Introduction Definition and description of overall process The M&A market (The Acquisition Market) (P4) Financial /Strategic objectives in a M&A deal The benefits and risks of M&A
Summary Sales side Eight steps to closing a sale Seeking a financial advisor- areas and FA should have experience Assembling the deal team Legal counsel, accounting and actuaries Types of sales process Control led auction Target auction negotiated process Deal structuring Asset versus entity sale Taxes Premarketing Preparing the buyer list Preparing marketing materials- CA,CIM, Teaser, Bid process letter Actuarial appraisal and reserve review Comparing data room Marketing Initial contact with prospective buyer and follow up Preliminary bids and review Preliminary due diligence and strategy Data room strategy and management presentation Break out session strategy
Summary Buy side Evaluating the opportunity Pre screening the opportunity Retaining a buying side FA Review of opportunity Market analysis Preliminary valuation of target Financial modeling Preliminary due diligence Final bids Negotiation LOI Due diligence, deal financing, rating agencies Negotiation Analysis Management updates Purchase agreement Key conveyance Deal protection Employment agreements The path to closing Presentation to board of directors Regulatory issues, antitrust issues, SEC review Public announcement Shareholder approval and closing
Concepts and Purpose Merger- A combination of two or more companies in which the assets and liabilities and liabilities of the selling firm are absorbed by the buying firm. Acquisition- The purchase of an asset (I.E- plant, division, entire company). The M&A market- based on: Availability of financing-loan and debt & equity markets. Rising Stock Prices and rising P/E multiples- lead to higher cash flow. Ongoing restructuring Tax Implications Wealth transfer b/w generations Market Psychology Financial objectives in a M&A deal Strategic objectives The benefits and risks of M&A
Financial/Strategic Objectives Financial Objectives Strategic objectives Primary Objective- Promote Corporate Growth. Increase perceived future earnings. Expense Reduction Strategy- acquiring “orphan blocks” of life insurance. Revenue Synergies- Increased sales of different product lines. Improving the buyer’s long term competitive position by: Elimination of competition Gain access to more markets Creating economies of scale Leveraging Tech Gain share/pricing power Improving Distribution.
Financial/Strategic Objectives (continued) Horizontal vs. Vertical Integration Other Potential Objectives Horizontal Integration- acquisition of market share in a company’s existing competency (typically at the expense of rivals). Geographic Integration is part of Horizontal Integration. Vertical Integration- Gaining control over additional “links” in the value chain. Diversification- could lead to less volatile earnings. I.E) Variable annuities and fixed annuities are inversely correlated. Regulation Accounting and Tax Research & Development
Benefits and Risks of M&A Benefits Risks Can provide short/long term benefits to acquirer’s shareholders. This increased cash flow and drives up value of share holder equity. Can provide immediate strategic benefits- impractical to generate organically. Financial Risks- possibility of overpaying due to overly optimistic revenue synergies or cost savings. Strategic Risks- “channel conflict.” Execution Risk- everything goes right except integration.
Eight Steps to Closing a Sale Preparing to Sell Pre-Marketing Marketing Review Preliminary Bids Due Diligence of Seller Final Bids & Negotiations Executive Definitive & Regulatory Filings Closing
Seeking and Acquiring a FA Strategic Alternatives- A financial Advisor (FA) is typically retained to formally review the seller’s options. The advantages to hiring an FA: An Investment Bank is impartial. Investment banks may present options management has not considered. They have insight into the most feasible as opposed to most desirable alternative. A FA should have experience in: the relevant industry or sector Valuation expertise Relevant M&A experience Financial structuring experience Strategic vision Process Prowess Negotiating skills
Assembling a Deal Team Senior Management time is scarce and valuable, efficiency is important. Coordination of efforts- Effective communication, generally done by FA Need to seek a Financial Advisor Legal Council- bids, contracts, agreements Accountants- “Quality of Earnings” report, taxes, employee benefits, risk management, IT. (Play a larger role on the buy side). Actuaries- Character of seller’s liabilities.
Controlled Auction Advantages Disadvantages Broad number of strategic and financial buyers. Maximizes likelihood all possible buyers will be contacted.
Deal Structuring Will seller’s shareholders accept cash, stock, or combination? Asset Vs. Entity- Operations and liabilities or a book of business. Insurance Industry- An Asset Acquisition is typically a block of policies or line of business.
Tax Issues How are gains calculated? Are there tax efficient ways to sell the business? Can buyer increase tax basis to reflect seller’s purchase price.
Pre- Marketing Preparing the Buyer List- FA provides list of qualified buyers.
The Teaser- brief 1-3 page document that is prepared and distributed by FA to attract potential investors. The document highlights attractive attributes of company, provides financial summary, and may contain financial projections. If the potential buyer remains interested, the bankers send out the: Confidentiality Agreement (CA)
Confidentiality Agreement(CA)- Between Seller and Potential buyer. The CA is intended to protect the seller from unauthorized sharing of information by the buyer. Upon agreement of the CA by the buyer, the seller sends the Confidential Information Memorandum (CIM).
Confidential Information Memorandum (CIM)- Primary document used to market to the seller. Describes seller’s industry, contains:
Bid Process Letter- accompanies CIM when sent to prospective bidder. Includes description of general process and establish deadlines. It may also contain the identity of acquiring entity, source of financing and other detailed information.
It is a wise idea to hire an outside firm for valuation due to impartiality.
Ideally, this is completed before the formal marketing begins.
Final Bids- As a result of Due-Diligence, Management decides whether to continue or not.
Negotiation of the Letter of Intent, LOI- Describes the ground rules for buyer and seller. Typically deal with management and policies of a transaction.
Due Diligence- buy side A potential investor may dispatch a team of 50 or more individuals. All issues are addressed as: 1) adjusting the bid price or by 2) adding protection mechanisms. Deal Financing- FA assists management in raising financing. Rating Agencies
Employment agreements- deals with incentivizing employees in integration processes and may prevent an exodus of talent.
Path to Closing Presentation to the Board of Directors- once deal is arranged, buyer and seller both present to the boards of their respected companies. The seller’s board of directors will ask for a “fairness opinion.” Regulatory Issues- State, Anti-trust, SEC Review Presentation of deal to the Public: Announcement Shareholder Approval Closing