Session 7 Phases 3-10
A man that is very good at making excuses is probably good at nothing else. Ben Franklin
The Acquisition Process
Phase 1: Business Plan Phase 2: Acquisition Plan Phase 3: Search Phase 4: Screen Phase 5: First Contact Phase 6: Negotiation Phase 7: Integration Plan Phase 8: Closing Phase 9: Integration Phase 10: Evaluation
Phase 3: Initiating the Search
Two step procedure: Establish primary selection criteria (e.g., industry and maximum size of transaction) Develop search strategy to identify potential targets using computerized databases; directory services; legal, banking, and accounting firms; and the Internet.
SEC filings Lexis Nexis One Source Frost & Sullivan
Phase 4: The Screening Process
As a refinement of the search process, screening involves increasing the number of selection criteria to reduce the list of potential candidates. In addition to the industry and maximum size of transaction used in the search process, additional criteria could include: Market segment Product line Profitability Degree of leverage Market share Cultural compatibility
Phase 5: First Contact
The appropriate approach strategy depends on Size of target Whether target is publicly or privately held Acquirers timeframe for completing transaction Trust and relationship building when time is not critical Discussing value Preliminary legal documents: Confidentiality agreements Term sheets Letter of intent
Phase 6: Viewing Negotiation as a Process
If No, Walk Away1 Profiling Target Market & Firm
Perform Due Diligence
First Contact Structuring the Deal Form of Acquisition Form of Payment Tax Considerations Accounting Considerations Acquisition Vehicle Post-Closing Organization Legal Form of Selling Entity Develop Financing Plan/ Structure Decision: Proceed to Closing or Walk Away
If Yes, Initiate Negotiations
Refine Initial Valuation
Negotiation Process
1Alternatively,
the potential buyer could adopt a more hostile approach such as initiating a tender offer to achieve a majority stake in the target firm.
Phase 6: Negotiation
Negotiating strategy Initially determine areas of agreement and disagreement Solve the easiest areas of disagreement first Establish and maintain trust throughout the process Concurrent activities: Refining valuation Deal structuring Conducting due diligence (buyer, seller, and lender) Developing the financing plan
Phase 6: Buyer Due Diligence During Negotiation
Objectives: Validate preliminary valuation assumptions (e.g., growth, cost, productivity, etc.) Identify additional sources/destroyers of value (i.e., those providing upside potential & fatal flaws) Activities: Detailed legal (e.g., contracts) and financial record reviews Management interviews (consistency in questions asked) Site visits (e.g., inspect equipment, inventory, etc.) Customer and supplier interviews
Phase 7: Developing the Integration Plan
Use due diligence to determine post-closing sequencing of events necessary to realize potential savings and revenue enhancements Resolve contract-related transition issues in purchase agreement Employee payroll and benefit claims processing Seller reimbursement for products shipped before closing for which payment not received Buyer reimbursement for vendor supplies/services received before closing for which payment had not yet been made Ensure contract closing conditions include those necessary to facilitate integration (e.g., employee contracts, agreements not to compete) Develop post-merger integration organization consisting of both target and acquirer managers to Build a master schedule of what should be done, by whom and by what date Establish work teams to determine how each function and business unit will be combined Establish post-closing communication strategy for all stakeholders
Phase 8: Closing
Obtain all necessary consents: Shareholder Regulatory (e.g., state and federal) Third party (e.g., customer, lender, and vendor) Complete definitive agreement Purchase price Allocation of purchase price Assumption of liabilities Representations and warranties Closing conditions
Phase 9: Implementing Post-Closing Integration
Communication plans (e.g., consistent and continuous) Employee retention (e.g., retention bonuses) Satisfying cash flow requirements (e.g., deferred maintenance expenditures) Employing best practices (e.g., competitor or similar business) Cultural issues (e.g. joint work teams, colocation of acquirer and target employees)
Phase 10: Conducting Post-Closing Evaluation
Dont change performance benchmarks
Ask the difficult questions Learn from mistakes