1. M&A TOOLKIT
Closing:
Deal Structuring
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2. You can increase value creation through smart choices on deal
structuring
PRIMARY DEAL STRUCTURE CHOICES
• What are you buying?
- Asset or share purchase? What is included/excluded?
- 100%, 51% or minority position?
• How are you paying?
- Cash or shares? Funding?
- Deferred payments? What timescale/pricing mechanism?
• Where are you buying?
- What legal vehicle?
- Tax efficiency? IES Development Ltd. All Rights Reserved
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3. You can increase value creation through smart choices on deal
structuring
ADDING VALUE THROUGH INCLUDE/EXCLUDE CHOICES
Consider buying one Division from a multinational
company, e.g. Lenovo buying IBM PC Division
• What do you want to include in the deal?
oSupport from Corporate that is high value? (e.g. sales support)
oKey corporate assets (e.g. patents, brand copyrights)
• What do you want to exclude from the deal?
oLiabilities? (e.g. pension, environmental)
oAssets you don’t need? (e.g. US assembly plants)
oSupport from Corporate that is low value to you? (e.g. HR support)
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4. One of the primary choices is whether to offer cash or shares
SHARE DEAL EQUIVALENCE
Cash deal
Share deal = +
Rights Issue
(usually new shares
issued to target)
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5. Share deals and cash deals have different advantages
ADVANTAGES ADVANTAGES
OF A CASH DEAL OF A SHARE DEAL
•Cheaper price because •Preserve net cash/debt
target values cash higher position
•Capture all synergies •Share some synergy risk
•Value of the offer will •Shared market price risk
not change during offer*
•No dilution if your shares •Good for existing shareholders
are undervalued if your shares are overvalued
CLASS EXERCISE: Why do you think cash acquirers outperform?
* If the offer is a fixed share ratio and2007-2013 specific valueAll Rights Reserved
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6. One of the problems with M&A is the “information asymmetry”
in a deal
THE PROBLEM WITH BUYING A USED CAR
George Akerlof paper "The Market for Lemons"
His basic insight was simple: If somebody who has plenty
of experience driving a particular car is keen to sell it to
you, why should you be so keen to buy it?
This “information asymmetry” exists in M&A too
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7. Deferred payments are a tool to overcome the “information
asymmetry” problem and generate “win/win” opportunities
ADVANTAGES OF DEFERRED PAYMENTS
1) Provides some protection to acquirer
[Especially important in China, where legal redress limited, having
the cash in your hand improves your negotiating position if you find
a problem in the company]
2) Enables a deal to be negotiated despite different future
performance assumptions
Any other advantages?
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8. Deferred payments allow deals to be negotiated despite
different valuation assumptions
EXAMPLE OF A DEAL THAT REQUIRES DEFERRED PAYMENT
• Your DCF valuation model says profits will increase from $20m to
$25m next year, justifying a price for the business of $275m
• The seller says profits will increase to $30m next year, justifying a
price of $300m for the business
• Do you believe him?
• Your DCF valuation model says if profits increased to $30m next
year, the business would be worth $325m
• How can you do a deal?
• Possible deal: $150m cash plus 5 times next year’s profit
• Seller happy =>gets his $300m if he is right
• You are happy
oif profit is $25m, you pay $275m, the right price
oif profit is $30m, you pay $300m, creating $25m value
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9. Deferred payments are payments made after a deal closes
subject to various conditions
DETAILS REQUIRED FOR DEFERRED PAYMENT DEALS
How long deferred? Amount of payment?
•6 months? •Lump sum?
•Next financial year? •Multiple of profit? What profit?
•3 years time? •Independent valuation? Binding?
Key terms? What is the payment for?
•Conditions e.g. satisfaction •Original price (only up to 1
with Representations, year in China)?
Indemnities and Warranties? •Additional equity purchase?
•Rights e.g. Put/Call? •Consultancy services?
•What is the problem with deferred payments conditional on future business performance?
•How can the seller prevent the buyer “gaming” the calculation?
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