Presentation on theme: "UCSD English Language Institute Discussion on Mergers & Acquisitions Ed Murphy Senior VP, Strategic Transactions (retired) SAIC 8-13-2012."— Presentation transcript:
UCSD English Language Institute Discussion on Mergers & Acquisitions Ed Murphy Senior VP, Strategic Transactions (retired) SAIC 8-13-2012
My Background 20 years of M&A experience at SAIC – Led team for last several years – Closed over 100 acquisitions, investments, joint ventures, and divestitures – Acquired companies with over $2.5 billion in revenue (SAIC FY12 revenues: $10.6 billion) 10 years of senior financial line management at SAIC 3 years at Dyncorp, including 18 months as financial site manager in Saudi Arabia Georgetown B.S., Pepperdine MBA
How to succeed at M&A Avoid it – most buyers are not successful Don’t stray from your competencies Check your wallet, then your ego Deals should be material, but not outsized – Generally, no such thing as a “merger of equals” Do deals routinely, so they are a competency Don’t be deluded by success or disappointed by failure; learn from both Be a seller, not a buyer!
Key Point on M&A Acquisitions are not a strategy. They should be an element in the execution of a strategy. Keeping that in mind, and with sufficient resources properly applied and a lot of hard work, you can expect to benefit from the acquisition process.
Why Do An Acquisition? Strategic - New business area, new customer, technology insertion, diversification, defensive Tactical - Key contract or technology, support of near-term business goals, customer support issue Opportunistic - Matches existing business at good price, “stress sale”
Strategic vs. Financial Buyers Strategic generally refers to corporate buyers focused on building a long term business without any thought of selling at the time of acquisition Financial generally refers to private equity buyers focused on creating value through growth and/or cost-cutting and eventual sale of the business
Strategic vs. Financial Buyers Strategic buyers generally have advantages in – Market synergy opportunities – Cost synergies – Lower financing costs using the corporate balance sheet – Deeper understanding of market dynamics and areas of due diligence Strategic corporate buyers can have competing internal issues that can make the M&A process difficult in not all committed to the same objective and corporate buyers may be more apt to “fall in love” with a deal Financial buyers advantages include – Focus almost solely on the financial outcome – Better use of equity to motivate acquired senior management – Experienced in executing multiple transactions – Willingness to use high debt levels to enhance equity returns
Process (in context of strategy) Candidate identification/preliminary discussions Valuation/structure discussion Offer Due diligence and negotiations Closing Integration Operations
Pre-Deal Considerations Remain Focused: Identify value drivers in a transaction Determine how value drivers will be captured Ensure negotiated transaction is not inconsistent with value driver capture Ensure integration and execution plan incorporates achievement of value driver results
Pre-Deal Considerations You need to understand an industry or market before you can understand a company Both strategy and execution are key to successful acquisitions Low price is not a defense against a poorly-developed strategy or integration process Execution is probably more important Direct cost and opportunity cost of an acquisition is significant Make appropriate trade-offs to manage within resources
Valuation is the result of financial inputs that model the combined business outlook of buyer and seller; it is much more an overall business process than a financial exercise Valuation Valuation Inputs Starting revenue and revenue growth rate Operating profit (EBIT) Net asset base of acquired business Operating capital requirements Tax rate Discount rate
Parsing Valuation Inputs (example) How to calculate revenue growth They grew at 10% in the past; together we can use synergy to boost that to 12% They grew at 10% in the past; let’s be conservative and use 8% What is the economic/market outlook for the combined businesses Are there any regulatory concerns that could affect growth How will the competition react Will the customers fear consolidation of suppliers and spread their business around Can we combine sales & marketing, properly train, and provide effective incentives Should we assume the integration process will affect near-term sales …and so on…
Value vs. Price Value is what it is worth to you; price is what you pay for it Price includes the “headline” purchase price, tax costs/benefits, retention payments, required divestitures; opportunity costs Buyer determines value; negotiations determine price
Price Considerations In competitive situations, price is generally set at the margin (high price wins) If there are 10 bidders, 9 were not willing to pay the highest price – who’s right…who won – sometimes “the best deals are the ones you didn’t do” Price is rarely the only consideration – Time to close, probability to close are important to most sellers – Best strategic fit and employee considerations are often addressed, usually in the unspoken context of “if you are the highest price or quickest to close” Closely held companies can (and have) give these matters more serious attention
Some Reasons Other Companies May Pay More Greater perceived strategic value More effective use of sales/marketing channels Ability to consolidate / eliminate significant costs Lower required rates of return or financing Ability to utilize tax benefits more effectively Better information Worse information Use of “overpriced” stock; less dilution Desperation Ego
Negotiation The Process Determine what items/issues are “non-negotiable” Understand/codify your alternatives and walk-away points Commit to your willingness to walk away If you won’t walk away, the other side has all the power During the negotiations, maintain a focus on the key issues and the ability to operate the business post- closing Look at the situation from the seller’s perspective
Negotiation Negotiation often begins with substantive facts on both sides As competitive interest grows, or fear of losing increases, negotiations often turn on fiction masquerading as fact Value needs to remain in clear view; don’t allow price to cloud your view of value
“ Doing the Deal” and “Making the Deal Work” Origination Due Diligence Signing Pre-Close Closing Normal Operations Resource Commitment “Doing the Deal” Team “Making the Deal Work” Integration Team
Real World Case #1 Multiple bidders, including Lockheed Martin, SAIC, Home Depot and Private Equity Bids had a wide range; we focused on developing strong relationship with management of selling company and price near high end of value range Low margins but very efficient asset utilization provided high return on net assets Difficult discussion with board due to low margins Focused on high ROI Integration and retention of key management made the deal very successful Key manager of acquired business now runs a much larger piece of SAIC business
Real World Case #2 Price expectation was set high by seller Multiple bidders dropped early – 3 “final” bidders Bidder A had become inactive, still “on-the radar” Bidder B & C close in price initially Bidder B raised price by almost 20% Bidder C considered price increase above “value”, stood pat due to board concerns, then withdrew bid Bidder B won with no other bidders, overpriced bid
Real World Case #3 Bidder A bids a price much higher than other bidders; is selected by buyer fails to get buyer board approval; drops out Bidder B has next highest price inexperienced in getting deals done cautious board takes too much time Bidder C has 3 rd highest price; moves toward closing ignores seller’s insistence for higher price and “immediate” closing internal discussions: will price increase help or not completes diligence and insists on closing or walk-away; deal closed Market turns unfavorable in near-term; was lowest price still too high?
Summary Determine your strategic intent Summarize your key points & value drivers, get them agreed to before the “heat of the battle” Determine your value range and stick to it Avoid the hype (there will be a lot) and stay close to your value, in price, process & structure – New information can change your view of value, but remember fiction masquerading as fact Allow a margin of error to be successful – This means you will lose a lot of deals to those who don’t allow a margin of error – Winning 20% of deals and liking all of them is better than “winning” 80% of deals and liking 20% of them