Finance Stuff Merger & Acquisition Process Joe Nau

Motivation Behind M&A  “To maximize shareholders wealth” by…  Economies of scale  Economies of scope  Economies of Scope Video Economies of Scope Video  Secure supplies or supply chains (Vertical)  Operational synergies  Diversification (not the best way to diversify)  Increase market share/power  Entry into new geographic markets  Hubris  Company is undervalued  Biggest M&A deal of all time?  AOL/Time Warner

The M&A Process 1. Identify a Target 2. Valuation & Due Diligence 3. Structuring the Deal & Negotiation 4. Financing the Deal 5. Accounting of Acquisition

Identifying a Target  If you are an investment bank, you may be staffed on:  Targeted Sell-Side Deal – A company wants to sell themselves to a particular company  Broad Sell-Side Deal – A company wants to sell themselves but to a broader group of potential buyers  Targeted Buy-Side – Represent the buyer in a targeted sell- side deal  Broad Buy-Side – A company wants to acquire something (A complete waste of time from an analysts perspective)

Valuation & Due Diligence  Valuation helps companies determine how much they should pay for a company  Precedent Transaction  Looking at acquisitions of similar companies and how much they cost  Comparable Company Analysis  Looking at multiples of similar companies to determine the value of their equity  Discounted Cash Flow  A company’s value today based off how much money it is going to make in the future  Net Asset Value  Adding up the value of each of a companies assets  Due Diligence  An investigation of a business before signing any legal documents

Valuation & Due Diligence

Core Five Deal Structures  Asset Purchase  The buyer purchases a set of selected assets from the seller in exchange for cash or other assets  Stock Purchase  The shareholders of the seller sell their shares to the buyer in exchange for cash or other assets  Statutory Merger  A nontaxable acquisition in which one corporation completely absorbs another  Stock-for-Stock Acquisition  The acquiring company exchanges its voting stock for the acquiring company  Stock-for-Assets Acquisition  A typically nontaxable transaction where the acquiring company exchanges only its voting stock for the assets of the target corporation

Negotiation  Auction Sales  Providing a large audience of potential buyers with standardized information and the best offer wins  Pro – Reach out to many different interested parties that can bid and raise the price  Con – No buyers like auctions and some refuse to participate  Less formal process  Approach a handful of potential buyers that will likely be interested

Financing the Deal  Cash  “Cash is King”  Especially important when the credit worthiness of the buyer is shaky  Debt  Acceptable when the credit worthiness of the buyer is high  Can be secured by the buyer’s assets or the sellers  Stock  Good way to incentivize the seller not to let their company go to shit  Convertible Securities  A hybrid between debt and equity that allows them to combine advantages of both  Contingent Payments  A way to pay the seller more or less if they meet or miss goals  Ex. Revenue targets, cash flow goals, synergies achieved

Typical Earn-Out Agreement

Accounting of Acquisition Companies use the Purchase Method to account for an acquisition  Compares purchase price to the “Net Asset Value” (NAV = Book Value – Liabilities)  If the purchase price is less than the Net Asset Value, the assets are written down  If the purchase price is more than the Net Asset Value, “Goodwill” is created

Tax Inversions “When a company becomes foreign through a merger, or “inverts”, it no longer owes American tax on its foreign profit. It still owes American tax on its American profit.” - The Economist What are the mechanics? 1.) A foreign company purchases a US company’s assets 2.) A parent company is formed on top of the foreign company and US company in the corporate structure 3.) The foreign company and US company are now subsidiaries and pass as much of their profits to the Parent company

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