence Bundling of of  Pace involvement Revenue Growth capabilities Perf Economy  Time NO of scale GO  The integration strategy is: ZONE  Key stages in the journey need to be  Cost Reduction  How deeply will we integrate? defined  in terms of the business model   How quickly will we integrate? and the performance of the combined   The integration strategy must be driven   How many do we need to involve  organisation. This enables success to be  by the strategic rationale for the deal (i.e.  by the strategic rationale for the deal (i e in the process? in the process? measured as the integration progresses measured as the integration progresses achieving the ‘1+1=3’) The approach may vary across the  organisation
  • 19. M&A Governance Diversification Market Access Empire Building Input Access Strategic Rationale Consolidation Capability Access Market Power Pre‐emptive Balanced  Performance  Risk  Enterprise Governance Scorecard Metrics Management M&A Governance   Expert  Top Down Bottom Up Silo‐in Hybrid Models Centric Speed of  Extent of  Prioritization Integration Strategy g gy Integration I t ti Integration I t tiIntegration  TechniquesIntegration Techniques Replacement Adoption Standardization Synchronization
  • 20. Best Practices in M&A IntegrationUnderstand the Business ArchitectureAny business hinges around four parameters for its basic design, a merger, acquisition or a divestiture alters one or more of these attributes..more of these attributesComprehensive Due DiligenceDue Diligence must span broader than just financial and legal and should look at all aspects of the business, the risks, liabilities and their associated impacts.liabilities and their associated impacts
  • 21. Best Practices in M&A IntegrationUnderstand Cultural  HighDifferences UpfrontDifferences UpfrontA cultural due diligence should help  Strategic Buyerdocument all issues of significant  (Absorptions) grationdifferences. Strategic Buyer Strategic Buyer Extent of integ (Consolidation)Determine Speed & Extent of integration Financial BuyerThe speed and extent of integration vary  The speed and extent of integration vary (Bolt On) (Bolt On)significantly depending on the transaction  Financial Buyer (Transformation)size, the type of acquirer and the complexity of the integration. Low Slow Speed of integration Rapid Large sized M&A  Small sized M&A 
  • 22. Best Practices in M&A IntegrationCommunication MatrixA well defined communication matrix must be designed A ll d fi d i ti ti tb d i dand executed with focus on target community, periodicity, medium of communication  and the source . U de sta d egu ato yUnderstand Regulatory Environment o e tThorough due diligence must be conducted on all legal and regulatory aspects of the absorbed company’s country. Issues that tend to often come up in around labour laws, intellectual property , cross border data privacy issues
  • 23. Questions? Comments? Concerns?Questions? Comments? Concerns?
  • 24. Your Panelists & Moderator Your Panelists & ModeratorBrett Axelrod, Esq. , q Nitin Kumar, CM&AA ,Fox Rothschild, LLP CE0 ‐ Turnarounds CE0 ‐702.699.5906 1.408.91.KUMAR BAxelrod@foxrothschild.com       nikumar_09@yahoo.com BAxelrod@foxrothschild com nikumar 09@yahoo comMary Drury, Esq. Carl Sheeler, PhD, CBA    Marquis & AurbachMarquis & Aurbach Business Valuations, Ltd.702.942.2157 800.286.6635mdrury@maclaw.com y carl@bizvalsltd.com