Mergers & Acquisitions Training

4
XYZ M&A
Agenda
Introduction
• Trends in M&A
• Guiding Principles for Successful M&A
• XYZ Approach
• Case Examples
– screening
– due diligence
– sale
• Exercise on Synergy Calculation
• Typical Watchouts
• Key Takeaways
This document is a partial preview. Full document download can be found on Flevy:
http://flevy.com/browse/document/mergers-and-acquisitions-training-727

7
M&A Activity
• M&A activity has grown rapidly in nominal dollar terms, peaking in the U.S. in the
late 1980s, and then matching those levels last year
• The ferocious merger activity of the late 1980s was driven in large part by the “easy
money” afforded by the junk bond market. This resulted in huge, often
unsubstantiated, premiums being paid for companies without regard to the value
creation opportunities presented (or not presented, as the case may be) by the
operations/underlying business of the target
• Growth in merger activity since 1992 has coincided with the economy’s recovery
from recession
• Recent M&A activity benefiting from:
– extended economic health with little recessionary pressure on horizon
– a resulting corporate demand for growth
– increase in international M&A activity as companies pursuing global strategies
• Since late 1997, U.S. and European markets have experienced the resurgence of
junk bonds to facilitate the execution of deals getting larger and larger
TrendsXYZ M & A

10
Trends
Multiples Paid for Acquisitions
EBIT Multiples Paid for Acquisitions
7.4
5.4
6.5
7
7.8
6.1
7.2
8.6
0
1
2
3
4
5
6
7
8
9
10
1988-89 1992-93 1995 1996
Financial Buyers
Strategic Buyers
Sources: The BUYOUTS Yearbook, XYZ Analysis.
Over the last five years, the prices paid for acquisitions have been increasing, and
reinforces the need for in-depth due diligence and analysis to ensure a fair price.
Average
EBIT
Multiple
XYZ M&A

13
Glossary
Trends
Credit Rating
• The legal combination of two (or more) formerly independent entities
• The acquisition by an independent entity of a control stake in another
entity. This is usually achieved by acquiring more than 50% of shares for
a public company
• The sale or closure of a particular entity
• Leveraged buy-out: An acquisition made possible financially by large
issuance of debt, making the new entity highly “leveraged” or “geared”
(i.e., with a high ratio of debt to equity)
• Investment firms managing private funds by running business portfolios
• Bonds (or debentures, or coupon debt) issued by an entity without a
credit rating or with entities with “non-investment grade” rating
• Financial markets use the service of credit rating firms such as Standard
& Poor’s and Moody’s to determine entities’ credit worthiness (i.e., the
ability for an entity to pay back their debt). Ratings are allocated from
AAA or Aaa (highest) to C (lowest)
– Entities with Investment Grade Ratings (AAA down to B) are
considered stable
– non-investment Grade entities (below B) present an investment risk
(e.g., third world countries, highly leveraged companies)
Merger
Junk bonds
Acquisition
Divestiture
LBO
Private Equity Firms
XYZ M&A

16
Principles
Guiding Principles
(2 of 2)XYZ believes that a clear and disciplined approach to
the acquisition process is vital to ensure success.
Principles:
Activities:
Execution Capture Full Value
• Make better decisions
upfront through careful due
diligence
• Strive to identify "deal
breaker" issues as early as
possible
• Use information and insights
to provide confidence in
making a bid
• Clearly communicate corporate vision
to target
• Begin integration process as early as
possible
• Be objective to ensure a fair decision-
making process
• Create a set of short-term and long-
term objectives
• Quantify all potential
synergies and cost savings
• Examine margin and
revenue forecasts
• Evaluate management of
target
• Provide a blueprint for capturing full
potential value
• Support managerial integration team
XYZ M&A

19
Principles
M&A Value Creation Opportunities
Buy cheap
M&A value can arise from generating the full value of an undervalued entity
or by adding value to under performing assets.
Add value
Take advantage of
inefficiencies in the
market
Spot new market
trends early
Generate
synergies
XYZ M&A

22
Principles
Success and Market Share
43%
58%
61%
70%
73%
35%
18% 19% 18%
3%
0%
10%
20%
30%
40%
50%
60%
70%
80%
< 5% 5-10% 10-25% 25-50% 50%+
Market Share Bought
Percent
Incidence
of success
Incidence
of outright
failure
Acquisitions that increased market share
substantially were consistently more successful.
Sources: Porter (33 Large U.S. Corps.; Management Interviews)
XYZ M&A

25
Examples of Failures
(2 of 2)
Principles
Industry Acquirer Target
Transaction
Value
Acquisition
Thesis Reason for Failure
Sources: Industry literature; XYZ Analysis.
Retail Allied Federated
Technology/
Telecommu-
nications
AT&T NCR
$ 6.5B •Expand
geographically
•Inadequate due
diligence
–overvalued
potential
synergies and
brand value
•Technology/
telephony
integration
•Strategically flawed
–few synergies
between computer
hardware and
telephony
•Poor integration
$ 7.5B
•New market entryNovell WordPerfect •Poor integration
–culture clash
$ 1.4B
The M&A landscape is littered with failures which failed to adhere to
the core guiding principles.
XYZ M&A

28
XYZ M&A
Agenda
Introduction
• Trends in M&A
• XYZ Approach
• Case Examples
– screening
– due diligence
– sale
• Key Takeaways

31
XYZ Approach
XYZ and Other Advisors' Role
XYZ's Role: • Analyze quality of
customer and supplier
base
• Look for potential cost
savings and upside
synergies
• Understand market
dynamics to better
project market and
company growth
objectives
• Construct a discounted
cash flow model that
values stand alone,
operating improvements
and potential synergies
• Provide a reality check on
market valuations
• Active involvement in
transition plan, cost
reduction and revenue
enhancement
opportunities
• "Hands-on" driver of
change process to realize
full value of merged entity
• In tandem with
accountants, analyze
financial projections based
on managerial input
Investment Banks: • Value based on prices of
comparable businesses
recently bought or sold
• Multiple of earnings/cash
flow, assets
• Little or no direct input in
post-merger activities
• Limited external research
– largely dependent on
managerial projections
Accounting Firms*:
• Determine targets based
on corporate objectives
and strategies
• Identify acquisitions that
enable the acquirer to:
– penetrate new markets
– acquire capabilities
– gain scale advantage
– improve relative
market position
• Comb for potential
acquisition candidates based
on availability
• Utilize contacts to build a
wide list of potential targets
• Look for potential acquisition
candidates based on
availability
• Use contacts to build list of
potential targets
• Value based on prices of
comparable businesses
recently bought or sold
• Construct a basic DCF
model
• Little or no direct input in
post-merger activities
XYZ provides a neutral, third-party view and analysis on the primary strategic
and financial issues.
Notes: *Consulting branches of Big Six Accounting Firms.
IntegrationValuationDue Diligence
Acquisition
Screening
XYZ M&A

34
Acquisition Screening
(Common Mistakes)
XYZ Approach
•Review all potential candidates and determine which ones
present the best fit in terms of:
–relatedness
–impact on market position
Objective:
•Drawing up an incomplete list of candidates, excluding
divisions of large companies and very small companies
•Using the screening process to develop the strategy
•Saying
–"We can't buy it because..."
–"They have turned us down before"
–"The government won't approve it" or
–"It's family/state/competitor/or big company owned"
•Making the wrong contact at the target company
•Being impatient with acquisition process
•Assuming "no" really means "no"
Common
pitfalls:
Inadequate screening of candidates is commonplace.
XYZ M&A

37
Due Diligence
XYZ Approach
•Business/strategic review
–market trends
–customers and suppliers
–competitors
–costs, technology
–valuation/full potential assessment
•Make better decisions upfront
•Provide agenda for post-acquisition
change
•Improve success in closing deal
•Non-identification of "deal breaker" issues
•Misunderstanding of cost savings and upside opportunities
XYZ goes beyond financial analysis to assess fully the competitive
position of the target, and identify "deal breaker" issues .
Acquisition
Screening
Objective:
XYZ Activities:
Common Pitfalls:
XYZ M&A

40
Typical Due Diligence Issues
(2 of 2)
XYZ Approach
What strategies are key competitors pursuing? How successful
are they?
Competitor
Review:
How well managed is the business? Where can the company
improve margins and returns?
Operations:
What is the potential growth? Are there follow-on acquisitions
available?
Growth:
When applicable, is there a clear exit strategy?Exit Strategy:
How much is the company worth on a stand-alone basis? How
much value can be created?
Valuation:
XYZ M&A

43
The Value Creation Process
XYZ Approach
Difference between purchase price and post-
integration value to client represents
value creation opportunity
XYZ's approach to valuation encompasses three distinct steps that closely
examine the historical and future financial performance of the target.
• Stand alone cash flow
– domestic demand
– import penetration
– current market share
– price per unit
– variable cost per unit
– fixed costs (R&D, advertising, etc.)
– capital expenditures
• Integration opportunities
– expanded distribution
– plant consolidation
– eliminate redundant R&D
– purchasing leverage
• Better management of assets
– plant best demonstrated practices
– reduced manufacturing complexity
– outsourcing/move off shore
– reduced working capital
0%
20%
40%
60%
80%
100%
120%
140%
160%
180%
200%
Market value
of debt and
equity
Premium
Current market
value
Maximum potential
value
Synergies
Stand alone
operating
improvement
Current
operating
value
Percent of
Current
Market Value
(Debt and
Equity)
Financial deal
structure
• Investment banking focus
– leverage/gearing
– type of financial products used
XYZ M&A

46
Integration
Objective: •Implement strategic vision for merger
that gives direction and impetus for
change
•Definitive actions and role definitions
to speed integration process
XYZ
Activities:
•Pre-planning
–combined cash flows
•Transition plan
•Cost reduction
•Revenue enhancement
Common
Pitfalls:
•Reluctance to interfere in operations
of acquiree
XYZ can assist in the integration process and maximize the value of the target.
Acquisition
Screening
XYZ ApproachXYZ M&A

49
Explicit expression of corporate
mission/vision by CEO
Long-term objectives
•Articulate immediately when control is taken
•Gives organization focus for new direction
•Maintains impetus for change
Short-term objectives
•Driven by due diligence and valuation
•Reality check
•Directs Transition Team in first weeks
after the merger
Top-down consistent approach
Integration - Develop Short - and Long-Term Objectives
XYZ ApproachXYZ M&A

52
XYZ M&A
Agenda
Introduction
• Trends in M&A
• XYZ Approach
• Case Examples
– screening
– due diligence
– sale
• Key Takeaways

55
Case Example - Prepress
Search Criteria
Potential Industries
Information
Capture, and
Dissemination
Output
Devices
Companies that
Purchase
Computer
Components,
Add Value, and
Remarket
Competitor
Industries
Prepress
Customers
Another
Prepress
Industry
Recording products X X X
Duplication products X X X X X
Data enhancement/
manipulation/editing devices
X X X X X
Data management (storage and
retrieval) devices
X X X X
Transmission originators X X
Transmission carriers/controllers X X
Transmission receivers ("dumb') X
Intelligent digital processing
systems
X X X X
Interactive digital systems X
Office automation/high potential
customers
X
Along with the client, XYZ developed a set of criteria with
which to evaluate different industries.
XYZ M&A

58
Magnetic Resonance Imaging (MRI)
(2 of 2)
Prepress Value-added Proposition:
Similarity to
pre-press:
Linkage to
other
industries:
Prepress
synergies:
– Same workflow
– Similar manufacturing (value-added resale of high-technology
components linked by proprietary software and customer circuit
boards or chips)
– Color imaging becoming increasingly valued system feature
– Signifies major move into medical imaging market
– Complements current client printer medical market strategy
– Entry vehicle to data storage industry
– No linkage to non-medical/other markets
– System similarity (modular design, user-friendly, upgradeable, high
quality)
– Sales process similarity (system sell, proven ROI benefits)
– Customer need similarity (high resolution images, low maintenance,
strong price-value relationship)
Attractive
The MRI industry was selected based on its attractiveness and potential fit
with Prepress.
XYZ M&A

61
MRI: Target Acquisition Candidates
•H
•K
•L
•M
•N
Viable
Acquisition
Candidate
Not Viable
Company Revenue Market Value
Medical Imaging
Parent
Division of Large
Company
Market Share
Too Small
•D
•E
F $150MM $100MM
A $170MM $200MM
B $165MM $100MM
•I
•G
•C
•J
•K
After the creation of a market map, individual companies were
assessed for their viability as an acquisition.
•O
•P
•Q
•R
•S
XYZ M&A

64
Case Example - Sand
Industry Overview
Sources: U.S. Bureau of Mines
0
2000
4000
6000
8000
10000
12000
14000
1970
1971
1972
1973
1974
1975
1976
1977
1978
1979
1980
1981
1982
1983
1984
1985
1986
1987
1988
1989
1990
1991
1992
1993
Volume('000sMetricTons)
Glass
Foundry
Abrasives
Frac
Fillers
CAGR
(1970-1993)
0.1%
1.3%
8.5%
-5.6%
-1.0%
Every market segment has been volatile. Only the frac segment has grown
significantly, but it is still below its 1985 peak.
XYZ M&A

67
Case Example - Sand
Industrial Sand Market Overview
• The overall silica sand industry has been notably cyclical with flat
volume growth over the past twenty-five years; downturns generally
track broader economic slowdowns
• Each market segment of the silica sand industry is volatile and only frac
has shown significant long-term volume growth: However, frac volume
is still below its 1985 peak
• Real industry revenues have fallen by 1.6% since 1980
• Real revenues per ton have fallen by 0.5% since 1980
• Extraction, manufacturing and distribution should be viewed as different
businesses with unique returns, customers and competitors
• Future environmental and health risks appear to be limited - regulations
limiting access to and use of silica sands are not expected to become
more burdensome in the near future
Summary
XYZ M&A

70
Case Example - Sand
Valuation Summary
$64.9MM
Worst Case Base Case Best Case
$91.3MM $123.0MM
Notes: Assumes no growth perpetuity
Sources: XYZ model
CAGR (1995-2000)
Sales
GP
EBIT
Operating Cash Flow
-0.1%
-1.4%
-7.5%
1.4%
3.8%
3.1%
2.7%
8.1%
8.4%
7.9%
11.3%
14.3%
DCF (@12%)
Based on different scenarios a $100MM bid was made.
XYZ M&A

73
•After detailed evaluation of strategic options, a decision was made to sell the
Asset Management Division (AMD) business. The asset management company
required significant investment in order to achieve profitable growth, and the
parent company was able to achieve higher returns by investing in other
businesses within its portfolio
•XYZ continued to support the client through the sale process by
–developing the offer memorandum, the business forecast and the
management presentation
–identifying the best new parent and quantifying their full-potential price
–supporting the bid negotiations
Source: XYZ & Company Experience Centre
Conclusion:
Impact: •The division was successfully sold, realizing $500M more in value from the
transaction than the parent would have been able to extract from the business
through continued ownership.
Summary
(2 of 2)
Case Example - AMDXYZ M&A

76
Source: XYZ & Company Experience Centre
Management Selling Presentation (1)
Case Example - AMD
A Member of Liechtenstein Global Trust
LGT Asset Management
99
Asset Forecast
0
25
50
75
100
1997 2002RetailInst.
US
RetailInst.
Europe
RetailInst.
Asia
Frankfurt
Assets
($ Millions)
Asset growth is forecast to come from across the AMD
56
6
7 1 2 2 2 3 78
Note: 1997 is based on 10+2 forecast
The XYZ team helped the management prepare the selling presentations to the
investors.
business.
A B C D E F G
XYZ M&A

79
Case Example - AMD
Bidder Evaluation - Model
The analysis combined a re-evaluation of AMD business, a synergy
analysis by bidder and an estimation of strategic premium which bidders
would be ready to pay.
AMD Purchase Value by Buyer All figures in US$M
Key Assumptions
Discount Rate 14% percent
Tax rate 25% percent
Pay off equivalent 1 year
AUM 54.5 Billion
Price adjustment (3%) percent on top of -1%
Valuation
Stand
alone
A B C D E
AMD Plan 1,090 1,090 1,090 1,090 1,090 1,090
Revenue Adjustment (254) (254) (254) (254) (254) (254)
Cost Adjustment 157 157 157 157 94 78
% achieved 100% 100% 100% 100% 60% 50%
XYZ upside to client plan 157 157 157 157 157 157
Cost cut 49 49 49 49 49 49
Cost cut % 17% 17% 17% 17% 17% 17%
Cost synergies - 288 342 505 262 11
Cost cut - 67 79 116 60 5
Cost cut % - 28% 33% 48% 25% 2%
Revenue Synergies - 105 114 - 36 -
New markets - - 114 - - -
Brokerage - 105 - - 36 -
Strategic Premium - 100 80 40 20 60
Maximum Value 992 1,485 1,528 1,537 1,247 985
Difference from highest (545) (52) (9) - (290) (552)
Percent of AUM 1.8% 2.7% 2.8% 2.8% 2.3% 1.8%
Percent in bid 86% 73% 70% 73% 77% 84%
Base plan 90% 90% 90% 90% 90% 90%
Price Adjustment 100% 100% 100% 100% 100% 100%
Operating Improvement 80% 80% 80% 80% 80% 80%
Cost synergy 50% 50% 50% 50% 50% 50%
New Markets synergy 10% 10% 10% 10% 10% 10%
Brokerage Synergy 40% 40% 40% 40% 40% 40%
Strategic Premium 50% 50% 50% 50% 50% 50%
'Realistic' Bid 852 1,088 1,074 1,124 957 825
Difference from highest (272) (37) (50) - (167) (300)
Percent of AUM 1.6% 2.0% 2.0% 2.1% 1.8% 1.5%
XYZ M&A

82
Manufacturing Synergies - Company C
Case Example - AMD
Asset Class
Company CClient Synergy
Cost
Saving
Rationale
• Global
• US
• UK
• Germany
• Europe
• Asia
• Australia
• Japan
• Emerging markets
Costs
($M)
Assets
($B)
Staff
Equity
Fixed Income
• Alternative Assets
• Other
• Realty
Other
• Global
• US
1 5?
25 66
2 5
1 17
4 11
5 25
1 4
2 10
2 3
3 5
11 30
12
3
London / US offices?
Houston, Denver, Boston
London
London (?)
London (?)
Hong-Kong
Hong-Kong (?)
Tokyo
London (?)
Staff Comments
London
Adopt AMD team
Close Chancellor operation
Combine both in one location
Adopt AMD team ?
Adopt AMD team ?
Adopt AMD team ?
Adopt AMD team ?
Close Chancellor operation
No impact
No impact
No impact
XYZ M&A

85
XYZ M&A
Agenda
Introduction
• Trends in M&A
• XYZ Approach
• Case Examples
– screening
– due diligence
– sale
• Key Takeaways

88
Exercise
Approach
Having selected 4 candidates, synergies were evaluated between
each combination of 2 players to determine the optimal scenario.
Selection
Process
Potential
Sources of
Synergies
Synergy
Evaluation
Integration of
Results
•Select key
consolidation
players based on
first cut:
–size
–product mix
–geographic mix
–availability
already done, 4
candidates
selected
(S,P,B and G)
focus of the exercise
•Analysis of the
potential and
specific sources
of synergies:
– hard
– soft
– soft-soft
•Evaluation of
hard and soft
synergies for
each combination
of 2 candidates
•Integration of
synergy valuation
results
•Conclusions on
best potential
consolidation
XYZ M&A

91
Exercise
Question 1 - Typical Sources of Synergies
Using your knowledge of synergies, fill in types of synergies that
should be considered for hard, soft and soft-soft synergies.
• Raw material
purchasing
•
•
•
•
Hard Soft Soft-Soft
•
•
•
•
•
•
•
•
•
•
XYZ M&A

94
Exercise
Question 2 - Hard Synergy Quantification Example - S+P
•Manufacturing
•Materials Purchasing
•Distribution
•Sales & Marketing
•Headquarter Consolidation
Taking the example of the combination of S and P, we want to evaluate the
hard synergies achievable. The purpose of Question 2 is to use the
attached data to fill in the template below.
Cost Synergy (£ 000s)
£
£
£
£
£
£Total
XYZ M&A

97
Exercise
Question 2 Data - Candidates’ Distribution Profile
The 4 potential candidates’ distribution profiles vary significantly.
Note: Sales and cost information are best estimates for 1997/98
Source: Company accounts; Information memorandum; FAME; XYZ analysis
S P B G
0%
20%
40%
60%
80%
100%
Social
Private
Builders Merchant
Specialists
DIY
Sales %
£85 M £21 M £105 M £35 M
Click Here for
Back-up Data
XYZ M&A

100
Exercise
Question 3 - Soft Synergy Quantification
Again using S + P combination, the question is to evaluate the potential
soft synergies as shown below. Use attached data for this question.
Channel
Complementarity:
Portfolio
Strengthening:
(£ M)
XYZ M&A

103
Exercise
Question 3 Data - UK Market Map
(1997)
The UK market for Garden Furniture is mainly channelled through DIY stores.
£353M £135M £120M £70M £51M Total = £750M
Other
Leader
Other
Other
Other
Other
0
20
40
60
80
100%
Percent of
Total
£23M
DIY Specialists BMs Private
Public
Other
S
G
P
S
P
G
S
S
S
P
B
B
B
P
G
XYZ M&A

106
Exercise
Answer 3 - S+P - Soft Synergy - Answer
Using the soft synergy assumption framework and knowing each player’s
relative distribution strength, it is simple to calculate the incremental revenue
due to synergy in the combined entity.
Note: Revenues have been pro-rated to the share A Garden Furniture Sales
DIY
Specialists
BMS
Private
Public
Total
S Strength P Strength
Type of
Synergy
S Revenue*
Base (£000s)
P Revenue*
Base (£000s)
Synergy
(£000s)
None
Channel complementarity
10% uplift for smaller
player
None
Portfolio strengthening
1% uplift on total combined
Channel complementarity
10% uplift for smaller
players
– – –
29,987 1,061 106
– – –
25,382 11,236 366
14,950 1,381 138
610
– Channel complementarity
– Portfolio strengthening
244
366
XYZ M&A

109
Exercise
S+P - ROS/RMS
*Note: Relative Channel Share is the weighted average relative market share by channel;
ROS based on three year average to 1996/97, as available
Source: FAME; Company Accounts; Information Memoranda; MBD Report; XYZ analysis
Consolidation of S+P’s positions would create significant ROS improvement
thanks to the realization of synergies.
(5%)
0%
5%
10%
15%
20%
25%
0.1 0.2 0.5 1 2 5
£ 60M
1997
Revenues
Return on
Sales
(Operating
Profit/
Turnover)
Relative Channel Share*
Leader
R² = 74%
S+P
G
B
XYZ M&A

112
XYZ M&A
Agenda
• Trends in M&A
• XYZ Approach
• Case Examples
– screening
– due diligence
– sale
• Key Takeaways

115
XYZ M&A
Agenda
• Trends in M&A
• XYZ Approach
• Case Examples
– screening
– due diligence
– sale
• Key Takeaways

118
XYZ M&A
Key Takeaways
(3 of 3)
Approach: •Major steps in an M&A in which XYZ may be involved are:
–strategy development: should an acquisition be pursued? in which sector
or region?
–target screening: who is/are the best candidate(s) based on
attractiveness and availability?
–due diligence: how comfortable are we with the screening hypothesis?
–valuation: what is the full value of the entity? what is the right price for it?
–integration: how will we ensure that full value is achieved?
•XYZ role is complementary rather than competing with other advisors’ role:
–XYZ focuses on strategic issues and full value quantification
–investment banks concentrate on the financial aspects of the deals:
market-related information gathering and analysis, valuation, deal
financial structuring, production of information memorandum, etc.
–lawyers deal with legal matters, including due diligence at the time of the
transaction (confirming that the information memorandum reflects reality,
for instance)
–accountants are occasionally involved in the deal structuring

1
Flevy (www.flevy.com) is the marketplace
for premium documents. These
documents can range from Business
Frameworks to Financial Models to
PowerPoint Templates.
Flevy was founded under the principle that
companies waste a lot of time and money
recreating the same foundational business
documents. Our vision is for Flevy to
become a comprehensive knowledge base
of business documents. All organizations,
from startups to large enterprises, can use
Flevy— whether it's to jumpstart projects, to
find reference or comparison materials, or
just to learn.
Contact Us
Please contact us with any questions you may have
about our company.
• General Inquiries
support@flevy.com
• Media/PR
press@flevy.com
• Billing
billing@flevy.com

Mergers & Acquisitions Training

Recommended

Recommended

More Related Content

More from Flevy.com Best Practices

More from Flevy.com Best Practices (20)

Recently uploaded

Recently uploaded (20)

Mergers & Acquisitions Training