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

Book Description

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.

Table of Contents

  1. Copyright
  2. FT Prentice Hall Financial Times
  3. About the authors
  4. Publisher’s acknowledgements
  5. Executive summary
  6. Foreword
    1. Rule 1: Do not acquire with cash during an acquisition boom
    2. Rule 2: The improvements and synergies need to be greater than the premium
    3. Rule 3: The improvements and synergies we can create need to be bigger than the improvements and synergies rival bidders can create
    4. Rule 4: Don’t forget learning costs and distraction costs
    5. Rule 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)
  7. 1. The foundations
    1. Bad news...most acquisitions fail
    2. Planning for success
      1. Strategic and acquisition planning
        1. Have you sufficient strength to be acquiring?
        2. Do you have the right strategy?
        3. Do not make opportunistic acquisitions
        4. Consider the alternatives
      2. Acquisition target evaluation
        1. Understand the market
        2. Understand the target’s business model
        3. Work out synergies early on
        4. Identification of problem areas in due diligence
      3. Deal management
        1. Right price
        2. Do not ‘wing’ the negotiations
        3. Prepare well
        4. Develop the integration plan in advance
      4. Integration management
        1. Communicate ten times more often that you think is necessary
        2. Establish clear leadership from the beginning
        3. Make changes quickly
        4. Recognise the scale of the task
      5. Corporate development
        1. Ensure changes are appropriate
        2. Do not ignore cultural differences
        3. Do not ignore customers
        4. Do not ignore the core
    3. Conclusion
    4. Notes
  8. 2. Finding candidates
    1. Introduction: have a sound acquisition plan
    2. Acquisition criteria
    3. Target identification methods
      1. Exploiting contacts and knowledge within the business
      2. Communicating an acquisition profile to introducers
        1. Auctions
      3. Building a database of targets through research
      4. Advertising
      5. Waiting to be approached by sellers
      6. Using outside help
    4. Running an acquisition search
      1. Obtaining more than a basic profile on the business
    5. Timing
    6. Conclusion
  9. 3. Preliminary negotiations
    1. The confidentiality agreement
      1. Who signs?
      2. What is covered?
      3. How long does it last?
      4. What happens if it is breached?
    2. The letter of intent
      1. Advantages of a letter of intent
        1. It speeds up the deal and makes final agreement easier
        2. It can contain binding provisions which help get the deal done
        3. It can help with financing
      2. Disadvantages of a letter of intent
        1. It might be difficult to renegotiate
        2. Negotiating a letter of intent may delay the transaction
        3. It can lead to unintended obligations
    3. Enforceability of the letter of intent
    4. Conclusion
  10. 4. The integration plan
    1. The golden rules of acquisition integration
      1. Plan early
        1. The link between integration, valuation and due diligence
        2. Acquisition rationale drives the plan
        3. Identify operational barriers to integration
      2. Minimise uncertainty
        1. Make people decisions early
        2. Communicate openly
      3. Day-one communication
      4. Be prepared for the obvious questions
      5. Do not forget the customer
      6. Do not forget the power of symbolism
      7. Manage properly
        1. Should we appoint an integration manager?
        2. Role of the integration manager
        3. The integration team
        4. Prioritise what needs to be done
        5. Get the reporting right
        6. Overlap with the due diligence team
      8. Soft issues are paramount
        1. Identifying cultural barriers to integration
        2. Adjust integration to fit the cultural gap
        3. Get people to work together
    2. The integration plan
      1. Speed is important
      2. Day One
        1. Financial control
      3. Week One
      4. Month One
      5. One hundred days
    3. Post-acquisition review
      1. Acquisition guidelines
    4. Conclusion
  11. 5. Investigating the target
    1. What is due diligence about?
    2. When should you do it?
    3. Be prepared for obstacles
    4. Remember: the target will have prepared
      1. Selecting the right buyers
      2. Trading record
      3. Forecasts
      4. Installing control systems
      5. Reducing business risks
      6. Management and staff
      7. Valuing assets
      8. Tidying up legal and administrative matters
      9. Conclusion
    5. How do I know what due diligence to do?
    6. Who does due diligence?
    7. What do I do?
    8. Get the right team
    9. Brief them properly
    10. Get the written report presented
    11. Other points to watch
      1. Be sensitive
      2. Remember your duty of confidentiality...
      3. ...and promises you have made...
      4. ...and the perils of insider dealing
    12. Commercial due diligence
      1. Why should I carry out both commercial and financial due diligence?
      2. What is the CDD process and where does the information come from?
      3. Start-up
        1. Uncertainty
        2. Risk
        3. Upside
      4. Meet management
        1. Disclosure and confidentiality
        2. Selection of interview targets
      5. Information gathering
        1. External published information (secondary sources)
        2. External unpublished information (primary sources)
          1. Conducting the interviews
          2. Do people tell the truth?
        3. Internal information
          1. Market information
      6. Reporting
        1. Analysis
          1. SWOT analysis
          2. Key purchase criteria
        2. Critical success factors
        3. Forecast analysis
        4. Business models and cultures
        5. Who does commercial due diligence?
      7. Conclusion
    13. Financial investigations
      1. What are the key issues to be covered?
        1. Earnings
        2. Assets
        3. Liabilities
        4. Cash flows
        5. Net cash or debt
        6. Management
      2. Where does the information come from?
        1. Shopping lists
        2. Interviews with the target’s management
        3. The target’s historical advisers
      3. What are the contents of an FDD report?
        1. History and commercial activities
        2. Organisational structure and employees
        3. Information systems
        4. Accounting policies
        5. Sales, cost of sales, gross margins
        6. Cash flow
        7. Net assets
        8. Taxation
        9. Financial issues relating to pension schemes
        10. Financial projections
          1. Get opinions, not just facts
          2. Preparation of the projections
          3. Link with commercial due diligence
          4. The review of the forecasts
          5. Acquisition synergies
    14. Legal investigations
      1. What is legal due diligence?
      2. Why do it?
      3. Where does LDD get the information?
        1. Site visits
        2. Written questionnaires
        3. Data room visits
        4. Disclosure letter
        5. Certificates of title
        6. Commissioning specialist reports
        7. Collection of public information
      4. How much LDD is needed?
    15. Conclusion
  12. 6. Valuation
    1. Valuation is not best left to the experts
    2. There is no single number
    3. The valuation process – a summary
    4. Valuation is not just about modelling
    5. Calculating synergies
    6. Valuation techniques
      1. Choosing the valuation method
      2. Use more than one method
      3. 1: Discounted cash flow (DCF)
        1. The process
          1. Assumptions
          2. Computer modelling
        2. The maths
        3. Free cash flow
          1. Using the right numbers
            1. Fixed assets
            2. Operating leases
            3. Pension deficits and surpluses
            4. Provisions
            5. Capitalised expenses
            6. Working capital
            7. Tax
            8. Tax losses
            9. Nominal or real numbers?[5]
            10. Pre-tax or post-tax?
        4. The discount rate
          1. The cost of debt
          2. The cost of equity
        5. Terminal value
      4. 2: Return on investment
      5. 3: Price/earnings and other profit ratios
        1. Public vs private P/E ratios
        2. The reliability of P/E ratios
        3. Estimating sustainable earnings
        4. Other profit multiples
          1. Profit multiples vs cash flow
      6. 4: Comparable transactions
      7. 5: Sector-specific valuation benchmarks
      8. 6: Impact on earnings per share
      9. 7: Net asset backing
    7. Conclusion
    8. Notes
  13. 7. Negotiation
    1. The basics
    2. Preparation
      1. The procedure
      2. Interests
      3. BATNA
      4. The negotiations
        1. Skill
          1. Good negotiators
        2. Aspiration
        3. Power
    3. Starting discussions
      1. Ask questions...listen to the answers
      2. Use silence
      3. Answering their questions
    4. Keeping control
    5. Dealing with tactical ploys
      1. Aggression
      2. Non-aggression
      3. Anger
      4. Emotion
      5. Experts
      6. Threats
      7. An ultimatum
      8. Lies
      9. Feigned misunderstanding
      10. Good cop/bad cop
      11. Bluff and deception
      12. Option limitation
      13. The non-negotiable item
      14. Blinded by science
      15. Bluff
    6. Trading concessions
    7. Splitting the difference
    8. Dealing with pressure devices
      1. Time
      2. The fake stalemate
      3. Last-minute changes
    9. Unblocking bottlenecks
    10. Body language
      1. Open
      2. Closed
      3. Leg crossing
      4. Leaning
      5. Eyes
    11. The green light
    12. Learn to recognise and return signals
    13. What to do when ‘win-win’ will not work
      1. Win-lose tactics
    14. Conclusion
    15. Notes
  14. 8. The sale and purchase agreement
    1. Why is a contract necessary?
    2. The agreement
      1. Commencement
        1. Formalities for execution
        2. The parties
      2. Recitals
      3. Deal points
        1. Type of consideration
          1. Cash
          2. Shares
          3. Debt
        2. Guarantee of the guarantee
      4. Timing of the consideration
        1. Retentions
        2. Escrow
        3. Earn-outs
      5. Representations and warranties
        1. Misrepresentation
      6. Restrictive covenants
        1. Types of restrictive covenant
      7. Definitions
      8. Conditions to closing
        1. Consequences of conditions
      9. Indemnification
      10. General
    3. Warranties and indemnities
      1. What is a warranty?
      2. What is an indemnity?
        1. Issues
          1. The seller’s financial position
          2. The nature and scope of warranties and indemnities
          3. The disclosure letter
          4. Restrictions on when and how a claim can be made
          5. The minimum level of claim and a ceiling on the amount recoverable
          6. How to establish breach and make a claim
          7. The size of damages
    4. Indemnities
    5. Post-deal
    6. Alternatives to contractual warranties and indemnities
    7. Cross-border issues
    8. Conclusion
    9. Notes
  15. A. Checklist for a financial due diligence investigation
    1. History and commercial activities
    2. Organisation structure and employees
    3. Accounting policies and audit issues
    4. Management information and control systems
    5. Trading results
    6. Assets and liabilities
    7. Cash flow
    8. Financial projections
    9. Current trading
    10. Taxation
    11. Other
  16. B. Checklist for working with advisers
    1. Prepare:
    2. Consider:
    3. Brief:
    4. Select:
    5. Interview:
    6. After the interview:
    7. Agreeing the final brief:
    8. On appointment:
    9. Managing the advisers:
    10. Receiving the results:
    11. After due diligence:
  17. C. Checklist for legal due diligence
    1. Constitution/ownership/status
    2. Main contracts
    3. Accounts/financial position
    4. Property
    5. Employment and pensions
    6. Intellectual property rights
    7. Information technology
    8. Taxation
    9. Miscellaneous
  18. D. Checklist of published information sources
  19. E. Pre-negotiation checklist
  20. F. Skills checklist for conflict negotiation