Published on October 30, 2018
1. strategic finance for business impact
2. In today’s highly competitive world, the playing field has levelled. This has opened a new world of possibilities for the medium sized companies but has also allowed larger companies to become real competition. Larger companies have internally, aided by available resources, have tweaked their business models to allow them to be more competitive to SME clientele. The easiest, and in many cases the fastest, way to stay competitive and maintain the speed of growth amid competition is to collaborate. But collaboration sometimes lacks the flexibility the time commands. Enter M&A. So we thought of putting these thoughts together in an instructional bible to help SMBs ease up and look at making the most of coming together and working at building something larger. Disclaimer: Please note that these are our views are based on our experience in being advisors and working with various organizations. They are for the limited purpose of educating the officers of a company. The rationale and the procedure to be followed can vary significantly based on the context, exact nature & size of the business. Coming together is the beginning. Keeping together is progress. Working together is success. - Henry Ford
3. Why M&A? Is this something I should be considering?
4. There is nothing more powerful than the coming together of like-minded minds working together on a common mission. This is the foundation on which all successful partnerships work. However, most organizations tend to only realize the importance of working together with their internal people and tend to forget the power of coming together with other businesses and look at long- term synergies. ▪ Simplify the understanding and help create a foundation ▪ Consider M&As as an important strategic move ▪ Demystify and present options for consideration ▪ Execute more well thought out M&As Is this a nut worth cracking? Short answer: The whole is always greater than the sum of moving parts. Long answer: Businesses, each in their unique way, develop strategies to be able to do more with less. This may make them unique and efficient in many ways in their use of talent and capital. Further, each unlocks value in its own ways and can boast of success stories at it. These success stories and learnings which are unique can be carried forward to the combined benefit of the merged enterprise.
5. What kind of benefits? Is there something more than I am seeing?
6. Intra-functional leverages From a function to function perspective, below is a simplified representation of how the coming together can benefit the collective unit.
7. Inter-functional leverages Apart from this, myriad other leverages are also possible by combining the key strengths in one driver with a driver of another. Identifying these leverages and synergies can be the first step in setting the internal expectations for pursuing a planned transaction in pursuit of a great portfolio strategy.
8. Interesting. Now, how do I do it? Can it be less complex than I think it is?
9. Getting it right the first time around M&A ‘on paper’ usually offers great value creation for all the people involved. Quick returns where organic growth options may be limited or the industry itself may be highly competitive. But the worrying truth of the matter is that over 80% of transactions fail to deliver shareholder return in the short term. A primary root cause analysis points towards a lack of sufficient planning, setting of wrong objectives for the transaction and spending the wrong (insufficient/ more than necessary) amount of time in making it work.
10. Set up the right M&A strategy Set up a goal statement Identify your targets Create well thought out target profiles Engage PMI
11. Set up the right M&A strategy Set up a goal statement Identify your targets Create target profiles Engage PMI The first step to setting up the right strategy is to look inward. Some questions that can help in the process can be: ▪ What does my business face as a key inhibitor of growth? ▪ What are the key challenges & key differentiators as an organization? ▪ What kind of a competitive environment exists? ▪ Who are my largest competitors and what are our points of parity? ▪ How are we staying relevant and what are my competitors doing to stay relevant? Once you have been able to answer these questions, it may be easier to approach the next part of this document.
12. Set up the right M&A strategy Set up a goal statement Identify your targets Create target profiles Engage PMI Pick a strategy that works A simplified guide on how to pick the strategy to pursue is in the image below. The final decision needs to also factor in the availability of cash reserves, valuation expectations of both businesses and the requirement of growth capital for combined business pursuits.
13. Set up the right M&A strategy Set up a strong single line goal Identify your targets Create target profiles Engage PMI A simple comprehensive single sentence objective statement A single sentence goal statement allows all stakeholders to be on the same page as to why the proposed route is being taken. This ensures that future stakeholders are also in the know and aligned.
14. Knowing what you want Companies seldom spend enough time in setting up the objectives of the M&A. The objectives for an M&A should consider deep-dives on the post-transaction synergies expected and re-emphasize the opportunities for unlocking exponential value. This helps identify go/ no-go situations while profiling targets as well. ▪ A reference to the Acquirer’s 5-year plan ▪ A realistic look at synergies (sensitivity adjusted) ▪ What inhibitors exist to achieve synergy gains, both short term & long-term ▪ What Inhibitors exist to maximize enterprise value ▪ A Risk mitigation plan for potential pitfalls ▪ The acceptable margin of tolerance for deviation for each expected gain Set up the right M&A strategy Set up a goal statement Identify your targets Create target profiles Engage PMI
15. Set up the right M&A strategy Set up a goal statement Identify your targets Create target profiles Engage PMI Setup a target evaluation & compatibility scorecard A scorecard allows for looking at things more objectively, allowing for a scan of a larger base of potential targets. This is custom created with the management views of the objective. At this stage, some targets may already be in mind that could potentially be a great fit for the strategy selected. Advice from a practitioner: Don’t skip this step. This is the most important step in the process. This establishes the attributes of a business and outlines what you are comfortable to overlook and what is essential in a suitor. Without this ‘target profile’ well laid out, there are bound to be issues in getting a strong business integration roadmap.Need help?
16. Set up the right M&A strategy Set up a goal statement Identify your targets Create target profiles Engage PMI Head Attributes Importance Weight Yes No Can't say Score adj. for imp. Top-line exceeds $5M in the previous year? Critical 10 a 40.00 Business from Canada, exceeds 51% of LY top- line? Critical 10 a 40.00 Exposure to BFSI exceeds 40% of their LY top- line? High 10 a - Top 10 accounts amount to less than 50% of their top-line in the last year? Medium 6 a - Do they have more than 3 products listed in their portfolio? Low 3 a 1.50 Do they have a full-fledged sales team in North America? High 7 a 21.00 Does their North America sales team have more than 15 members? Critical 10 a - Do they use any of the following CRMs? Salesforce, Sugar Medium 5 a 10.00 Do they have more than 100 live accounts in the last year? Medium 3 a 3.00 Is their management team based out of San Francisco? Medium 8 a 16.00 Is their management team centrally located? Low 3 a - Are there less than 5 levels in the organization chart? Low 5 a 5.00 Is the company privately held? Medium 5 a 10.00 Is the company also run by the promoters? Low 5 a 5.00 Profitability Has the company generated positive FCFF in 2 of last years? High 10 a - TOTAL 151.50 000 - 100 Stop 100 - 150 Re-evaluate 150 - 300 Go Business Sales Management A sample scorecard could look something like this You can access our template for this simple scorecard here: [ Download ] Golden Rule : Exceptions are tolerated but are not be the norm. If there are too many exceptions, start from setting up the right M&A strategy again.
17. This process can be broken down into 3 steps: ▪ Scanning – scan the market the targets occupy across the geographies they operate in ▪ Prioritization – prioritize the targets for selection based on the evaluation criteria and value accretion logic ▪ Elimination – eliminate the ones who do not qualify for further assessment Need help? Set up the right M&A strategy Set up a goal statement Identify your targets Create detailed target profiles Engage PMI Identify your targets While it is true that on paper, M&As boost shareholder value (especially in the bourses), it is also true that many M&As fail. Over 50% of these failures can be attributed to the strategy adopted and the process utilized for Target Identification & Selection.
18. Set up the right M&A strategy Set up a goal statement Identify your targets Create detailed target profiles Engage PMI Create detailed target profiles One of the most critical aspects to consider is that the industry is large but doing a thorough job allows for you to be able to run through multiple targets judiciously, eliminate bias and avoid false negatives or false positives. This profile should be a mix of both qualitative and quantitative indicators. You can download a detailed target definition template here: [ Download ]
19. I was able to pick my bet. Now? How can you make this more efficient and less risky?
20. Set up the right M&A strategy Set up a goal statement Identify your targets Create target profiles Engage PMI Solicit interest Negotiation Diligence Set up a clean team Commence PMI Planning Get to a yes Introductions can be made by I-bankers, mentors, attorneys or accountants.
21. Solicit interest Negotiation Diligence Set up a clean team Commence PMI Planning The no-frills Anchor To achieve faster closure of the acquisition and to keep a potential deal conversation reversible with no bridges burnt, create a clean team. The clean team has no boss, but must operate under strict, mutually agreed-upon rules. Instead of sharing sensitive information directly, the companies provide it to the clean team, which consolidates the analyses into figures and reports that can be presented without risk to the top management of all parties.
22. Final Price Solicit interest Negotiation Diligence Set up a clean team Commence PMI Planning Craft win-win-win-wins (employees) Soon after a preliminary diligence, the negotiations should be based on actual facts rather than emotions. In a good M&A, the price can make or break a deal. A common heuristic is the perceived value vs. perceived price. The best negotiations are always on facts and benchmarks, with reservations for adjustment of certain events (say, inability to keep growth continuing in the short-term and hidden liabilities). Benchmarked price Potential Material Issues Adjustments for way forward Negative Synergies, if anyNeed help?
23. Need help? Solicit interest Negotiation Diligence Set up a clean team Commence PMI Planning Data Sources • Discussion with senior management • Information Memorandum • Limited information in data room What to Look For • Ensure scope of DD includes everything related to material and risk • Allot responsibilities to employees and third parties Value Metrics • Cost Synergies • Revenue Synergies • Strategic Value Acquisition Rationale Value Creation Potential Prepare for Detailed DD Fact Checking Verification Checklist • Physical and Intangible Assets • Compliance And Litigation • Liabilities • Contracts and Licenses Preliminary Due Diligence Detailed Due Diligence
24. We agreed. Next? Is there a right way to go about this process?
25. Set up the right M&A strategy Set up a goal statement Identify your targets Create target profiles Engage PMI Post Merger Integration The first 100 days post the merger are the most integral to any business. They can significantly impact the culture, the business and the relationship between both parties. Ensuring that this step is completely thought through allows for a smoother transition and better value exchange. This process should ideally commence before conclusion of the deal itself. That stage is the best time to secure the buy-in of the target and keep them rallying for the success of the integration. Acting in a structured way ensures rapid achievement of value accretion at both sides. Planning Setting up Consolidation Measurement Correction Need help?
26. Set up the basics Setting up Consolidation Measurement Correction Set up a clear single line objective for the PMI Create a simple one line description of why this matters Develop a clear integration strategy around value drivers Decide achievable timelines for PMI accomplishment Enrol partners for addressing specific areas of importance Need help?
27. Set up the basics Setting up Consolidation Measurement Correction Put together a strong steering committee containing the key management members of both businesses along with sectoral experts Carve out a PMI Team whose core objective is to execute the M&A operationally and be accountable for the synergy gains envisioned Create separate functional teams, including members of the PMI team across business and support functions to achieve individual unit goals Create incentive structures to reward short-term performance post transaction & maximize gains Define key 30 day outcomes that are expected linked back to the M&A objective Need help?
28. Set up the basics Setting up Consolidation Measurement Correction Set up the basics Setting up Consolidation Measurement Correction Set up the basics Setting up Consolidation Measurement Correction Consolidate both businesses fully to be able to unlock the full potential of the merger Evaluate every 90 days on the merger, it’s short term and long term scores against the objective for the transaction. Devise course correction measures based on the mitigation plans and execute changes
29. How can you guys help? Can I get help so I can save executive time and ensure results?
30. Prequate’s IB, M&A practice relies on the core skill-set of having a deeper understanding of business and management. A special advantage of being transaction partners than task based partners. Great deals happen when synergies are established and focused effort to capitalise on them are instituted. Prequate’s approach is to first work with the fundamentals of the business and rather than look at a transaction as an event. Fund-raising, M&A are growth steps in the business roadmap of every organization and potentially very valuable for every business if correctly executed. Investment Banking, Mergers & AcquisitionsSearch profiling & advisory Overviews reporting & reviews Diligences mgmt., fin & ops Post Integration PMO Fin, Mgmt. Buy-side Prep modeling with strategy Valuations variable based Cap-raise $2M & upward Negotiations value based structures Sell-side
31. IB, M&A initiatives BUSINESS MODELLING VALUATION STUDY FINANCIAL MODELLING FUND DECK BUILDING REVERSE IB BUSINESS PLAN BUSINESS SIMULATIONS FINANCIAL SIMULATIONS CAPITAL RAISES INVESTEE REPORTING SEARCH ADVISORY INFORMATION MEMORANDUM INVESTOR RELATIONS DUE DILIGENCE ASSET VALUATION TARGET PROFILING CAP-TABLE MANAGEMENT POST TRANSACTION INTEGRATION SPECIAL SITUATIONS TRANSACTION NEGOTIATION SELLSIDEBUYSIDE
32. Disclaimer: This paper is a property and copyright of Prequate™. No reader should act on the basis of any statement contained herein without seeking adequate professional advice. The authors and the company expressly disclaim all and any liability to any person who has read this paper, or otherwise, in respect of anything, and of consequences of anything done, or omitted to be done by any such person in reliance merely upon the contents of this paper.
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