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ME RGE RS & ACQUIS IT IONS

Mergers & AcquisitionsToolkit

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M&A TO O L K I T

2 ER N S T YO U N G | 2005

Consider also the ability of the

management team to

integrate/operate the enlarged

business

3. Some acquisitions will be more

opportunistic than planned and will

need to be approached differently in

each case. Approach should remain

flexible however even opportunistic

opportunities need to be analysed in

line with planned stated objectives to

minimise the risk of being caught up

in the moment and making a wrong

acquisition. Should also have

guidelines in place to manage the

short time frame requirements often

imposed in an opportunistic process.

Identifying potential targets

1. Establish the population through

the following sources:

Database

Competitors Advisors

Internal referrers

Introduction

With the increasing intensity of

todays business environment

redefining business success, it can be

difficult to know how decisions can

maximise your companys growth. The

following document seeks to uncover

the various issues that need to be

considered when planning growth by

acquisition and various steps that need

to be taken.

Strategic Issues

1. When an organisation is planning

expansion by acquisition, it must

undertake a thorough selection and

acceptance process. Any acquisition

should be based solely on sound

strategic or financial benefits to

the organisation.

2. Examine in detail the motives for

the acquisition

Develop a corporate business plandetailing objectives of acquisitions

Compare the relevant features of

the desired target to your stated

acquisition objectives

Develop a corporate

business plandetailing objectives

of acquisitions.

Planned Opportunistic

Never sure vendor will sell. Could incur

significant time and costs with no result.

Opportunity arises as vendor has made

decision to sell and has asked for

expressions of interest

More likely to fit criteria and more time toassess.

Usually only a 6 to 8 week period to makedecision.

May have to pay a premium price as you

have often approached target.

Usually competitive situation ensuring

price is reflective of market.

Table One. The key considerations for Planned and Opportunistic Acquisitions.

(Source: Ernst & Young Mergers & Acquisitions)

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Differences lie in working capital, debt

assumed (ie. if using an earnings

multiple basis dont forget to deduct

the debt!), tax liabilities, assets not

acquired, surplus assets acquired and

contingent liabilities

Understand where the value drivers

are and undertake a sensitivity analysis

to ensure any risks are understood and

can be mitigated.

Be mindful that if you pay for all the

synergies and cost savings you bring

to the business, you bear the risk if

they are not realised.

All costs of integrating and growing

the business should be factored into

the assessment of what you are willing

to pay.

2. Screen the population in line with

stated acquisition objectives and

knowledge of likelihood of vendor

to be interested to sell.

3. Often a good place to start is

competitors or customers in closely

related industries.

Valuation Issues

Common methodologies include

discounted cash flow (DCF), multiples

of earnings (EBIT, EBITDA, price to

earnings). Valuation is never an exactscience and the primary methodology

should always be cross checked by

either a secondary methodology, rule of

thumb, asset backing and/or gut feel.

Understand the difference when buying

assets as opposed to shares/equity.

3

Formulatepreliminary

proposal

Discussion withselect target

Strategicassessment

Due diligencePreliminarydue diligence

Develop Acquisitioncriteria

Refine pricingPreliminarypricing

Identify &screen targets

Acquisitioncriteria

List oftargets

NO YES

NO YES

Targetinformation

Financialmodelling

Preliminaryproposal

Understandexpectations

Pro formafinancials

Financeagreement

Acquisitioncriteria

Draftagreement

StructuringPreliminarystructuring

Contact targets

NegotiationsPreliminarynegotiations

Determine levelof interest

Executecontracts

Close

Implement

Proceed ?

ExecuteCreate dealDetermine strategy

Priceanalysis

Integrationissues & plan

Financialmodelling

Purchaseagreement

Proceed ?

Table Two. The Acquisition Process

(Source: Ernst & Young Mergers & Acquisitions)

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M&A TO O L K I T

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Undertake a detailed analysis of

expected synergies and measures to

achieve those synergies to ensure

they can be realised as anticipated.

Synergies include cost-cutting, asset

rationalisation, economies of scale

and other revenue or cross-selling

opportunities.

Evaluate internal controls

throughout newly acquired

operating environment. Assess

accounting and financial controls,

policies and procedures and

implement best practices to ensure

timely flow of information to assess

and address performance issues.

Identify and address cultural issues.

Establish a communication plan for

employees and stakeholders.

Identify key people and positions

and consider measures for retention

of these people through integration

and beyond. Establish an integration strategy for

human resources generally.

Due diligence

Due diligence is the process of

establishing that you are buying what

you think you are buying.

Identifying risk issues

Deal breakers risks too great to

continue with the acquisition

Price adjustments basis for

renegotiation

Due diligence is also critical to the

post-acquisition integration planning

process and must be seen as adding

value to the asset being acquired.

Post acquisition integration

When preparing for the post

acquisition integration, the following

steps should be considered;

Select a focused management team

which should include individuals

who negotiated the deal who willbe responsible for the integration

and future performance of the

acquisition.

Identify and

address culturalissues.

Governance& Management

KEY RISKS AND ISSUES

Operational& Technical

IntegrationPlan

CommercialInformationTechnology

BoardApproval

Due Diligence

Committee

TaxationFinancial

Model

FinancialModel

Financial Legal

Sale and PurchaseAgreement

Table Three. Integrated team approach to Due Diligence

(Source: Ernst & Young Transaction Advisory Services)

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Over-estimation of the value and/orunder-estimation of the time to

realise synergies/savings. Accept

computer valuation model as fact.

Over pay for the business because

the acquirer uses its cost of capital

rather than market price.

Undervalue the goodwill in the

employees and a retention plan is

not undertaken.

Lack of, or poorly implemented,

integration plan.

Wrong deal structure and paying

upfront instead of an earn-out.

Assess information systems

capabilities and ability to support

expanded operations/upgrades.

Identify improvement and growth

initiatives with aplan to implement

once integration issues have

subsided.

Common errors made in mergers

and acquisitions

The common mistakes made at a

macro level include:

Wrong deal undertaken for the

wrong reason.

Lack of sufficient due diligence

investigations.

5

Perform first strikeplanning session

Identify integrationrisk and priority areas

Identify synergies and integration

focus areas

Integrationreadiness

Assess integrationreadiness

Initiate integrationmanagement office

Determine integrationfocus area and synergy teams

Gather andanalyse data

Recommend andprioritise integration

activities

Developintegration structure

Prepare master plan and detailed

functional plans

Develop masterscorecard

Launch integrationfocus areas and synergy teams

Integration

execution

Focus on operationalstabilisation

Execute day onedetailed work

plan tasks

Integration management office

Day one readiness

Communications

Organisational Structure

Perform integrationactivities

Execute expensereduction plans

Execute revenue growth plans

Execute capital efficiency plans

Hand offintegration activities

Management isresponsible for execution

and implementation

Integration strategy Analysis and planning Integration Execution

and Monitoring

DAY

ONE

Table Four. Post Acquisition Integration

(Source: Ernst & Young Mergers & Acquisitions)

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M&A TO O L K I T

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The merger and acquisition

process How to get it right

First: pre-acquisition

Acquisition planning

Integration planning

Due diligence

Negotiation strategy

Second: post-acquisition / merger

implementation

Success post acquisition depends on

time spent on pre-acquisition issues.

Third: measure success and

understand what went right and

wrong.

The common mistakes at a micro

level include:

Egos get in the way before, during

and after the transaction the deal

becomes a game.

Deal fever or its not my money

attitude and lack of experienced

personnel on the team.

Do not accept that you can always

learn from the target company, ie,

its our way or no way attitude.

Dont get external advice.

Change the business model too

soon after acquisition.

Too positive or too negative on

forecasts.

Inventory valuation methodology

not considered in sufficient detail.

Loss of staff loss of

entrepreneurial skills and culture.

Confusion on valuation principles

and issues.

Do not accept

that you canalways learn from

the target..

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Summary1. Planning more the better on

targets, integration and risk areas

prior to proceeding.

2. Reconcile price paid to various

sources dont just accept the

computer model.

3. Over conservative approach is just

as bad as over optimism.

4. Make sure there is a team

approach not just one or two

individuals greater scope to

recognise risks.

5. Accountability is paramount to

ensure acquisition takes on hurt

money feel.

Contact

James Joughin

Partner

Ernst & Young

Mergers & Acquisitions

james.joughin@au.ey.com

tel: +613 9288 8663

Roger Walsh

Partner

Ernst & Young

Transaction Advisory Services

roger.walsh@au.ey.com

tel: +613 9288 8604

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www.ey.com/auERNS T & YOUNG

Ernst & Young Australia 2005.

This communication provides general information current as at the time of production. It is not intended that the

information provide advice and should not be relied on as such. Professional advice should be sought prior to acting

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