Introduction to CR, M&A and Valuations

Dr Ashish Varma

Ph.D, FICWA, PGDBM

CEM, CIBLA, ASSISTANT PROF. ACCOUNTS AND FINANCE IMT , GHAZIABAD. Email avarma@imt.edu, sir_ashish@rediffmail.com

Contents
Why Mergers and Acquisitions?

The Deal Continuum Road Map to Mergers and Acquisitions Key Components Challenges to M&A Pre Deal Post Deal Role of an Advisor Concluding Thoughts

Contents
Why Mergers and Acquisitions? The Deal Continuum Road Map to Mergers and Acquisitions Key Components Challenges to M&A Pre Deal Post Deal Role of an Advisor Concluding Thoughts

Mergers & Acquisitions are at the core of Corporate zeal for Growth
Corporate Growth could be:

Organic Safer but slower

Inorganic Quicker but riskier

Why Mergers and Acquisitions ?

Strategic - Intent to strengthen competitiveness, gain higher market share and create critical size Products - Broadening the product portfolio Markets - Access to new, lucrative markets

Integration - Backward/forward/lateral
Scale economies - Cost Savings/Increased Profitability Restructuring - Concentrate on core competencies and Businesses

Financial

Strategic

Contents
Why Mergers and Acquisitions? The Deal Continuum Road Map to Mergers and Acquisitions Key Components Challenges to M&A Pre Deal Post Deal Role of an Advisor Concluding Thoughts

The Deal Continuum A Road Map to M&A

Deal/Target Identification

Evaluating Deals

Executing Deals

Making Deals Successful

Harvesting Deals

Deal Continuum - Identification

Deal/Target Identification

Strategy Willingness Synergies Shortlist EoI

Deal Continuum - Evaluation

Deal/Target Identification Signing a preliminary Memorandu m

Strategy Willingness Synergies Shortlist EoI

Initial MoU Term Sheet Confidentiality Information Ballpark Value

Deal Continuum - Execution

Deal/Target Identification Signing a preliminary Memorandu m Pre Investment Appraisal

Strategy Willingness Synergies Shortlist EoI

Initial MoU Term Sheet

Due Diligence Deal Drivers

Confidentiality Identification of Deal Issues Information Value Adj. Reps & Ballpark Value Warranties

Deal Continuum - Execution

Deal/Target Identification Signing a preliminary Memorandu m Pre Investment Appraisal Valuation and Deal Structuring

Strategy Willingness Synergies Shortlist EoI

Initial MoU Term Sheet

Due Diligence Deal Drivers

Valuation Bid Strategy

Confidentiality Identification of Negotiations Deal Issues Information Value Adj. Agreements Reps & Ballpark Value Warranties Exit Options

Deal Continuum - Succeeding

Deal/Target Identification Signing a preliminary Memorandu m Pre Investment Appraisal Valuation and Deal Structuring Deal Closure

Strategy Willingness Synergies Shortlist EoI

Initial MoU Term Sheet

Due Diligence Deal Drivers

Valuation Bid Strategy

Consideration Documentation Closing Date Remittances Approvals

Confidentiality Identification of Negotiations Deal Issues Information Value Adj. Agreements Reps & Ballpark Value Warranties Exit Options

Deal Continuum - Harvesting

Deal/Target Identification Signing a preliminary Memorandu m Pre Investment Appraisal Valuation and Deal Structuring Deal Closure Post Deal Integration

Strategy Willingness Synergies Shortlist EoI

Initial MoU Term Sheet

Due Diligence Deal Drivers

Valuation Bid Strategy

Consideration Synergies Documentation Control Closing Date Remittances Approvals Integration Compliance People

Confidentiality Identification of Negotiations Deal Issues Information Value Adj. Agreements Reps & Ballpark Value Warranties Exit Options

The Deal Continuum

The Current Course Content

Deal/Target Identification

Evaluating Deals

Executing Deals

Making Deals Successful

Harvesting Deals

Contents
Why Mergers and Acquisitions? The Deal Continuum Road Map to Mergers and Acquisitions Key Components Challenges to M&A Pre Deal Post Deal Role of an Advisor Concluding Thoughts

Key Challenges to Mergers and Acquisitions

Structurin g the Deal Agreements

Investmen t Banking

Pre Deal
Valuation

Pre Investment Appraisal

Exit Options Human Resources

Representations and Warranties

Cultural Issues

Integration Issues

Post Deal
Process Integration Harvesting the deal

Deal Synergies

Although A and B are in the same industry there could be cultural differences
Company A Voice-mail driven Consensus driven Short Term Consultative Risk Averse Company B

E-mail driven
Hierarchy driven

Dislike projects Deadlines cause stress Non confrontational Scientific debate Gentlemanly

Fear of numbers
Centralised Decisive management

Fear discomfort

... in organisational and individual behaviours

What do you want & How to get it?

(Investment Banking Deal Sourcing)

M&A STRATEGY Corporate/portfolio strategy Business unit strategy Acquisition strategy Market reviews Business planning Exit strategy

ACQUISITIONS Criteria formulation Target / partner identification Assessment Financial & tax structuring Negotiations Public company takeovers

PRIVATE EQUITY Investment identification Investment evaluation Assistance in negotiation Documentation Deal Closure Fund Raising

DISPOSALS Options appraisals Value enhancing initiatives Buyer identification Information memoranda Marketing Negotiations Project management

FINANCE RAISING & MBO Bank financing Securitisation

JVs & ALLIANCES Corporate & legal structuring Capital structuring Valuation of JV assets Debt restructuring Negotiations Documentation

What would it take to make informed investment decisions?

(Due Diligence Reviews)
Due Diligence Review

Buy Side Diligence (Are you buying what you think you are buying) No Access Diligence (How reliable is the Information Memorandum) Market Diligence (Helps understand the competitive position) Operational Diligence ( Are your Operational Assumptions reasonable)

Sell Side Diligence (Do you know the issues buyers may negotiate on) No Access Diligence (Determine how to get maximum, by giving the least)

What price to negotiate for?

(Valuation)
Fair Value

Open & Unrestricted Market, Knowledgeable & Willing Parties,

Acting at arms length Price Keenness/negotiating strengths of parties Degree of competition Specific Parties involved Timing Value could change with time Risk perceptions could change Change of people

Value to Buyer vs Value to Seller

(Typical Price Bargaining)

Intrinsic Value Seller

Sellers Initial Price

NO DEAL ZONE FOR BUYER

Value (Rs.)

NO DEAL ZONE FOR SELLER

Max. Premium Possible Buyers Initial Offer

Intrinsic Value Buyer

Possible Deal Price

Reported Control Premium

Whats the most efficient way to go about it?

(Structuring)
Objective of structuring a transaction is to optimise / maximise achievement of interests of all concerned parties, in full compliance with the law Purchase of Shares Investment vs Acquisition vs Disinvestment Purchase of Assets Joint Ventures without direct Equity Participation Outsourcing Arrangements Spin Off of a non core unit Other Structures

Understanding of Both Sides to a Transaction and Their Competing Interests

(Deal Closure)
Buyer Pay contract price or possibly reduce purchase price Do not want to assume uncertain liabilities Maximize indemnifications Desire to purchase assets Obtain as many assurances from Seller in the form of representations and warranties as possible Seller Maintain or possibly increase purchase price Absolve themselves of exposure to uncertain liabilities Minimize indemnifications Desire to sell stock Minimize assurances provided to the Buyer in the form of representations and warrantees

Contract Representations & Warranties

Buyer would want detailed Reps and Warranties
Help in transition Vouch for information provided Damages for inaccurate submissions Window to renegotiate, on false representation, Regulatory compliance, etc.

While Seller wants to Limit Reps and Warranties

GAAP Compliance Consistently with audited information No undisclosed liabilities exists

Realisability of receivables
No material change in the Companys business, etc.

Preventing Failures
(Post Closure)
Integration could get difficult, on account of the following: Poor Evaluation of Internal strengths and weaknesses of the parties involved. Lack of clarity on how to harvest deal synergies and other potential benefits Technological Incompatibility No proper tracking mechanism for the progress made and how is it being managed Cultural Clashes

Companies are slow to move and Shareholders Value bears the brunt
The integration phase
Rs
Primarily on account of loss of market share and slow market growth reduced productivity

diminished margins
downturn in morale
Shareholder Value

loss of key people

internal competition
Time

There is no value in a prolonged transition

Get on with it!

What not to do?

(Key issues post deal)

How will post deal progress be tracked and managed? Value and Synergies
Robustness Key revenues and costs drivers - products/customer base - market penetration - R&D, new product development - Rationalisation

How will the business operate post-deal? How will the post deal period be managed? Establishing Control
Performance KPIs key personnel Resources for implementation

Issues

What is the culture of the business? How do we keep employees, customers etc happy? Cultural Integration (across the organisation)
Management & workforce interaction Achieving change

Contents
Why Mergers and Acquisitions? The Deal Continuum Road Map to Mergers and Acquisitions Key Components Challenges to M&A Pre Deal Post Deal Role of an Advisor Concluding Thoughts

Contents
Why Mergers and Acquisitions? The Deal Continuum Road Map to Mergers and Acquisitions Key Components Challenges to M&A Pre Deal Post Deal Role of an Advisor Concluding Thoughts

Concluding Thoughts
Successful deals a risk/reward game more sophisticated vendors are making life (much) harder The deal does not finish on signing that just gives you the opportunity to win or lose later Best practice processes can reduce risk pro-active management of issues is key get ahead of the process, its very difficult to catch up small(er) deals require just as much effort and attention

Speed, Focus, Stability & Ruthless prioritisation