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- Herausgeber: John Wiley & Sons
- Kategorie: Fachliteratur
- Serie: Wiley Finance Editions
- Sprache: Englisch
The essential executive M&A primer, with practical tools and expert insight Mergers and Acquisitions Basics provides complete guidance on the M&A process, with in-depth analysis, expert insight, and practical tools for success. This new second edition has been updated to reflect the current M&A landscape, giving busy executives the ideal resource for navigating each step in the process. Veteran executives relate guidelines, lessons learned, and mistakes to avoid as they explain how M&As work, identify the major players, and describe the roles involved in a successful transaction. Both buyer and seller must consider a broad range of factors, and this essential guide provides checklists, forms, sample reports, and presentations to help you avoid surprises and ensure your organization's full preparation for the deal. Equity investments, valuation, negotiation, integration, legal aspects, and more are explained in detail to provide a foundational primer for anyone seeking to clarify their role in the process. Mergers and acquisitions are becoming ever more critical to the growth of large and mid-sized companies. This book balances depth and breadth to provide a one-stop guide to maximizing the financial and operational value of the deal. * Identify key drivers of purchase or sale * Understand major roles, processes, and practices * Avoid valuation detractors and negotiate effectively * Overcome common challenges to successful integration Effective M&As are highly strategic, solidly structured, and beneficial on both sides. It's a complex process with many variables, many roles, and many potential pitfalls, but navigating the deal successfully can mean the difference between growth and stagnation. Mergers and Acquisitions Basics is the comprehensive resource every executive needs to understand the ins-and-outs of strategic transactions.
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Table of Contents
Cover
Title Page
Copyright
Preface
Acknowledgments
Chapter 1: Introduction
Notes
Chapter 2: The Players
The Buyer
The Seller
Investors/Owners
Corporate Staff
Advisors
Regulators
Others
Notes
Chapter 3: Decision to Buy or Sell
Reasons to Buy
Choosing to Sell
Notes
Chapter 4: Buyer's Preparation for the Deal
Developing a Strategy
Building a Capability
Devising a Process
Planning the Message
Notes
Chapter 5: Seller's Preparation for the Deal
Building a Capability
Making the Business Most Sellable; Cleaning It Up
Setting Expectations with Constituents
Preparing the Business for Sale
Notes
Chapter 6: Deal Process
Determining the Universe of Buyers
Making the Approach
One‐on‐One Negotiation
Formal Auction
Informal Auction
Bankruptcy Auction
Direct versus Proxy
Relative Positions of Power
International M&A
Seller Behavior and Building Trust
Notes
Chapter 7: Due Diligence
Building a Team
What the Buyer Wants to Know
Notes
Chapter 8: Valuation
Standard Valuation Methods
Pro Forma: Finding and Splitting the Upside
Getting the Valuation and Pro Forma Done
Deal Structure and Consideration
Notes
Chapter 9: Integration Planning
Dedicating Resources
Linking Due Diligence to Integration Planning and Execution
Key Integration Issues
Notes
Chapter 10: Financing Issues
Cost of Capital
Lost Opportunities
Financing Contingency: “Bird in the Hand”
Notes
Chapter 11: Closing the Deal and After
How Is a Deal Closed?
Other Signing and Closing Events
Post‐Closing Issues
Integration and Look Back (the Postmortem)
Note
Appendix A: Standard Form Deliverables During a Strategic Transaction Example
Appendix B
B1: Due Diligence Report Table of Contents
B2: Due Diligence Report for Project X
Appendix C: Standard Deal Process Checklist Example
Appendix D: Standard Approval Process Example
Appendix E: Approval of a Strategic Transaction: Key Topics in Presentation
Appendix F: Generic Valuation Exercise
Appendix G: Generic Acquisition Term Sheet for Acquisition by Public Buyer of Privately Held Target
Appendix H: Generic Investment Term Sheet for Project “Moon”
Appendix I: Notable Transaction Issues by Country/Territory
Index
End User License Agreement
List of Illustrations
Chapter 1: Introduction
Exhibit 1.1 Historical US M&A Activity
Exhibit 1.2 US Venture Capital Commitments
Exhibit 1.3 US Private Equity Investment
Exhibit 1.4 Global Private Equity Dry Powder
Chapter 2: The Players
Exhibit 2.1 The Most Active Healthcare Corporate Acquirer‐Investors, 2010–2013
Exhibit 2.2 The Top Tech Acquirers, 2009–2014
Exhibit 2.3 The Largest M&A Deals Announced in 2013–2015
Exhibit 2.4 Investment Banking Advisory Fees Example
Chapter 8: Valuation
Exhibit 8.1 Historical Control Premiums
Exhibit 8.2 Trading Comparables Example: Federal Savings Banks
Exhibit 8.3 Model Valuation Exercise
Appendix F: Generic Valuation Exercise
Exhibit F.1 Generic Valuation Exercise
Guide
Cover
Table of Contents
Begin Reading
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Mergers and Acquisitions Basics
The Key Steps of Acquisitions, Divestitures, and Investments
Second Edition
MICHAEL E. S. FRANKEL
LARRY H. FORMAN
Copyright © 2017 by John Wiley & Sons, Inc. All rights reserved.
Published by John Wiley & Sons, Inc., Hoboken, New Jersey.
Published simultaneously in Canada.
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Preface
The nature of business is a moving target. The way markets and businesses operate is constantly evolving, changing, and developing. For those who study business, this is a source of new data, and for those who conduct business, it is a source of a constant stream of new challenges and opportunities. Transactions, deals, agreements, or contracts are as old as commerce itself. However, in recent decades, transactions involving control of business entities themselves have become far more common.
Mergers, acquisitions, divestitures, equity, and venture investments are all forms of what we refer to in this book as Strategic Transactions. Strategic 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 independent business or a dramatic change in its management, ownership, or fate.
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 consider being acquired a possible and sometimes likely end game. Strategic Transactions, in the form of private equity and venture capital investments, also represent a large and increasing source of capital for new and growing businesses.
As Strategic Transactions have become a common and popular business tool, a new class of business professionals has emerged to manage and execute these deals. While professional advisors such as investment bankers, lawyers, and consultants have long been expert at structuring and executing Strategic Transactions, today this segment of the advisor community is larger than ever.
More important, a class of business professionals who are experts in doing Strategic Transactions has emerged within companies: the corporate development professional. Some of these corporate development professionals learn their craft as bankers or lawyers while others are developed within a company. Business schools now devote coursework to the art and science of deal making as a specialty. Many companies now have chief corporate development officers. Doing deals has become a defined and recognized business specialty like marketing, finance, and operations. We may even suppose that 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 source of inorganic corporate growth, in turn leading to the development of more deal experts.
In addition to the growing population of professionals both inside and outside of companies who make a career of deals, there is a growing legion of business executives who are involved in Strategic Transactions. It is rare to find a manager or executive who has not found herself involved at least tangentially in an acquisition, divestiture, or other Strategic Transaction.
The goal of this book is not to provide an all‐encompassing and definitive treatise on Strategic Transactions. Many books have been written by legal, finance, and accounting experts delving into tremendous detail on the mechanics and features of Strategic Transactions. The goal of this book is to provide the reader with a primer and overview of the key steps and features of most deals.
We hope that this book will be read by both young professionals starting to develop an expertise in Strategic Transactions and also by a wider range of business executives who find themselves involved in deals. For the young corporate development executive, investment banker, lawyer, or consultant, this book can provide a foundation for understanding deals, on which they can build a deep expertise and specialty. For business executives and managers, the book can hopefully provide a complete and easy‐to‐read overview to help them navigate a deal and their role in it.
We have sought to balance the need for detail with ease of understanding, and to add a measure of fun and humor to a serious and complex topic. As the reader navigates this book, and then a career with some or perhaps many deals, we hope she will not only learn vital lessons to ensure her success but also share some of the huge enjoyment we have found in the infinite challenge and complexity of doing deals and building businesses.
Acknowledgments
This book is the result of months of writing, but also of years of work and 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, and the Chicago Mercantile Exchange for their guidance, wisdom, and mentoring.
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, his daughter Sophie, who is the inspiration for everything he does. Their kindness and intelligence also run through this book, as with every part of our lives.
Of course, while any wisdom or insight can be attributed to our time with these people, any errors or mistakes are entirely our own.
CHAPTER 1Introduction
M&A, deals, buyouts, LBOs, MBOs, private equity, venture capital, corporate development, and a myriad of other terms are used to describe large transactions that fundamentally change the nature or course, and control, of a company. Although there are many differences among these different types of deals, a common thread runs through all of them. They are all Strategic Transactions that involve a change or shift in control of a company and usually a corresponding shift in strategic direction.
There are many different types of transactions done by a company during its life cycle. Companies execute agreements with suppliers, customers, partners, regulators, and financiers almost constantly. A lawyer would argue that running a business is really a long series of contractual obligations, entered into, complied with, and terminated. At any given time, most companies are entering into new agreements and consummating new transactions on a daily, even hourly, basis.
Strategic Transactions are different. They are the seismic, life‐changing events that fundamentally alter a company. They usually change not only who controls the company but also the strategic direction the business will take. They sometimes take a public company private or make an independent company into a small subsidiary. While full acquisitions are the most commonly known Strategic Transactions, there are many variations on the theme. However, all Strategic Transactions have a lot in common. They all involve a substantial or total change in control and a large amount of money (or other form of payment) changing hands. They all involve a Buyer, who will want to learn a tremendous amount about the business and understand it deeply. They also all involve a Seller, who is trying to maximize the value of its business but also often has other interests, including the long‐term partnership it may be entering into with the Buyer and the fate not only of its business but also of its employees.
Over the past few decades, Strategic Transactions have played an increasingly important role in business. Companies turn to Strategic Transactions as an alternative to investment in their organic growth or when obtaining capability via strategic alliances does not provide the necessary control and/or economic value. From the growth of private equity investments in a variety of forms to the increasing use of acquisitions as a growth tool by large, and even midsized, companies, Strategic Transactions have become a standard and common part of the business landscape, fueling the growth of large and small companies. There is a long‐term upward trend in both the volume and average deal size of acquisitions in the United States. Exhibit 1.1 shows that US M&A (measured in terms of dollars) remained on a substantial upward trend over the past two decades despite the downturn during the collapse of the tech bubble in 2001 and 2002, and the 2007–2009 financial crisis (aka the Great Recession). More recently, even though deal volume in 2015 was about the same as deal volume in 2005, during this 10‐year time period the total dollars spent on US M&A activity grew at a compounded annual growth rate (CAGR) of 5.9 percent.
EXHIBIT 1.1 Historical US M&A Activity
Source:https://imaa‐institute.org/statistics‐mergers‐acquisitions/#Mergers‐Acquisitions‐United‐States‐of‐America.
While the increased dollar spend, and hence average deal size, are partly explained by inflation, the increase in dollar volume is a clear indication that Strategic Transactions continue to be a core tool of growth for US companies. The recent trend is even stronger. Looking at the period coming out of the Great Recession, 2009–2015, both deal volume and total dollars spent on transactions increased, 3.6 percent CAGR and 18.1 percent CAGR, respectively, as the economy recovered.
Many of the largest US technology companies today received their early funding from venture capital and private equity investments, and many of the largest and most established names in business, including IBM, General Electric, and Pepsi, as well as newer stars, such as Oracle, Google, and Cisco, drove a significant part of their growth through acquisitions. (Note: More on corporate M&A will be discussed in Chapter 2.) For the 11‐year period of 2006–2016, US venture capital raised increased from $36.4 billion (2006) to $41.6 billion (2016)—see Exhibit 1.2. However, during this period, venture capital raised declined dramatically in 2009 as a result of the impact of the Great Recession and did not again reach even 2007's level of ∼$35 billion until 2014. Most recently, US venture funds secured $41.6 billion in 2016, an 18.2 percent increase over 2015's $35.2 billion. This new capital will likely be put to use over the next five years.1
EXHIBIT 1.2 US Venture Capital Commitments
Source: NVCA 4Q 2016 US Venture Monitor, page 17, National Venture Capital Association.
EXHIBIT 1.3 US Private Equity Investment
Source: Private Equity Growth Capital Council website (now the American Investment Council).
Private equity (PE) firm investment is one form of M&A activity in that PE firms are generally buying companies for their own investment portfolio. In the last decade (2006–2015), despite the Great Recession of 2007 to 2009, US private equity firms increased their investment—that is, their M&A activity—from $487 billion in 2006 to $632 billion in 2015 (see Exhibit 1.3). When you look at the money available for M&A activity globally (so‐called dry powder), the same pattern emerges. A near record $1,307 billion was available at the end of 2015, up from $800 billion at the end of 2006 (see Exhibit 1.4). The signs are clear that M&A activity will increase as these funds are eventually put to use across all sectors of the global economy.
EXHIBIT 1.4 Global Private Equity Dry Powder
Source: Private Equity Growth Council website.
However, Strategic Transactions are not a riskless exercise; far from it. Although they can be a source of dramatic and quick growth when they are successful, they can be a huge drain on a business when they fail to deliver. In what is often known as the winner's curse, many studies find that most of the value derived from many deals ends up in the hands of the Seller rather than the Buyer.2 Often, this failure is the result of a gap between the cost and revenue synergies expected and actually realized. In some cases, this is the result of optimistic expectations, and in others, of a failure to execute effectively on integration plans.3 One study found 64 percent of the deals studied destroyed value for the Buyers' shareholders.4
This book will provide an overview of all the key steps in a Strategic Transaction and try to provide the reader with not only an overview of how the process works but also key lessons for how to approach and execute a deal effectively and efficiently. Many sections will discuss each side—Buyer and Seller—individually; however, it is important for any participant in a Strategic Transaction to understand both sides. Too often, a Strategic Transaction falters, or the parties do not reach the optimal terms, because one side fails to understand the other. Buyers need to understand the needs of a Seller and try to reflect them in their bid. Sellers need to understand the goals of a Buyer and manage their business to meet those goals. This can not only help to get a deal done but also, in many cases, result in a deal that is better for both sides.
One of the interesting things about a Strategic Transaction is the potential for synergy, where one plus one equals three. The combination of Buyer and Seller can create additional value to be shared. For example, a company that is undercapitalized can actually return dramatically better results once it is owned by a larger parent with more access to capital. Similarly, a small technology company with an innovative product might be worth much more when combined with the marketing power of a large, branded electronics manufacturer. In each case, the Strategic Transaction itself unlocks additional value that neither side could access individually. One of the keys to unlocking this value is a clear understanding of the other party's goals, challenges, and processes. Understanding the Buyer will make you a more effective and successful Seller, and vice versa.5
Chapter 2 reviews all of the key players in a Strategic Transaction. The goal here will be to discuss not only the role of these players but also their motivations and goals. This chapter will also differentiate between the goals of organizations and the individuals who run and represent them. Chapter 3 discusses the decision to buy or sell. Many of the terms, as well as the nature of the process of a transaction, will be driven by the underlying decision made by Buyer and Seller to do a deal. Chapters 4 and 5 discuss first the Buyer's preparation and then the Seller's preparation for a deal. Investing time and resources in preparing for a Strategic Transaction can yield dramatic returns. Given the large dollar amounts at stake, proper preparation is always a worthwhile investment.
Chapter 6 discusses the deal process. Given the complexity of a Strategic Transaction, how the process is crafted can actually contribute to the success of the deal. Chapter 7 will focus on the core of a Strategic Transaction—due diligence. This is the period during which the Buyer tries, in a relatively short period of time, to get a sufficiently detailed understanding of the business for sale to have comfort that its price is reasonable and its plans for growing, expanding, or otherwise improving the business are feasible. This is also an opportunity for the Seller to further pitch the value of the asset and to try to allay any concerns that the Buyer may have. Effective due diligence is the key to avoiding nasty surprises after a deal is done, and failure to do proper due diligence can leave a Buyer owning a business much less attractive, less profitable, or simply much different from what the Buyer thought it was buying.
Chapter 8 will discuss valuation, arguably the core of a Strategic Transaction. The fact that a valuation is expressed in terms of a single or small range of numbers belies the fact that the process, part art and part science, of reaching this number is often complex and unclear. Chapter 9 will review the often ignored issue of integration planning. For most Buyers, effective integration planning can be the difference between success and failure in a Strategic Transaction. While actual integration takes place after a deal is done, integration planning is an essential part of the transaction itself, since it both informs the other parts just mentioned (valuation, due diligence, and even the decision to buy) and helps to ensure that the actual integration can occur quickly and efficiently after the deal is closed. Chapter 8 also touches on financing issues that the Buyer may face. While some Buyers have sufficient capital on hand to do a Strategic Transaction, some large and relatively rare deals often require outside financing, and this has an impact on both the Buyer and the Seller. Chapter 10 will also discuss such financing issues.
Finally, Chapter 11 will discuss some of the mechanics of actually closing a deal and some of the “tail” issues that remain after a deal is closed. Every deal is unique and, by definition, requires a tailored set of documents. That said, some standards, forms, and checklists can be a valuable starting point. In the appendices are examples of reports, checklists, process maps, and term sheets that can help the reader flesh out the deal process.
The key steps, challenges, and processes in all Strategic Transactions are very similar. While this book will focus on the most common, the acquisition of an entire company, most of the lessons are equally applicable to transactions involving the acquisition of a strategic stake in a company as well.
NOTES
1.
NVCA 4Q 2016 US Venture Monitor, page 17, National Venture Capital Association.
2.
Scott Christofferson, Robert McNish, and Diane Sias, “Where Mergers Go Wrong,”
McKinsey Quarterly
2 (May 2004), p. 2.
3.
Ibid. The authors found that in 70 percent of the deals studied, the Buyer failed to achieve the expected levels of revenue synergies, and in 25 percent of the deals the Buyer substantially overestimated cost synergies.
4.
“Of 277 big M&A deals in America between 1985 and 2000, 64% destroyed value for the acquirers' shareholders. Interestingly, mergers in recessions or periods of low growth from 1985–2000 did better than mergers consummated in good times.” In “The Return of the Deal,”
The Economist
368, issue 8332 (July 10, 2003), p. 57.
5.
For a much more detailed discussion of this topic, see Michael E. S. Frankel,
Deal Teams: The Roles and Motivations of Management Team Members, Investment Bankers, Venture Capitalists and Lawyers in Negotiations, Mergers, Acquisitions and Equity Investments
(Boston: Aspatore, 2004).
CHAPTER 2The Players
You cannot understand a Strategic Transaction without understanding the players involved, their roles, their motivations, and the way transactions are managed. Beyond the Buyer and the Seller, there are many entities that participate in a Strategic Transaction. Beyond the entities, it is as important, if not more important, to consider the individuals. In many cases, individuals within an entity and the motivations that drive them can have a substantial impact on a deal. This chapter will review the major players in a Strategic Transaction. It will discuss what role they play, how they are motivated, and how they are managed.1
THE BUYER
In this book, the Buyer is the entity rather than the individuals who may represent it. Subsequent sections will briefly talk about the individuals who may be sitting across the table from you in a negotiation. In theory, people who work for an entity should exactly represent its best interests, but in practice this is not always the case. In this section, think of the Buyer as a corporate entity maximizing its and its shareholders' best interests.
Buyers come in many forms with different goals and motivations. When negotiating with a Buyer, it is essential to understand the Buyer's business model and priorities. Similarly, as a Buyer, it is important to first establish what your priorities are to ensure that a Strategic Transaction meets your company's specific goals.
Strategic Buyers
When people refer to strategic Buyers, they are usually referring to corporations that are making an acquisition to bolster their existing business. A better and broader definition might be that a strategic Buyer is an entity making a purchase that it intends to somehow consolidate, link, or integrate with other operations that it owns. Strategic Buyers will be differentiated from financial Buyers shortly. Strategic Buyers generally view an acquisition in terms of the impact that it will have on the Buyer's existing business and the impact that the Buyer's existing business can have on the acquired business. These can be defined broadly as synergies. Chapter 8 will discuss synergies in detail, but for the moment suffice it to say that synergies are the exercise of making 1 + 1 = 3. To the extent that a strategic Buyer can recognize synergies through an acquisition, it has an inherent advantage. In effect, it can buy something for $10, but by virtue of buying it and integrating it effectively, can make it worth $11 or more. However, as will be discussed in this chapter, synergies presume an effective and efficient integration. This is a far, far more daunting task than most acquirers expect.
Strategic acquirers have an additional advantage. Unless they are looking to acquire a business in a wholly new area, a strategic acquirer will have a fairly deep understanding and knowledge of the business, markets, operations, and customers of an acquisition Target. A strategic acquirer will also be able to call on its own staff to provide detailed expertise when reviewing an acquisition and considering the challenges of integration.
Repeat Players
For many companies, acquisition has become a standard business tool. Companies like Cisco, Google, HP, and Oracle drove growth through acquisition and effective integration. In fact, of the top 10 largest tech acquisitions to date, Oracle bought PeopleSoft ($10.3 billion) and Sun Microsystems ($7.4 billion), HP bought Compaq ($18.6 billion), EDS ($13.9 billion) and Autonomy ($10.2 billion), and Google purchased Motorola Mobility ($12.5 billion).2 Google, a serial acquirer, has bought more than 180 companies since its first acquisition in 2001.3 But tech isn't the only active sector for M&A. During the period from 2010 to 2013, some of the largest companies in the healthcare market did multiple deals, with GE completing 10 acquisitions, Pfizer completing 7, and Medtronic 6.4Exhibit 2.1 lists the most active healthcare acquisitions.
Company
Ticker
Investments
Acquisitions
Total
Novo Group
NYSE: NVO
51
1
52
Johnson & Johnson
NYSE: JNJ
41
3
44
Novartis
NYSE: NVS
39
1
40
GlaxoSmithKline
NYSE: GSK
34
4
38
Pfizer
NYSE: PFE
23
7
30
General Electric
NYSE: GE
18
10
28
Roche Holding
Six Swiss EX: ROG
16
4
19
Medtronic
NYSE: MDT
14
6
20
Eli Lilly & Co.
NYSE: LLY
16
3
19
Kaiser Permanente
N/A
19
0
19
EXHIBIT 2.1 The Most Active Healthcare Corporate Acquirer‐Investors, 2010–2013
Source:cbinsights.com.
The tech sector has been acquiring many private companies. The “top tech acquirers of 2009 made 55 disclosed private company acquisitions compared to the 200+ that have taken place” through September, 20145 (see Exhibit 2.2). “Five companies consistently rank in the top tech acquirers by year: Google, Facebook, IBM, Cisco, and 3D Systems.”6Exhibit 2.3 contains a list of the largest deals announced in 2013 to 2015, deals ranging from $10 billion to $191 billion, representing a variety of industries as well. What's interesting to note is that not all of these deals were completed due to regulatory or other issues. For example, Time Warner Cable did not get acquired by Comcast in 2014 as announced, but in 2015, Charter announced the acquisition of Time Warner Cable, which closed in 2016. The Williams–Energy Transfer Equity deal, was announced in 2015, but collapsed in 2016. And the Anthem–Cigna deal announced in 2015 has been blocked by the Justice Department on anti‐trust concerns. As of September 2016, it was still in limbo. Despite the challenges associated with such large acquisitions, the activity continues with new announcements almost daily.
Repeat players have several distinct advantages even over other strategic Buyers. The most obvious and powerful is that they have learned through experience and through trial and error. Repeat players have honed their ability to evaluate, negotiate, close, and integrate Strategic Transactions. They have learned what they do well and what they do not do well. In terms of governance, repeat players have learned how to quickly and efficiently navigate their own internal approval processes for Strategic Transactions, which inevitably attracts senior management's attention and scrutiny. Part of this is that the senior management and boards of repeat players have gotten more comfortable with the inherent risk and volatility of Strategic Transactions. Repeat players have also developed dedicated expertise in their staff to do these deals. Repeat players usually have dedicated deal teams and standardized procedures, documents, and models. More broadly, repeat players usually develop a general understanding among their broader management and employee base of the role and purpose of strategic acquisitions. This makes both drawing resources to do a deal and the process of integrating a deal less traumatic for the organization and its employees.
EXHIBIT 2.2 The Top Tech Acquirers, 2009–2014
Source:https://www.cbinsights.com/blog/tech‐acquirers‐private‐companies/.
Newbies and One‐Timers
Like anything else in life, there is always a first time for doing deals. For some companies, a first Strategic Transaction is the first step in becoming a repeat Buyer—a serial acquirer. For other companies a Strategic Transaction may be an aberration or a one‐time event, which is unlikely to be repeated. There is also the third category—occasional Buyers. While occasional Buyers are not as unsophisticated or unprepared as first‐time Buyers, they do not have the same infrastructure, experience, and capabilities that a repeat Buyer has.
For first‐time Buyers, a Strategic Transaction is far more frightening and far more risky than for a repeat Buyer. For them, it is not only far more expensive in terms of dollars spent, but also, more importantly, in terms of resources that must be devoted and the distraction to senior management and the board of directors. Much of the rest of this book will be devoted to discussing the various parts of a Strategic Transaction and the capabilities that a Buyer or Seller needs to do one. First‐time Buyers usually lack most, if not all, of these capabilities and skill sets. Part of the challenge for any first‐time Buyer is overcoming the “speed bump” of developing the capabilities to do a deal. A first‐time Buyer must also overcome the fear and uncertainty associated with such a dramatic change to its core business: placing one very large bet in a game with which they are not particularly familiar. For many companies, the speed bump of building a capability and getting comfortable with the risks of a deal outweigh the appeal of doing a deal.
If a first‐time Buyer does decide to pursue a Strategic Transaction, it is crucial that the company approach the deal with caution, preparation, and a sufficient awareness among senior management and the board of directors of the inherent risks and volatility in this particular tool for growth.
First‐time Buyers can often draw on internal expertise doing a deal. Even if a company has never done a Strategic Transaction, many of its managers and senior executives may have deal experience from prior roles in other companies. This said, first‐time Buyers usually find Strategic Transactions to be painful and unnerving. Senior management and the board of directors find the inherent risk really hard to accept, and employees find the uncertainty created during the deal and subsequent integration to be unnerving. Although repeat players will usually act decisively and efficiently in assessing transactions, first‐time Buyers are often slow to make a decision and hesitant to make a bid. It is not uncommon to see first‐time Buyers review a large number of deals for a long period of time before becoming comfortable with actually executing one.
Financial Buyers
Strategic Buyers look at a Target and see a component to be added to their current business. By contrast, financial Buyers look at a Target as something they can maintain as a stand‐alone company, but improve, revitalize, or recapitalize and eventually sell at a substantial gain. The notable exception here is for financial Buyers, who will undertake a roll‐up, where they plan to acquire multiple businesses that can be combined and integrated. There are a variety of types of financial Buyers who focus on different sizes of transactions, different transaction structures, and different industry sectors. Broadly speaking, all financial Buyers use some form of investor capital to acquire control of Target companies with the eventual goal of selling the company for a profit.7
Fundamentally, financial Buyers face two significant challenges in doing deals versus strategic Buyers. First, investors and financial Buyers generally expect a significant return on investment. Significant usually means well in excess of what they could realize by making investments in similar companies on the open market. Second, in most cases, financial Buyers will not be able to realize the synergies (cost, revenue, operational, channel, etc.) that strategic Buyers can in an acquisition. When bidding against strategic Buyers, this puts them at a significant disadvantage. Now, the various types of financial Buyers will briefly be discussed.
Private Equity Firms
There are a variety of types of private equity firms. As a general matter, private equity firms are firms that collect a pool of capital from large institutional and private investors and then make selective investments in a portfolio of companies. While some private equity firms take small minority interests in these private companies, many acquire control, or effective control, in their portfolio companies. There are many “flavors” of private equity firms. Some private equity firms focus on making the large investments in large, established businesses. Other “venture capital” firms focus on acquiring an interest in earlier‐stage companies. Another variation is leveraged buyout (LBO) funds, which acquire companies with strong cash flow, where they are able to borrow money for a significant portion of the purchase price (i.e., a “leveraged transaction”) and then pay down the debt out of the company's cash flows over time.
Management Buyers
In some cases, a private equity firm will partner with a management team to acquire a company. This could be a public company that it takes private, effectively buying the company from the public market. This could also be a division of a public or private company that the management team, when partnered with a private equity firm, acquires from the parent company and runs on its own. In either case, the result is a company that is acquired by a combination of a private equity firm and a management team. Unlike a traditional private equity transaction, where the management team may get little equity, in a management buyout (MBO), the management team will likely get a significant chunk of the equity of the company in the acquisition as an incentive to grow the business—in other words, an increase in their ownership stake benefits the private equity owners, too, even more.
Largest M&A deals in 2015
Rank
Companies
Industry
Price ($ Billions)
10
Ebay and Paypal
Internet
47
9
Anthem and Cigna
Healthcare
48
8
Heinz and Kraft Foods
Food Processing
55
7
Energy Transfer Equity and Williams
Energy
56
6
Dell and EMC
Technology
66
5
Dow Chemical and DuPont
Chemicals
68
4
Charter and Time Warner Cable
Telecommunications
78
3
Shell and BG Group
Energy
81
2
Anheuser‐Busch InBev and SABMiller
Beverage
120
1
Pfizer and Allergan
Pharmaceuticals
191
Largest M&A deals in 2014
Rank
Companies
Industry
Price ($ Billions)
10
Novartis AG & GlaxoSmithKline
Pharmaceuticals
20
9
Facebook and WhatsApp
Internet
22
8
Actavis and Forest Laboratories
Pharmaceuticals
25
7
Reynolds American, Inc. and Lorillard Inc.
Tobacco
27
6
Halliburton Company and Baker Hughes Incorporated
Oil Services
35
5
Medtronic and Covidien
Healthcare
43
4
Actavis and Allergan
Pharmaceuticals
66
3
AT&T and DirecTV
Telecommunications
67
2
Comcast and Time Warner Cable
Telecommunications
70
1
Kinder Morgan Inc. and El Paso Pipeline
Energy
76
Largest M&A deals in 2013
Rank
Companies
Industry
Price ($ Billions)
10
Applied Materials and Tokyo Electron
Semiconductor
10
9
Spectra Energy Partners and Spectra Energy
Oil & Gas
9.8
8
American Airlines and US Airways
Aviation
11
7
Thermo Fisher Scientific and Life Technologies
Healthcare
13
6
Liberty Global and Virgin Media
Telecommunications
16
5
Publicis Groupe and Omnicom Group
Advertising & PR
17
4
Comcast and NBC Universal Media (from GE)
Telecommunications
17
3
Dell and Silverlake (Private Equity Firm)
Computer Hardware & Software
25
2
Berkshire Hathaway & 3G Partners and H.J. Heinz
Conglomerate
23
1
Verizon and Vodafone (bought out VOD's 45% stake)
Telecommunications
130
EXHIBIT 2.3 The Largest M&A Deals Announced in 2013–2015
Sources:CNBC.com and Investorplace.com.
THE SELLER
By contrast to Buyers, who often pursue Strategic Transactions repeatedly, by definition Sellers are one‐time participants. With some notable exceptions, the decision to sell is a singular and final decision of the corporation. In effect, selling a corporation is the final endgame for the shareholders. Once a company is sold, it loses the distinct nature of a separate entity and becomes a subsidiary of another company or is even subsumed in whole into an existing business. In any case, it loses many of the characteristics of a stand‐alone company. From a financial point of view, the sale of the company is a true endgame for stockholders. If they receive cash, they have entirely severed their relationship with the company. Even if they receive stock, they are usually relatively uninvolved minority equity holders in a much larger company. The notable exceptions to this last item is a situation in which the selling stockholders receive a significant portion of the resulting parent company or they are offered an earn‐out (deferred purchase price contingent on specified business/financial performance metrics). This situation will be discussed further when talking about the currency of transactions in Chapter 8. The other notable exception is the case of partial Sellers. Let us discuss Sellers in three categories: (1) partial Sellers, (2) full Sellers, and (3) unwilling Sellers.
Partial Sellers
Many Strategic Transactions may involve the sale of a part, but less than all, of a company. In some cases, this is the first in a series of transactions that will eventually end in a complete sale of the company. In other cases, the Buyer will never acquire the whole company but only a minority stake. For the Seller, partial sale is thus either a prelude to a complete sale or an end in and of itself. In this vein, a partial sale can be used as a financing mechanism. Rather than trying to sell shares on the open market, in the case of a public company, or to a large number of investors, in the case of a private company, a partial Seller can get capital by selling a chunk of itself to a single counterparty. For the partial Seller, this provides capital that can be used to grow the business, or it can provide a liquidity event for some of the existing shareholders of the partial Seller. The partial Seller may also be seeking to solidify a relationship with the partial Buyer. One good example of this would be a small manufacturing company that is trying to solidify its relationship with a large retailer that it uses as its main channel of sale. By having the retailer make an investment and own a chunk of the manufacturer, the manufacturer can create a powerful incentive for the retailer to continue to sell its products. Thus, in addition to the cash from the sale, a partial Seller may use the transaction to build a relationship with the Buyer.
In most cases, partial Sellers will be private companies. Private companies have limited access to the public markets for debt and no access to the public markets for equity. A partial sale to a single large Buyer can be an attractive funding mechanism for private companies. In some cases, public companies may also choose a partial sale. In recent years, Private Investment in Public Equities (PIPEs) deals have become very popular. In a PIPEs deal, a public company makes a prearranged sale of a minority interest to a single Buyer. The key issue to remember with all partial Sellers is that, unlike a full Seller, the transaction does not spell the end of the corporate entity. The company will continue to operate, albeit with a new large and potentially influential shareholder.
Full Sellers
The term full Seller is used in this book to refer to the traditional Seller of a company. In this situation the company is being sold in toto. This is truly the endgame for shareholders and often for senior management of the Seller. The decision to sell will be discussed in more detail in Chapter 3, but it is important to remember that for the Seller, this will be the first and last of this transaction. As such, the Seller usually goes through a complex and detailed process of deciding to make a sale. For reasons that will be discussed in Chapter 3, the Seller, its management, and its board of directors have decided that shareholders' value can be maximized by selling the company at this time.
Unwilling Sellers
This last category is a rare, but important, group of Sellers. In most cases, Strategic Transactions occur at the instigation, or at least with the enthusiastic support of, the management of the Seller. However, in some cases, a Strategic Transaction will be thrust upon a Seller—the hostile deal. In a hostile deal, a Buyer will bypass the management and board of directors of a Seller and appeal directly to the shareholders of the Seller to sell their shares. In most cases, the Buyer will first approach the Seller's management or board and only bypass them after being rebuffed. In either case, in a hostile transaction, the management and board of directors of the Seller are actually fighting to avoid a transaction and battling the company's shareholders for their “hearts and minds.” Unwilling Sellers behave dramatically differently from willing Sellers. In many ways, hostile deals bear little resemblance to other Strategic Transactions. There is a rich and deep literature that discusses these strategies and the processes of hostile deals.8 This book will focus largely on “friendly” deals, but it is important to remember the hostile category of deals and the category of unwilling Sellers.
INVESTORS/OWNERS
So far, this book has referred to Buyers and Sellers, the two entities involved in a transaction. The remainder of this section will talk about the entities and individuals who are part of the Buyer or Seller, or who surround them during a Strategic Transaction. At this point, it is useful to review the difference between a legal entity and a person. Corporations may be legal entities that take “actions,” but at the end of the day they are made up of, and advised by, a number of different groups of individuals. The way that Buyers and Sellers act during Strategic Transactions is largely driven by the motivations, interests, and views of those individuals and other entities.9 There are several types of investors or owners of companies. Think of them in the context of the evolution of a company from its initial conception and founding through its early stage growth to its later stage growth and finally to going public and becoming a publicly held company. This section will discuss the various investors and owners along that same development life cycle.
Entrepreneurs/Founders
Like fires, every company starts with a spark. That initial spark is sometimes an idea or a product or a concept or even a theme.10 Founders are the people who take that initial spark and turn it into a concrete plan and then begin to execute it. In some cases, founders will step aside once the business starts to become successful, ceding control to “professional management.” In other cases, founders will continue at the helm for years or even decades throughout the entire life cycle and growth cycle of a company. In the middle case, founders may cede the top spot to professional managers, while retaining a role on the management team, such as chief technology officer or chief strategy officer. By definition, founders or co‐founders start out owning 100 percent of the company. Of course, in this early stage, that means they own 100 percent of effectively nothing in terms of value. But as a company matures and begins to create value, and even as it is diluted by the addition of funding from other investors, founders usually retain a significant ownership stake in their companies (e.g., Larry Ellison, chairman of Oracle, even today owns approximately 27 percent of Oracle). As a result, even in large well‐established companies, founders can play a significant role and have a large say in whether or when the company does a Strategic Transaction. Through both their equity ownership and their historical and continuing role in the company, founders usually have a seat at the table.
When considering the role of founders in Strategic Transactions, it is important to remember the variety of motivations at play. Certainly, as large equity holders, founders seek to maximize their personal wealth. However, founders are also driven by personal motivations. Like watching a child grow up, a founder watches the growth and progression of a company with significant emotion. A founder may be swayed for or against the Strategic Transaction based on how it will affect the company that he or she has created. For example, the founder of a company who is considering selling the company to a large competitor may have mixed feelings. Even if she is sure that this deal will maximize the value of the company, she will hate to see the business she helped build be subsumed into a larger entity whom she may have spent a large part of her career battling. In many cases, founders believe that they have built a unique corporate culture or philosophy and will be hesitant to see that diluted or destroyed by a Strategic Transaction. A founder may also consider how a Strategic Transaction will affect him or her personally on a day‐to‐day basis. For many founders, the company is not only a job and an asset but also a home and a family. When a company is acquired, the founder may lose her role and even her office. Similarly, when a company acquires other companies, the founder gets to watch her child grow. Acquisitions that make the company larger may be especially personally rewarding for a founder because his ego and self‐worth may be closely tied to the success and perhaps the pure size of the company.11
When dealing with founders, it is essential to keep in mind these nonfinancial motivations that in some cases may even outstrip financial interests. For example, the commitment to a founder that the corporate culture she has built, or perhaps her personal role as a strategic leader, will be left intact after an acquisition may be more important to her than maximizing the purchase price for a company. Similarly, painting an acquisition as a significant step toward demonstrating that a founder's strategy, approach, or product is superior may be a more powerful motivator than showing that the acquisition will have short‐term financial benefits. This is not to say that founders are irrational, but simply that as individuals, like all of us, they can be swayed by personal as well as financial goals and preferences.
Private Equity
At a certain stage in its development, almost every company has the need for outside capital. In many cases, companies start out being funded by their founders, and in some rare cases the business grows quickly enough to fund its own growth. However, in most cases, particularly for larger, faster‐growing businesses, an infusion of capital is needed relatively early in the development of the business. In the evolution of a business, there is a large space between initial founding and eventual access to public markets. When a business has grown too large to be funded by its founders, and is far too small to be taken public, it is funded by private equity and sometimes debt. Here, the term private equity is used in its broadest sense, simply to refer to investments made outside the realm of the public markets. These private equity investors can be separated into four broad categories:12 (1) angels, (2) venture capitalists, (3) traditional private equity firms, and (4) LBO/MBO investors.
Angels
Early in the development of a business, in some cases before the business is even launched, a founder will need to look outside of her own resources. In some cases, this is because the founder does not have the money, and in other cases, the founder is simply seeking to avoid putting her entire life savings into a risky early‐stage business venture. In either case, a founder will often start by looking to people she already knows. Broadly defined, angel investors are individuals (usually with a personal relationship directly or indirectly to the founder) who make relatively small investments in very early–stage companies. An angel may be a classmate, friend, family member, or business associate of the founder. In some cases, there may be one or even two degrees of separation, where the founder is introduced to the angel. Angel investors will tend to behave more like traditional private equity investors, who are discussed in the “Private Equity Firms” section. However, it is important to remember that angel investors have some unique characteristics. With a personal relationship to the founders, they may be swayed by some of the founders' interests and motivations. Even though they are making relatively small investments, as individuals, these investments may represent a significant portion of their net worth, and as a result they may use a different financial calculus than a large institutional investor would. For example, an angel investor who puts $300,000 into a startup company may have a total net worth of $5 million or $10 million. Although $300,000 does not “break the bank,” if the company does well and that investment is worth $10 million or $15 million, the sale of the company or at least the angel's stake in it, will be a life‐changing event for the angel investor. You need look no further than some of the angel investors in large technology companies in the late 1990s to see examples of dramatic increases in wealth.
Venture Capitalists
Venture capital has been around for decades but has reached new prominence in the last 15 years. Venture capital firms are usually made up of a small number of professionals who have built a fund of committed investments from institutional investors and in some cases very wealthy individuals. The business model of a venture capital firm is to find a number of promising, early‐stage businesses, make a series of investments, help these businesses to develop and grow, and hope that a small number of these investments will yield significant upside. By definition, venture investing is the exercise of, to borrow an old baseball term, “swinging for the fences.” Venture capital firms expect that a large percentage of the investments they make will be worthless, that a smaller number will yield modest results, and that a very small number will yield spectacular results. Some venture capital firms would argue with this assessment and say that they focus on more conservative business models, in effect trying to hit a lot of doubles and triples, but it is generally safe to say that venture capital, investing in early‐stage companies without proven track records, is a relatively high‐risk exercise. The upside to this risk is that venture capital firms will get to invest in companies at relatively low valuations. Once invested, a venture capital firm will usually try to help the business succeed. Venture capitalists sit on boards of directors, make industry connections, and often even install members of management into companies in which they have invested. Some venture capital firms operate like Japanese keiretsu.13 These firms will create a network of investments and then work to ensure that each of their portfolio companies works with other relevant portfolio companies to help each other succeed (the same can be said for other private equity firms discussed later in this chapter).
Venture capital firms are, at the end of the day, beholden to their investors. They need to show performance in order to raise larger funds and, in some cases, even to keep the funds they have raised. The two measures of performance are (1) time and (2) quantity. The shorter the period between making an investment and reaping a reward, the better. The greater the return on that investment, the better as well. Often, these two measures will come into conflict. When a venture capital firm is faced with the option of selling its stake in a portfolio company, it must balance the benefit of an immediate win against the possibility of an even greater win in the future. A venture investor and a potential Seller will have to consider this balance not only in terms of this particular investment but also in terms of their broad portfolios. If a venture fund has not been able to sell many of its portfolio positions, it may be under pressure from its investors to reach a liquidity event. This may drive the venture investor to consider the bird in the hand of an early sale versus the two in the bush of continuing to grow a portfolio company. By contrast, a venture capital firm that has recently sold off many portfolio companies or that has recently received a large inflow of investment funds may have an incentive not to sell a portfolio company but rather continue to grow it, hoping to yield even better returns in a few years.
A final point on venture capital firms, which also applies to other private equity firms, is discussed in the following section. In most cases, the employees and partners of a private equity firm or venture capital firm receive most of their financial compensation in the form of carry. The carry is a percent of the returns made on the sale of the portfolio after the initial capital—and in some cases an additional preference premium—is returned to the investors (often limited partners). A venture capital partner may receive a base salary, but the vast majority of her compensation comes in the form of a share of this upside in the investments she makes or the firm as a whole makes. As a result, partners in venture capital and private equity firms have a very personal and immediate financial stake in the sale of their portfolio companies. The sale of a portfolio company at a significant premium to the valuation at which the venture capital firm invested will translate immediately into a large financial windfall for the partner(s) at the venture capital firm. As a result, the time and return forces that impact a venture capital firm have a similar derivative impact on the individual partners in that firm. Venture funds are often measured by their return on equity denominated as a compounded annual return, an important measure for raising subsequent funds. On a personal, financial level, they must weigh the size of the financial windfall of a sale against the time required to receive it.
Private Equity Firms
Much
