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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
4 ER N S T YO U N G | 2005
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
tel: +613 9288 8663
Roger Walsh
Partner
Ernst & Young
Transaction Advisory Services
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
on any of the information contained herein.
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