Mergers & Acquisitions Training

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This is a training material used for merger and acquisition projects.
It includes:
- Guiding Principles For Successful M&A
- The Firm?s M&A Approach
- Case Examples
- How to Calculate Synergies
- Typical Watchouts
- Key Takeaways
It contains many useful frameworks and tools that can be adapted for use in M&A deals.
merger & acquisition, M&A, due diligence, consulting, tools, approach, synergies,

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Mergers & Acquisitions Training

  1. 1. Merger & Acquisition Approach
  2. 2. 4 XYZ M&A Agenda Introduction • Trends in M&A • Guiding Principles for Successful M&A • XYZ Approach • Case Examples – screening – due diligence – sale • Exercise on Synergy Calculation • Typical Watchouts • Key Takeaways This document is a partial preview. Full document download can be found on Flevy: http://flevy.com/browse/document/mergers-and-acquisitions-training-727
  3. 3. 7 M&A Activity • M&A activity has grown rapidly in nominal dollar terms, peaking in the U.S. in the late 1980s, and then matching those levels last year • The ferocious merger activity of the late 1980s was driven in large part by the “easy money” afforded by the junk bond market. This resulted in huge, often unsubstantiated, premiums being paid for companies without regard to the value creation opportunities presented (or not presented, as the case may be) by the operations/underlying business of the target • Growth in merger activity since 1992 has coincided with the economy’s recovery from recession • Recent M&A activity benefiting from: – extended economic health with little recessionary pressure on horizon – a resulting corporate demand for growth – increase in international M&A activity as companies pursuing global strategies • Since late 1997, U.S. and European markets have experienced the resurgence of junk bonds to facilitate the execution of deals getting larger and larger TrendsXYZ M & A This document is a partial preview. Full document download can be found on Flevy: http://flevy.com/browse/document/mergers-and-acquisitions-training-727
  4. 4. 10 Trends Multiples Paid for Acquisitions EBIT Multiples Paid for Acquisitions 7.4 5.4 6.5 7 7.8 6.1 7.2 8.6 0 1 2 3 4 5 6 7 8 9 10 1988-89 1992-93 1995 1996 Financial Buyers Strategic Buyers Sources: The BUYOUTS Yearbook, XYZ Analysis. Over the last five years, the prices paid for acquisitions have been increasing, and reinforces the need for in-depth due diligence and analysis to ensure a fair price. Average EBIT Multiple XYZ M&A This document is a partial preview. Full document download can be found on Flevy: http://flevy.com/browse/document/mergers-and-acquisitions-training-727
  5. 5. 13 Glossary Trends Credit Rating • The legal combination of two (or more) formerly independent entities • The acquisition by an independent entity of a control stake in another entity. This is usually achieved by acquiring more than 50% of shares for a public company • The sale or closure of a particular entity • Leveraged buy-out: An acquisition made possible financially by large issuance of debt, making the new entity highly “leveraged” or “geared” (i.e., with a high ratio of debt to equity) • Investment firms managing private funds by running business portfolios • Bonds (or debentures, or coupon debt) issued by an entity without a credit rating or with entities with “non-investment grade” rating • Financial markets use the service of credit rating firms such as Standard & Poor’s and Moody’s to determine entities’ credit worthiness (i.e., the ability for an entity to pay back their debt). Ratings are allocated from AAA or Aaa (highest) to C (lowest) – Entities with Investment Grade Ratings (AAA down to B) are considered stable – non-investment Grade entities (below B) present an investment risk (e.g., third world countries, highly leveraged companies) Merger Junk bonds Acquisition Divestiture LBO Private Equity Firms XYZ M&A This document is a partial preview. Full document download can be found on Flevy: http://flevy.com/browse/document/mergers-and-acquisitions-training-727
  6. 6. 16 Principles Guiding Principles (2 of 2)XYZ believes that a clear and disciplined approach to the acquisition process is vital to ensure success. Principles: Activities: Execution Capture Full Value • Make better decisions upfront through careful due diligence • Strive to identify "deal breaker" issues as early as possible • Use information and insights to provide confidence in making a bid • Clearly communicate corporate vision to target • Begin integration process as early as possible • Be objective to ensure a fair decision- making process • Create a set of short-term and long- term objectives • Quantify all potential synergies and cost savings • Examine margin and revenue forecasts • Evaluate management of target • Provide a blueprint for capturing full potential value • Support managerial integration team XYZ M&A This document is a partial preview. Full document download can be found on Flevy: http://flevy.com/browse/document/mergers-and-acquisitions-training-727
  7. 7. 19 Principles M&A Value Creation Opportunities Buy cheap M&A value can arise from generating the full value of an undervalued entity or by adding value to under performing assets. Add value Take advantage of inefficiencies in the market Spot new market trends early Generate synergies XYZ M&A This document is a partial preview. Full document download can be found on Flevy: http://flevy.com/browse/document/mergers-and-acquisitions-training-727
  8. 8. 22 Principles Success and Market Share 43% 58% 61% 70% 73% 35% 18% 19% 18% 3% 0% 10% 20% 30% 40% 50% 60% 70% 80% < 5% 5-10% 10-25% 25-50% 50%+ Market Share Bought Percent Incidence of success Incidence of outright failure Acquisitions that increased market share substantially were consistently more successful. Sources: Porter (33 Large U.S. Corps.; Management Interviews) XYZ M&A This document is a partial preview. Full document download can be found on Flevy: http://flevy.com/browse/document/mergers-and-acquisitions-training-727
  9. 9. 25 Examples of Failures (2 of 2) Principles Industry Acquirer Target Transaction Value Acquisition Thesis Reason for Failure Sources: Industry literature; XYZ Analysis. Retail Allied Federated Technology/ Telecommu- nications AT&T NCR $ 6.5B •Expand geographically •Inadequate due diligence –overvalued potential synergies and brand value •Technology/ telephony integration •Strategically flawed –few synergies between computer hardware and telephony •Poor integration $ 7.5B •New market entryNovell WordPerfect •Poor integration –culture clash $ 1.4B The M&A landscape is littered with failures which failed to adhere to the core guiding principles. XYZ M&A This document is a partial preview. Full document download can be found on Flevy: http://flevy.com/browse/document/mergers-and-acquisitions-training-727
  10. 10. 28 XYZ M&A Agenda Introduction • Trends in M&A • Guiding Principles for Successful M&A • XYZ Approach • Case Examples – screening – due diligence – sale • Exercise on Synergy Calculation • Typical Watchouts • Key Takeaways This document is a partial preview. Full document download can be found on Flevy: http://flevy.com/browse/document/mergers-and-acquisitions-training-727
  11. 11. 31 XYZ Approach XYZ and Other Advisors' Role XYZ's Role: • Analyze quality of customer and supplier base • Look for potential cost savings and upside synergies • Understand market dynamics to better project market and company growth objectives • Construct a discounted cash flow model that values stand alone, operating improvements and potential synergies • Provide a reality check on market valuations • Active involvement in transition plan, cost reduction and revenue enhancement opportunities • "Hands-on" driver of change process to realize full value of merged entity • In tandem with accountants, analyze financial projections based on managerial input Investment Banks: • Value based on prices of comparable businesses recently bought or sold • Multiple of earnings/cash flow, assets • Little or no direct input in post-merger activities • Limited external research – largely dependent on managerial projections Accounting Firms*: • Determine targets based on corporate objectives and strategies • Identify acquisitions that enable the acquirer to: – penetrate new markets – acquire capabilities – gain scale advantage – improve relative market position • Comb for potential acquisition candidates based on availability • Utilize contacts to build a wide list of potential targets • Look for potential acquisition candidates based on availability • Use contacts to build list of potential targets • Value based on prices of comparable businesses recently bought or sold • Construct a basic DCF model • Little or no direct input in post-merger activities XYZ provides a neutral, third-party view and analysis on the primary strategic and financial issues. Notes: *Consulting branches of Big Six Accounting Firms. IntegrationValuationDue Diligence Acquisition Screening XYZ M&A This document is a partial preview. Full document download can be found on Flevy: http://flevy.com/browse/document/mergers-and-acquisitions-training-727
  12. 12. 34 Acquisition Screening (Common Mistakes) XYZ Approach •Review all potential candidates and determine which ones present the best fit in terms of: –relatedness –impact on market position Objective: •Drawing up an incomplete list of candidates, excluding divisions of large companies and very small companies •Using the screening process to develop the strategy •Saying –"We can't buy it because..." –"They have turned us down before" –"The government won't approve it" or –"It's family/state/competitor/or big company owned" •Making the wrong contact at the target company •Being impatient with acquisition process •Assuming "no" really means "no" Common pitfalls: Inadequate screening of candidates is commonplace. XYZ M&A This document is a partial preview. Full document download can be found on Flevy: http://flevy.com/browse/document/mergers-and-acquisitions-training-727
  13. 13. 37 Due Diligence XYZ Approach •Business/strategic review –market trends –customers and suppliers –competitors –costs, technology –valuation/full potential assessment •Make better decisions upfront •Provide agenda for post-acquisition change •Improve success in closing deal •Non-identification of "deal breaker" issues •Misunderstanding of cost savings and upside opportunities XYZ goes beyond financial analysis to assess fully the competitive position of the target, and identify "deal breaker" issues . IntegrationValuationDue Diligence Acquisition Screening Objective: XYZ Activities: Common Pitfalls: XYZ M&A This document is a partial preview. Full document download can be found on Flevy: http://flevy.com/browse/document/mergers-and-acquisitions-training-727
  14. 14. 40 Typical Due Diligence Issues (2 of 2) XYZ Approach What strategies are key competitors pursuing? How successful are they? Competitor Review: How well managed is the business? Where can the company improve margins and returns? Operations: What is the potential growth? Are there follow-on acquisitions available? Growth: When applicable, is there a clear exit strategy?Exit Strategy: How much is the company worth on a stand-alone basis? How much value can be created? Valuation: XYZ M&A This document is a partial preview. Full document download can be found on Flevy: http://flevy.com/browse/document/mergers-and-acquisitions-training-727
  15. 15. 43 The Value Creation Process XYZ Approach Difference between purchase price and post- integration value to client represents value creation opportunity XYZ's approach to valuation encompasses three distinct steps that closely examine the historical and future financial performance of the target. • Stand alone cash flow – domestic demand – import penetration – current market share – price per unit – variable cost per unit – fixed costs (R&D, advertising, etc.) – capital expenditures • Integration opportunities – expanded distribution – plant consolidation – eliminate redundant R&D – purchasing leverage • Better management of assets – plant best demonstrated practices – reduced manufacturing complexity – outsourcing/move off shore – reduced working capital 0% 20% 40% 60% 80% 100% 120% 140% 160% 180% 200% Market value of debt and equity Premium Current market value Maximum potential value Synergies Stand alone operating improvement Current operating value Percent of Current Market Value (Debt and Equity) Financial deal structure • Investment banking focus – leverage/gearing – type of financial products used XYZ M&A This document is a partial preview. Full document download can be found on Flevy: http://flevy.com/browse/document/mergers-and-acquisitions-training-727
  16. 16. 46 Integration Objective: •Implement strategic vision for merger that gives direction and impetus for change •Definitive actions and role definitions to speed integration process XYZ Activities: •Pre-planning –combined cash flows •Transition plan •Cost reduction •Revenue enhancement Common Pitfalls: •Reluctance to interfere in operations of acquiree XYZ can assist in the integration process and maximize the value of the target. IntegrationValuationDue Diligence Acquisition Screening XYZ ApproachXYZ M&A This document is a partial preview. Full document download can be found on Flevy: http://flevy.com/browse/document/mergers-and-acquisitions-training-727
  17. 17. 49 Explicit expression of corporate mission/vision by CEO Long-term objectives •Articulate immediately when control is taken •Gives organization focus for new direction •Maintains impetus for change Short-term objectives •Driven by due diligence and valuation •Reality check •Directs Transition Team in first weeks after the merger Top-down consistent approach Integration - Develop Short - and Long-Term Objectives XYZ ApproachXYZ M&A This document is a partial preview. Full document download can be found on Flevy: http://flevy.com/browse/document/mergers-and-acquisitions-training-727
  18. 18. 52 XYZ M&A Agenda Introduction • Trends in M&A • Guiding Principles for Successful M&A • XYZ Approach • Case Examples – screening – due diligence – sale • Exercise on Synergy Calculation • Typical Watchouts • Key Takeaways This document is a partial preview. Full document download can be found on Flevy: http://flevy.com/browse/document/mergers-and-acquisitions-training-727
  19. 19. 55 Case Example - Prepress Search Criteria Potential Industries Information Capture, and Dissemination Output Devices Companies that Purchase Computer Components, Add Value, and Remarket Competitor Industries Prepress Customers Another Prepress Industry Recording products X X X Duplication products X X X X X Data enhancement/ manipulation/editing devices X X X X X Data management (storage and retrieval) devices X X X X Transmission originators X X Transmission carriers/controllers X X Transmission receivers ("dumb') X Intelligent digital processing systems X X X X Interactive digital systems X Office automation/high potential customers X Along with the client, XYZ developed a set of criteria with which to evaluate different industries. XYZ M&A This document is a partial preview. Full document download can be found on Flevy: http://flevy.com/browse/document/mergers-and-acquisitions-training-727
  20. 20. 58 Case Example - Prepress Magnetic Resonance Imaging (MRI) (2 of 2) Prepress Value-added Proposition: Similarity to pre-press: Linkage to other industries: Prepress synergies: – Same workflow – Similar manufacturing (value-added resale of high-technology components linked by proprietary software and customer circuit boards or chips) – Color imaging becoming increasingly valued system feature – Signifies major move into medical imaging market – Complements current client printer medical market strategy – Entry vehicle to data storage industry – No linkage to non-medical/other markets – System similarity (modular design, user-friendly, upgradeable, high quality) – Sales process similarity (system sell, proven ROI benefits) – Customer need similarity (high resolution images, low maintenance, strong price-value relationship) Attractive The MRI industry was selected based on its attractiveness and potential fit with Prepress. XYZ M&A This document is a partial preview. Full document download can be found on Flevy: http://flevy.com/browse/document/mergers-and-acquisitions-training-727
  21. 21. 61 Case Example - Prepress MRI: Target Acquisition Candidates •H •K •L •M •N Viable Acquisition Candidate Not Viable Company Revenue Market Value Medical Imaging Parent Division of Large Company Market Share Too Small •D •E F $150MM $100MM A $170MM $200MM B $165MM $100MM •I •G •C •J •K After the creation of a market map, individual companies were assessed for their viability as an acquisition. •O •P •Q •R •S XYZ M&A This document is a partial preview. Full document download can be found on Flevy: http://flevy.com/browse/document/mergers-and-acquisitions-training-727
  22. 22. 64 Case Example - Sand Industry Overview Sources: U.S. Bureau of Mines 0 2000 4000 6000 8000 10000 12000 14000 1970 1971 1972 1973 1974 1975 1976 1977 1978 1979 1980 1981 1982 1983 1984 1985 1986 1987 1988 1989 1990 1991 1992 1993 Volume('000sMetricTons) Glass Foundry Abrasives Frac Fillers CAGR (1970-1993) 0.1% 1.3% 8.5% -5.6% -1.0% Every market segment has been volatile. Only the frac segment has grown significantly, but it is still below its 1985 peak. XYZ M&A This document is a partial preview. Full document download can be found on Flevy: http://flevy.com/browse/document/mergers-and-acquisitions-training-727
  23. 23. 67 Case Example - Sand Industrial Sand Market Overview • The overall silica sand industry has been notably cyclical with flat volume growth over the past twenty-five years; downturns generally track broader economic slowdowns • Each market segment of the silica sand industry is volatile and only frac has shown significant long-term volume growth: However, frac volume is still below its 1985 peak • Real industry revenues have fallen by 1.6% since 1980 • Real revenues per ton have fallen by 0.5% since 1980 • Extraction, manufacturing and distribution should be viewed as different businesses with unique returns, customers and competitors • Future environmental and health risks appear to be limited - regulations limiting access to and use of silica sands are not expected to become more burdensome in the near future Summary XYZ M&A This document is a partial preview. Full document download can be found on Flevy: http://flevy.com/browse/document/mergers-and-acquisitions-training-727
  24. 24. 70 Case Example - Sand Valuation Summary $64.9MM Worst Case Base Case Best Case $91.3MM $123.0MM Notes: Assumes no growth perpetuity Sources: XYZ model CAGR (1995-2000) Sales GP EBIT Operating Cash Flow -0.1% -1.4% -7.5% 1.4% 3.8% 3.1% 2.7% 8.1% 8.4% 7.9% 11.3% 14.3% DCF (@12%) Based on different scenarios a $100MM bid was made. XYZ M&A This document is a partial preview. Full document download can be found on Flevy: http://flevy.com/browse/document/mergers-and-acquisitions-training-727
  25. 25. 73 •After detailed evaluation of strategic options, a decision was made to sell the Asset Management Division (AMD) business. The asset management company required significant investment in order to achieve profitable growth, and the parent company was able to achieve higher returns by investing in other businesses within its portfolio •XYZ continued to support the client through the sale process by –developing the offer memorandum, the business forecast and the management presentation –identifying the best new parent and quantifying their full-potential price –supporting the bid negotiations Source: XYZ & Company Experience Centre Conclusion: Impact: •The division was successfully sold, realizing $500M more in value from the transaction than the parent would have been able to extract from the business through continued ownership. Summary (2 of 2) Case Example - AMDXYZ M&A This document is a partial preview. Full document download can be found on Flevy: http://flevy.com/browse/document/mergers-and-acquisitions-training-727
  26. 26. 76 Source: XYZ & Company Experience Centre Management Selling Presentation (1) Case Example - AMD A Member of Liechtenstein Global Trust LGT Asset Management 99 Asset Forecast 0 25 50 75 100 1997 2002RetailInst. US RetailInst. Europe RetailInst. Asia Frankfurt Assets ($ Millions) Asset growth is forecast to come from across the AMD 56 6 7 1 2 2 2 3 78 Note: 1997 is based on 10+2 forecast The XYZ team helped the management prepare the selling presentations to the investors. business. A B C D E F G XYZ M&A This document is a partial preview. Full document download can be found on Flevy: http://flevy.com/browse/document/mergers-and-acquisitions-training-727
  27. 27. 79 Case Example - AMD Bidder Evaluation - Model The analysis combined a re-evaluation of AMD business, a synergy analysis by bidder and an estimation of strategic premium which bidders would be ready to pay. AMD Purchase Value by Buyer All figures in US$M Key Assumptions Discount Rate 14% percent Tax rate 25% percent Pay off equivalent 1 year AUM 54.5 Billion Price adjustment (3%) percent on top of -1% Valuation Stand alone A B C D E AMD Plan 1,090 1,090 1,090 1,090 1,090 1,090 Revenue Adjustment (254) (254) (254) (254) (254) (254) Cost Adjustment 157 157 157 157 94 78 % achieved 100% 100% 100% 100% 60% 50% XYZ upside to client plan 157 157 157 157 157 157 Cost cut 49 49 49 49 49 49 Cost cut % 17% 17% 17% 17% 17% 17% Cost synergies - 288 342 505 262 11 Cost cut - 67 79 116 60 5 Cost cut % - 28% 33% 48% 25% 2% Revenue Synergies - 105 114 - 36 - New markets - - 114 - - - Brokerage - 105 - - 36 - Strategic Premium - 100 80 40 20 60 Maximum Value 992 1,485 1,528 1,537 1,247 985 Difference from highest (545) (52) (9) - (290) (552) Percent of AUM 1.8% 2.7% 2.8% 2.8% 2.3% 1.8% Percent in bid 86% 73% 70% 73% 77% 84% Base plan 90% 90% 90% 90% 90% 90% Price Adjustment 100% 100% 100% 100% 100% 100% Operating Improvement 80% 80% 80% 80% 80% 80% Cost synergy 50% 50% 50% 50% 50% 50% New Markets synergy 10% 10% 10% 10% 10% 10% Brokerage Synergy 40% 40% 40% 40% 40% 40% Strategic Premium 50% 50% 50% 50% 50% 50% 'Realistic' Bid 852 1,088 1,074 1,124 957 825 Difference from highest (272) (37) (50) - (167) (300) Percent of AUM 1.6% 2.0% 2.0% 2.1% 1.8% 1.5% XYZ M&A This document is a partial preview. Full document download can be found on Flevy: http://flevy.com/browse/document/mergers-and-acquisitions-training-727
  28. 28. 82 Manufacturing Synergies - Company C Case Example - AMD Asset Class Company CClient Synergy Cost Saving Rationale • Global • US • UK • Germany • Europe • Asia • Australia • Japan • Emerging markets Costs ($M) Assets ($B) Staff Equity Fixed Income • Alternative Assets • Other • Realty Other • Global • US 1 5? 25 66 2 5 1 17 4 11 5 25 1 4 2 10 2 3 3 5 11 30 12 3 London / US offices? Houston, Denver, Boston London London (?) London (?) Hong-Kong Hong-Kong (?) Tokyo London (?) Staff Comments London Houston, Denver, Boston Houston, Denver, Boston Adopt AMD team Close Chancellor operation Combine both in one location Adopt AMD team ? Adopt AMD team ? Combine both in one location Adopt AMD team ? Combine both in one location Adopt AMD team ? Combine both in one location Close Chancellor operation No impact No impact No impact XYZ M&A This document is a partial preview. Full document download can be found on Flevy: http://flevy.com/browse/document/mergers-and-acquisitions-training-727
  29. 29. 85 XYZ M&A Agenda Introduction • Trends in M&A • Guiding Principles for Successful M&A • XYZ Approach • Case Examples – screening – due diligence – sale • Exercise on Synergy Calculation • Typical Watchouts • Key Takeaways This document is a partial preview. Full document download can be found on Flevy: http://flevy.com/browse/document/mergers-and-acquisitions-training-727
  30. 30. 88 Exercise Approach Having selected 4 candidates, synergies were evaluated between each combination of 2 players to determine the optimal scenario. Selection Process Potential Sources of Synergies Synergy Evaluation Integration of Results •Select key consolidation players based on first cut: –size –product mix –geographic mix –availability already done, 4 candidates selected (S,P,B and G) focus of the exercise •Analysis of the potential and specific sources of synergies: – hard – soft – soft-soft •Evaluation of hard and soft synergies for each combination of 2 candidates •Integration of synergy valuation results •Conclusions on best potential consolidation XYZ M&A This document is a partial preview. Full document download can be found on Flevy: http://flevy.com/browse/document/mergers-and-acquisitions-training-727
  31. 31. 91 Exercise Question 1 - Typical Sources of Synergies Using your knowledge of synergies, fill in types of synergies that should be considered for hard, soft and soft-soft synergies. • Raw material purchasing • • • • Hard Soft Soft-Soft • • • • • • • • • • XYZ M&A This document is a partial preview. Full document download can be found on Flevy: http://flevy.com/browse/document/mergers-and-acquisitions-training-727
  32. 32. 94 Exercise Question 2 - Hard Synergy Quantification Example - S+P •Manufacturing •Materials Purchasing •Distribution •Sales & Marketing •Headquarter Consolidation Taking the example of the combination of S and P, we want to evaluate the hard synergies achievable. The purpose of Question 2 is to use the attached data to fill in the template below. Cost Synergy (£ 000s) £ £ £ £ £ £Total XYZ M&A This document is a partial preview. Full document download can be found on Flevy: http://flevy.com/browse/document/mergers-and-acquisitions-training-727
  33. 33. 97 Exercise Question 2 Data - Candidates’ Distribution Profile The 4 potential candidates’ distribution profiles vary significantly. Note: Sales and cost information are best estimates for 1997/98 Source: Company accounts; Information memorandum; FAME; XYZ analysis S P B G 0% 20% 40% 60% 80% 100% Social Private Builders Merchant Specialists DIY Sales % £85 M £21 M £105 M £35 M Click Here for Back-up Data XYZ M&A This document is a partial preview. Full document download can be found on Flevy: http://flevy.com/browse/document/mergers-and-acquisitions-training-727
  34. 34. 100 Exercise Question 3 - Soft Synergy Quantification Again using S + P combination, the question is to evaluate the potential soft synergies as shown below. Use attached data for this question. Channel Complementarity: Portfolio Strengthening: (£ M) XYZ M&A This document is a partial preview. Full document download can be found on Flevy: http://flevy.com/browse/document/mergers-and-acquisitions-training-727
  35. 35. 103 Exercise Question 3 Data - UK Market Map (1997) The UK market for Garden Furniture is mainly channelled through DIY stores. £353M £135M £120M £70M £51M Total = £750M Other Leader Other Other Other Other 0 20 40 60 80 100% Percent of Total £23M DIY Specialists BMs Private Public Other S G P S P G S S S P B B B P G XYZ M&A This document is a partial preview. Full document download can be found on Flevy: http://flevy.com/browse/document/mergers-and-acquisitions-training-727
  36. 36. 106 Exercise Answer 3 - S+P - Soft Synergy - Answer Using the soft synergy assumption framework and knowing each player’s relative distribution strength, it is simple to calculate the incremental revenue due to synergy in the combined entity. Note: Revenues have been pro-rated to the share A Garden Furniture Sales DIY Specialists BMS Private Public Total S Strength P Strength Type of Synergy S Revenue* Base (£000s) P Revenue* Base (£000s) Synergy (£000s) None Channel complementarity 10% uplift for smaller player None Portfolio strengthening 1% uplift on total combined Channel complementarity 10% uplift for smaller players – – – 29,987 1,061 106 – – – 25,382 11,236 366 14,950 1,381 138 610 – Channel complementarity – Portfolio strengthening 244 366 XYZ M&A This document is a partial preview. Full document download can be found on Flevy: http://flevy.com/browse/document/mergers-and-acquisitions-training-727
  37. 37. 109 Exercise S+P - ROS/RMS *Note: Relative Channel Share is the weighted average relative market share by channel; ROS based on three year average to 1996/97, as available Source: FAME; Company Accounts; Information Memoranda; MBD Report; XYZ analysis Consolidation of S+P’s positions would create significant ROS improvement thanks to the realization of synergies. (5%) 0% 5% 10% 15% 20% 25% 0.1 0.2 0.5 1 2 5 £ 60M 1997 Revenues Return on Sales (Operating Profit/ Turnover) Relative Channel Share* Leader R² = 74% S+P G B XYZ M&A This document is a partial preview. Full document download can be found on Flevy: http://flevy.com/browse/document/mergers-and-acquisitions-training-727
  38. 38. 112 XYZ M&A Agenda • Trends in M&A • Guiding Principles for Successful M&A • XYZ Approach • Case Examples – screening – due diligence – sale • Exercise on Synergy Calculation • Typical Watchouts • Key Takeaways This document is a partial preview. Full document download can be found on Flevy: http://flevy.com/browse/document/mergers-and-acquisitions-training-727
  39. 39. 115 XYZ M&A Agenda • Trends in M&A • Guiding Principles for Successful M&A • XYZ Approach • Case Examples – screening – due diligence – sale • Exercise on Synergy Calculation • Typical Watchouts • Key Takeaways This document is a partial preview. Full document download can be found on Flevy: http://flevy.com/browse/document/mergers-and-acquisitions-training-727
  40. 40. 118 XYZ M&A Key Takeaways (3 of 3) Approach: •Major steps in an M&A in which XYZ may be involved are: –strategy development: should an acquisition be pursued? in which sector or region? –target screening: who is/are the best candidate(s) based on attractiveness and availability? –due diligence: how comfortable are we with the screening hypothesis? –valuation: what is the full value of the entity? what is the right price for it? –integration: how will we ensure that full value is achieved? •XYZ role is complementary rather than competing with other advisors’ role: –XYZ focuses on strategic issues and full value quantification –investment banks concentrate on the financial aspects of the deals: market-related information gathering and analysis, valuation, deal financial structuring, production of information memorandum, etc. –lawyers deal with legal matters, including due diligence at the time of the transaction (confirming that the information memorandum reflects reality, for instance) –accountants are occasionally involved in the deal structuring This document is a partial preview. Full document download can be found on Flevy: http://flevy.com/browse/document/mergers-and-acquisitions-training-727
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