Chapter 6

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 organization and preparation first round second round negotiations closing

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

Remember value creation! The most important part of any comparison of alternatives should be their impact on shareholders wealth. need to determine if growth being projected is sustainable internal growth vs. inorganic growth growth alternatives contractual relationships – licensing agreements, co- marketing agreements, joint purchasing agreements, franchising strategic alliance joint venture minority investment

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 motives for restructuring adverse effects of industry turbulence need to get out of unattractive businesses other motives????

sale of minority interest or joint venture interest divestiture – types: partial sale of assets LBO liquidation carve out spin off tracking stock financial recapitalization

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

Identify seller objectives and determine appropriate sale process What are sellers 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

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: 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

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

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

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 initial bid procedures letter – sent to prospective buyers after CIM is provided date and time when written but nonbinding bids must be received

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

topics covered may include: 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

through investment bank or partner a pre- packaged 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

conduct management presentations facilitate site visits provide data room access distribute final bid procedures letter and draft definitive agreement receive final bids

The definitive agreement is a risk management device focused only on the completion of the transaction. 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

Negotiations 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

1. Think like an investor 2. Intrinsic value is unobservable; we can only estimate it 3. An opportunity to create value exists where price and intrinsic value differ 4. So many estimators, so little time – it helps to have a view 5. Exercise estimators of intrinsic value to find key value drivers and bets 6. Think critically; triangulate carefully 7. Focus on process, not product 8. When in doubt, see Rule #1 Bruner (Applied Mergers and Acquisitions)