Acquisition process in Europe
Duncan Gregory
Structuring
Kathy Gillen
23 September 2011
© 2011 Moore Stephens LLP
www.moorestephens.co.uk
PRECISE. PROVEN. PERFORMANCE.
Agenda
• Introduction to Moore Stephens
• Acquisition process in Europe
– Duncan Gregory
• Structuring
– Kathy Gillen
Introduction to Moore Stephens
• Established in London in 1907 (Jersey: 1968)
• Strong financial and operational resources: one of the world’s
largest accounting networks
• Focus on long-term relationships and adding value
• Wide range of skills and sector disciplines
• Committed to using the right people on every assignment
• Substantial international experience
• Proven track record
• Dedicated India desk in London
Locations
World
India
UK
98
1
1
630
21
37
Principals and staff
20,864
n/a
1,551
Turnover
$2.1bn
n/a
£138.8m
Countries
Offices
Overview of our services
• Audit and accountancy
• Business Support and Outsourcing
• Corporate Finance (Duncan Gregory)
• IT Consultancy
• Taxation
• Trust and Corporate Services and International Planning
(Kathy Gillen)
• Wealth Management
• Other services including Corporate Recovery, Forensic Accounting
and Governance, Risk and Assurance
Acquisition process in Europe
Duncan Gregory
© 2011 Moore Stephens LLP
www.moorestephens.co.uk
Moore Stephens Corporate Finance
• Specialist division based in London
• International remit and active in India
• Comprehensive range of lead advisory and transaction support
services:
– Mergers and acquisitions, MBOs/MBIs and disposals
– Capital markets related (AIM, LSE and other regulated markets)
– Due diligence
– Valuations
– Business planning, financial modelling and strategic review
– Fund raising
• Privately owned and listed businesses
• Typical equity value of £1 million to £200 million
Indian acquisitions in the UK
• UK is a leading destination for offshore acquisitions by Indian
companies
– Cox & Kings £300m acquisition of Holidaybreak
– Essar Energy £775m acquisition of Stanflow Refinery
– Sahara India Pariwar £500m acquisition of Grosvenor House Hotel
– CORE Projects & Technologies £15m acquisition of ITN Mark Education
• Moore Stephens actively working on acquisitions in certain sectors:
– Leisure
– Pharmaceuticals and distribution
– Motor
– Infrastructure
– IT
Success and failure in acquisitions
• Largest survey of value creation by Moeller, Schlingemann and Shultz
– 12,000 transactions
– Net losses to acquiring firms: $25.2 billion
• Key causes of failure
– Overpaying
– Poor strategy
– Financial instability
– Inadequate due diligence
– Failure to integrate cultures
– Failure to integrate operations
Why make acquisitions?
• Effective acquisition strategy driven by overall growth strategy
• Acquisitions used to meet objectives that:
– Cannot be achieved through organic growth and development
– Can be achieved more quickly and cost effectively with less risk by buying
established performer instead of developing from scratch
• Strategies fall into 4 broad categories
– Consolidation
– New markets
– New technologies
– Industry convergence
Key stages of the acquisition process
• Strategic
– Corporate strategy
– Acquisition strategy
• Acquisition process
– Acquisition criteria
– Target search
– Appraisal
– Value/negotiations
– Finance
– Due diligence
– Legals/completion
• Post acquisition integration
Developing an acquisition strategy
• Integration with overall corporate strategy?
– Shareholder value creation?
• Are acquisitions the most effective way of achieving objectives?
• Feasible strategy?
– Are suitable targets likely to exist?
– Can they be identified?
– Likely to be for sale?
• Be careful about:
– Pursuing growth for growth’s sake
– Deflecting attention from weaknesses in the core business
Acquisition criteria?
• Sector/industry
• Competitive position within the industry/product mix
• Revenue/size
• Valuation
• Location of operations
• Likely synergies and integration success
• A clear acquisition criteria will form the basis of an acquisition search
Target search
• Understanding the target sector is critical
• Access to information
– Overall sector information (press, trade conferences, databases)
– M&A activity reviews (specialist data available)
– Information about targets (websites, broker reports, filed information)
• Report on shortlisted targets
– Target name, location and business description
– Summary financial information
– Ownership structure
– Consider why a match with acquisition criteria
– Prioritise targets
Planning the approach
• Why is the current owner a possible vendor?
• Non-financial reasons for sale?
• Synergistic benefits?
• Integration plan?
• Critical members of the target management team?
• Reaction to new management?
• What critical issues need addressing during early discussions?
• Maximum likely valuation and to what extent will synergies be shared?
• Cash, deferred consideration, own shares or a mixture?
• Does finance need to be raised?
Making the approach
• Initial approach
– Write directly to the majority, dominant or controlling shareholder
– Confidentiality letters
– Vendor quickly asks for indication on valuation range
– First proposal will be rejected
– However, a process to ensure maximum price achieved may commence
• While price will be the biggest factor (usually), consider
– Certainty of completion
– Speed of completion
– Minimisation of hurdles, barriers and deal breakers
Understand the sale process
• Vendor’s key weapon is information flow
– Can be managed for tactical purposes
• Vendor may:
– Disclose positive information to encourage bidders to commit high prices
– Limit site visits
– Disclose more information to preferred bidders
– Present information in a positive light
– Resist requests for detailed analysis
– Limit access to second line management
– Limit or delay disclosure of prejudicial information
Understand the sale process
• Acquirer should:
– Access as much information as possible
– Understand vendor’s key issues
– Know the vendor’s decision making process
– Assess the attitude of target’s management team
– Consider different approach for owner-managed target
• UK law requires directors to take into account factors other than price
– ‘act in good faith’
• Project management
– Achieve an agreement in principle and draft HOA (with exclusivity period)
– After completion of due diligence, negotiate sale and purchase agreement
Getting to heads of agreement
• Consider valuation, including to purchaser
• Information gathering
– Information Memorandum, due diligence, data room
– Consider how business will fit post-completion
• Seeing through the figures
– Vendors will try to make the business as attractive as possible
• Identifying key issues, including dealbreakers
• Modelling is a key tool
• Preparing the offer
• Draft heads of agreement, including exclusivity ‘lock-out’
Types of due diligence
• Financial due diligence
– Data room
• Vendor due diligence
• Commercial due diligence
• Management due diligence
• Legal and regulatory due diligence
• IT due diligence
• Technology due diligence
• Environmental due diligence
Getting to completion
• Steps to completion
– Detailed due diligence
– Post completion operating and integration plan
– Negotiation of final contracts (including SPA)
– Tax planning and off-shore structuring
– Finalisation of arrangements for external financing
• Advisors can help to ensure that:
– Specialist advisors are properly briefed
– Reporting deadlines are met
– Reports are integrated into the decision making and planning process
– Issues, conflicts and disagreements constructively addressed
Integration
• Post acquisition implementation plan is crucial BEFORE completion
• Areas to address include:
– Structure
– How to capture merger benefits
– Payroll
– Administration
– Sales tactics and product integration
– Accounting systems
– Many others!
• Set milestones and allocate responsibilities
Common issues for Indian acquirers
• Acquisition process
– Sourcing appropriate targets in Europe
– European approach different to Indian
– Time zone impact
• Post acquisition
– When value is not created, poor integration is to blame in 70% cases
– Talent retention and understanding the people issues
– Communication
– Synergies not delivered
Summary
• Acquisition process in Europe is well established
• Complex and emotive issues can arise
• Deadlines and certainty are important
• Development of relationships critical
• Commitment to the process and planning is essential
• Due diligence and good negotiation can improve transaction terms
• Local advisors with international experience important to help ensure
success
Structuring
Kathy Gillen
© 2011 Moore Stephens LLP
www.moorestephens.co.uk
Types of Indian Clients using Jersey
• Corporate
– Investment
o Capital Markets/Corporate Structuring using Jersey (Public) Holding
Companies and Cell Companies
o Private equity, real estate, hedge and infrastructure investment
opportunities using a range of Jersey Funds
• Owners of businesses (families):
– General asset protection, estate succession and tax planning
• Structures are simple or complex depending on clients’
requirements
Why Jersey is attractive to Indian
clients
• Wide range of solutions
• Political and Financial Stability
• Effective, comprehensive, world class, internationally recognised
Regulatory Standards
• Robust, modern and sophisticated legislation
• Privacy/confidentiality, not secrecy
• Tax Neutrality – as investors are outside Jersey there are no
domestic taxes
• Self-governing UK Crown dependency
• In Europe but not in UK or EU
• Proven track record in European listings
Why Jersey is attractive to Indian
clients (cont’d)
• Depth and breadth of more than 13,000 finance professionals
• One of the first jurisdictions to regulate Trust Company Business
• Clarity and quality of products and services offering
• Convenient location – 35 minutes by air from London
• Time Zone (same as the UK)- able to transact business with
Jersey practitioners in the same working day
• Excellent Communications
• A UK visa is sufficient to travel to Jersey
It is common for companies in jurisdictions with double taxation arrangements
with India, e.g. Mauritius, to form part of a Jersey structure
Some examples of the accolades that
Jersey has received in recent times
• Financial Action Task Force: “close to complete adherence”,
Jersey is considered a co-operative jurisdiction
• Financial Stability Forum - Jersey is considered to be a group one
jurisdiction
• International Monetary Fund – ranked number 1 in 2009 – “Jersey
has a robust supervisory framework”
• The G20 considers that Jersey has a tax regime that meets the
highest standards of transparency and regulation. The Island is
ranked in the top tier alongside the UK, US, Germany and France
• Jersey was named as the top offshore finance centre in the world
in recent official rankings by the City of London.
Jersey Tax Regime
• Standard 0% corporate tax on worldwide income and bank deposit
interest paid in Jersey
• No stamp duty on share transfers
• No withholding tax on dividends paid or received
• No capital gains tax
• No inheritance or wealth tax
• UK VAT is not levied in the Island
Example of a (complex) Corporate
Structure
*Source Mourants
Why Jersey Holding Companies?
• Reputation
• Quality of service providers
• Tax Environment
• A Jersey (Public) Holding Company is comparable to a UK
Company (PLC )
• Speed of incorporation
• If Listed – Three CREST enabled share registrars.
– Ability to trade shares directly through CREST (the UK share
settlement system)
Facts!
• 91 Jersey holding companies listed on worldwide stock
exchanges from London to New York
• Combined market capitalisation of over £157 billion
Jersey is now one of the leading international
finance centre jurisdictions to be used for
incorporating listing vehicles
Most Common Structures used by
Owners of Businesses
• Trusts
• Foundations
• (Underlying company/ies e.g. owning UK real estate)
Trusts v Foundations: Features
General
Trust
Foundation
Not a separate legal entity - an
‘arrangement’
A corporate body,
registered with Jersey
Registrar
Assets held in Trustees name
Assets held in
Foundations name
Contract/ sue/ be sued in Trustees
name
Contract/ sue/ be sued in
own name
Must hold property to be valid
Does not have to have
property including initial
endowment
Fiduciary responsibilities
No fiduciary
responsibilities
Requirement to provide beneficiaries
with information
No requirement to
provide beneficiaries
with any information
Trusts v Foundations
Key parties
Trust
Foundation
Settlor
Founder
Protector/ enforcer (if
any)
Guardian
Trustees
Council
Beneficiaries
Beneficiaries (if any)
Key documents
Charter (lodged with
JFSC – public
document)
Trust Deed (not
public)
Regulations (not
public)
Letter of Wishes (not
public)
Letter of Wishes (not
public)
Trusts v Foundations: Benefits and Uses
• SIMILAR FOR BOTH!
• Key additional benefits of Foundations:
–
Holding real estate directly
–
Where there is a single family ‘wasting’ asset
Other Vehicles
• Limited Partnerships - for families
• Private Trust Companies
• Family Offices
Conclusions
• Jersey structures can provide a number of solutions for Indian
corporate and private clients
• Jersey is a well respected and renowned jurisdiction which is attractive
to Indian clients
Moore Stephens….. in India, London, Jersey and…..
Internationally …….. has a wealth of experience in assisting
Indian clients with Mergers and Acquisitions…… and the
necessary structuring
Profiles
• Kathy Gillen
•
Partner
•
Moore Stephens’ Offshore Group
•
Jersey
•
T +44 (0) 1534 880088
•
F +44 (0) 1534 880099
•
M +44 (0) 7797 828755
•
E kathy.gillen@moorestephens-jersey.com
•
Duncan Gregory
•
Partner
•
Moore Stephens Corporate Finance
•
London
•
T + 44 (0) 20 7651 1531
•
F + 44 (0) 20 7651 1954
•
M + 44 (0) 7904 392 121
•
E duncan.gregory@moorestephens.com
•
Kathy is a Partner of the Moore Stephens’ Offshore Group (Jersey,
Guernsey, Isle of Man and Gibraltar) and Director of our in-house corporate
trust and fund companies
•
She advises international clients, both individuals and corporate bodies, on
the establishment and implementation of trusts, foundations and company
structures
•
She is a member of the Institute of Directors and in 2004 was awarded the
Institute of Directors’ Chartered Director Status, the first person to have
achieved this distinction in the finance sector in Jersey
•
She is responsible for Indian clients
•
Duncan specialises in flotations, financial due diligence and valuations
covering a wide variety of sectors on transactions involving UK and
overseas companies
•
He qualified with a Group A firm where he commenced his corporate
finance career before joining MSCF. He was awarded the ICAEW’s
Advanced Diploma in Corporate Finance in 2006
•
He has worked with a broad range of corporate clients and is also
experienced in dealing with flotations, transaction support, valuations and
raising finance