Buy vs Sell sides
3 Phases
1. Pre-merger phase
Due diligence: to prevent fraud (can take a couple of weeks to months).
Pitching: junior bankers, analyst and associates will often be working on pitch decks.
Valuation
Marketing
Out reach (finding specific buyers)
3 Key stakeholders
Buyer: needs to be assured that they are buying a functioning business and that what they are reading/signing is what they are going to get.
Seller: needs due diligence on the buyer to make sure that the buyer can actually afford to pay what they are claiming that they can pay.
Financier: if the buyer is going to raise debt or get leverage, the financier needs to make sure that the business is real, and that another buyer has enough collateral in order to keep up with the the repayments and pay back the principal.
Regulations
US:
Securities Act of 1933
Securities Exchange Act of 1934
Sarbanes-Oxley Act (SOX) at 14
Dodd-Frank Wall Street Reform Act of 2010
Europe:
EU merger control of Three/O2
2004 EU Merger Policy Reform
In recent times, the European Competition Commission have also interfered in some merged deals
(E.g. when UPS, the logistics company, tried to acquire TNT back in 2013 the European Competition Commission intervene and prevented a deal from going forward).
UK:
Financial Conduct Authority (FCA)
Competition Commission of 2008: will interfere if they perceive that competition is about to get significantly reduced or there was going to be a huge imbalance of market share (to prevent dominance or monopoly).
Buyers
Tier 1 buyers: companies which we have a high conviction that they are going to be interested.
Tier 2 buyers: other companies
2 Types of buyers
1) Strategic buyer: a company that is going to buy another company because they have synergistic reason, e.g. trying to buy out:
their competitor or
another key area in their distribution chain
Downside:
Not in a rush like PEF
A lot of bureaucracy
A lot of files and documents which take too long to get through
2) Financial buyer: private equity firms (are in a rush to close)
Downside:
They are literally going to rip apart your financial valuation and they're going to want to prove every single one of your assumptions and methodology wrong so that they can justify a much lower valuation than what you are trying to sell it for.
If buyers are happy to proceed with the deal then they are required to sign a non-disclosure agreement (NDA). Once buyers sign NBA, they are given detail on pretty much everything they need to know in order to be confident.
2. Merger Negotiation
Due diligence
Data room
Bank & forth request
Meetings
Tender & final offer
This is where the financial models really come into play:
buyer wants to pay the least amount possible for the firm,
seller wants the highest valuation for their company,
so you have financial models from each side, then you have to come together and agree on
- the final selling price
- how is the deal going to be financed (cash? a mixture of debt and cash?)
- anything else which needs to be ironed out on the contract before everything is signed off.
Models:
Comparables analysis
Precedent transaction analysis
DCF model
M&A model
Dilution model
LBO model
3. Post-merger phase
Structuring deal
Payouts
Integration
Meetings
Issues*
Strategies
Divestitures: sale of the subsidiary or business line to another company.
Carve-out: the parent company sells some of its shares in its subsidiary to the public through an IPO, effectively establishing the subsidiary as a standalone company.
Spin-off: to create a new business subsidiary.
Consolidations: multiple companies join to form a new entity.
Mergers: other corporate entities become a part of an existing entity.
Issues (particularly cross-border M&A)
Currency fluctuations: both parties should get a currency option to hedge their exposure if they are located in a region where there is a high fluctuation of currency.
Political instability: e.g. threat of nationalisation, excessive regulatory controls, corruption bribery.
Tax rules: e.g. if you were to sell a company in the UK, the first $10 million is tax-free under a provision of entrepreneur relief.
Cultural norms: from how you speak to management to how long it takes for you to actually get data or emails back from them.
Threat of redundancies: e.g. when you have 2 companies merging together and each one of these companies have their own head office, there is no point of having 2 head offices since they're both becoming one entity.
The most important factor when constructing a successful M&A deal is
PRICE.
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