book

Acquisition Essentials: A step-by-step guide to smarter deals

Name: Acquisition Essentials: A step-by-step guide to smarter deals
ISBN: 9780273688617

by Denzil Rankine, Peter Howson

October 2005

Beginner

232 pages

5h 19m

English

Pearson Education Canada

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Copyright
FT Prentice Hall Financial Times
About the authors
Publisher’s acknowledgements
Executive summary
Foreword
Rule 1: Do not acquire with cash during an acquisition boomRule 2: The improvements and synergies need to be greater than the premiumRule 3: The improvements and synergies we can create need to be bigger than the improvements and synergies rival bidders can createRule 4: Don’t forget learning costs and distraction costsRule 5: The prize from an acquisition needs to be greater than the prize from a joint venture or alliance with the target company (assuming these are available)
1. The foundations
Bad news...most acquisitions failPlanning for successStrategic and acquisition planningHave you sufficient strength to be acquiring?Do you have the right strategy?Do not make opportunistic acquisitionsConsider the alternativesAcquisition target evaluationUnderstand the marketUnderstand the target’s business modelWork out synergies early onIdentification of problem areas in due diligenceDeal managementRight priceDo not ‘wing’ the negotiationsPrepare wellDevelop the integration plan in advanceIntegration managementCommunicate ten times more often that you think is necessaryEstablish clear leadership from the beginningMake changes quicklyRecognise the scale of the taskCorporate developmentEnsure changes are appropriateDo not ignore cultural differencesDo not ignore customersDo not ignore the coreConclusionNotes
2. Finding candidates
Introduction: have a sound acquisition planAcquisition criteriaTarget identification methodsExploiting contacts and knowledge within the businessCommunicating an acquisition profile to introducersAuctionsBuilding a database of targets through researchAdvertisingWaiting to be approached by sellersUsing outside helpRunning an acquisition searchObtaining more than a basic profile on the businessTimingConclusion
3. Preliminary negotiations
The confidentiality agreementWho signs?What is covered?How long does it last?What happens if it is breached?The letter of intentAdvantages of a letter of intentIt speeds up the deal and makes final agreement easierIt can contain binding provisions which help get the deal doneIt can help with financingDisadvantages of a letter of intentIt might be difficult to renegotiateNegotiating a letter of intent may delay the transactionIt can lead to unintended obligationsEnforceability of the letter of intentConclusion
4. The integration plan
The golden rules of acquisition integrationPlan earlyThe link between integration, valuation and due diligenceAcquisition rationale drives the planIdentify operational barriers to integrationMinimise uncertaintyMake people decisions earlyCommunicate openlyDay-one communicationBe prepared for the obvious questionsDo not forget the customerDo not forget the power of symbolismManage properlyShould we appoint an integration manager?Role of the integration managerThe integration teamPrioritise what needs to be doneGet the reporting rightOverlap with the due diligence teamSoft issues are paramountIdentifying cultural barriers to integrationAdjust integration to fit the cultural gapGet people to work togetherThe integration planSpeed is importantDay OneFinancial controlWeek OneMonth OneOne hundred daysPost-acquisition reviewAcquisition guidelinesConclusion

5. Investigating the target
What is due diligence about?When should you do it?Be prepared for obstaclesRemember: the target will have preparedSelecting the right buyersTrading recordForecastsInstalling control systemsReducing business risksManagement and staffValuing assetsTidying up legal and administrative mattersConclusionHow do I know what due diligence to do?Who does due diligence?What do I do?Get the right teamBrief them properlyGet the written report presentedOther points to watchBe sensitiveRemember your duty of confidentiality......and promises you have made......and the perils of insider dealingCommercial due diligenceWhy should I carry out both commercial and financial due diligence?What is the CDD process and where does the information come from?Start-upUncertaintyRiskUpsideMeet managementDisclosure and confidentialitySelection of interview targetsInformation gatheringExternal published information (secondary sources)External unpublished information (primary sources)Conducting the interviewsDo people tell the truth?Internal informationMarket informationReportingAnalysisSWOT analysisKey purchase criteriaCritical success factorsForecast analysisBusiness models and culturesWho does commercial due diligence?ConclusionFinancial investigationsWhat are the key issues to be covered?EarningsAssetsLiabilitiesCash flowsNet cash or debtManagementWhere does the information come from?Shopping listsInterviews with the target’s managementThe target’s historical advisersWhat are the contents of an FDD report?History and commercial activitiesOrganisational structure and employeesInformation systemsAccounting policiesSales, cost of sales, gross marginsCash flowNet assetsTaxationFinancial issues relating to pension schemesFinancial projectionsGet opinions, not just factsPreparation of the projectionsLink with commercial due diligenceThe review of the forecastsAcquisition synergiesLegal investigationsWhat is legal due diligence?Why do it?Where does LDD get the information?Site visitsWritten questionnairesData room visitsDisclosure letterCertificates of titleCommissioning specialist reportsCollection of public informationHow much LDD is needed?Conclusion
6. Valuation
Valuation is not best left to the expertsThere is no single numberThe valuation process – a summaryValuation is not just about modellingCalculating synergiesValuation techniquesChoosing the valuation methodUse more than one method1: Discounted cash flow (DCF)The processAssumptionsComputer modellingThe mathsFree cash flowUsing the right numbersFixed assetsOperating leasesPension deficits and surplusesProvisionsCapitalised expensesWorking capitalTaxTax lossesNominal or real numbers?[5]Pre-tax or post-tax?The discount rateThe cost of debtThe cost of equityTerminal value2: Return on investment3: Price/earnings and other profit ratiosPublic vs private P/E ratiosThe reliability of P/E ratiosEstimating sustainable earningsOther profit multiplesProfit multiples vs cash flow4: Comparable transactions5: Sector-specific valuation benchmarks6: Impact on earnings per share7: Net asset backingConclusionNotes
7. Negotiation
The basicsPreparationThe procedureInterestsBATNAThe negotiationsSkillGood negotiatorsAspirationPowerStarting discussionsAsk questions...listen to the answersUse silenceAnswering their questionsKeeping controlDealing with tactical ploysAggressionNon-aggressionAngerEmotionExpertsThreatsAn ultimatumLiesFeigned misunderstandingGood cop/bad copBluff and deceptionOption limitationThe non-negotiable itemBlinded by scienceBluffTrading concessionsSplitting the differenceDealing with pressure devicesTimeThe fake stalemateLast-minute changesUnblocking bottlenecksBody languageOpenClosedLeg crossingLeaningEyesThe green lightLearn to recognise and return signalsWhat to do when ‘win-win’ will not workWin-lose tacticsConclusionNotes
8. The sale and purchase agreement
Why is a contract necessary?The agreementCommencementFormalities for executionThe partiesRecitalsDeal pointsType of considerationCashSharesDebtGuarantee of the guaranteeTiming of the considerationRetentionsEscrowEarn-outsRepresentations and warrantiesMisrepresentationRestrictive covenantsTypes of restrictive covenantDefinitionsConditions to closingConsequences of conditionsIndemnificationGeneralWarranties and indemnitiesWhat is a warranty?What is an indemnity?IssuesThe seller’s financial positionThe nature and scope of warranties and indemnitiesThe disclosure letterRestrictions on when and how a claim can be madeThe minimum level of claim and a ceiling on the amount recoverableHow to establish breach and make a claimThe size of damagesIndemnitiesPost-dealAlternatives to contractual warranties and indemnitiesCross-border issuesConclusionNotes
A. Checklist for a financial due diligence investigation
History and commercial activitiesOrganisation structure and employeesAccounting policies and audit issuesManagement information and control systemsTrading resultsAssets and liabilitiesCash flowFinancial projectionsCurrent tradingTaxationOther
B. Checklist for working with advisers
Prepare:Consider:Brief:Select:Interview:After the interview:Agreeing the final brief:On appointment:Managing the advisers:Receiving the results:After due diligence:
C. Checklist for legal due diligence
Constitution/ownership/statusMain contractsAccounts/financial positionPropertyEmployment and pensionsIntellectual property rightsInformation technologyTaxationMiscellaneous
D. Checklist of published information sources
E. Pre-negotiation checklist
F. Skills checklist for conflict negotiation

Overview

Do you really understand the business you are thinking of buying?

Have you worked out the realistic synergies?

What is the right price?

How well prepared are you for the negotiations?

What does all that lawyer speak mean?

Have you developed a clear integration plan in advance?

What is the distraction potential for managing your core business?

These challenges face every executive engaged in an acquisition.

Knowing the answers to these questions will help you and your business make the right choices, make the right decisions and deliver a successful acquisition. These are the questions which Acquisition Essentials answers.

Acquisitions Essentials is the comprehensive and crystal-clear companion to making the right acquisition decisions and executing them well.

It will guide you, step-by-step, through the M&A process. It will help you understand the critical issues and master the critical interventions that make the difference between success and failure.

Become an O’Reilly member and get unlimited access to this title plus top books and audiobooks from O’Reilly and nearly 200 top publishers, thousands of courses curated by job role, 150+ live events each month,
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