M&a for CFOs What you Don't Know Could Kill Your Deal

Event Sponsors

© 2011 Proformative. Proprietary and confidential

Welcome to Proformative

Proformative is the largest and fastest growing online resource for
senior level corporate finance, treasury, and accounting professionals.
An ad-free, noise-free community of more than 350,000 CFOs,
Controllers, Treasurers and related professionals
A resource where corporate finance and related professionals excel in
their careers through:
Uniquely valuable, online Peer Network
Direct subject-matter-expert advice
Valuable Features and Resources

All of it completely free and noise-free
Check it out at www.proformative.com

THE RESOURCE FOR CORPORATE FINANCE, ACCOUNTING & TREASURY PROFESSIONALS

The Legal View On M&A Preparedness
Gabor Garai
Foley & Lardner LLP

Identify the Target Business

• Buyer or seller?
• Is the target business in a separate entity?
• Who owns the assets used in the target business?
• Do shareholders or other affiliates provide services or employees to
the target business?
• Is the target business in a heavily regulated industry?


Identify the Target’s Owners
• Is the target owned by:
– Corporate seller
– PE fund
– Family / founders
• Why does owner want to sell?
– Change in corporate direction
– Financial need
– PE Fund lifecycle
– Generational issues
• What are key sale drivers?
– Money
– Politics
– Management (or lack thereof)
– Fear / risk
– Age
• How do these translate into ―price‖ offered?

First Contact: How Do the Parties Meet?

• For an experienced buyer, this may occur before attorneys are
brought in
• For an inexperienced buyer or seller, intermediaries should be
involved at this stage
• The role of bankers and lawyers
• Romancing the buyer
– Understand motivations
– Speed and certainty
– Reputation
– Style and culture
• NDA
– Definition of proprietary information and exclusions
– Non-solicitation
– Trading


Plan Your Deal Team

• Company
– Senior management
– Identify those with authority to direct the professionals
– Company specialist
• Outside professionals
– Attorneys
– Investment bankers
– Accountants
– Others
• Define working relationships/responsibility of in-house vs. outside
attorneys
– Skill
– Capacity
– Cost


Letters of Intent / Term Sheet

• Non-binding vs. binding
• Binding provisions
– Exclusivity
– Disclosure of confidential information
– Expenses
– Good faith negotiations
– Access to information
– Termination
• What is the purpose and benefit?
• Who drafts the purchase agreement?
– Control
– Cost containment
– Negotiating strategy


Structure of the Transaction

• Stock Sale
– Transfer of shares
– All assets and liabilities automatically transfer
• Asset Sale
– Transfer of individual assets and liabilities
– Permits carve-outs
• Merger
– Assets and liabilities transfer by operation of law
– Forward vs. reverse triangular merger
• Importance of flexibility
– Substance should dictate structure
– We can create desired outcome with any structure
– Risk vs. value


Issues Affecting Deal Structure

• Tax planning
– ―Form over substance‖ means that tax planning often determines
structure
– Doing your target a favor: understand its tax attributes
• Transferability of permits and contracts
• Insulation from liability
• Dissenting shareholders
• Customers and vendors


Due Diligence

• Due diligence in the process of investigation
• Purpose of due diligence:
– Identify issues affecting the deal structure
– Identify and deal with problems before they are discovered by the other
side
– Provide information for disclosure schedules
• Applies to buyer and seller
• Review business from perspective of
– Financing needs
– Consolidation
– SOX compliance
• What’s beneath the fresh paint
• Different approaches depending on type of seller


Common Problems

• Key employees
• Intellectual property rights
• Title to assets
• Validity/transferability of permits and contracts
• Affiliate transactions
• Customer and supplier relationships
• Pending litigation and other contingencies
• Environmental
• Poor documentation
• Disclosure schedule
• Letter of Intent vs. reality


Financing Considerations

• Earn-out
– Certainty of collection
– Post-closing issues
• Financing post-closing indemnification claims
• Bank financing
– What will the bank require?
– Financing contingency
• Seller notes
• Escrows


Think About What Comes Next

• Transition services and integration
– Seller agrees to provide services to buyer after closing for a limited time
– Accounting services, human resources, employee benefits, information
technology, etc.
• Non-competition agreements
• Incentives


Possible Deal-Specific Concerns

• Public companies/securities laws
• Cross-border transactions
• Unionized labor
• Regulatory matters
• Other industry-specific issues


Post-Closing

• Integration of the new business and its employees (clients generally
do this without lawyers):
– Human resources/benefits
– Customers
– Suppliers
– Name changes
– Other transition issues
• Closing Binders on CD/DVD


General Tips

• Be organized
• Be patient
• Develop a risk allocation philosophy to guide you through the deal
• Be actively involved in the deal process


Thank You



Being prepared: The accounting and financial reporting
obstacles to realizing deal value
Dan Kabat
Partner, Transaction Services
PwC

Current deal environment about to get more
challenging?

• Corporations look cash rich – over Increasing storm clouds on horizon:
$1 trillion in cash
• Financing market getting difficult,
• Deal environment was robust and particularly high yield market,
growing for past year spreads on corp debt up significantly
• Companies looking for ways to • Can PE compete in higher interest
increase growth rates rate environment
– International deals – particularly • European debt issues remain
in emerging markets – Brazil, worrisome and unresolved
India, China
• US and Euro growth slowing again
– Bolt-on’s and tuck-ins – fill
product / geographic gaps
– R&D alternative Middle market deals continuing, bigger
deals never came fully back and may
• Financing market very favorable past struggle
6-12 months….short memories


What’s expected at every stage of the transaction

Typical transaction order of events

Select
potential Develop Manage and
Prepare Circulate buyers to Transition execute
preliminary financial conduct data Service separation
financial information/ room visits; Agreement plans across
information/ business deliver Draft contract (TSA) people,
sell side due summary to management and deal requirements process, Public capital
diligence buyers presentations negotiation and costing systems raising

Develop Address Prepare data Perform due Negotiate Develop plans Purchase Post-closing
divestitures separation room and diligence for price and key for separation agreement adjustment
strategy; requirements; management selected terms across signed; buyer completion
reach tentative structure presentation; buyers; functions financing
decision to alternatives; prepare conduct audit needs
divest carve-out historical (if required) addressed;
financial financials for transaction
matters; taxes; carve-out closed
IT, ops, etc…


Performing more seller diligence has greatest
favorable impact on deal success
2011 PwC Divestiture webcast polling result: 452 votes received

Question: Using your divestiture experience as a reference, which of the
following do you feel would have MOST favorably impacted one or more of
your deals, closed or not?

12% Performing more seller
diligence or pre-sale
37% preparation
19% Having more bidder(s) for the
deal(s)

Providing more detailed
information to buyers for their
due diligence
31%
Having audited financial
statements available for the
divestiture


Largest value deterioration occurs in the diligence
phases
2011 PwC Divestiture webcast polling result: 468 votes received

Question: From your transaction experience, where have you seen the largest
risk of value deterioration for the seller?

During the dataroom/initial
12% due diligence phase
29%
During the final due diligence
14%

Contract
drafting/negotiations/TSA
17%
Post-closing adjustment
28% mechanisms

After the initial discussion but
before distribution of an
information memorandum


Value leakage can occur if key considerations
are not addressed

2010 Divestiture Survey
results:
Timing
Key takeaways for divestitures
Deal
Transitional
financials • More time consuming - over
matters
half say they take 20% or
longer to complete

• Greater info and access
Separating Key required - 75% say buyers
Governance
infrastructure & Obstacles & process
were requiring more or
extensive additional
operations In a Sale information.

• Audited financials are
important - - 76% say audits
Employee Audit/reporting are more important or critical
related matters requirements

Structure


Common process challenges and deal issues

• Timing – Difficulties sustaining value • Governance & process
– Is timeline realistic? – Insufficient allocation of resources and capital
– Accumulating the required information for pro for divestiture and separation effort
forma, Offering Doc, data room, etc. – Divesture leader seniority in company
– Delays in selling process reduce negotiating – Accountability / Compensation for critical
leverage resources
– Surprises from buyer due diligence reduce – Complexity in coordinating dependencies
prices across teams, functions and geographies
– Loss of deal ―momentum‖ – Disorganized process, bankers limitations
– Overall project management - centrally run
process (from beginning to end)?

• Creating appropriate deal financials • Creating appropriate deal financials
– Historical results may not reflect information
(continued)
relevant to buyer – Is there a need for audited information – impact
– Sellers struggle to reconcile GAAP vs deal of lower level of materiality
financials vs internal #s – Need for audited information to support
– Determine basis of presentation financing
– Identifying the appropriate accounting records – Accumulate KPI’s and other operating data that
and data gaps is consistent with deal based financial
– Building projections and bridge various information and overall story
historical and pro forma financials


Common process challenges and deal issues (cont.)

• Structure • Separating infrastructure &
– Planning should consider most likely operations
alternatives and anticipate impact of mid- – Complexity in separating systems, data
stream change (stock vs assets, inclusion / confidentiality and shared services
exclusion of parts)
– Local regulatory requirements and Asset
– How will business extraction work? If a buyer segregation
doesn’t want it all, can you pull apart the
– Difficulty in negotiating ownership of IP and
information?
ongoing joint commercial relationships
– Understand retained liabilities and reserves
– Dependencies on third parties to execute
– Consider potential Tax implications for both contract consents and assignments
buyer and seller
– Understanding change in control provisions

• Employee related matters • Transitional matters
– Ensure appropriate motivation to get – Difficulty in identifying transition requirements
transaction completed for both divested and and developing cost effective TSA
retained personnel
– Underestimating stranded costs and timeline
– Management’s role pre/post deal required to unwind
– Employee selection and necessary employment – Lost cost synergies to buyer and seller. Co-
agreements sourcing other purchasing, etc.
– Identify and assess employee-related – Complexity in reorganizing and revitalizing
exposures, costs and deal-issues remaining company operations
– Equity and benefit plan conversion/transition
– HR shared service delivery


Making the sale of your business successful
Strategy Maximize value Management & execution

Have a strategy in place to Assess financial and operational Process and governance to
assess portfolio, market, and information to identify potential coordinate activities across
related strategic issues. issues, transition service people, functions, and
agreements, and alternative tax geographies.
structures.
• Formal portfolio optimization • Approach the deal from the • Create a dedicated divestiture
process with regular, metric-driven buyer’s perspective by performing management team
portfolio reviews and support from due diligence before buyers get • Prepare for dual-track
the C-suite involved transactions or other alternative
• Validate the case for separation • Identify and correct any significant outcomes
• Understand the market value of operational issues • Control negotiation of certain
the business • Ensure data provided to buyers is contract language including post
• Timing, price, and ease must be consistent and forecast is credible closing adjustment mechanisms in
balanced and prioritized and supported by the historical order to protect the seller
• Be prepared to answer key results • Coordination and execution of
questions around why the asset is • Evaluate working capital and other data room
for sale, reasons it has been items that will be considered for • Anticipate critical buyer requests
underperforming, and why it post closing adjustment • Address internal financial
should do well outside the mechanisms reporting requirements for
Company • Consider all of the various tax and discontinued operations
accounting structures available • Anticipate the need for audited
• Develop key transition service carve-out financial statements
agreements analysis
• Negotiate upfront to limit negative
impact on deal value



M&A: The Journey, The Destination
and The Hazards on the Way
Paul Burmeister
Partner, Tatum

Which is the greater tragedy:
the journey that goes awry, or the journey that
never begins?


Agenda

• Why?
• What?
• Who?
• How?
• Deal Killers
• Causes of Failure


Why?
Buyer Seller
Why are you buying? Why are you selling?
• Technology • Liquidity Event
• Market Share • Retirement/intergenerational
• Synergies transfer
• Growth prospects • Portfolio adjustment
• Profit improvement
opportunities

What are the value drivers?

What?
Buyer Seller
What are you buying? What are you selling?
• Stock versus assets • Stock versus assets
• Selected assets/selected liabilities • Selected assets/selected
• Intangible property liabilities
• Income stream/quality of earnings • Intangible property
• Income stream/quality of
earnings


Who?
Buyer Seller
Who is coming with the deal? Who is buying you?
• Strength of management team • Compatibility between buying
• Gaps-and plan to fill them and selling teams
• Roles post-sale
• Gaps-and plan to fill them


How?
Buyer Seller
How are you buying? How is the buyer paying you?
• Financing…and what it does to your • Financing…and what it says
balance sheet about the buyer
• Cash vs. stock • Cash vs. stock
• Earnouts… • Earnouts…

Decision Phase.…. Execution Phase….. Implementation Phase….. Post-Sale Phase

How? Part 2
Buyer Seller
How will you run the business once How will you be part of the
you’ve bought it? business once you’ve sold it?
• Integration must start when the deal • Integration isn’t just for buyers
is a gleam in the buyer’s eye • If you want to be part of the
• Integration ends…never future, demand a seat at the
• This is no place for amateurs or the integration table
faint of heart • This is no place for amateurs or
the faint of heart


4 Key Steps To Realize
Define Goals
Define strategy and
goals for acquisition,
focusing on integration
feasibility as key target
screening criterion

Plan and Execute Due
Perform the Integration Diligence
Merge operations, Identify challenges to
processes, cultures to value realization,
realize strategic and including risks,
financial objectives integration and
transition issues

Plan the Integration
Create plan to address
integration issues and
risks so as to realize
intended value


Step 1: Define Goals
• M&A strategy should rest on analysis of current
competitive position and future objectives
– Define future state and gaps with current state;
choose acquisition candidates that best fill gaps
• Develop revenue and cost model for combined
organization as an integral step in evaluating each
potential target
• Assess cultural fit
• Define key success factors to realize value
• Develop ―threshold‖ pro-forma assumptions and
business forecast


Step 2: Plan and Execute Due Diligence
• Goal is to verify that the value you are paying for is actually there
• Due diligence involves: financial due diligence, operational due
diligence; legal due diligence, technology due diligence, people
due diligence
• Review acquiree’s strategy and operations to validate
assumptions built into the valuation
• Test assumptions about how the new combined business will
operate and its projected sales, cash flows, margins
• Execute due diligence
– Build thorough understanding of target company via review of
relationships with customers, vendors, regulatory agencies,
etc.
– Identify and document transition issues to be addressed in
post-deal integration


Step 3: Plan the Integration
• Integration process should begin as soon as target is
identified and come into sharper focus as deal is finalized
• Concentrate on issues raised during due diligence that
threaten value realization
• Ensure members of acquisition team and key managers
understand valuation assumptions and their role in realizing
them
• Create transition steering committee and larger functional
team
• Define work plan for transition steering committee
• Focus on integration risks that could impede realization of
value: quantitative/ tangible and qualitative/ intangible risks


Step 4: Perform The Integration
• Revalidate all assumptions and integration plans developed
since the deal was first considered
• Execute essential Day One activities:
– Control
– Communications
– Governance
• Develop integration plans by function:
– Activities
– Names
– Dates
• Drill down in the organization and hold managers
responsible
• Speed is of the essence—delay drives failure

Deal Killers

Buyer Seller
• Unrealistic demands on the seller • Unrealistic demands on buyer
-Due diligence -Price (relying too much on wishful
-Terms & conditions thinking and distorted multiples)
- Reps & warranties -Terms & conditions
• Unrealistic expectations -Reps & warranties
-Smaller companies not as well prepared as • Bad financial and legal preparation and
you might wish advice
• Unprepared for integration • Unprepared for integration


Causes of Failure
Buyer
• Economic conditions: seldom the real cause
• Inadequate due diligence
• Wrong target/wrong acquirer
• Unrealistic expectations  unrealistic pricing
• Poor integration
-Lack of leadership commitment
-Lack of management commitment
-Lack of resources


Key Points To Remember

1. Focus on the key drivers for realizing the value you envisioned
for the deal

2.
Move quickly and decisively to retain key people and
communicate logic of the deal to employees, customers and
other stakeholders

3.
Don’t underestimate problems of integrating the two
organizations but insist everyone focus on the future—not on
―how we used to do things‖

4. Drive the integration effort deep into the organization, holding
managers responsible for achieving specific goals


Whether you are a buyer or a seller
• Understand your company: what you provide; how it is
different; who it benefits and why; what your revenue
and profit model is; who your competitors are; what
industry dynamics are changing; the capital available to
you, etc. etc.
• Run detailed projections on an on-going basis and test
them for ―worst case‖ scenarios
• Find outside advisors who understand your industry
• Look at ALL alternatives
• Err on the side of caution
• Adjust your expectations re: timing; valuation; execution
success

Panel Discussion and Q&A


We will send you a follow-up survey and would
appreciate your feedback.

Please join us at www.proformative.com to ask any
additional questions you may have and to continue
this conversation with your peers and the experts
you heard from today.
Proformative Contact
John Kogan
CEO
jkogan@proformative.com


M&a for CFOs What you Don't Know Could Kill Your Deal

Recommandé

Recommandé

Contenu connexe

Plus de Proformative, Inc.

Plus de Proformative, Inc. (20)

Dernier

Dernier (20)

M&a for CFOs What you Don't Know Could Kill Your Deal