This deck was presented by Sumir Verma in his session on Mergers & Acquisitions as a part of the TiE Investor Forum (SiG) on 26 Jine 2011.
This session was organised by TiE Mumbai.
To discuss more on this topic, please visit:
http://www.linkedin.com/groupItem?feature=&gid=1938322&type=member&item=59918453
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Mergers & Acquisitions by Sumir Verma
1. Merisis Capital Advisors Pvt. Ltd.
Mergers & Acquisitions I Syndication I Advisory
M&A – A Sellers Perspective
Sumir Verma
sumir@merisis.in
2. Outline
• M&A Trends
• Rationale for an M&A
• Typical Process
• Key Issues
3. M&A - Trends
• Earlier the confines of the larger companies and new age industries
• Increasingly family businesses have recognized M&A as a valid end to their
tenure.
• India continues to attract FDI who recognize the pitfalls of a green field
entry strategy –
– USD24.3 billion worth of inbound deals recorded during the year 2010
• India is increasingly acquisitive –
– 2010, most active year in terms of outbound investments for the
country
– 95 transactions boosted outbound deal value to USD24.6 billion
• Does M&A make sense – Yes for both buyers and sellers
4. Rationale
•Size
•Adding •Management Control
Capabilities •Management Incentive
•Leveraging •Defending against
Consumer Base competition
•Innovation •Tax Benefits
Integration /
Diversification
New
Portfolio expansion
Products
Existing
Consolidation Entry Strategy
Existing New
•Economies of
Scale Markets •Expanding
•Efficiencies
Geographically
•Higher
•Buying Growth
Distribution
•Cross selling
5. The Process
Decoding Strategy Negotiations Closure
Making a note of the Valuation Structure Detailed due diligence Resolving Causal linkages
M&A objective • Criteria development • Commercial due diligence • Setting up escrow
• Family succession • Target Identification • Legal & regulatory due accounts
• Consolidation •Initial short listing diligence • Third party guarantees
• Poor financials • Selection of process (Bid • Financial due diligence • Sorting Reps & warranties
• Good mkt. conditions out or one on one) • Technical due diligence Setting up agreements
• Good valuations • Valuation exercise Developing negotiation • Share purchase
Studying market segment • Internal v/s . External strategy agreement
•Educating Client Touching base with • Analyzing deal terms • share subscription
• See commercials Inv. prospects • Analyzing feedback agreement
• Rivalry in the sector • Talking to prospective • Freezing on timelines • employment agreement
• Benchmarking parties Documentation • supplier agreement
• Market Comparisons •Taking a sense of the •Develop & finalize the • trademark agreement
Study financials interest levels term sheet • Escrow agreement
• Recast as mgmt. • Further information Structuring the transaction • Business plan
financials sharing • All cash/Equity deal Closure
• Create realistic • Gauging expected pricing •Considering the tax •Signing
projections Final Short listing implications on both sides • Transfer of funds/ shares
6 weeks 8-12 weeks 8 weeks
Financial Model with at least 6 Pitch doc with details Term Sheet
mths. realistic forecasts like synergies, Commercials
Pitch done showing industry positioning of the
Attractiveness/ Co. attractiveness client
Recast past nos. if required Cost of targets
Teaser
6. Deal Done….I am off for a holiday!!!
60% of the deal value to be recovered over the
next 2-3 years
Key Issue 1: Understanding how deals are
structured
7. Payment Linked To Projected EBIDTA
Company Revenue 40 Cr
Expected Valuation 60 Cr
Actual value offered by acquirer 80 Cr
Year 0 Year 1 Year 2 Year 3
30 Cr
Structure of payment (Upfront) 10 20 20
Projected Sales 70 100 120
Projected EBIDTA 10.5 16 20.4
Consider such structured deals a given in most cases
8. Its all about the money honey!!
Focus on the fine print
Key Issue 2 : Excessive focus on figurehead
price tag
9. Payment Linked To Projected EBIDTA
Company Revenue 40 Cr
Expected Valuation 60 Cr
Actual value offered by acquirer 80 Cr
Year 0 Year 1 Year 2 Year 3
Structure of payment 30 Cr (Upfront) 10 20 20
Projected Sales 70 100 120
Projected EBIDTA 10.5 16 20.4
• Key points
– Focus should be on considering different scenarios and testing where risks lie
– For example
• Sales linkage or Ebitda or a mixed formula
• Aggressive ness of the projections
• Sliding scale for payout or a step process
• Level of Floor for Variable
• Carry forward of underachievement
10. The handshake is done - price is figured
out.. The deal’s done
Due diligence can kill the deal
Key Issue 3 : Poor Book keeping
11. 1. Getting Ready – Hire a banker !
• Understanding what a banker will do
– Creating the business model
– Valuation
– Identify the prospective buyers and connect
– Negotiations
– Drive the transaction
– Involve lawyers, tax consultants, company secretary etc.
• Complex activity
– Specific knowledge of corporate finance, tax, accounting, legal regulations
– Experience of negotiating and creating demand
• Needs time and focus
– Typically owners underestimate the time that M&As take – could stretch beyond
a year
– Need an external body that prevents the owner from defocusing on business
–
Don’t be pennywise and pound foolish
12. 2. Understanding Intrinsic Price – Quantitative methodology
Price
Core Value Synergy sharing Control Premium
• Discounted cash flows • Cost Rationalization
• Listed company • Cross Sell Typically 15%-30% of
benchmarks • Enhanced Revenues Core Valuation
• Multiples of Ebitda / • Is shared with the
Sales/ PAT acquirer
• Price to Book Value
• Comparable
Transactions
14. Understanding Valuation - Qualitative aspect
• It is a myth that since valuation models are quantitative,
valuation is objective
• It is a matter of the buyer’s perception
– reflection of his view of the industry
– Reflection of his view on what will be the growth trajectory of the
company
• Importantly is a function of demand and supply
• Finally it is about timing too
– Sell high i.e. when it is doing well
…Be realistic about pricing
15. 4. Protecting the price
1. Create a realistic bottom up financial projection for the next 6 months and next 2.5
years
1. 2 years - this is what the payout will get linked to
2. 6 months - these are the figures the potential buyers also evaluate and build
comfort
2. Realistic assumptions take into account
1. Business cycles
2. Capital expenditure requirements
3. Working capital demands etc.
4. Semi variable nature of overheads
3. Normalising accounts
1. Correct accounting practices
2. Correct anamolies in current financials in the projections
3. Management accounts which give a truer statement of the financials
16. An example of how you can go wrong
Payment Linked To Projected EBIDTA
•Valuation Offered – 2x Revenue Company Revenue 40 Cr
•Payment of future installments is Expected Valuation 60 Cr
subject to the company achieving Actual value offered by
at least 75% of projected EBIDTA acquirer 80 Cr
Year 0 Year 1 Year 2 Year 3
•But the actual EBIDTA achieved is
less than the minimum 30 Cr
requirement. Structure of payment (Upfront) 10 20 20
Projected Sales 70 100 120
•The company does not receive
the remaining three installments. Projected EBIDTA 10.5 16 20.4
Actual EBIDTA Achieved 7 9 12
•It only gets 30 Cr from the entire
deal Minimum EBIDTA required to
be earned- 75% of Projected 7.875 12 15.3
•Actual Valuation – 0.75x Revenue
Part Payment Actually
Received 0 0 0
17. 5. Focus on the nitty gritty
• Deals break at due diligence stage – high percentage
• Too many small issues – lower confidence
– Either lower valuation or
– Break the deal
• Advisable to do a pre due diligence exercise by hiring a professional who
does a legal and financial due diligence
• Examples of issues that have come up which have delayed deals
– Land / Building documentation
– Non adherence to standard company secretarial practices
– Non payment of statutory dues
– Inter se promoter shareholding issues
• Also understand
– The mode of sale – shares, slump sale, merger and impact
– On the tax issues – stamp duty, VAT, Capital gains etc.
• Some of these issues have delayed deals by over 3 months, which is risky
18. Qualitative aspects
• If it is straight sale, this is not an issue
• However if it is a joint venture or a structured deal, comfort
with the buyer is crucial
• Specially for entrepreneurs who have never worked for /with
others !
• More important than wringing the last cent out..
19. About Merisis Capital Advisors
• Merisis Capital Advisors is a leading independent investment banking advisory firm serving the middle
market companies and their owners
• Founded by three investment professionals each with 15 years of corporate finance experience with
complementary skills and domain knowledge
• Ability to cater to a wide range of domains, client requirements and customer segments
– Services : Capital Raising & M&A – Domestic & Cross-border
– Capital raise ticket size : Venture Capital funding ($2-5 million) to PE Funding($5-$25 million)
– Experience set :
• Ability to deal with early stage entrepreneurs as well as CXOs of large corporations
• Be an advisor to our clients in matters of corporate strategy and institution building
• Ability to evolve Structured financing
• Differentiators
– Significant connects across the investment ecosystem – Funds and Intermediaries
– Strong Execution and Closure capabilities
– Performance culture fostering meritocracy across the company
• For more information on Team, Deals and Sector coverage, please visit us at
www.merisis.in