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FM_bragg_1 08/13/2008 3 MERGERS & ACQUISITIONS A Condensed Practitioner’s Guide STEVEN M. BRAGG John Wiley & Sons, Inc. FM_bragg_1 08/13/2008 2 FM_bragg_1 08/20/2008 1 Mergers & Acquisitions FM_bragg_1 08/13/2008 2 FM_bragg_1 08/13/2008 3 MERGERS & ACQUISITIONS A Condensed Practitioner’s Guide STEVEN M. BRAGG John Wiley & Sons, Inc. FM_bragg_1 08/20/2008 4 Copyright#2009byJohnWiley& Sons,Inc. Allrights reserved. Published byJohnWiley&Sons,Inc., Hoboken,NewJersey. Published simultaneously inCanada. No part of this publication may be reproduced, stored in a retrieval system, or transmitted in any form or by any means, electronic, mechanical, photocopying, recording,scanning,orotherwise,exceptaspermittedunderSection107or108ofthe 1976UnitedStatesCopyrightAct,withouteither theprior writtenpermission ofthe Publisher, or authorization through payment of the appropriate per-copy fee to the Copyright Clearance Center, Inc., 222 Rosewood Drive, Danvers, MA 01923, 978- 750-8400, fax 978-646-8600, or on theweb at www.copyright.com. Requests to the Publisher for permission should be addressed to the Permissions Department, John Wiley & Sons, Inc., 111 River Street, Hoboken, NJ 07030, 201-748-6011, fax 201- 748-6008,or online athttp://www.wiley.com/go/permissions. Limit of Liability/Disclaimer of Warranty: While the publisher and author have used theirbesteffortsinpreparingthisbook,theymakenorepresentationsorwarrantieswith respect to the accuracy or completeness of the contents of this book and specifically disclaimanyimpliedwarrantiesofmerchantabilityorfitnessforaparticularpurpose.No warrantymaybecreatedorextendedbysalesrepresentativesorwrittensalesmaterials. Theadviceandstrategiescontainedhereinmaynotbesuitableforyoursituation.You shouldconsultwithaprofessionalwhereappropriate.Neitherthepublishernorauthor shallbeliableforanylossofprofitoranyothercommercialdamages,includingbutnot limitedtospecial,incidental,consequential,orotherdamages. For general information on our other products and services, or technical support, please contact our Customer Care Department within the United States at 800-762- 2974,outside theUnitedStates at317-572-3993orfax 317-572-4002. Wiley also publishes its books in a variety of electronic formats. Some content that appears inprint maynotbe availablein electronic books. For more information about Wiley products, visit our Web site at http:// www.wiley.com. Libraryof CongressCataloging-in-Publication Data Bragg,Steven M. Mergers&acquisitions :a condensedpractitioner’sguide/ Steven M.Bragg. p. cm. Includes index. ISBN 978-0-470-39894-4(cloth) 1. Consolidationand mergerof corporations. I. Title. II. Title: Mergersand acquisitions. HG4028.M4B69 2009 658.1062–dc22 2008023252 Printed intheUnitedStates ofAmerica 10 9 8 7 6 5 4 3 2 1 FM_bragg_1 08/13/2008 5 To my extremely tolerant wife, Melissa. Thanks for handling everything while I hide behind my computer. FM_bragg_1 08/13/2008 6 FM_bragg_1 08/13/2008 7 Contents Preface xiii About the Author xvii Free On-Line Resources by Steven Bragg xix 1 The Acquisition Process 1 Why We Acquire 1 Why a Target Sells 5 Acquisition Strategy 7 The Basic Acquisition Process Flow 10 The Auction Process Flow 18 Locating and Culling Acquisition Targets 21 The Optimal Target Size 25 Evaluate Acquisition Targets with Alliances 26 Acquisition Risks for the Buyer—Valuation 28 Acquisition Risks for the Buyer—Legal 29 Acquisition Risks for the Seller 31 Acquisition Follow-Up Activities 32 The Hostile Takeover 33 Defending Against a Hostile Takeover 35 Summary 39 2 Key Participants 41 The Acquisition Team 41 Attorneys 42 Board of Directors 43 Brokers 44 The Chief Executive Officer 46 Investment Bankers 47 Investor and Public Relations 48 Lenders 50 vii FM_bragg_1 08/13/2008 8 viii Contents Line Managers 51 Specialist Consultants 52 Players in Hostile Takeovers 53 Integration Team 54 Summary 54 3 Valuing an Acquisition Target 57 Alternative Valuation Methods 57 The Control Premium 65 Synergy Gains 65 The Discounted Cash Flow (DCF) Model 66 Constructing Cash Flow Scenarios 69 Cash Flow Adjusting Factors 71 The Earnout 74 Qualitative Factors 75 Which Valuation Method is Best? 77 The Method of Payment 78 Summary 82 4 The Term Sheet 83 Reasons for Using a Term Sheet 83 Components of a Term Sheet 85 Summary 92 5 Due Diligence 93 Due Diligence Team Staffing 93 Due Diligence Interviews 95 Due Diligence—Overview 96 Due Diligence—Market Overview 99 Due Diligence—Culture 101 Due Diligence—Personnel 102 Due Diligence—Intellectual Property 106 Due Diligence—Brands 107 Due Diligence—Risk Management 109 Due Diligence—Capacity 110
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