Mergers and Acquisitions Basics: The Key Steps of Acquisitions, Divestitures, and Investments

352 Pages·2017·2.75 MB·English

by  Michael E. S. Frankel

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Mergers and
Acquisitions
Basics
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Mergers and
Acquisitions
Basics
The Key Steps of Acquisitions,
Divestitures, and Investments
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Second Edition
MICHAEL E. S. FRANKEL
LARRY H. FORMAN
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Contents
Preface ix
Acknowledgments xi
CHAPTER1
Introduction 1
Notes 8
CHAPTER2
ThePlayers 10
TheBuyer 10
TheSeller 17
Investors/Owners 19
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CorporateStaff 29
Advisors 36
Regulators 46
Others 49
Notes 51
CHAPTER3
DecisiontoBuyorSell 55
ReasonstoBuy 56
ChoosingtoSell 70
Notes 84
CHAPTER4
Buyer’sPreparationfortheDeal 85
DevelopingaStrategy 85
BuildingaCapability 89
DevisingaProcess 95
PlanningtheMessage 102
Notes 103
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vi CONTENTS
CHAPTER5
Seller’sPreparationfortheDeal 104
BuildingaCapability 104
MakingtheBusinessMostSellable;CleaningItUp 107
SettingExpectationswithConstituents 130
PreparingtheBusinessforSale 134
Notes 145
CHAPTER6
DealProcess 147
DeterminingtheUniverseofBuyers 148
MakingtheApproach 149
One-on-OneNegotiation 151
FormalAuction 155
InformalAuction 159
BankruptcyAuction 160
DirectversusProxy 161
RelativePositionsofPower 161
InternationalM&A 162
SellerBehaviorandBuildingTrust 167
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CHAPTER7
DueDiligence 174
BuildingaTeam 174
WhattheBuyerWantstoKnow 186
Notes 209
CHAPTER8
Valuation 211
StandardValuationMethods 212
ProForma:FindingandSplittingtheUpside 228
GettingtheValuationandProFormaDone 239
DealStructureandConsideration 255
Notes 259
CHAPTER9
IntegrationPlanning 261
DedicatingResources 262
LinkingDueDiligencetoIntegrationPlanningandExecution 263
KeyIntegrationIssues 264
Notes 275
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Contents vii
CHAPTER10
FinancingIssues 276
CostofCapital 276
LostOpportunities 285
FinancingContingency:“BirdintheHand” 286
Notes 287
CHAPTER11
ClosingtheDealandAfter 288
HowIsaDealClosed? 288
OtherSigningandClosingEvents 291
Post-ClosingIssues 294
IntegrationandLookBack(thePostmortem) 295
Note 296
APPENDIXA
StandardFormDeliverablesDuringaStrategicTransactionExample 297
APPENDIXB
B1:DueDiligenceReportTableofContents 298
B2:DueDiligenceReportforProjectX 299
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APPENDIXC
StandardDealProcessChecklistExample 301
APPENDIXD
StandardApprovalProcessExample 303
APPENDIXE
ApprovalofaStrategicTransaction:KeyTopicsinPresentation 304
APPENDIXF
GenericValuationExercise 306
APPENDIXG
GenericAcquisitionTermSheetforAcquisitionbyPublicBuyer
ofPrivatelyHeldTarget 307
APPENDIXH
GenericInvestmentTermSheetforProject“Moon” 313
APPENDIXI
NotableTransactionIssuesbyCountry/Territory 315
Index 325
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Preface
T
henatureofbusinessisamovingtarget.Thewaymarketsandbusinesses
operateisconstantlyevolving,changing,anddeveloping.Forthosewho
study business, this is a source of new data, and for those who conduct
business,itisasourceofaconstantstreamofnewchallengesandopportu-
nities.Transactions,deals,agreements,orcontractsareasoldascommerce
itself.However,inrecentdecades,transactionsinvolvingcontrolofbusiness
entitiesthemselveshavebecomefarmorecommon.
Mergers, acquisitions, divestitures, equity, and venture investments are
all forms of what we refer to in this book as Strategic Transactions. Strate-
gic Transactions are unique in several respects. Unlike other commercial
contracts and agreements, Strategic Transactions are dramatic events for
companies and often represent either the end to a company as an indepen-
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dentbusinessoradramaticchangeinitsmanagement,ownership,orfate.
Since the 1970s, Strategic Transactions have evolved from rare events
to a common business practice. Today, most large companies have an
active, ongoing acquisition effort, and most small and private companies
considerbeingacquiredapossibleandsometimeslikelyendgame.Strategic
Transactions,intheformofprivateequityandventurecapitalinvestments,
alsorepresentalargeandincreasingsourceofcapitalfornewandgrowing
businesses.
AsStrategicTransactionshavebecomeacommonandpopularbusiness
tool,anewclassofbusinessprofessionalshasemergedtomanageandexe-
cute these deals. While professional advisors such as investment bankers,
lawyers, and consultants have long been expert at structuring and execut-
ing Strategic Transactions, today this segment of the advisor community is
largerthanever.
More important, a class of business professionals who are experts in
doing Strategic Transactions has emerged within companies: the corporate
developmentprofessional.Someofthesecorporatedevelopmentprofession-
alslearntheircraftasbankersorlawyerswhileothersaredevelopedwithina
company.Businessschoolsnowdevotecourseworktotheartandscienceof
dealmakingasaspecialty.Manycompaniesnowhavechiefcorporatedevel-
opmentofficers.Doingdealshasbecomeadefinedandrecognizedbusiness
specialtylikemarketing,finance,andoperations.Wemayevensupposethat
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x PREFACE
this is a virtuous cycle where the increasing population of deal experts will
lead to an increasing use of Strategic Transactions as a business tool and
sourceofinorganiccorporategrowth,inturnleadingtothedevelopmentof
moredealexperts.
Inadditiontothegrowingpopulationofprofessionalsbothinsideand
outsideofcompanieswhomakeacareerofdeals,thereisagrowinglegion
ofbusinessexecutives whoareinvolved inStrategicTransactions.Itisrare
to find a manager or executive who has not found herself involved at least
tangentiallyinanacquisition,divestiture,orotherStrategicTransaction.
The goal of this book is not to provide an all-encompassing and
definitivetreatiseonStrategicTransactions.Manybookshavebeenwritten
bylegal,finance,andaccountingexpertsdelvingintotremendousdetailon
themechanicsandfeaturesofStrategicTransactions.Thegoalofthisbook
is to provide the reader with a primer and overview of the key steps and
featuresofmostdeals.
Wehopethatthisbookwillbereadbybothyoungprofessionalsstarting
todevelopanexpertiseinStrategicTransactionsandalsobyawiderrange
ofbusinessexecutiveswhofindthemselvesinvolvedindeals.Fortheyoung
corporatedevelopmentexecutive,investmentbanker,lawyer,orconsultant,
thisbookcanprovideafoundationforunderstandingdeals,onwhichthey
(cid:2) can build a deep expertise and specialty. For business executives and man- (cid:2)
agers,thebookcanhopefullyprovideacompleteandeasy-to-readoverview
tohelpthemnavigateadealandtheirroleinit.
Wehavesoughttobalancetheneedfordetailwitheaseofunderstand-
ing,andtoaddameasureoffunandhumortoaseriousandcomplextopic.
As the reader navigates this book, and then a career with some or perhaps
manydeals,wehopeshewillnotonlylearnvitallessonstoensurehersuc-
cessbutalsosharesomeofthehugeenjoymentwehavefoundintheinfinite
challengeandcomplexityofdoingdealsandbuildingbusinesses.
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Acknowledgments
T
hisbookistheresultofmonthsofwriting,butalsoofyearsofworkand
dozens of deals. The knowledge we try to share comes from more than
five decades of work with a myriad of smart, accomplished, talented, and
kind professionals. We owe a debt of gratitude to our colleagues, clients,
and friends from GE, VeriSign, Merrill Lynch, Skadden, Arps, LexisNexis,
Dinsmore&Shohl,Deloitte,andtheChicagoMercantileExchangefortheir
guidance,wisdom,andmentoring.
We could not have written this book without the help and wisdom of
Shayna Klopott and the invaluable assistance of Gail Nurnberger. We also
need to thank our families and friends, including Ernst, Tamar, Ray, Inna,
John, Betsy, Patty, Joan, Pauline, Celeste, Jackie, Anat, and, in the case of
Michael,hisdaughterSophie,whoistheinspirationforeverythinghedoes.
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Their kindness and intelligence also run through this book, as with every
partofourlives.
Of course, while any wisdom or insight can be attributed to our time
withthesepeople,anyerrorsormistakesareentirelyourown.
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