MODULE V MA

8/13/2019 MODULE V MA

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FORMULATION

The top management should establish specific

criteria based on the objectives that havedetermined and on a strategy of growth

through acquisition.

The organization should evaluate in advancewhat the ideal target company looks like in

terms of various factors such as the following

Type of cost structure of the target company

Market channel of the target


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FORMULATION

Strategic customer accounts and marketsegments accessed by the target.

Capital structure

Types of governance process to be followed.


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LOCATE After finding the eligible target companies, the

initial financial and operational analysis shouldbe done.

This initial financial and operational analysis

leads to the initial conversation between theexecutive staffs. With continuing interest fromboth parties, the acquiring company ultimatelydefines and submits the initial deal parameters,

terms and conditions as part of the letter ofintent and the secrecy agreement.


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INVESTIGATE

Full integration

Moderate integrationMinimal integration


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NEGOTIATION

Deal teams along with the seniorexecutives:

Formulate the final negotiation

strategy for all terms and conditions

of the deal.

Consideration include price,

performance, people, legal protection

and governance.


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INTEGRATION

In determining how to resolve the many issues

that arise at this stage, the merging

organizations must carefully consider such

questions as how fast to integrate.

How much trouble will be created.

How trouble can be minimized.

How people can be helped to continue

focusing on customers, safety and day to day

operations.


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MOTIVATE

Once major integration activities arecomplete and most if not all the

projected synergies have beenachieved, management responsibilityshifts to the demands of forcing the

organization forward in order toachieve ongoing performanceimprovements.


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DEAL STRUCTURING PROCESS

Deal structuring involves identifyingThe primary goals of the parties involved in

the transaction;

Alternatives to achieve these goals; and

How to share risks.

The appropriate deal structure is that which

Satisfies as many of the primary objectivesof the parties involved as necessary to reachagreement

Subject to an acceptable level of risk


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FIVE STAGE MODEL


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FIVE STAGE MODEL

Stage I- Corporate Strategy DevelopmentStage II- Organizing for Acquisition

Stage III- Deal Structuring & Negotiation

Stage IV - Post-Acquisition Integration

Stage V - Post-Acquisition Audit &

Organizational Learning


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STAGEI: CORPORATE STRATEGY DEVELOPMENT

M&A is a part of Corporate Strategy

Enhancing competitive advantage

Optimizing Current portfolio of business

Gaining Economies of Scale Searching for Partners with Matching

Resources

Difficulty of Quantifying competitiveadvantage of M& A


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STAGE II: ORGANIZING FOR ACQUISITION

M&A may be a separate function or a part ofthe normal functions

Acquirer must develop capability and core

competence

Arrange for obtaining additional resources

Prepare a Road Map for Post Merger Scenario

of each department and functions Standardize & internalize early warning

signals


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STAGE III: DEAL STRUCTURING & NEGOTIATION

Major Pitfalls in Deal Structuring & Negotiation

- Overvaluation of target company

- Conflict of Interest of Advisors such as Investment Bankers,

lawyers, accountants and environmental consultants

- Obtaining insufficient data

- Defective due diligence

- not determining the range of negotiation parameters

-lack of clear negotiation regarding the positions of the senior

managers of both the firms- not developing defense strategies regarding regulatory

agencies


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CONTD III DEAL STRUCTURING & NEGOTIATION

For avoiding the pitfalls, the corporate should

- do proper valuation of the target

- conduct in advance a thorough investigation

of conflict of interest of the advisors

- conduct an elaborate due diligence even by

more than one agency

- negotiate clearly the absorption of the HR

and their designations


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STAGE IV: POST ACQUISITION INTEGRATION

Change Management

Project management capabilities

Communication Plans

Deadlines for execution of plansPerformance benchmarks

Reward for achievements

Merger of information systems

- continued..


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IV POST ACQUISITION INTEGRATION

HR Problems

- detailed meeting and discussion with HR

- reduce anxiety- assuring retention

- no cultural shock

- no downgrading of designations- no superior-inferior treatment


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POST-ACQUISITION AUDIT & ORGANIZATIONAL LEARNING

Contribute to codification of past acquisition

related activities.

Communicate both success and failures in

acquisitions effectively so they become

embedded in organizational procedures,systems, cultures and routines.

Highlight the weeknesses in systmes and

processes and help the business units andfunctions improve these systems and

processes.


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POST-ACQUISITION AUDIT & ORGANIZATIONAL LEARNING

Create a well calibrated feedback

mechanism for organizational learning.

Facilitate single loop learning, i.e.

understand reasons for failure of

expectations.

Facilitate double loop learning, i.e.

questions the assumptions underlyingacquisition strategy and programme and

its expectations.


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THE ACQUISITION PROCESS

Business plan

structure

Financing

Managementteam

Search TargetTarget

Due

diligenceDue

diligenceNegotiations Completion Integration

Target

selection

Desk top

Approach

Heads of

agreement

Indicative bid?

Value

Risk

Warranties

Indemnities

Disclosure

Sale &

purchase

agreement

Audit

Settlement

Post

acquisition

review

Post-acquisition

actions


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DUE DILIGEN E


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DUE DILIGEN E Analysis and appraisal of an entity in

preparation for establishing a relationship

with that entity which involves business risk.

In all, it tries to ensure that What You See is What You Get


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DUE DILIGENCE

A thorough investigation

about the target company andits operations is called duediligence

Due Diligence is the processof evaluating a prospectivebusiness decision by gettinginformation about the

financial, legal, and othermaterial (important) state ofthe other party.


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WHY AND WHEN DO YOU CONDUCT

A DUE DILIGENCE?

WHY?

Transactions involve substantial financial

obligations

A characteristic of our business environment is to

always present the best picture

Essential to determine the undisclosed risks which

are attached to the transaction as this may resultin the transaction being aborted or affect the

purchase price or terms of the agreement

WHAT IS THE DUE DILIGENCE


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WHAT IS THE DUE DILIGENCE

PROCESS?

Appointment of the team

Skills/expertise

Clear and definite mandate

Costs

Confidentiality agreements

Due Diligence Questionnaire and Checklist

One on one interviews with management from the

target company Investigative mode of enquiry which will include

searches of public registers


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MAKING DUE DILIGENCE EFFECTIVE

Strategy Target identification and evaluation

Financial assessment

Tax review direct/ indirect

Commercial assessment of

markets, management,

operations, IT, potential

synergies, pensions etc

Integrated financial

and commercial

due diligence

Management

Merchant bankers

Lawyers andother advisers

Due diligence

deliverables

Pricing

issuesStrategic

fitImprovement

opportunities

Key post-

acquisition

actions

Capex

needs

Funding

issues

Warranty

and contract

issues

Deal negotiation

and completion

Post-acquisition

plans


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TYPES OF DUE DILIGENCE

Financial

The business + historic/ prospective financials.

Tax

Tax aspects, liabilities etc.

Legal

Litigation, key contracts, regulatory aspects, title to

property, direct and indirect taxes.

Specialist

Commercial/ Operational/ Environmental/ HR/Technological

Product analysis, competitor analysis, barriers to entry,facilities, supply chain, capex needs

Plant efficiency

Contracts, pensions, mobility of labour


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THE DUE DILIGENCE REPORT

This report should contain:

An outline of the scope of the review

An analysis of the documentation and informationrevealed

A list of all the information disclosed byinvestigations (public record searches)

Limitations and disclaimers of liability

An executive summary which outlines the legalissues identified and advises on the legalimplications of proceeding with the transaction(Risks and Liabilities)


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AREAS COVERED BY DUE DILIGENCE

[a] Commercial Aspects[b] Operational Aspects

[c] Financial Aspects

[d] Legal Aspects[e] HR Aspects

[f] Organisational Aspects

[g] Aspects of Information Systems


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[A] COMMERCIAL ASPECTS

Competitive Position

Customer Relation

Market Share

Brand Portfolioatents/Copyrights


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[B] OPERATIONAL ASPECTS

Production Processes Technology used

Production Systems Channels of Distribution

Outsourced Operations Sub-contracting


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[D] LEGAL ASPECTS

Contractual Obligations Cases Pending with Regulatory

Agencies like RBI, SEBI, and

other Government Departments

Product Liability Class Action

Suits

Environmental Liability


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[E] HR ASPECTS

Competence Compensation

Training Employee Relations

Disputes Outstanding Contracts


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[F] ORGANISATIONAL ASPECTS

StructureDelegation of Authority

Leadership

Bureaucracy


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[G] INFORMATION SYSTEMS

PerformanceCost

Complexity

Compatibility


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WORKFLOW


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Due Diligence Checklist

I. Financial information

A. Annual and quarterly financial information for the pastthree years:

Income statements, balance sheets, and cash flows,including footnotes;

Planned versus actual results; Management financial report;

Breakdown of sales and gross profit by:

- Product type

- Distribution channel

- Geography;

Current backlog by customers;

Accounts receivable aging schedule.


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B. Financial projections:

Quarterly financial projections for the last two fiscal yearsand the latest quarter; revenue by product type, customers

and channel (full income statements, balance sheets, cashflow statements);

Major growth drivers and prospects;

Predictability of business;

Risks attendant to foreign operations (e.g. exchange rate

fluctuation, government instability); Industry and company pricing policies;

Economic assumptions underlying projections (differentscenarios based on price and market fluctuations);

Explanation of projected capital expenditures, depreciation,and working capital requirements;

External financing arrangement assumptions.

C. Capital Structure:


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Current shares outstanding;

Schedule of all options, warrants, rights, and any other

potentially dilutive securities with exercise prices and vesting

provisions;

Summary of all debt instruments/bank lines with key terms

and conditions;

Off balance sheet liabilities;

Capital losses.

D. Other financial information;

Summary of current federal, state, and foreign tax positions,

including net operating loss carry forwards; General accounting policies (revenue recognition, etc.);

Schedule of financing history for equity, warrants, and debt

(dates, investors, dollars investment, percentage ownership,

implied valuation, and current basis for each).


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II. Products

A. Description of each product within each market segment (including

product literature).

B. Major customers and applications.

C. Historical and projected growth rates.

D. Market share.

E. Speed and nature of technological change.

F. Timing of new products and product enhancements.

G. Cost structure and profitability.

III. Customer information

A. Representative list of 20 customersnames, addresses, phone

numbers, products owned, and timing of purchasers.

B. List of strategic relationships (contact names, phone numbers, revenue

contributions, marketing agreements).

C. Revenue by customer (names, contact, and phone numbers of any

customers accounting for 5% or more of revenue).

D. Brief description of any significant relationship severed within the last

two years.

IV Competition


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IV. Competition

Description of the competitive landscape within each market segment including the following:

A. Market position and related strengths and weaknesses as perceived in the marketplace.

B. Basis of competition (e.g. price, service, technology, distribution).

V. Marketing, sales, and distribution

A. Strategy and implementation:

Discussion of domestic and international distribution channels;

Positioning of the company and its products;

Marketing opportunities/marketing risk;

Description of marketing programs and examples of recent marketing/product/publicrelations/media information on the company.

B. Major customers: Status and trends of relationships;

Prospects for future growth and development.

C. Principal Avenue for generating new business.

D.Sales force productivity model:

Compensation

Average sales quota

Sales cycle Plan for new hires.

E. Ability to implement marketing plan within current and projected budget.

VI. Research and development


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VI. Research and development

A. Description of R&D organization:

Strategy

Key personnel

Major activities. B. New product pipeline:

Status and timing

Cost of development

Critical technology necessary for implementation

Risks.

C. Patents:

Dependence on outside licensing and patents;

Patents currently held by the company.

D. Relationships with third parties:

joint R&D efforts

participation in industry associations. E. Ability to implement marketing plan within current and projected

budgets.


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VII. Management and personnel

A. Organization chart.

B. Historical and projected headcount by function and

location. C. Summary biographies of senior management, including

employment history, age, service with the company, yearsin current position.

D. Compensation arrangements:

copies (or summaries) of key employment agreements; benefit plans.

E. Discussion of incentive stock plans.

F. Significant employee relations problems, past or present.

G. Personnel turnover: data for last two years;

key unfilled vacancies.

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VIII. Legal and other matters

A. Pending lawsuits against the companydetails concerning claimant, claimeddamages, brief history, status, anticipated outcome, and name of the company'scounsel.

B. Pending lawsuits initiated by the companydetails concerning defendant,

claimed damage, brief history, status, anticipated outcome, and name of thecompany's counsel.

C. Description of environmental and employee safety issues and liabilities:

Safety precautions

New regulations and their consequences.

D. List of material patents, copyrights, licenses and trademarksissued and

pending. E. Summary of insurance coverage/any material exposures.

F. Summary of material contracts.

G. History of regulatory agency problems, if any.

IX. Other company information

A. Business plan, if available. B. List of board members.

C. List of all stockholders with shareholding, options, warrants, or notes.


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GOLDEN PARACHUTE

A golden parachute has been

defined as an agreementbetween a company and anemployee (usually upperexecutive) specifying that the

employee will receive certainsignificant benefits ifemployment is terminated.Most definitions specify theemployment termination is as aresult of a merger or takeoveralso known as "Change-in-control benefits".


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GOLDEN PARACHUTE

Top executives in the

event that a company is

taken over by another

firm, resulting in the loss

of their job. Benefits

include items such as

stock options, bonuses,

severance pay, etc.

INITIAL PUBLIC OFFERING (IPO)


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INITIAL PUBLIC OFFERING (IPO)

An initial public offering

(IPO) is the process throughwhich a privately heldcompany issues shares ofstock to the public for the first

time.

IPO is a legal process, inwhich a company registers its

securities (share equity) withthe Stock Exchange for sale tothe general investing public.

CULTURE SHOCK


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CULTURE SHOCK

Culture shock is the

personal disorientation

a person may feel when

experiencing anunfamiliar way of life

due to immigration or a

visit to a new country,or to a move between

social environments.


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CULTURE SHOCK

The difficulty have adjusting to new

culture people had different markedly

from their own. Emotional and physical discomfort

that person feels while moving to

new environment.


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REVERSE CULTURAL SHOCK

Also called as Re-entry shock.

Return to home culture once

accustomed to new one.

MANAGERIAL PERSPECTIVE ON MERGER


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MANAGERIAL PERSPECTIVE ON MERGER

Under this perspective, managerial motives for mergersare considered as crucial determinants of the incidence,rationale, type, deal structure and outcome of mergers.

One of the important considerations for managersduring mergers is the extent of their control loss.

In the context of takeovers, managers may act to

maximize their own interests rather than those of theshareholders.

Shareholders need to diverse appropriate incentivecontracts to align managerial and their own interests.

Contracts such as golden parachutes that allowcompensation for managers in the event of losing theirjobs are designed to minimize conflicts of interest.


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MODULE V MA

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