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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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l h kl
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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.
l d h
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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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