Sell Side m&a
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Transcript of Sell Side m&a
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Overview
The approach Assistance across key stages of the disposal
process
Evaluation of options
Disposal planning and preparation
Competitive auction
Completion and post sale actions
Illustrative engagement letter procedures
Contents
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Overview
DISPOSAL PLANNING & PREPARATION COMPETITIVE AUCTION EXCLUSIVITY & COMPLETIONEVALUATIONOF OPTIONS
POST SALEACTIONS
What are common issues for Sellers?
Many sellers underestimate the time and resources necessary to sell their business
The seller must take action to address potential risks proactively by taking the same approach in selling theircompany as a buyer takes in analyzing potential acquisitions
How does a financial adviser sell side assistance differ from that of an investment bank?
Investment bankers provide an invaluable service to potential sellers which is generally focused on strategy, position,
marketing and negotiation. Most investment banks are not staffed to perform the level of analysis necessary to checkand challenge information at the level due diligence will be performed.
A financial adviser sell-side assistance focus is geared towards:
Identifying the areas that management needs to address to avoid surprises and subsequent price erosion;
Providing deeper insights into the value drivers of the business ;
Uncovering favorable and unfavorable deal matters; and
Assisting seller in developing the optimal tax structure or transition services requirements.
How does a financial adviser work with Sellers to bring value to the process?
The scope of work is flexible and based on assistance with carve-out historical financials (if applicable), Targetsfinancial projections and due diligence assistance type procedures which focus on risks, issues and opportunitiesfrom the perspective of a buyers accountant, although sellers must consider the impact of the divested business on
the remaining business (e.g. stranded costs).
A financial adviser can provide assistance at every stage of the disposal:
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Buy-side deals are becoming more successful
SELL-SIDE EXPERIENCE
35% of vendors completed their most recentdisposal at a price significantly below their ownvaluation
Of these, an average 20% price reduction fromvaluation to selling price was experienced
60% of all vendors suffer post deal issues
BUY-SIDE EXPERIENCE
Dealsaddingvalue
Deals thatdo not addvalue
Source: KPMG survey Increasing value from disposals A casestudy for professionalising the sell side - 2009
Source: KPMG survey Beating the Bears - 2008
but that sell-side activities are becoming more challenging
Value creation
17%
31% 34%
30%
38% 34%
53%
31% 32%
0%
20%
40%
60%
80%
100%
1999 2004 2007
Enhance value Neutral Reduce value
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Vendor frustrations frequently mirror those of bidders
Inconsistencies in financialpresentations
BIDDERS EXPERIENCE
Poor quality, inconsistentinformation in the data room
A legal data room, no
commercial information
Inability to prepare basicanalyses
Lack of access to management
Poor project management
Unrealistic timetable leads tolack of preparation time
WHAT CAN GO WRONG
Lack of central understandingof the business being sold
Lack of effective qualitycontrol over data roomcontent
Lack of robust financial dataand adequatesupport/explanation
Inadequate resourcingdeflects management teamfrom running the business
IM issued before supportinginformation is gathered &validated
Leakage of value during salesprocess
VENDORS EXPERIENCE
Slow process
Too many surprises
Extended warranties &indemnities
Too much disruption
Initial value expectation notrealised
Good preparation is therefore key to addressing these issues
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Managementpresentations
Address
purchaserenquiries
Transaction Services assistance
Validate financialmodel
Tax and accountingstructure
Draft sale agreement
Price adjustmentmechanism
Informationmemorandum
DISPOSAL PLANNING & PREPARATION COMPETITIVE AUCTION EXCLUSIVITY & COMPLETION
Negotiation
Assesssecondroundoffers
Accessindicativeoffers
Address value andtransaction issues
Historical
financial information
Internalapproval papers
Data room
Separation plan
Make contactand assessinterest
Deliverinformationmemorandum
Valuation
Identifypotentialpurchasers
EVALUATIONOF OPTIONS
POST SALEACTIONS
Sellers strategydevelopedinto M&Aagenda
Approvalsdelivery
Separation
Understandthe business
Collect/challenge
information
Pre-sale duediligence
Data room
Actionsrequired by
Sellercompany and
externaladvisors Review draft
agreements
Seller responsible for these dealstages
TS can provide assistance atthese deal stages
Key:
Completionmechanics
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Evaluation of options
Sellers strategydevelopedinto M&Aagenda
Assistance at this stage
Commercial due diligence
Impact on parent: Assist Seller in understandingthe impact that the planned disposal may haveon the parent Company. Areas to consider couldinclude possible impact on customers and the
Parent Companys ability to deliverservices/products.
Value capture options: Assist Seller inunderstanding any further value capture optionsavailable to potential bidders that Seller hasidentified (e.g., areas of the business which maycreate synergy opportunities or opportunities foroperational improvement).
M&A Tax
Consideration options: Assist Seller inunderstanding the accounting and tax impact onconsideration options:
Cash
Acquirer Stock
Earn-outs
Installment sales
Disposal options: Assist Seller in evaluating theaccounting and tax impact on disposal options:
Sale of assets or stock
All or part of the business
Tax-free reorganization
Joint venture / IPO / spin-off
Benefits
Helps Seller uncover the valuepotential which the business mayprovide to potential bidders.
Helps Seller better understandthe impact of the disposal on the
Parent Company and thereforeanticipate and mitigate suchareas of risk.
Achieve Sellers objective ofexiting a business in the most taxefficient manner, whileattempting to maximize thevalue it receives
Typical TS deliverables
Slide pack outlining theimpact of potentialoptions
DISPOSAL PLANNING & PREPARATIONCOMPETITIVE
AUCTIONEXCLUSIVITY & COMPLETIONOPTIONS
POST SALEACTIONS
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Typical TS deliverables
Slide-pack outliningpotential options
Tax basis study
Section 382 study
Valuation study to supportallocation of tax basesbetween retained anddisposed business assets
Status reports
Disposal planning and preparation (3)
Validate financialmodel
Address value andtransaction issues
Historicalfinancial information
Separation plan
Assistance at this stage
M&A Tax
Optimal tax structure: Through discussion with Sellerconsider the optimal tax structure for the disposal,considering:
The most efficient tax and legal disposal structure tosupport the desired business objective
Sellers preferred form of consideration andsettlement
Whether the Seller is looking to cash out of itsinvestment in Target or maintain an interest in theTarget or acquiring entity
Whether Seller wants to structure the sale as a
taxable or tax--free transaction Whether the sale should be a sale of assets, stock,
or stock with a section 338 election
Offset sales gain: Consider tax attributes and Sellersability to use to offset potential gain on sale
Determination of the effective tax rate to be used innormalized financials, where;
tax schemes currently in place are not being
transferred
Target operates in several locations(countries/states)
legal entities are not being transferred
Accounting implications: Advise on the accountingimplications of the proposed disposal
Unwanted assets: Comment on whether Target shouldconsider disposing of unwanted assets or subsidiaries
pre-sale
Benefits
Seller retains control of the taxaspects of the transaction
Maximizes value from the disposal
Buyer pays additional purchaseprice for step-up in tax basis inassets
Seller is able to use historicalNOLs to offset gain on sales
Buyer pays additional purchaseprice for ability to use Targetshistorical tax attributes post-acquisition
Allows Seller to retain flexibility todeal with proposals from differentbidders (e.g. domestic vs.
international, strategic vs. financial) Potentially defer taxable gain
DISPOSAL PLANNING & PREPARATIONCOMPETITIVE
AUCTIONEXCLUSIVITY & COMPLETIONOPTIONS
POST SALEACTIONS
Tax and accountingstructure
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Disposal planning and preparation (4)
Tax/ accountingstructure
Address value andtransaction issues
Historicalfinancial information
Separation plan
Assistance at this stage
Financial and business due diligence
Key assumptions: Assist the seller in identifying andthinking through the key assumptions to be used inthe financial model to control disposal activities andexpected outcomes in the sales process.
Model due diligence: Perform business plan duediligence on managements financial model. Identifykey assumptions underpinning the model and highlightareas of risk where appropriate.
Benchmark assumptions to both historicalperformance and external third party data. Externalthird party data may be collected from Sellerscustomers, suppliers, industry professionals and
industry reports. Sensitivity analysis: Assist management in quantifying
possible sensitivity in key assumptions or areas of risk.
M&A Tax
Tax calculation: Consider whether tax consequencesfrom the sale are correctly calculated inmanagements model
Compensation and benefits
HR costs: Consider whether HR separation costs areincluded in managements model
Accounting advisory
Accounting consequences: Consider potentialaccounting implications for the transition, e.g.impairment, gain/loss of sale, compensation etc.
Benefits
Highlights areas of inconsistencybetween the key assumptions in themodel and external marketconditions (e.g., projected marketgrowth or pricing assumptions) and
therefore be better prepared forquestions arising during buy-side duediligence.
Identifies areas in advance withaggressive assumptions and/or areasrequiring development of additionalsupporting documentation to satisfybuyer due diligence and negotiations
Typical TS deliverables
Status reports
DISPOSAL PLANNING & PREPARATIONCOMPETITIVE
AUCTIONEXCLUSIVITY & COMPLETIONOPTIONS
POST SALEACTIONS
Validate financialmodel
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Disposal planning and preparation (6)
Draft sale agreement
Price adjustmentmechanism
Informationmemorandum
Internalapproval papers
Data room
Deliverinformationmemorandum
Assistance at this stage
Financial and business due diligence
Data room information: Understand value drivers frombidders perspective and recommend financial,commercial, HR and taxation information to beincluded in the data room to support financial model.
Assist in development of data room index built around
value drivers
Assist with organization, collection and phasing of dataroom materials
Compare consistency of data room information andcontent with the information memorandum. Assistwith the development of a clear trail between theinformation presented in the informationmemorandum and the underlying financial records
Price adjustments: Provide input into SPA adjustmentmechanism for closing working capital, net worth orother
Assist in analysis of historical working capital forassessment of normal working capital levels
Assist with identification of potential purchase priceadjustments which bidders may use in pricenegotiations
Mitigation strategies: Consider mitigation strategies inresponse to potential bidder price adjustments
Consider potential representation and warranties andassess the impact to Seller
Benefits
Maintains confidentiality of certaininformation released later in theprocess to successful bidders
Limits the risk that commerciallysensitive information is disclosedinappropriately
Avoids bidder frustration by ensuringinformation disclosed to bidders isconsistent with previously releasedinformation.
Limits bidders opportunities forpurchase price reduction throughadjustment mechanism in saleagreement
Allows Seller to make informeddisclosure decisions
Typical TS deliverables
Suggested data room index
Comments on theconsistency and traceabilityof the data room materials
Comments on the financial,benefit plans and tax
sections of the sale andpurchase agreement
Status reports
DISPOSAL PLANNING & PREPARATIONCOMPETITIVE
AUCTIONEXCLUSIVITY & COMPLETIONOPTIONS
POST SALEACTIONS
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Managementpresentations
Address purchaserenquiries
Competitive auction
Data room
Review draftagreements
Assistance at this stage
Financial due diligence
Data room: Control and co-ordinate multiple datarooms (e.g. data room rules, opening and closing,administration of admissions)
Collate and organize questions from bidders and theiradvisors; assist with responses and counter arguments
Assist Seller in dealing with reasonable requests frombidders for additional accounting and financialinformation
Manage disclosure of confidential or commerciallysensitive information
Support Seller in preparing for its managementmeetings and presentations
Draft agreement: In conjunction with Sellers legaladvisors, provide input into the completion,accounting, tax, HR and representations and warrantysections of the sale and purchase agreements
Identify and understand the value and warranty issueswhich bidders are likely to raise and assist Seller inestablishing a clear negotiating strategy
Assist Seller in understanding the buyer positions andtypical negotiation responses
M&A Tax
Tax consequences: Assist Seller with evaluating thetax consequences of different bids and structurespresented by the bidders
Benefits
Frees up management by reducingtime spent coordinating andresponding to bidder questions -allows continued focus onmaintaining the business being sold
Ensures that bidders requests are
dealt with efficiently Minimizes the number and scope of
representations and warrantiesrequested by bidder
Avoids major changes to the saleagreement late in the disposalprocess
Simplifies and avoids ambiguity inthe sale agreement
Provides understanding of taxconsequences of the different bidspresented
Typical TS deliverables
Comments and advice onsale and purchaseagreements
Slide pack outlining taxconsequences of differentstructures and bids
Status reports
DISPOSAL PLANNING & PREPARATIONCOMPETITIVE
AUCTIONEXCLUSIVITY & COMPLETIONOPTIONS
POST SALEACTIONS
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Completion and post-sale actions
Approvalsdelivery
Separationdelivery
Completion mechanics
Assistance at this stage
Financial due diligence
Update procedures: Update due diligence proceduresprior to closing date to ensure financial results are inaccordance with expected budget/forecast andhistorical trends
Understand and document the impact on working
capital, pre-closing net worth, or other adjustments
Assist Seller in preparing responses to bidders closingbalance sheet due diligence issues
Closing statements: Perform due diligence and/orcoordinate with audit teams performing audit oragreed upon procedures on closing financialstatements/working capital statements for consistencywith SPA prior to submitting to bidder
M&A Tax
Assist Seller and bidder with understanding the taxtreatment of the proposed transaction
Assist Seller with understanding the tax itemsrequired for closing
Accounting advisory
Assist Seller with accounting issues arising fromchallenges to closing statements, working capital
statement etc.
Purchase price valuation support and valuation forbuyer
Benefits
Protects Seller from shiftingallegiances of Target managementduring the exclusivity andcompletion phase (e.g. defendagainst bidder attempt to influenceTarget management in closingbalance sheet adjustments)
Protects Seller against bidderattempts to negotiate pricedownwards through working capitaladjustments
Provides an understanding of the taxprocedures and items necessary forclosing
Typical TS deliverables
Input into responses tobidders closing balancesheet procedures
Tax opinion
Purchase price allocation
Tax elections, notices
Status reports
DISPOSAL PLANNING & PREPARATIONCOMPETITIVE
AUCTIONEXCLUSIVITY & COMPLETIONOPTIONS
POST SALEACTIONS
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Illustrative engagement letter procedures (2)
Financial due diligence (contd)Assistance with analyzing the financial track record
Assist management in preparing an analysis of historical sale trends byunderstanding:
Sales by core division
Customer Churns
Volume/Price mix by services & products
Product Line and/or key customers for the most significant businesscentres
Organic growth vs. acquisition growth
Sales by major customer
Backlog by quarter
Assist management in preparing an analysis of the change in EBITDA yearover year by understanding
Changes in sales
Change in gross margin
Changes in overheads and impact of cost reduction programs;
EBITDA by division and Business centre
EBITDA generated from organic growth vs. acquisition
One off or unusual items impacting EBITDA
Assist management in preparing an analysis of the cost structure and
breakeven analysis by considering:
Cost of goods sold
Direct and indirect labour costs
R&D costs
Other Selling and General administrative costs, variable vs. fixedcosts by division
Assist management in preparing an analysis of capital expenditures byunderstanding:
The breakdown of Capex by maintenance, growth and IT Capex.
Managements view of normalized capex by division
Managements estimate of the sensitivity of capex to businessgrowth
Assets by geographical location / legal entity
Assist management in presenting historical working capital movements by:
Analyzing inventories into quantities by product line, valuation andprovision methodology and turnover.
Analyzing accounts receivable into the composition of tradeaccounts receivable, reliance on key customers, ageing, bad debtsexperience, normal trade terms and credit control, receivable
turnover and specifically consider the timing of the recovery ofsignificant receivables, if any
Analyzing trade payables and accrued expenses to understand agingof trade creditors, key supplier relationships and turnover/paymentterms
Analyzing other liabilities
Analyzing working capital seasonality by month and division for200X, 200Y and 200Z
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Illustrative engagement letter procedures (3)
Financial due diligence (contd)
Assistance with analyzing the financial track record (continued)
Analyze information on commitments, contingencies and litigation, andconsider
contractual commitments, including share purchase agreements,capital transactions and operating lease obligations;
employment related contingent liabilities including post retirementbenefits, pensions and compensation agreements, on the basis ofthe calculation made by local management and local actuaries, if
any;
nature of outstanding or threatened litigation;
any potential environmental threats and litigation in this area.
Completion assistance
Read closing balance sheets prepared by Seller
Analyze actual to budget variances for the period between initial duediligence (e.g. financial year end) and latest available financial information,
identify and understand reasons for significant variances Analyze capital expenditures in the period to closing and compare to
managements capital expenditure forecast
Identify and document issues identified in the completion accounts
Consider issues raised by bidders due diligence teams and assistmanagement in preparing explanations or mitigating responses
Analyze preliminary working capital calculation based on provisions of saleand purchase agreement for discussion with Seller
Understand the basis for pre-closing working capital adjustments (e.g. bonusaccruals, capital expenditure accruals)
Understand the basis for corporate adjustments in the closing balance sheetsand discuss with Seller
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2010
+32 475 44 46 32www.clairfield.com
Syncap Management gmbh, member of Clairfield Partners
Hans Buysse, Partner