Banking Tutorial 11 M&A and Investment banking Pavel Hrbek Institute of Economic Studies, Faculty of Social Science, Charles University in Prague, Czech Republic December 12, 2012
Contents 1. M&A Process 2. Valuation Multiples 3. Databases Slide 2
The M&A Process There are two major types of M&A engagements: Buy-side: Investment bank represents a client looking to purchase a company. Buy-side engagements are riskier for an investment bank because the bank receives a success fee only if the client outbids all of the other potential buyers. Sell-side: Investment bank represents a client who wants to sell all or part of their business. Sell-side engagements are typically more certain than buy-side engagements. Source: http://www.bankingorbust.com Slide 3
Buy-side M&A Process Source: http://www.bankingorbust.com Slide 4
Sell-side M&A Process Source: http://www.bankingorbust.com Slide 5
Pitch Preparation Round 1 Non-binding offers Round 2 Due Diligence Negotiations & Signing Process Acquisition Call contact or cold call Client contacts the advisor Beauty contest Invitation to tender for advisory services Pitch Request for Proposal (RfP) written proposal (word or powerpoint) Pitch presentation Negotiations Negotiate fees Mandate agreement (including confidentiality) Get the client to sign the contract Slide 6
Pitch Preparation Round 1 Non-binding offers Round 2 Due Diligence Negotiations, Signing & Closing Sell-side Key events Project kick-off meeting Presentation of diligenced valuation and potential bidder cases Key tasks Establish internal project team Set-up internal work split and timetable Select and hire external advisors Prepare DR Define sale process Analyze and select potential buyers Materials to be prepared Seller's valuation model / presentation Marketing materials (teaser, IM) VDD reports (if appropriate) Procedure letter Legal documents (CA, draft SPA) Process Buy-side Key events Project kick-off Key tasks Establish internal project team Select and hire other advisers (legal, accountants) Analyze company based on secondary sources and publicly available information Develop positioning strategy Establish contact with sell-side Tricky issues Sell-side and Buy-side Management and/or client are inexperienced with M&A processes Sell-side Management is not co-operative Keeping a tight timeframe Building consensus on marketing materials Managing expectations on value Buy-side Limited information available How to differentiate from other bidders? Slide 7
Pitch Preparation Round 1 Non-binding offers Round 2 Due Diligence Negotiations, Signing & Closing Process Sell-side Key events Distribute IM and procedure letter Receive and evaluate indicative offers Recommend short-list and further procedure Key tasks Agree on short-list of potential buyers Contact investors with teaser and CA Request expression of interest (EoI) from potential buyers (if appropriate) Negotiate and sign CA Prepare DR Materials to be prepared MP VDD reports Legal documents (draft SPA) Round 2 procedure letter and DR rules Buy-side Key events Submit EoI Presentation and agreement on indicative valuation Submit indicative offer Key tasks Negotiate and sign CA Review IM and procedure letter Develop valuation model Perform comparables valuation Materials to be prepared Offer letter Board meeting materials (strategic) Investment committee presentation (financial sponsor) Tricky issues Sell-side Targeting the right buyers Seller starts reevaluating own criteria Making indicative bids comparable Deciding the right number to shortlist Bids are below seller's expectations A high bid from a disliked buyer Buy-side What are the criteria for being shortlisted? Getting the indicative offer price right Hurdle to be invited to second round Realistic price that must not be reduced significantly in round two Position yourself as the favored party (price, reliability, speed, management) Slide 8
Pitch Preparation Round 1 Non-binding offers Round 2 Due Diligence Negotiations, Signing & Closing Sell-side Key events Invite shortlisted bidders to 2nd round Distribute round 2 procedure letter and DR rules Distribute VDD reports Distribute seller's draft SPA Receive and evaluate binding offers and buyers SPA mark-up Recommend preferred bidder or parallel negotiations Key tasks Supervise DR and manage Q&A process Support DD process Schedule and carry out MPs Expert meetings and site visits Pre SPA negotiations (if appropriate) Discuss and define evaluation criteria Process Buy-side Key events Present final valuation Receive Supervisory Board / Investment committee approval Submit binding offer and buyers SPA mark-up Key tasks Review process materials and information in electronic DR Collate and submit DD questions, distribute answers Visit MP and site visits Review and comment on draft SPA Support SPA discussions with the seller Refine valuation model Materials to be prepared Binding offer letter Buyers SPA mark-up Board / Investment committee presentation Tricky issues Sell-side and buy-side Logistics of DD Arranging disclosure of commercially sensitive information Sell-side How "tough" can/ should draft SPA be? Making final bids comparable Bids are below seller's expectations or a high bid from a disliked buyer How to weight price vs. SPA mark-up? Sellers starts getting cold feet Buy-side Not sufficient information disclosed ("red files") Lots of unanswered DD questions How to differentiate vs. competitors Getting the valuation right and convincing the client Deciding price and SPA mark-up with a view towards bid tactics Slide 9
Pitch Preparation Round 1 Non-binding offers Round 2 Due Diligence Negotiations, Signing & Closing Process Sell-side Key events Invite shortlisted bidders to final negotiations Signing of the SPA Closing of the transaction Key tasks SPA negotiations Meetings, discussions and exchange of further SPA mark-ups Facilitating between the client and buyer/seller Confirmatory DD Closing documentation Materials to be prepared Final SPA mark-up SPA appendices Buy-side Key events Sign final SPA mark-up Key tasks Support SPA negotiations with the seller Support Confirmatory DD Materials to be prepared Final SPA mark-up Tricky issues Sell-side and buy-side Agreeing clear negotiation strategy with the client Last minute surprises Cartel issues Sell-side How to handle exclusivity requests? Keeping pressure on the preferred bidder High complexity of parallel negotiations Securing fall-back options Buy-side How to differentiate vs. competitors in parallel negotiations? In case of exclusivity, how to negotiate for your points without losing it? Slide 10
Illustrative result of a structured auction process (sell side) Finding the best buyer Round 1 Non-binding offers Round 2 Due Diligence Negotiations, Signing & Closing Slide 11
Key deliverables of the Investment Bank Working party list (WPL) Company and market analysis Valuation and valuation report Internal work split and timetable Project timetable Support in the selection of other advisors Support in transaction structuring Support during negotiations, signing and closing Specific deliverables Sell-side Teaser IM CA Identification of potential bidders DD procedures DR organization MPs Evaluation of offers Buy-side EoI DD support and co-ordination Financial model and valuation Competitor / interlooper analysis Internal presentations for the client Indicative / non-binding offer Final / binding offer Slide 12
Valuation Multiples (1/2) Valuation multiples are the quickest way to value a company, and are useful in comparing similar companies (comparable company analysis) Trading Multiples vs. Transaction Multiples Source: http://macabacus.com/valuation/multiples Slide 13
Valuation Multiples (2/2) Identify comparable firms and determine values from market data Adjust values for different accounting methods Calculate the multiples based on the comparable firms base and values Estimate the base of the multiple for the subject business unit or company Apply the multiple from the comparables to the subject business unit or company Source: http://wise.fau.edu/~ppeter/fin4422/multiples.pdf Slide 14
Reference Valuation Multiples Trading Multiples Slide 15
Valuation Multiples Football field 2011 EV / Revenues 12 361 ALL PEERS TRADING EUR mn 2011 EV / EBITDA 2011 EV / EBIT 69 337 76 337 2011 P / E 92 234 Slide 16
Reference Valuation Multiples Transaction Multiples Slide 17
Databases ThomsonOne Bloomberg MergerMarket Etc Slide 18
Bloomberg Slide 19
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