Chapter 6
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discuss appropriate vocabulary used in deal
process
examine difference between process for
auction and process for negotiated sale
introduce types of valuation methods used
discuss stages in auction process
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organization and preparation
first round
second round
negotiations
closing
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sell-side advisor
buy-side advisor
broad auction
targeted auction
negotiated sale
strategic buyer vs. financial buyer
teaser / pitch book
confidential information memorandum (CIM)
definitive agreement
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Remember value creation! The most important
part of any comparison of alternatives should be
their impact on shareholder’s wealth.
need to determine if growth being projected is
sustainable
internal growth vs. inorganic growth
growth alternatives
◦ contractual relationships – licensing agreements, comarketing agreements, joint purchasing agreements,
franchising
◦ strategic alliance
◦ joint venture
◦ minority investment
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lengthy process
◦ Boone and Mulherin (2002) found median length of
targeted restructuring is 345 days
◦ finds that investor reactions to initial and
subsequent announcements are significantly
positive
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motives for restructuring
◦ adverse effects of industry turbulence
◦ need to get out of unattractive businesses
◦ other motives????
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sale of minority interest or joint venture
interest
divestiture – types:
◦ partial sale of assets
◦ LBO
◦ liquidation
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carve out
spin off
tracking stock
financial recapitalization
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Identify seller objectives and determine
appropriate sale process
Perform sell-side advisor due diligence and
preliminary valuation analysis
Select buyer universe
Prepare marketing materials
Prepare confidentiality agreement
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Identify seller objectives and determine
appropriate sale process
◦ What are seller’s priorities in sale?
◦ How large a group of buyers does seller want to
target?
◦ Are there any time constraints?
◦ process timeline and detailed “roadmap” drafted
with idea of targeted timeframe for launch, initial
bids, closing
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Perform sell-side advisor due diligence and
preliminary valuation analysis
◦ due diligence by sell-side advisor
◦ gather information to best position target to
potential buyers
◦ view financial projections from mgt from
perspective of potential buyers
◦ due diligence:
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think like an investor
choice between narrow and broad-scope due diligence
be fact-based but make knowledge-oriented decisions
short concise reports for mgt but leave a significant
“paper trail”
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for a firm trying to sell itself, they will prepare
2 types of documents early on
◦ teaser – quick synopsis of firm and why it might be
attractive to potential buyers
◦ confidential information memorandum (CIM) – more
detailed information about seller including financial
information and possibly future financial
projections
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Contact prospective buyers
negotiate and execute CAs with interested
parties
Distribute CIM and Initial Bid Procedures
letter
Prepare management presentation
Set up data room
Prepare stapled financing package
Receive initial bids and select buyers to
proceed to second round
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buyers may engage buy-side advisors at this
time to help with valuation of the target and
to determine financing alternatives
◦ they will also help determine initial offer
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initial bid procedures letter – sent to
prospective buyers after CIM is provided
◦ date and time when written but nonbinding bids
must be received
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information differs depending on whether process is
auction or negotiated sale
commits buyer to hold in confidence all nonpublic
information received from target and to use it for no
purpose other than making the transaction
outlines information to be provided and the way through
which it will be accessed
agreement may even commit buyer not to disclose publicly
the merger negotiations without approval of the target
agreement will enable target to seek injunctions in event
information is misused or about to be disclosed
sometimes prevents buyers from soliciting to hire target
employees for a certain period of time
standstill agreement and restrictions on clubbing
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topics covered may include:
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retention of advisors
confidentiality information
exclusivity of information
termination of process
standstill
term sheet
letter of intent (LOI)
documents and information included within
will differ depending on whether we are
discussing an auction or negotiated sale
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through investment bank or “partner” a prepackaged financing package may be
tentatively “offered” during the initial round
◦ gives potential buyers an idea of what the minimum
package is available for financing
◦ no requirement for buyer to use this – can put
together better package on his own if possible
◦ financing package generally prepared by
“independent” advisors to put together viable
financing structure to buy the firm
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conduct management presentations
facilitate site visits
provide data room access
distribute final bid procedures letter and draft
definitive agreement
receive final bids
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The definitive agreement is a risk management
device focused only on the completion of the
transaction.
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Deal Mechanics
Representations and Warranties
Pre-Closing Commitments
Other Agreements
Closing Conditions
Termination Provisions
Indemnification
if litigation occurs after the transaction,
provisions here must explain to the court who
committed to doing what and with what
consequences
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Negotiations
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evaluate final bids
negotiate with preferred buyer(s)
select winning bidder
render fairness opinion
receive board approval and execute definitive
agreement
Closing
◦ obtain necessary approvals – regulatory and
shareholder
◦ financing and closing
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Think like an investor
Intrinsic value is unobservable; we can only
estimate it
An opportunity to create value exists where price
and intrinsic value differ
So many estimators, so little time – it helps to have
a view
Exercise estimators of intrinsic value to find key
value drivers and bets
Think critically; triangulate carefully
Focus on process, not product
When in doubt, see Rule #1
Bruner (Applied Mergers and Acquisitions)