M&A Strategy and Valuation, Oct 3 and 4 - 2012

MERGERS, ACQUISITIONS AND DIVESTITURES

3/4 October 2012

Prof Scott Moeller, Director, M&A Research Centre, Cass Business School, London

1

Course Organised in co-operation withEureka Financial Ltd

© Scott Moeller, 2012

Course organised in co-operation with Eureka Financial Ltd

PROGRAMME OVERVIEW

Objectives Identify key value drivers Understand the process of M&A Assess the needs and benefits of M&A for a company and therefore the

right and wrong reasons to do a deal Understand synergies and how to quantify them Learn the different methods of M&A valuation and pricing, and the

appropriate application of these methods Understand M&A due diligence Analyse alternative deal structures

We will achieve this through the extensive use of Real life examples of transactions (case studies) Discussion amongst all participants Break-out groups

2© Scott Moeller, 2012


COURSE PROGRAMME

Day 1: Morning: Reasons for doing deals, funding and exit requirements, risk and regulation.

Day 1: Afternoon: Deal process, deal teams, strategy, due diligence and negotiation, post-deal integration

Day 2: Morning: Financial engineering (deal structuring, financing, pricing vs valuation, covenants)

Day 2: Afternoon: Synergies and summary case study.



M&A FACTS3% Deals that are

hostile

91% US deals over $100 million that were challenged in court

19.8% UK Deals with suspicious trading pre-deal

30% Probability that a US Fortune 1000company will pursue a significant merger in any one year

Sources: Cass Business School, Towers Watson, Cornerstone Research, Bernstein Research, J.P. Morgan

£174 million

Amount each deal contributes to the UK economy 31% Likelihood a

hostile target company will remain independent

12% Chance of being made redundant following an acquisition

9 months

40% of deals don’t complete within this time after announcement

37% Deals in emerging markets


Day 1Mergers, Acquisitions & Divestitures

Morning, Session 1

INTRODUCTION AND DEAL DRIVERS



IT’S NO LONGER TRUE THAT MOST DEALS FAIL… ‘Headlines’ focus on failures The press and many boards still believe this Yes, it was once true:

1987 McKinsey 116 acquisitions 61% failed . Porter 56% of all acquisitions get sold off

1996 Mercer/ 150 deals 57% failure rate / 30% had 'substantial' losses Business Week

. Economist 150 acquisitions 70% failed to meet expectations

. McKinsey 160 acquisitions Only 12% accelerated their growth 1997 Sirower 168 mergers Only 20% return in 4 years1998 A. T .Kearney 115 mergers 58% added no value 1999 McKinsey 77% fail to yield expected synergies 2001 KPMG 118 acquisitions 70% created no value / 31% destroyed value

2004 BCG 277 deals 64% destroyed value for acquirers’ shareholders



STUDIES SINCE 20071 SHOW DEALS NOW SUCCEED MORE OFTEN THAN FAIL…

1Sources: Cass Business School, Towers Watson, McKinsey, BCG© Scott Moeller, 2012


QUARTERLY PERFORMANCE OF COMPLETED DEALS

8Sources: Towers Watson / Cass Business School

2.1 2.0

4.0

2.2

-1.0

8.5

-2.8

4.04.3

3.1

4.34.9 5.1

4.1

1.5

2.5

-0.8

-2.7

-0.4

-4.0

-2.0

0.0

2.0

4.0

6.0

8.0

10.0

Q1 2008

Q2 2008

Q3 2008

Q4 2008

Q1 2009

Q2 2009

Q3 2009

Q4 2009

Q1 2010

Q2 2010

Q3 2010

Q4 2010

Q1 2011

Q2 2011

Q3 2011

Q4 2011

Q1 2012

Q2 2012

Q3 2012

Perc

enta

ge P

oint

s

The line below (2.5pp) shows the median-adjusted performance of all acquirers throughout the period.

The red line below (2.4pp) shows the median-adjusted performance of all acquirers over a three year rolling period.



MIDDLE EAST M&A ACTIVITY

Slow in 2012: Only 20 deals in H1 vs 42-57 annually in 2007-11 Megadeals:

Qatar Telecom’s $2.2 billion purchase of the remaining 48% of Wataniya(August) and 60% for Asiacell of Iraq for $1.5 billion (June)and Qatar Petroleum’s partial sale of Industries Qatar for $3.9 billion (August)

National Bank of Kuwait / Boubyan Bank for $2.1 billion (June) Average size of deal <$100 million when above excluded Why?

Only 6 deals in H1 into the region vs 10-15 in each of past three years Only 5 deals in H1 out of the region vs 13-16 annually in past three years But within Middle East is strong.

For the first time, investment in the region exceeded outbound investment. But reasons to be optimistic as the principal GCC sectors are poised for

activity: Financial, Real Estate, Industrials, Energy & Power, even if TMT now appears strongest.



MIDDLE EAST M&A ACTIVITY: QUARTERLY ACTIVITY ESPECIALLY STRONG COMPARED TO 2011

0

50

100

150

200

250

300

$0$1,000$2,000$3,000$4,000$5,000$6,000$7,000$8,000$9,000

$10,000

Q32010

Q42010

Q12011

Q22011

Q32011

Q42011

Q12012

Q22012

Q32012

Deal Value ($ mm) No. of DealsSource: Zephyr


M&A MATURITY

Country Index Score

1 YrΔ

2 YrΔ

1 USA 85 0 0

2 Singapore 84 0 0

3 United Kingdom

82 0 1

4 Hong Kong 81 0 3

5 South Korea 81 0 0

6 Germany 80 0 -3

7 Canada 80 0 -1

8 France 80 0 3

9 China 79 1 4

10 Japan 79 2 -1

Country Index Score

1 YrΔ

2 YrΔ

20 United Arab Emirates

72 -1 6

45 Qatar 61 -5 0

59 Saudi Arabia 58 -2 7

62 Bahrain 57 1 1

64 Kuwait 56 0 -6

65 Egypt 56 1 0

66 Oman 56 -1 9

67 Iran 55 0 -10

73 Jordan 52 1 -3

78 Lebanon 51 4 711


M&A MATURITY SCORE AND FACTORS FOR KUWAIT

12

56%60%

67%

43%

60%

52%

0%

10%

20%

30%

40%

50%

60%

70%

CASS MARC M&AMATURITY SCORE

REGULATORY ANDPOLITICAL

ECONOMIC ANDFINANCIAL

TECHNOLOGICAL SOCIO-ECONOMIC INFRASTRUCTURE ANDASSETS

Kuwait

Opportunity: Economic and Financial Factors (Development of Equity market and availability of Domestic Banking Credit)Threat: Technological (High Technology Exports 15%)


4

MIDDLE-EAST MATURITY INDEX

Kuwait is ranked among the top 100 countries in the world and with a score above average (53%) in the Middle East Maturity Countries.

Country name CASS MARC M&A MATURITY SCORE

REGULATORY AND POLITICAL

ECONOMIC AND FINANCIAL TECHNOLOGICAL SOCIO-ECONOMIC INFRASTRUCTURE

AND ASSETS Ranking

United Arab Emirates 72% 78% 66% 63% 70% 83% 20

Turkey 64% 61% 54% 56% 79% 68% 37

Qatar 61% 73% 65% 41% 61% 66% 45

Saudi Arabia 58% 70% 53% 53% 68% 46% 59

Bahrain 57% 63% 63% 39% 58% 63% 62

Kuwait 56% 60% 67% 43% 60% 52% 64

Oman 56% 73% 50% 43% 56% 56% 66

Jordan 52% 59% 60% 50% 35% 56% 73

Lebanon 51% 37% 59% 59% 51% 50% 76

Syria 42% 38% 45% 35% 49% 42% 97

Iraq 36% 16% 53% 13% 44% 57% 115

Yemen 29% 36% 26% 29% 41% 15% 139



4

KUWAIT: VOLUME AND VALUE TRACKER

100

138

49

266

53

98

32

115

17

153

100

54 24

380

241

133

7

278

8

469

-

50

100

150

200

250

300

350

400

450

500

Q1 2010 Q2 2010 Q3 2010 Q4 2010 Q1 2011 Q2 2011 Q3 2011 Q4 2011 Q1 2012 Q2 2012

MARC M&A Volume Tracker MARC M&A Value Tracker



4

KUWAIT: VOLUME AND VALUE

0

1

2

3

4

5

6

7

8

9

2005 2006 2007 2008 2009 2010 2011 2012

DOMESTIC

INWARD

OUTWARD

0

2000

4000

6000

8000

10000

12000

14000

2005 2006 2007 2008 2009 2010 2011 2012

DOMESTIC

INWARD

OUTWARD

Domestic deals in Kuwait peaked in the year 2007 and 2009



4

KUWAIT: VOLUME BY INDUSTRY

Date Announced Acquirer Name Acquirer Nation Target Name Target Nation Value ($mil)

30/09/10 Zain Group Kuwait Emirates Telecommun UAE 13,028

13/12/07Dow Chemical Co-Petrochemicals United States Petrochemical Inds Kuwait 9,500

02/03/07 Wataniya Kuwait Qtel Qatar 3,801

Top 3 Deals in Kuwait

0%

5%

10%

15%

20%

25%

Volume (%)

Volume (%)



GLOBAL M&A WAVES…

Source: Sanford Bernstein, Thomson Financial

0.10.2 0.1 0.2 0.3

0.4 0.5 0.5

0.8 0.90.6

0.4 0.40.6 0.7

1.2 1.3

1.9

2.8

4.3

3.8

2.0

1.2

1.9

2.2

2.9

3.6

4.7

2.9

2.2

2.7

2.22.0

0.0

0.5

1.0

1.5

2.0

2.5

3.0

3.5

4.0

4.5

5.0

$ trillions (announced)© Scott Moeller, 2012



M&A PARADOX

Most mergers fail, but few companies succeed without acquiring or merging.

Can you be a large organisation without having made acquisitions?

Is organic growth sufficient to become a leading player?

Management’s challenge:

'How can you reconcile the low odds of deal success with the need to incorporate mergers into the growth strategy.'

Or…

Best Practice to make deals successful



THREE COMPONENTS TO AN M&A DEAL

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Strategy

Price

Post‐merger Integration

Should we do a deal?With whom?

For how much will they sell?How structured?

What can we afford?

How?



Source: Corporate Executive Board, 2012

SOURCES OF DEAL ERROR: RESPONDENTS CITING EACH REASON AS THE PRIMARY SOURCE OF ERRORS IN THE M&A PROCESS



CONSIDER FIRST THE ALTERNATIVES TO M&A



THREE PRE-REQUISITES FOR BUYING

There are 3 pre-requisites for an acquisition to take place

The target must have a “valuable” business to offer

The target must be owned by people who accept losing control

There must be compatible price expectations on both sides (buyer and seller)



PUBLIC AND PRIVATE DEALS

There is a fundamental distinction in mergers & acquisitions between

Public take-overs

Private acquisitions

A public takeover offer occurs

When an offer is made for a publicly listed company

By any other person or company (whether listed or unlisted)

Any other M&A deal is ‘private’



PUBLIC DEALS

A public deal is likely to have

A fixed timetable

Minimum pricing levels

High documentation requirements

High publicity requirements

Many rules and regulations, especially from the exchange on which the target has its primary listing



PROGRESS OF A PUBLIC ACQUISITION (BUY-SIDE)

BuyCo:•needs to grow•decides to grow by acquisition

BuyCo:•identifies specific target(s)•approaches specific target

BuyCo:•appoints advisers •identifies acquisition criteria

BuyCo:•agrees valuation/pricing•agrees other terms

BuyCo:•launches public offer, or•signs S&P agreement

BuyCo:•carries out due diligence•arranges finance & structure

25Course organised in co-operation with Eureka Financial Ltd © Scott Moeller, 2012


PLANNING PROCESS

Planning incorporates the acquisition goals and objectives

These include one or more of the following: Market share Transaction synergies; cost or growth Industry diversification (vertical integration) Remove competition Gain control of strategic resources/skills Market penetration

Beware other factors! Management ego Advisers (transaction based fees)



SUCCESSFUL M&A PROGRAM STEPS

1. Manage pre-acquisition phase Instruct staff on secrecy requirements Evaluate your own company Identify value-adding approach

Understand industry structure, and strengthen core business Capitalise on economics of scale Exploit technology or skills transfer



PRE-ACQUISITION PLAN

Management Small companies do not have management slack Management role cannot be delegated Soft issues

Deal size Look for economies – not too small unless a bolt on Affordability

Measure risk tolerance Operating Financial Strategic




2. Screen Candidates Identify knockout criteria Decide how to use investment banks and other

advisors Prioritise opportunities Look at public companies, divisions of companies

and privately held companies



SCREEN TARGETS

Concentrate on four key areas Right industry Right size Right fit Right price

Refine the list Absolute deal breakers Potential deal breakers Desirable but lacking essential criteria

Reduce to one or two candidates Remember lions eat first!



EXAMPLE OF SCREENING CRITERIA

Market segment Product line Profitability Degree of leverage Market share Willingness of owners to sell … but remember,

‘everyone has their price!’



M&A OPPORTUNITIES: TARGET COMPANIES

Need value chain integration - e.g. dependent on supplier - vertical integration Benefit from greater efficiency - avoid cutthroat competition, achieve production or

distribution efficiencies Company has weak financials - flat earnings, overleveraged Has several businesses that have no synergies - some growth, some flat Company

has businesses with incompatible cultures - or two different companies with compatible cultures

Company is in sector with overcapacity - benefit from consolidation Company wants to buy competitor who could end up in a rival’s hands Company wants to do an IPO but is not suitable - e.g. not in a “hot” business, or the

size is insufficient Companies in the same line of business, but with P/E differentials Conglomerate discount - company is undervalued in the market and would be worth

more if some businesses were hived off Owner wants to retire




3. Value remaining candidates Know exactly how you will recoup the takeover

premium Identify real synergies Decide on restructuring opportunities Decide on financial engineering opportunities



WHERE WILL THE VALUE COME FROM?

34

Gains from merger

Top line Bottom line Financial Businessrestructuring Restructuring

(M&A)

Synergies Control




4. Negotiate Decide on maximum price and stick to itUnderstand background and incentives of the other

side Understand value that might be paid by a third

party Establish negotiation strategy Reach mutual agreement Conduct due diligence



NEGOTIATION STRATEGY

Select the team Small is best Establish roles Continuity is essential

Have clear objectives Deal breakers What is negotiable List of ‘give-aways’ that can be conceded

Deal with the organ grinder not the monkey Match seniority and experience

Representations and warranties Disclosure Sale and purchase agreement



FIRST RULE OF NEGOTIATION

‘You pick the price and I pick the terms…

And I always will win.’




5. Manage post merger integration Move as quickly as possible in making and

announcing decisions Carefully manage the process



FAILURE CAN START AT THIS POINT IN THE DEAL

Process failures Lack of management and financial resources or

experience Failure to plan early for the integration Wrong (or no) advisors

Commercial failures Poor information about target (‘due diligence’) Industry changes Unfamiliarity with industry characteristics Acquiring the wrong company



KEYS TO SUCCESS

Soft issues Management (existing and new) Cultural issues Communication

Hard issues Strategic evaluation Evaluation of the synergies Post-deal integration planning Due diligence process Advisors Price




Morning, Session 2

SPECIAL ISSUES, INCLUDING REGULATION AND RISK



SELLERS: PRIVATE TRANSACTIONS

Private sales of companies are usually the result of one or more of the following factors

An owner/manager of a private company wishing to cash out

A change in strategy by a parent company

As an alternative to a flotation (perhaps to realise higher value and/or to make a clean break)

The company has good prospects but requires new investment to realise them




Three major types of private auctions from the Seller’s viewpoint Public/open auction (also known as an ‘open auction’) Limited private auction (‘prioritised auction’) Bilateral negotiation (‘negotiated sale’)




Public/Open Auction Useful

For “trophy” assets Where unlikely to be confidentiality issues

Advantages Demonstrates to shareholders that best price achieved Largest possible market of potential buyers

Disadvantages Embarrassing if it fails Puts off some buyers Effect on staff morale, suppliers, customers Risk of price effect since competitors will see information Can sometimes lead to “loss of control” by seller




Limited Private Auction Approach to limited number of parties Useful where limited identifiable market of potential buyers Advantages

Usually maintains good level of confidentiality Less (public) embarrassment on failure

Disadvantages Skill required to build up “feeding frenzy” LPAs often become OPAs (One Party Auctions)!




Bilateral Discussions Useful

For highly confidential issues, such as critical client lists, intellectual property, production method, etc

Where very few potential purchasers due to product, size, competition, etc

Advantages Can be quicker than open/limited auction Reduced effect on staff, customers, etc

• Disadvantages Exclusivity rarely in Seller’s interest




After decision to sell, there are four main stages of the process

Preparation (including Pricing)

Stage 1: The “Long List”

Stage 2: The “Short List”

Stage 3: The “Preferred Bidder”



STAGES OF A PRIVATE SELL-SIDE

48

Stage 1Universeof Buyers

Stage 2Short Listof Buyers

Stage 3Preferred

Bidder

ConfidentialityAgreement,Information

Memorandum

Data room,Meet management,

Site visits

Exclusivity,Due diligence

Buyers

Whatthey get

Whatthey want

IndicativeOffers Final Offers Exchange /

Completion© Scott Moeller, 2012



Preparation

Preparation of Confidential Information Memorandum Purpose Contents [shorter is better?] Responsibility “Health warning”/disclaimer





Preparation of universe of potential purchasers Drawing up the list

Horizontal/vertical buyers MBO team? Other financial buyers Previous approaches

Separation of long list into “Tiers” or the “A-List” and the “B-List” Approval of client to list





Confidentiality agreements Usual terms Whose letterhead? (seller’s or buyer’s) Dealing with larger purchasers

Distribution of information memorandum Use recorded delivery Identification numbers for info memo (control) Contents of the package Covering letter: purpose and terms





Selection of shortlist for second stage Why have a shortlist? Factors to get on the shortlist Keeping the others warm

Distribution of further information Either

Each buyer gets information specifically asked for? Each buyer gets all information asked for in aggregate?




Stage 2: The “Short List” Establishment of document/data room

Where? “Rules of engagement” Co-ordination of visits by buyers How many rooms? Geography of the room(s) Developing trend: the Virtual Data Room

Management meetings and “site” visits “Meet the management”

Preparation of management? Formal presentations or informal meetings? Financial adviser monitors questions and answers

Site visits Financial adviser accompanies buyers, tries to look interested





Receipt of final/second round offers By fax? By letter? By e-mail?




Stage 3: The “Preferred Bidder” Selection of winner/ “preferred bidder”

Factors for selection First telephone call Notification to losers

Preferred bidder gets Exclusivity (if requested) Due diligence exercise (limited)

Negotiation of Sale & Purchase Agreement Usual terms Major negotiating points

Representations and warranties Restrictive covenants Escrow arrangements




Stage 3: The “Preferred Bidder” Execution of Contract Satisfaction of conditions

Regulatory Financing Shareholder approval

Completion Press announcement (if required or desired) Letter from vendor to major customers of SaleCo (“purchaser’s comfort

letter”)



Pre-transaction:•Appointment of advisers•Indicative sell-side valuation

Preparation:•Preparation of documents•Dealing with deal-busters

Completion:•Vendor gets consideration•Buyer gets SaleCo

Stage 3:•“Preferred” bidder selected•Negotiation/execution of S&P


57

Stage 1:•Drawing up list of buyers•Distributing info memo

Stage 2:•Selection of shortlist•Data room,site visits,meetings




Indicative timetable

- Preparation and Pricing 4 - 6 weeks

- Stage 1: The “Long List” 3 - 4 weeks

- Stage 2: The “Short List” 3 - 4 weeks

- Stage 3: The “Preferred Bidder” variable




Afternoon, Session 1

STRATEGY: DEAL TEAM, TARGET SCREENING AND DUE DILIGENCE



KEY SHARE OWNERSHIP THRESHOLD LEVELS(EXAMPLE FROM THE UK)

Shares of Target Consequences

0.5%+ If target is in offer period, all dealings by a 1%+ shareholder to be disclosed

3%+ Acquirer must disclose level of shareholding to target

10% If target is a bank, FSA approval required for change of control

10%+1 10%+1 shareholder has ability to prevent compulsory acquisition of its stake

25%+1 25%+1 shareholder has ability to block special resolutions

30% Mandatory offer triggered

50%+1 Minimum level of acceptances for an offer to be successful under the Takeover Code

50%+1 50%+1 shareholder has ability to carry ordinary resolutions in a general meeting -effectively equals control

75%+1 75%+1 shareholder has ability to carry special resolutions in a general meeting

90% (dependent) Compulsory acquisition of minorities (otherwise known as a “squeeze-out”)



Australia 20%Austria 30%China 30%Dubai (DIFC) 30%Finland 30%France 33%Germany 30%Greece 33.3%Hong Kong 30%India 25%Indonesia 50%Ireland 30%Italy 30%Japan 33.3%Kuwait 30%

Malaysia 33%Netherlands 30%New Zealand 20%Nigeria 30%Norway 33.3%Portugal 33%Romania 33%Russia 30%Singapore 30%South Africa 35%Sweden 30%Switzerland 33.3%United Kingdom 30%USA none

MANDATORY OFFER LEVELS

Source: Allen & Overy (10/12/2008) 61© Scott Moeller, 2012


TIMETABLE ISSUES (IN THE UK)The Bid Timetable

Date Event

Day before day of announcement Irrevocable undertakings (if any) obtained

Day of announcement (“A”) 8.00 am: Offer announced (including all its terms and conditions)

Up to 28 days after A (“D”) Offer document posted

D + 21 First closing date

D + 22 By 8.00am: If offer unsuccessful at the first closing date, Offeror announces the level of acceptances and that the offer is being extended for, normally, 14 days

D + 39 (timetable extended on request of the Panel if merger control condition not satisfied by now)

Latest date for release of new information by the target

D + 42 First date for withdrawal of acceptances

D + 46 Latest date for the posting of revised offers: if a revision is to be made, Offeror announces revision of its offer and extension to 1.00 pm on D + 60 and posts a new offer document



TIMETABLE ISSUES (IN THE UK) (CONTINUED)

D + 74 Latest date for the posting of consideration to those shareholders who accepted the offer on or before D + 60, assuming the offer becomes wholly unconditional on that day

D + 81 Day by which conditions (other than the acceptance condition) must have been fulfilled or waived

D + 95 Latest date for the posting of consideration to shareholders assuming the offer becomes wholly unconditional on D + 81

3 months after last day on which offer can be accepted

Normal cut-off for serving squeeze-out notices under Section 979 of the Companies Act 2006

Date of squeeze-out notice + 6 weeks

Acquisition of relevant minority shareholdings

D + 60 1.00 pm: Last time for receipt of acceptances counting towards fulfilment of the acceptance condition

By 5.00 pm: Offeror announces whether it has received sufficient acceptances to declare its offer unconditional as to acceptances. If not, offer lapses; if so, offer normally declared wholly unconditional or declared unconditional as to acceptances (e.g. if regulatory conditions still outstanding)



COMPETITION LAW

Competition law covers (in particular): mergers, anticompetitive agreements (including cartels) and abuse of a dominant position

Example: EU rules on level of dominance –

Presumption of anticompetitive at 40%

Indication at 25% market share (referral)



TAXABLE VS. NON-TAXABLE DEALS

The basic tax rule in mergers:Exchanging stock = non-taxable transactionCash or Debt = taxable

In practice, it is more complicatedSpecialised tax advisors usually required





STRATEGY: CROSS BORDER / NEGOTIATION / POST-DEAL



Advisors and their Roles

‘The only source of knowledge is experience.’

Albert Einstein



Investment Bank

Legal

General Management Consultants

Human Resources

Accounting

Tax IT Specialist Funding Bank Others

DIFFERENT ADVISORS IN A DEAL



Deal Team Leader

IT / SystemsLegal /

Intellectual Property

HR• Strategy

• Communications• Culture

Finance / Tax

Compliance

Commercial• Sales & Marketing

• eCommerce• Sourcing

Operational• Risk

• Services & Processes• Quality

A SERIAL ACQUIRER EXAMPLE: THE GE DEAL TEAM



FINANCIAL ADVISOR(S)

Financial advisor role Gives general financial advice Drafts some, coordinates all documentation Controls other advisors and the client/directors Advises on target valuation and deal pricing Manages overall strategic direction of the offer Lend its good name to the transaction

There may be two financial advisors Investment bank (advisory and possibly underwriting) Lending bank (funding: short-, medium-, long-term)

Increasingly the financial advisor will play both roles, and also the stockbroker role

Financial advisor role differs depending on whether representing the bidder or target.



INVESTMENT BANKERS WITH BIDDERS Finding acquisition opportunities, e.g. locating an acquisition target.

Evaluating the target from the bidder’s strategic and other perspectives; valuing the target; providing ‘fair value’ opinion.

Devising appropriate financing structure for the deal, covering offer price, method of payment and sources of finance.

Advising the client on negotiating tactics and strategies or, in some cases, negotiating deals.

Collecting information about potential rival bidders.

Profiling the target shareholders to ‘sell’ the bid effectively; helping the bidder with presentations and ‘road shows’.

Gathering feedback from the stock market about the attitudes of financial institutions to the bid and its terms.

Identifying potential ‘show stoppers’, such as antitrust investigation and helping prepare the bidder’s case in any regulatory investigations.

Helping prepare offer document, profit forecast, circulars to shareholders and press releases, and ensuring their accuracy



INVESTMENT BANKS WITH TARGETS

Valuing the target and its component businesses to negotiate a higher offer price; providing fair value opinion on the offer.

Helping the target and its accountants prepare profit forecasts.

Arranging buyers for any divestment or management buyout of target assets

Getting feedback concerning the offer and the likelihood of its being accepted

Negotiating with the bidder and its team.

If the bid is hostile or unsolicited:

Crafting effective bid resistance strategies

Finding white knights or white squires to block hostile bid.

Monitoring target share price to track potential bidders and provide early warning to target of a possible bid.



DEAL ADVISORY FEESANNOUNCED TARGET ACQUIRER

ANNOUNCEDTOTAL VALUE

(M)

TARGET FINANCIAL ADVISER FEE

($ IN MILLIONS)%

27 Jan 2012 Solutia Eastman Chemical $4,501 $14.3 0.32%

18 Apr 2012 Catalyst Health Solutions SXC Health Solutions $4,167 $25.0 0.60%

30 Jan 2012 Thomas & Betts ABB $3,867 $21.5 0.56%

19 Mar 2012 AboveNet Zayo Group $2,147 $16.3 0.76%

7 Jan 2012 Inhibitex Bristol-Myers Squibb $2,065 $21.5 1.04%

12 Mar 2012 Zoll Medical Asahi Kasei $2,063 $8.4 0.41%

9 Feb 2012 Taleo Oracle $1,838 $20.0 1.09%

21 Feb 2012 CH Energy Fortis $1,443 $6.2 0.43%

30 Jan 2012 Pep Boys-Manny Moe & Jack Gores Group $1,009 $7.8 0.77%

26 Jan 2012 Micromet Amgen $902 $15.0 1.66%

13 Mar 2012 Great Wolf Resorts Apollo Global Management $744 $5.2 0.70%

10 Apr 2012 X-Rite Danaher $626 $8.9 1.42%

6 Feb 2012 SureWest Communications Consolidated Communications Holdings $521 $7.1 1.36%

5 Mar 2012 Archipelago Learning PLATO Learning $324 $5.5 1.70%

7 Mar 2012 Transcend Services Nuance Communications $302 $4.3 1.42%

17 Jan 2012 Convio Blackbaud $272 $5.0 1.84%

16 Apr 2012 Dreams eBay $167 $2.7 1.62%

3 Feb 2012 Swank Randa $81 1.3% 1.65%

19 Mar 2012 Adams Golf Adidas $72 $2.2 3.06%

27 Feb 2012 Access Plans Aon $70 $2.1 3.00%

Acquisitions and divestitures announced between 1 January and 30 April 2012 where fees have been disclosedSource: Bloomberg



INVESTMENT BANK FEE LEVELS

0.00%

0.50%

1.00%

1.50%

2.00%

2.50%

3.00%

3.50%

0 500 1000 1500 2000 2500 3000 3500 4000 4500 5000

Fee

Perc

enta

ge

Deal Value ($ millions)

Relationship between Deal Size and Fee Level

Acquisitions and divestitures announced between 1 January and 30 April 2012 where fees have been disclosedSource: Bloomberg



LAWYERS Draft legal agreements and documents Draft ‘back end’ of offer and defence documents Give tax advice (sometimes) Handles competition concerns, if any, and other

regulatory issues Gives general corporate and regulatory advice Verification and (legal) due diligence May negotiate (or renegotiate) senior management and

other employee contracts.



ACCOUNTANTS

Produce numbers as required 3 year track record for offer document (not

required for offeree document) Profit forecast (but note their role)

Give tax advice (when lawyers don’t) Take on bulk of due diligence Sometimes have specialist consultancy roles



GENERAL MANAGEMENT CONSULTANT

Can advise at any point in the deal For smaller acquisitions, may include some of the roles noted for

investment bankers

Example: Services provided by Accenture Training:

M&A Strategy and Pre-Deal Workshop Due Diligence Workshop

What to do: Pre-deal Playbook Clean Room Playbook (when providing information during due diligence) Synergy Playbook Divestitures Playbook Merger Integration Playbook

Toolkits (specifics): Merger Integration Toolkit



PUBLIC RELATIONS ADVISOR

Helps with selling message

Corporate ‘logo’ / spin

Organises PR campaign Press briefings Presentations Media events

But…don’t let them out alone



IN-HOUSE M&A CORE COMPETENCY

Corporate Development group Usually populated with transfers from other areas of the company Can be a feeder to the divisions, especially related to deal integration Staff who can perform well in an uncertain and chaotic environment often

with extreme pressures on time and performance Sees the deal through from start to post-merger integration, often including

execution

Deal Process and Integration Playbook Tools developed that are unique to the company Metrics for all phases of the deal Anticipates potential trouble areas Incorporates learning from one deal to another Links corporate strategy and SWOT analysis to the acquisition plans



KEY ELEMENTS OF IN-HOUSE M&A

Clear and compelling M&A Strategy

Merger Integration Playbook Merger Integration Unit

• Create/refine acquisition strategy “Why buy?”

• Assess strategic needs and gaps relative to current business.

• Determine where and how acquisitions may close Corporate and / or Business Unit gaps

• A set of diagnostic tools and repeatable processes that is tailored to the company’s acquisition needs

• Includes customized integration methodologies, performance metrics, tools, and templates

• Includes diagnostic to assess a deal’s complexity and likely integration trouble spots to identify what must be integrated successfully

• The Merger Integration Unit should bring together people who can perform well in a chaotic, uncertain merger environment

• A Core Integration Management team will be responsible in realising the synergies and is also given a voice in synergy estimation of new deals

Source: ‘The Role of M&A in Driving Convergence: Further Data Points’ (Accenture, March 2007)



Strategy

‘In preparing for battle I have always found that plans are useless, but planning is indispensable.’

Dwight D. Eisenhower (1890–1969)



STRATEGIES FOR REALISING VALUE

Categories of seller Private individuals – family firms, entrepreneurs Commercial – corporates of all sizes Financial – PE house, venture capital

Rationale for selling Financial exit Diversification Generate liquidity Family retirement planning or dispute resolution Inderperformance Lack of strategic fit Tax strategy Opportunism



DEVELOPING AN ACQUISITION STRATEGY

Define your acquisition objectives Establish specific acquisition criteria Focus on the company’s “wish list”: Is it the right

target? Is the market going to like the deal? Why? What is the business vision that justifies it? How much dilution in the buyer’s stock price will there

be? What will it take after the deal to make it work?



DISPOSAL ERRORS

Process failures Lack of planning No grooming Separation issues ignored No sell-side due diligence Unreasonable price and terms expectations Wrong marketing approach

Commercial failures Failure to identify a company that should be sold Wrong strategy – flotation, joint venture, PE house



TYPICAL LOSING PATTERN FOR MERGERS

Targets are screened on the basis of industry and company growth and profitability

Pressure is building to do a deal

Unrealistic synergies are included in DCF analysis

Negotiation concludes at a high premium

Post acquisition, the synergies are found to be unachievable

Company share price falls with negative external comment



REASONS FOR MERGERS AND ACQUISITIONS

There are good and bad reasons for acquiring another company

At its core, the headline communications demonstrate: Expansion Synergistic gain Financial factors, including investment (e.g., private equity

returns)

But - unfortunately - other motives may also provide the impetus



WHY DO A DEAL?

GoodBut still risky

•Improve target company performance•Management•Operating synergy•Financial synergy

•Remove excess capacity from the industry

•Accelerate market access for the buyer or seller

•Get skills, technologies, IP faster or at a lower cost than building.

•Pick winners early

Questionable:Russian Roulette

•‘Big is Better’: Roll-up strategy

•Reduce competition•Reactive to industry changes

(‘me-too’ deals)•Prevent a competitor from

doing the same deal•Taxes•‘Shake things up’: Redefine

the industry•Undervaluation / ‘Buying

cheap’•Opportunism: ‘Because it’s

available now’•Shareholder pressure

(usually a major shareholder)•Public relations benefits•Advisor recommendation

(being sold a deal)

Bad:‘Betting the farm’

•Hubris / Managerialism

•Pure diversification

•Hide internal problems

Source: McKinsey (2010) / lecturer87



IDENTIFYING COMPANY STRATEGY

Acquirer must know its own existing core competences and therefore its gaps …to be filled in through acquisitions Desired competences must be kept in mind throughout the

M&A process: planning, screening, due diligence and negotiation

Acquirer’s familiarity with the target and industry will assist in the communications with the target once negotiations have begun Reducing uncertainty Assisting in retaining key personnel



STRATEGIC JUSTIFICATION: SIX QUESTIONS TO EVALUATE1. Sound Strategic Assessment?

Value-creating potential of the acquisition Transfer of skills must meet three conditions:

Similar enough to be meaningful Activities lead to competitive advantage Skills represent a significant source of competitive advantage

Possible mistakes: considering the target only and not the combined firm, static analysis and not the industry’s future

2. Shared View of Purpose? Without a shared understanding of the strategic role of the acquisition, there will

be no clarity for the integration Possible destruction of value

3. Clear view of the sources of Benefits and Potential Problems? Identify potential risks, and alternatives to mitigate those risks Consider that proponents of the acquisition will downplay the risks in 'selling' the

idea to senior management



STRATEGIC JUSTIFICATION: SIX QUESTIONS TO EVALUATE4. Consideration of Organisational Conditions?

Synergy is more than cost control and technical integration Key factor is who will manage the various departments in the 'new'

organisation

5. Plan for Implementation Timing? Planning for the process, not just the end-point Milestones need to be set

6. Maximum Price Set? Must set 'walk-away' price so that all the benefits will not be bid away

in the heat of the process Pricing is dynamic, and will change as market conditions and better

information becomes available



LINKING STRATEGY TO SELECTION: 10 GUIDELINES1. Pay for the past, consider the present but buy the future

• Evaluate the business on expected future performance after you buy it

2. Buy a good business and make it great• Buying a mediocre business at a low price is more expensive than

buying a good business at a fair price

3. Ingredients are nothing without a recipe• Can you put the parts of the business together at a reasonable cost?

4. Fall in love with the cashflow not the product• Remain objective

5. Stick to your knitting• Do what you do best



LINKING STRATEGY TO SELECTION: 10 GUIDELINES6 Autopilot

• Can the business run on its own so that you can concentrate on driving the profits?

7 What holds the gold?• Where are the hidden values?

8 Can we sell the deal?• You must be enthusiastic about the business and able to sell the idea to

others

9 Identify and evaluate what is missing• Sometimes the smallest improvements yield remarkable results

10 Timing and cost• How long will it take to implement and how much will it cost?



EVALUATE THE STRATEGY: TOOLS

Competitive position Porter’s Five Forces analysis

Resource analysis 7M’s

Product/market strategy Ansoff matrix

Long term strategic impacts P.E.S.T.E.L. analysis

S.W.O.T. summary



SUPPLIERS CUSTOMERSQuestions: Questions:

Is supplier industry Is the customer baseconcentrating? concentrating?Is supplier value/cost Is value added toCOMPETITIVEadded to end product high, customer end productchanging? high, changing?ADVANTAGEPotential Actions: Potential Actions:Backward - integrate Create differentiated

productForward - integrate

SUBSTITUTESQuestions:

Do substitutes exist? What is their price/ performance?

Potential Action:Fund venture capital and joint venture to obtain key skills Acquire position in newsegment

BARRIERS TO ENTRYQuestions:

Do barriers to entry exist? How large are the barriers? Are they sustainable?

Potential Actions:Acquire to achieve scale in final product or critical component

Lock up supply of criticalindustry input

USING INDUSTRY STRUCTURE ANALYSIS: PORTER



THE 7 M’S MODEL

Analysing strategic resources Materials Machines Method Manpower Management Markets Money

Relates as well to the due diligence95

Where is the competitive advantage?

How to integrate?

How to retain?



ANSOFF DEVELOPMENT MATRIX

96

Product

Market

Present

Present

New

New

Market penetration

Product development

Market development

Diversification



S.W.O.T. PLUS P.E.S.T.E.L. ANALYSIS

97

Political Economic Social Technology Environmental Legal

Strengths

Weaknesses

Opportunities

Threats



Due Diligence

‘Know thy enemy and know thyself; in a hundred battles you will never be in peril.’

Sun Tzu 400-320 BC



PRE-SALE PLANNING

Vendor due diligence Advantage for vendor or purchaser? Identify deal breakers – pre- and post-closingGrooming and separation issues Close down marginal activities Control the deal – no surprises Information memorandum and due diligence

package



SOME THOUGHTS ON DUE DILIGENCE

Needs to start before the deal is announced•But most active period is when the deal is public

Led from the top…•But needs to involve all divisions and staff at all levels•Outside experts

Issues of public vs non-public information•Assume that anything disclosed WILL be public•Non-disclosure agreements

Methods used:•Initial information memorandum•Virtual data rooms•Physical data rooms



DUE DILIGENCE ISSUES (CONTINUED)

The target company is not required to provide to a bidder any confidential or non-public information unless: Compelled by the courts An auction process has been initiated by the target, in which case they must

disclose information equally to all parties when requested by those parties If the management of the target determines that it is in the best interests of

the shareholders that such information is disclosed.

The target is not required to disclose information that the party has not requested.

If non-public information is disclosed during due diligence, then it is necessary to protect that information through a confidentiality agreement. Increasing use of virtual data rooms.



TYPES OF INFORMATION GATHERED DURING DUE DILIGENCE

Ethical

Cultural

People

Commercial

IT

Legal

Financial



SOURCES OF DUE DILIGENCE INFORMATION

TargetManagement

StaffSales staff

SubsidiariesAdvisors

Competitors

Customers

Former Employees

Industry Advisors

Distributors

Regulators

Suppliers

Analysts



DUE DILIGENCE KEY SUCCESS FACTORS

What?

• Identifying the most important items to collect

• There isn't time to look at everything

Where and How?

• Identifying the right sources of the information

•Not just the right information, but where so it can be rapidly collected

By Whom?

• Identifying the right people to review the data

•This should include people who may be managing the business post-acquisition.



Post Merger Integration

‘A wise person once said that a beautiful marriage is one in which two people become one.

The trouble starts when they try to decide which one.’



WHY DO M&A DEALS FAIL?

106

Rank Top 10 Pitfalls in Achieving SynergiesNegativeImpact

Note: Survey of Forbes 500 CFOs. Assessed on a scale of 1 to 7, where 7 is high.

1 Incompatible cultures 5.60

3 Unable to implement change 5.34

5 Did not anticipate foreseeable events 5.14

7 Acquirer paid too much 5.00

9 Need to spin off or liquidate too much 4.05

2 Inability to manage target 5.39

4 Synergy non-existent or overestimated 5.22

6 Clash of management styles/egos 5.11

8 Acquired firm too unhealthy 4.58

10 Incompatible marketing systems 4.01



CHANGE OR PRESERVE?

107

High

HighLow

Change in Target

Change in Acquirer

DigestionTarget

organisation absorbed into

Acquirer

Brave New World

Both companies combine to

become a new business

Business as Usual

Target remains intact within the

acquirer

Reverse Takeover

Acquirer adopts culture

of target



FOCUS OF INTEGRATIONS

108Source: Mergermarket / CMS Cameron McKenna, Feb 2007



‘CLEAN RAID’ PRINCIPLE

C•Communicate

L•Lead from

the top

E•Engineer

successes

A•Use

Advisors

N•Nurture

clients

R•Retain key

employees

A•Adjust,

plan and monitor

I•Integrate

the two cultures

D•Decide

quickly



THERE ARE 4 STAGES IN MATURITY OF M&A INTEGRATION

Source: Richmond Events© Scott Moeller, 2012


POST-ACQUISITION INTEGRATION MILESTONES

Pre Announcement•Due Diligence with

focus on post-acquisition planning (including key client and key employee retention)

•Design PMI 100-day plan

Day One•Gain control•CEO press

conference and internal communications

•Demonstrate value of acquired company

•PR to major stakeholders

•Announce top line management and board

•Announce PMI plan

Week 1•Complete initial

communication plan to stakeholders, including all key clients

•Announce overall company structure

•Start redundancy announcements

•Demonstrate an early ‘win’

•Communication from PMI head, with trickle-down

Month 1•Full PMI plan

implemented•Review process in

place (milestones and targets agreed)

•First PMI review against plan

•Retention plan in place for all key managers

100 Days•Complete all major

integrations and up to 3 levels of management

•‘Wins’ confirmed•PR to all

stakeholders•Staff to know if they

will be made redundant or not



FACILITATING INTEGRATION: INTEGRATION MANAGERS

Integration managers are needed to: Speed up the integration process Create a structure Forge social connections between the two organisations Help engineer short-term successes

Who would make the ideal Integration Manager? Deep knowledge of the acquiring organisation No need for credit Comfort with chaos Willingness to put in the hours Trusted by senior management in the acquirer Emotional and cultural intelligence Ability to delegate

112Source: Ashkenas & Francis, HBR Nov – Dec 2000, Lecturer



FACILITATING INTEGRATION: TASK FORCES

Integration Task Force Multiple levels in the organisation One overall “integration steering committee” to manage the whole

process Cannot be outsourced

Key tasks Key manager decisions Aligning strategies Aligning structures, systems, processes Corporate identity, brands, names Communications Resolving conflicts



POST MERGER INTEGRATION: OUTSIDERS

“Controlled” Outsiders Consultants Lawyers Accountants

“Uncontrollable” Outsiders Regulators Press and analysts Competitors



FACILITATING INTEGRATION: COMMUNICATION

Poor communication usually reflects poor underlying business strategy and definitely poor implementation.

Communication needs to incorporate as many tools as possible, such as: Hot lines Newsletters Presentations Workshops

From top management of both organisations

Informal lines of communication critical as well



ACHIEVING SHORT-TERM BENEFITS IS EASY

Short-term benefits Overhead cost reductions Factory rationalisation Brand selection Channel integration

Longer-term benefits are much more difficult to achieve and often even to measure True cultural integration Sales force efficiency



HIDDEN MERGER COSTS: DIFFICULT TO QUANTIFY Hiring and training new employees and existing employees in

new positions

Time consuming and distracting meetings and activities during integration (diverting focus from marketing, product development, etc.)

Dysfunctional politicking and power fights

Decrease in employee efficiency during period of uncertainty

Customer uncertainty and competitors attempts to take advantage of the uncertainty



NEED FOR CLEAR OBJECTIVES

Necessary as a corporate road-map Client and employees must see the end-goal, or will leave

118

Mission

Vision

Strategy

Objectives



MOST DEALS DO NEED THE TARGET’S STAFF

Communicate early and often Tell the truth

Acknowledge the cultural and business differences

Select some target company strengths and show these are valued and will be retained Find a few things the target does right, and adopt them quickly

Change only what you must

Involve the target management in decision-making



Measure Description ExamplesIntegration Assessing specific integration events and thereby

determining whether the overall integration approach is accomplishing its mission of leading the organisation through change.

Brief survey of task force members and employee focus groups, or feedback received through a confidential hotline.

Operational Tracking any potential merger‐related impact on the organisation’s ability to conduct its continuing, day‐to‐day business.

Statistics that reflect sudden changes in sick days, indicate more than a normal number of productivity‐ or quality‐related issues, or reveal an inability to process reports in a timely way.

Process & Cultural

Determining the status of merger driven efforts to redesign business processes or elements of the organizational culture.

Reports (in terms of percentages) on the completion status of task forces’ integration plans, specific surveys of the internal customers of a given process (to spot bottlenecks or new disruptions that are due to the merger), and periodic feedback identifying pressure points with respect to how things are being done in the new organisation.

Financial Tracking and reporting on whether the organisation is achieving the expected synergies of the deal.

Ongoing summaries of the actual synergy projects in process and the economic value of those already captured, plus some kind of synergy related communications.

Source: Galpin T (2007). The Complete Guide to Mergers and Acquisitions (2nd Ed)

INTEGRATION MEASUREMENT AREAS



CHALLENGES TO INTEGRATION

46.2%

53.8%

30.0% 35.0% 40.0% 45.0% 50.0% 55.0%

Yes

No

Post merger - do you socialise with your new work colleagues?

46.2%

53.8%

30.0% 35.0% 40.0% 45.0% 50.0% 55.0%

Yes

No

Do you believe that the new company has a spirit / dynamic?

Source: Cass Business School Survey (Falconer), 2010



Source: ‘The Role of M&A in Driving Convergence: Further Data Points’ (Accenture, March 2007)

Key Success Factors Impact on Pre-Merger Integration Approach1. Value Creation, Not Just

Integration• Sources of value must be clearly identified & communicated; teams must focus on creating value• Customer experience is the key driver of value creation; have a clear vision for Day 1

2. Top 5 Critical Decisions • Focus time and energy on areas that will make a difference and choose the right leaders for each• Invest the effort to develop options and as many facts as possible

3. Setting Clear Aspirations • Define clearly and quickly the market and financial synergy metrics (revenue, EBITDA, cash flow)• Develop leading indicators, stretch targets. Be ready to adapt. Seek a common language.

4. Benevolent Dictatorship –Tight Process

• Inherently messy (whitewater rafting); unpopular decisions will be made – set a productive tone• Tighten process (regulatory , focus, efficiency, gaming); keep it as simple as possible

5. Opportunity for Change •Organization is unfrozen; employees/partners/suppliers expecting change• Targeted change where needed

6. Gluttony is Severely Punished • Organizations have limited capacity for change; 70% solution, 100% executable• Lockdown dates but create safety nets and backup plans (brute force backup)

7. Don’t Underestimate Resource Requirements

• Heavy workload with teams working long hours for long periods of time• Back up resources such as retirees, consultants leveraged for support

8. Proactively Design the Organization

• Make organizational decisions as soon as practical• To facilitate culture change, run processes the way we want the NewCo to run

9. Communicate • Identify and manage many constituencies – customers, employees, regulators, shareholders, partners, suppliers, competitors

• Outline rules of engagement and proactively manage messages and perceptions

10. Governance & Process Controls from day 1

• Establish a dedicated PMO at the onset to create a common process & objectives across logically-defined teams and to manage critical interdependencies; ensure ‘apples to apples’ analysis

• Process execution minimizes issues and implementation risks in later phases

Source: ‘The Role of M&A in Driving Convergence: Further Data Points’ (Accenture, March 2007)© Scott Moeller, 2012




STRATEGY: CASE STUDY



Mobile Telecommunications Company [MTC] (Rebranded as Zain September 2007) founded in Kuwait in 1983

Zain Market Cap USD $20.5 billion (2010) Over 70 million Subscribers (2010) Acquired Celtel on March 29, 2005 A leading African operation spread across 13 countries with 5.2 million subscribers

125


All of the Zain deals were: Acquisitions Horizontal Strategic / Opportunistic Supplementary/ Complementary Friendly

127


Celtel acquisition in an emerging market (Africa) – huge opportunities for growth

Source: Case Study “Crossing Borders: MTC’s Journey through Africa”128


“One Network” for all ‐ The world’s first borderless network offering 160 million subscribers in 6 countries in Central Africa, i.e. free roaming

charges.

Celtel has increased its regional subscriber base by 10%

At the time, “One network” was the single most important factor in wrestling market share from other providers

129


A clear vision for success for the brand:

Top 10 worldwide telecom operators

Top 100 brands in the world

Motivated management team

130


Focusing on the rebranding

Ignoring Celtel brand equity (strong brand recognition & loyalty in African countries)

Patronizing the Celtel team

131


Ignoring market trends in Africa (competition / market dynamics)

Losing market share to MTN and other foreign entrants ;

Zain operating in an environment as a foreign entrant without providing enough support to existing operations (Celtel).

132


Opportunistic approach

Move for 3rd operating license in KSA – a congested market (tough competition)

Head to Head with Competition

Ignoring opportunity to explore a Win‐Win with MTN such as a Joint Venture or Strategic Alliance

Driven by Hubris / Ego of Leadership

133


Resignation of Dr. SaadAl Baraak Zain CEO, the man behind the success of MTC. He stepped down on the 3rd of February 2010 after 8 years

in service!

Bharati Airtel an Indian Group acquires Zain African operations for a price of US $10.7

billion (The African operations equates to 42 million customers out of 70 million of Zain

Group’s customer base)!134

© Scott Moeller, 2012 135

There were a lot of activities during the 2004‐2008 period within MTC / ZAIN.

Some were successful, such as the acquisition of Celtel and entering the African market.

Some were unsuccessful such as the high price paid for KSA license for only 25% share in the consortium.

And with the Lack of proper Bid Process, there was a lack of proper DD, and therefore no proper Post‐Acquisition review, therefore no risk was identified or could potentially be identified

The lessons learned from this journey of entering Africa, its exit and back into KSA are as follows:

An organisation should always look for alternatives of M&A before making the decision

The role due diligence plays in making a deal successful such as having the right items analysed through the right source of information and received within the required timeframe.

The role of negotiations/ bidding plays in making the deal a success. Such as if the African countries were negotiated for lesser than the amount paid. The emotional bidding for KSA’s license resulting in paying a high price could have been avoided if proper negotiations and bidding plans / processes were in place.

© Scott Moeller, 2012 Source: http://www.zain.com/Sold in 2010

136



Morning, Session 1

INTRODUCTION TO DAY 2



PROGRAMME OVERVIEW

Objectives Identify key value drivers Understand the process of M&A Assess the needs and benefits of M&A for a company and therefore the

right and wrong reasons to do a deal Understand synergies and how to quantify them Learn the different methods of M&A valuation and pricing, and the

appropriate application of these methods Understand M&A due diligence Analyse alternative deal structures

We will achieve this through the extensive use of Real life examples of transactions (case studies) Discussion amongst all participants Break-out groups



COURSE PROGRAMME

Day 1: Morning: Reasons for doing deals, funding and exit requirements, risk and regulation.

Day 1: Afternoon: Deal process, deal teams, strategy, due diligence and negotiation, post-deal integration

Day 2: Morning: Financial engineering (deal structuring, financing, pricing vs valuation, covenants)

Day 2: Afternoon: Synergies and summary case study.




Morning, Session 1

FINANCIAL ENGINEERING: DEAL STRUCTURE



141

ARBITRAGEURS: ALLIES OR ADVERSARIES

Arbs bet on the price movements in takeover stocks They absorb a large percentage of available stock when a

hostile deal is announced They provide liquidity to shareholders who do not want to wait

out the deal Given the size of their holdings, as a group they often become

the decision makers They are extremely rational in their decision based almost

exclusively on short-term financial factors.



142

ARBITRAGE HEDGING

Arbs want to hold positions where the exposure is exclusively to the deal, not the market

This typically takes the form of going long the target company and short the bidder

Arbs will consider the following Current bid Potential bids from other bidders Recapitalisation plans or other changes initiated by the

target as a defence



143

CALCULATING ARBITRAGE RETURN:

Target (400p/share) received 600p/share bid. Shares immediately rise to 570p/share

Bidder (530p/share) declines to 500p/share.

Arbitrage:1. Position taken:

100 Target Shares at 570p 100 Bidder Shares sold short at 500p

2. Date position taken: 1 June 20103. Date shares tendered: 28 June 20104. Date proceeds received: 10 July 20105. Total Time of investment: 40 days

Source: Bruner



144

ARBITRAGE RETURN CALCULATION

Capital employed Assets

Long 100 shares of Target £570

Liabilities and Capital Short 100 shares of Bidder £500 Borrowed 100 shares of Bidder (£500) Bank borrowing (70% of assets) £399 Capital (30% of assets) £171 Total £570

Net Spread Calculation £30.00 Gross spread (Target: [600p-570p] x 100 plus Buyer: [500p-

500p] x 100) (£4.37) Interest Cost (10% of bank borrowings for 40 days) (£2.00) Short dividends foregone £3.00 Long dividends received £26.63 Net spread (ROI)

Source: Bruner / Moeller© Scott Moeller, 2012


145

ARBITRAGE RETURN CALCULATION

Average Capital Employed 40 days/365 days x £171 = £18.74

Annualised Return on Capital Employed £26.63 / £18.74 = 142%

Annualised return significantly affected by small changes in actual return and time period.

Source: Bruner



146

SETTING A BID PRICE

Think like the target company’s shareholders – the arbs.

Value of Tendering > Expected Value of Not Tendering (EVNT)

EVNT = (Share price No Competing Bid * Probability No Competing Bid)

+ (Share price Competing Bid * Probability Competing Bid)



MISCONCEPTIONS ABOUT VALUATION

Myth 1: Valuations are accurate Bias is endemic in valuation and enters in subtle and not so

subtle ways

Myth 2: Valuation is a science A valuation is never precise and is never quite finished

Myth 3: You need complex models Complexity comes with a cost; more information is not

necessarily better than less information



MYTH 4: ACCOUNTANTS KNOW HOW TO MEASURE EARNINGS

Profits are often smoothed by accounting rules

Operating leases and other off balance sheet treatments mask the true picture

R&D is often written off immediately and yet the benefits are in future years

Profits are usually out of date



MYTH 5:VALUATION IS COMPLICATED WITH HUNDREDS OF MODELS

149

Cashflow to FirmEBIT (1 - t)- (Cap Ex - Depn )- Change in WC= FCFF

Expected GrowthReinvestment Rate* Return on Capital

FCFF 1 FCFF 2 FCFF 3 FCFF 4 FCFF 5

Forever

Firm is in stable growth:Grows at constant rateforever

Terminal Value= FCFF n+1 /(r- gn)

FCFF n

Cost of Equity Cost of Debt(Riskfree Rate+ Default Spread) (1 - t)

WeightsBased on Market Value

Dis count at

Value of Operating Assets+ Cash & Non - op Assets= Value of Firm- Value of Debt= Value of Equity- Value of Equity Options= Value of Common Equity

Riskfree RateNo default risk-No reinvestment risk-

In same currency andin same terms (real or nominal as cash flows

+Beta- Measures market risk X

Risk Premium- Premium for averagerisk investment

Type of Business

Operating Lev erage

FinancialLeverage

Base EquityPremium

Country RiskPremium



MYTH 6: YOU CANNOT VALUE YOUNG COMPANIES LOSING MONEY

How do we usually value companies? Use the firm’s current financial statement How much did the firm sell? How much did it earn?

The firm’s financial history, usually summarized in its financial statements. How fast have the firm’s revenues and earnings grown over time? What can we

learn about cost structure and profitability from these trends? Susceptibility to macro-economic factors (recessions and cyclical firms)

The industry and comparable firm data What happens to firms as they mature? (Margins.. Revenue

growth…Reinvestment needs… Risk) Valuation is most difficult when a company

Has negative earnings and low revenues in its current financial statements No history No comparables ( or even if they exist, they are all at the same stage of the life

cycle as the firm being valued)



MYTH 7: CASH FLOW STATEMENTS TELL US EVERYTHING ABOUT CAPITAL EXPENDITURES

Capital expenditure in financial statements generally includes only investment in long term tangible assets

Capital expenditure should also include Research and development expenses Acquisitions of other firms Any other item which could be considered long term investment



MYTH 8: EXPECTED GROWTH RATES ARE EXOGENOUS VARIABLES

In most valuations growth is predicted from analyst estimates

In reality growth is a function of how much is reinvested and how good are the reinvestments

gEBIT = [(Net capex + Δ in WC)/(EBIT*(1-T))]* ROC



MYTH 9: ONCE YOU HAVE DISCOUNTED THE CASH FLOWS YOU HAVE FINISHED

Cash and marketable securities must be added to the value. You might consider discounting the value if management have a history of bad investments

Minority holdings need to be valued separately and the percentage owned calculated. If there are a large number of small private minorities it is almost impossible to value them correctly

Management options need to be valued and subtracted from the equity value



MYTH 10: GOOD VALUATIONS DO NOT CHANGE

Valuations are not timeless since each of the inputs is susceptible to change as new information becomes available Market information such as interest rates, risk premium,

economic growth Industry information such as legal or tax changes or new

technology Company specific information such as new financial data or

changes in fundamental risk factors



OVERPAYING ON TAKEOVERS

The quickest and perhaps the most decisive way to impoverish stockholders is to overpay on a takeover. Average target premiums are 20-40% Higher premiums than this are known as ‘bear hugs’ and are

increasingly common

Share prices of bidding firms decline on the takeover announcements a significant proportion of the time. Many mergers do not work, as evidenced by a number of

measures. The profitability of merged firms relative to their peer groups does

not increase significantly after mergers. An even more damning indictment is that a large number of

mergers are reversed within a few years, which is a clear admission that the acquisitions did not work.



IMPORTANCE OF VALUATION IN M&A

Acquirer: Needs to know the proper offering price and whether the target meets financial standards / expectations

Target: Needs to know what it is worth to let shareholders know what is in their best interests

Each company is different, and each deal is unique Public vs private companies Knowing what you're buying: the importance of due diligence Outsiders heavily involved in valuations

Investment bankers Accountants

Bidder usually at an information disadvantage to the target

Impact of the structure of the deal Hostile vs. friendly deals Different access to financial and company data Cash vs stock



IMPORTANCE OF VALUATION IN M&A (CONTINUED)

Disciplines required: Economics Finance Accounting Marketing

…and experience

Valuation for M&A is both an art and a science!

Traditional corporate finance and private equity methods of valuation are not typically applicable



DIFFERENCES WITH IPO VALUATION AND VENTURE CAPITAL VALUATION

158

M&A Valuation Techniques: Usually with a 20-40% premium paid

• Value of Business = Future benefits derived from a business - Costs of the deal• Must be a market clearing price: Value agreed by the seller and at least one buyer

IPOs (Initial Public Offerings): Discount generally about 10-15%

• Requires market clearing level, but from a consensus market agreed by many buyers• Need to show demand: increase in share price and volumes

Venture Capital / Private Equity method: Assumes exit, usually 3 to 7 years

• Not strategic – financial investment only• Premiums similar to M&A levels for public deals (sometimes higher)• No (or little) synergies with existing business or portfolio• Requires return of between 25-30% IRR



MERGER VS. ACQUISITION

In an acquisition, the target’s management and shareholders give up control and therefore require a premium Typically needing 20-40% premium to market

In a merger, the two companies often consider themselves (or try to be) equals Therefore future control is shared and no premium is required.

Acquisitions typically have premiums; mergers are transacted at market

Example: JP Morgan acquisition of BankOne in 2004 Bill Harrison (JP Morgan) vs. Jamie Dimon (BankOne) Dimon said the company would sell at market if he was given the top job

immediately Deal settled at 14% premium (+$7 billion) with Harrison keeping the

CEO spot



ENTERPRISE VALUE VS. EQUITY VALUE

It is important to be explicit about exactly what is being included / excluded

Enterprise Value: The value of the whole company From an asset valuation perspective, it is the value of the assets, which also

equals the debt plus equity

Equity Value: Value of the company excluding outstanding debt

Principal question to be resolved: 'What happens to the target's debt?‘

But the related 'detailed' questions are: 'What is considered debt?'

'Are there contingent liabilities?'

'How about hybrid debt and equity?'

'For private companies, what about owner's debts?'



OTHER BUSINESS VALUATION ISSUES

Buyer Value vs. Seller Value: Business and its assets may be worth more to its buyer than seller Buyer may use assets differently, including planning to sell of assets

after purchase

Non-operating Assets: Assets not used in the operations of the business Valued separately and add to the earnings valuation Example: Real estate not involved in the business

Minority Discount: If valuing a minority share and not a controlling position, then need to apply a Minority Discount



VALUING PUBLIC VS. PRIVATE COMPANIES

Public Companies:

Easier to value because there is a price for the company from the stock market

Value of Public Company = Value Outstanding Shares + Control Premium

Note: Actually more difficult than it appearsWhich stock price to select

Most recentHistorical averageRecent and historical figures may already include a takeover

premiumAmount of Takeover or Control Premium, if any



PRIVATE COMPANIES

Private Companies: Valuation can be more difficult initially

Private companies’ information may not be publicly available

Financial statements do not have to be audited and may not be as reliable

Financial statements may contain many costs that are not really costs but a form of owner return

Companies may be doing this to lower taxes

Solution: Recast the Income Statement / Cash Flow



APPROACHES TO VALUATION

Discounted cashflow valuation, when we try to understand the intrinsic value through theory, guesswork and prayer

Relative valuation, where we choose a group of assets, attach the name ‘comparable’ to them and try to tell a story Trading multiples

Option valuation, although not common in practice, where we take the DCF value and divide it up between the thieves of value (equity) and the victims of the crime (debt)



Discounted Cash Flow Analysis

Trading Multiples Of Already Listed

Comparable Companies

Reference To Statistics From

Recent Acquisitions Of

Comparable Companies

MAJOR VALUATION METHODS

166

• Estimate• Cash flow• Discount rate• Growth rate

• Adjust for• Private companies• Small, high risk

• Types• IPO’s• M&A• Trade sales

• Select comparables• Analyse datasets

• Profit based

• Revenue based

• Asset based

• Analyse key drivers

Plus option valuation, although not common in practice, which is where we take the DCF value and divide it up between the thieves of value (equity) and the victims of the crime (debt)



Use replacement value when this is a

strategic alternative

Net asset value from the Balance SheetValue of Assets

BookLiquidationReplacementOr what?

EQUITY VALUATION



IPO VALUATION

Use the same procedure as M&A type valuations

IPO discount generally about 10-15% “bad reasons” for the discount

lack of background information private company

“good reasons” give investors upside market liquidity

Other issues IPO waves main market or AIM industry, % sold, advisors



VENTURE CAPITAL METHOD

Select a terminal year and estimate EBITDA based on a success scenario

Compute continuing value by applying an EXIT multiple –usually based on the adjusted entry multiple

Use a high discount rate for continuing value

Based on the present value of the cashflows calculate the required equity percentage that needs to owned to give a target return of between 25-30% IRR (can be lower)



SCENARIO ANALYSIS

For some methods, run different scenarios re the expected future performance of the company Appropriate for use of discounted cash flows, capitalisation of

earnings, real options.

Typically: Optimistic Most Likely Pessimistic

Weighting Scheme: Weights may reflect the probability of occurrence

Example: High Growth 15% probabilityModerate Growth 60% probabilityLow or Negative Growth 25% probability



COMPANY VALUATION

Value is the residual operating cashflows of the company discounted at the weighted average cost of capital

171

nt

tt

t

1 WACC1firm toCFfirm of Value



ESTIMATING CASH FLOW

EBIT

+ Depreciation and amortisation

- Capital Expenditure

- Change in Working Capital

- Tax

= Free Cash Flow to the firm



EXPECTED GROWTH IN EBIT

Reinvestment Rate and Return on Capital

= Reinvestment Rate * ROC

No firm can expect its operating income to grow over time without reinvesting some of the operating income in net capital expenditures and/or working capital.

The net capital expenditure needs of a firm, for a given growth rate, should be inversely proportional to the quality of its investments.

173

ROCt1EBITin WCcapex Net

EBITg



COMPANY VALUE

Value = PV of cash flows during the forecast periodplus

PV of cash flows after forecast period

Simple growth assumptions allow calculation of continuing value

Continuing value is usually a large proportion of total value



TOTAL VALUE CONSTITUENTS

175

Clothing Sportsgoods

Skincare

Hightech

ForecastContinuing



GROWING FREE CASH FLOW PERPETUITY

Only valid if g is less than WACC

Easily misused formula

If g is less than the growth in the explicit period then value will be understated unless FCF is enhanced

176

gWACCFCFCV t

1



PERPETUITY MODEL AND P/E

If D/E is the dividend payout ratio then reinvestment rate, investment efficiency, risk and growth are all reflected in the P/E ratio

P/E =

Ke = Rf + beta (Rm -Rf)

177

g - KeD

growth - rateDiscount Dividends Price

ED

g 1

Ke



RELATIVE VALUATION IS PERVASIVE…

Most valuations are relative valuations Almost 85% of equity research reports are based upon a multiple and

comparables More than 50% of all acquisition valuations are based upon multiples Rules of thumb based on multiples are not only common but are often

the basis for final valuation judgments

While there are more discounted cashflow valuations in consulting and corporate finance, they are often relative valuations masquerading as discounted cash flow valuations The objective in many discounted cashflow valuations is to back into a

number that has been obtained by using a multiple The terminal value in a significant number of discounted cashflow

valuations is estimated using a multiple178



EV/EBITDA

Enterprise value divided by EBITDA

Classic version = value of debt and equityEBITDA

This is a type of P/E ratio but excludes the impact of debt, tax and capital investment



FROM FIRM VALUE TO EBITDA MULTIPLES

Now the Value of the firm can be rewritten as

Dividing both sides of the equation by EBITDA

180

Value = EBITDA (1- t) + Depr (t) - Cex - Working Capital

WACC- g

ValueEBITDA

= (1- t)

WACC- g +

Depr (t)/EBITDAWACC-g

- CEx/EBITDA

WACC- g -

Working Capital/EBITDAWACC- g



VALUE/EBITDA MULTIPLE LINKAGE TO DCF VALUATION

Firm value can be written as:

The numerator can be written as follows:

FCFF = EBIT (1-t) - (Capex - Depn) - Working Capital

= (EBITDA - Depr) (1-t) - (Capex - Depn) - Working Capital = EBITDA (1-t) + Depn (t) - Capex - Working Capital

181

V0 = FCFF1

WACC - g



A SIMPLE EXAMPLE

Consider a firm with the following characteristics

Tax Rate = 30%

Capital Expenditures/EBITDA = 30%

Depreciation/EBITDA = 20%

Cost of Capital = 10%

The firm has no working capital requirements

The firm is in stable growth and is expected to grow 5% a year forever.



CALCULATING VALUE/EBITDA MULTIPLE

In this case, the Value/EBITDA multiple for this firm can be estimated as follows

183

9.2 = .05-.10

0 - .05-.10

0.3 - .05-.10

(0.2)(.30) + .05-.10

.30)-(1 = EBITDA

Value



VALUE/EBITDA MULTIPLES: MARKET

The multiple of value to EBITDA varies widely across firms in the market, depending upon:

How capital intensive the firm is (high capital intensity firms will tend to have lower value/EBITDA ratios), and how much reinvestment is needed to keep the business going and create growth

How high or low the cost of capital is (higher costs of capital will lead to lower Value/EBITDA multiples)

How high or low expected growth is in the sector (high growth sectors will tend to have higher Value/EBITDA multiples)



BOOK VALUE

Also called 'net asset value':Book Value = Assets – Liabilities

Potential for Inaccuracy: May not reflect the earning power of the business Assets may be kept on the books at a value that does not reflect market

values: Usually valued at historical costs minus depreciation Intangible assets are not generally included on a balance sheet The longer an asset is on the books, the more likely there will be greater

deviation from Book Value and Value in Use What are the real liabilities and debts of the company

For some types of firms, this may be an appropriate starting point Real estate companies or extraction industry companies, with 'easily'

valued real assets Investment banks valued at 'market to book' (market capitalisation

divided by book value) as principal assets are daily marked to book



COMPARABLE MULTIPLES METHOD

Common Comparable Multiples (Market Ratios) P/E Multiples Price/EBITDA Price/Book

Other financial ratios vs. industry Liquidity ratios (e.g., current ratio, quick ratio) Activity ratios (e.g., avg. collection period, inventory turns) Financial leverage ratios (e.g., debt ratio, debt / equity, etc.) Profitability ratios (e.g., ROI, ROE)

Issues: Control Premium: Market ratios do not include a control premium as they are

derived from stock trades that are minority stakes Best to use recent M&A transactions where available Companies may be a mix of businesses, so multiple ratios would then be used

and applied against each line of business.



‘BACK OF THE ENVELOPE’ VALUATION METHOD

Capitalisation of Earnings: Treats income as a perpetuity

Simple calculation method: Step 1: Select an Appropriate Earnings Base Step 2: Select an Appropriate Capitalisation Rate

Select Discount Rate Select Growth Rate Subtract Growth Rate from Discount Rate

Step 3: Divide the Earnings Base by the Capitalisation Rate

Example: Company X’s earnings are expected to be £20 million Earnings have been growing at 5% per year; 15% discount rate has been selected

Capitalisation Rate = 15% – 5% = 10% Value = £20 million / 10% = £200 million

Even easier: Capitalisation Rate is the Reciprocal of the P/E Ratio Company sells for 10x earnings: 1/10 = 10% capitalisation rate Company sells for 5x earnings: 1/5 = 20% capitalisation rate



SUMMARY OF VALUATION METHODS

Discounted cashflow Trading comparables Transaction comparables

Fundamentals• value on expected ungeared free cash

flows

Advantages• captures the company specific long term

outlook• reflects improvement opportunities• risk and duration of cashflow is reflected in

the WACC

Problems• perceptions of future performance• requires in depth understanding of

company and business drivers

Issues• industry dynamics affect revenue and

margin assumptions• capital structure, tax and country risk

assumptions have significant impact on valuation

Fundamentals• analysis based on publicly traded

‘comparable’ companies

Advantages• reflects current trends in market prices and

profitability of similar companies• availability of public financial information

Problems• different business perspective of

comparables• valuation and strategy could be affected by

exogenous market events ( bull or bear markets)

Issues• there are few truly comparable companies

Fundamentals• analysis based on previous similar

transactions

Advantages• reflects the perception of strategic

business investors• provides objective valuation information• valuation generally includes a control

premium

Problems• different perceptions of risk and return• limited information of ‘comparable’

transactions• usually requires country risk, tax and size

adjustments

Issues• few really comparable transactions• lack of disclosure in relevant private

transactions• applicability in change of control

situations



WEIGHTING VALUATION RESULTS

M&A valuations include as many appropriate methods as possible As all of the methods are not equal in terms of certainty or reliability of data Methods must be weighted to come up with a single figure or range Most external advisors will show a large variety of methods in their fairness

opinions and pricing recommendations Scenarios

How do you determine the weight? Think about what aspects of the business tend to give rise to its value Is it its Assets? Then book value should get greater weight Is it its Earning Power? Then give cash flow and income methods more

weight Have there been recent similar transactions? Then give more weight to the

market multiples.



WEIGHTED VALUATION EXAMPLE

Method Value Weight Adjusted Value

DCF £19.9 million 50% £10.0 million

DCF High £24 million 30% £7.2 million

DCF Medium £21 million 50% £10.5 million

DCF Low £11 million 20% £2.2 million

P/E Method £17 million 30% £5.1 million

Book Value £15 million 10% £1.5 million

Net Assets £ 5 million 10% £0.5 million

Weighted Total 100% £17.1 million

Actual valuation recommendation would incorporate many more methods.

Then, it would look at deal costs and incorporate a negotiation starting point.190




Morning, Session 2

FINANCIAL ENGINEERING: STRATEGIC VSFINANCIAL / FINANCING



TOTAL DEAL COST

TargetValue

Premium

Deal Expenses

Opportunity Costs

Post-merger Integration

Costs



TOTAL COST OF A MERGER OR ACQUISITIONTotal Deal Cost = [VA + VB] + P + E + OC + IC

Most private sector acquisitions include a premium to existing market value (P)

'Cash' Costs, or the expenses of the acquisition process (E): Investment banking fees Legal fees Accountant fees Other fees (printers, etc.) Interest payments on debt

'Opportunity Costs' (OC) Management distraction Sales force focus and reaction of customers / clients Competitive responses

Cost of post-merger integration (IC)



EARN OUTS MAY PROTECT THE BUYER

Full payment to target ONLY after certain criteria met AFTER the deal’s completed.

Format can be a variety of measures: EBITDA and PBT are normal

Earn out period is dependent upon prospects and cyclicality of business

Buyer’s adjustments Exclude buyer generated benefits Include all relevant expenses

Vendor adjustments Exclude inflated costs and long term R&D, marketing or capex Exclude effects of changed accounting policies

‘Caveat vendor’ Charge over shares until paid Call on shares if change of control No double recovery on warranties



SALE AND PURCHASE AGREEMENTS

A legal document which contains the price, terms, conditions and structure of the transaction (including any earn-outs)

Contains financial and legal details of the transaction Often substantially drafted and redrafted before final

agreement A long and complex document – commonly over 100 pages



SALE AND PURCHASE AGREEMENTS: CONTENTS

Description of parties Definitions Agreement to buy and sell Conditions Completion obligations Warranties and indemnities Post completion obligations Restrictive covenants Public announcements Fees, costs and expenses Governing law and dispute resolution Schedules of particulars for vendors, company, warranties,

properties, etc



SOME ACQUISITION FINANCING CHOICES

Debt Bank loans: bridge loans, term financing, asset-based lending Bond issue; private placement Seller note, convertible, or performance-related earn-out

Equity Common or preferred stock Public share issue; Venture capital or private equity fund

Mezzanine and Structured Finance High-yield bonds with sweeteners Convertible notes, warrants and participation financing Pay-in-kind notes Asset-backed securities



SENIOR DEBT

Cheapest and main source of finance Term loans with fixed repayment schedule Secured and usually unrated Large tranches may be syndicated Tenor: 6 years or less ~ amortising gives a 3-4 year

average life Interest: LIBOR + 2 to 4% but varies by country and

risks Typically limited historically to no more than 4 times

EBITDA – today more like 2½ to 3 times



SENIOR DEBT (ALPHABET NOTES)

Senior tranches often structured as two or more tranches ~ A, B, C and sometimes D

All tranches rank pari passu for security but B, C, etc have longer maturities and bullet payments higher margins in 50bps increments

Revolving loans can be used for cyclical firms Tranche A (TLa) is amortising TLb and TLc are usually bullet payment



SYNDICATION

Syndication is to satisfy two primary investor groups – banks and institutional investors (funds, insurance co’s and structured finance vehicles)

Pro rata debt revolvers and TLa because they are typically syndicated on

a pro rata basis Institutional debt

First lien TLb and TLc, second lien Structural flex allows arrangers to move debt

between expensive mezzanine to second or first lien or in more difficult times the opposite



SENIOR DEBT PRICING

Traditionally in Europe pro rata debt is priced at about E + 225 bps

Institutional debt is priced up by 50 bps per tranche TLb at E + 275 TLc at E + 325

Market flex language in the documentation allows arrangers to flex the pricing upwards in the current climate to attract lenders



DEBT TO EBITDA



SENIOR DEBT VOLUME



STRUCTURE



DEBT SUBORDINATION AND RANKING

A junior creditor agrees to subordinate their claim to a senior creditor on interest and principal until the senior has been repaid

Subordination can be achieved in one of two ways

Contractual via an inter creditor agreement

Structural – a creditor does not lend or invest directly in a company but does so via a holding company



CONTRACTUAL SUBORDINATION

206

Hold Co

Debt Co

Target/OP Co

Equity

Senior bank debt

Mezz

Inter creditor agreement



STRUCTURAL SUBORDINATION

207

Hold Co

Bid Co

Target/OP Co

Equity

Senior bank debt

High yieldBond Co

High yield invested from

Bond Co to Bid Co via

equity



LEVERAGED FINANCE TECHNIQUES

Senior Debt Asset-backed debt: first lien, mortgage, leasing, ABS Bridge loans,

term debt, revolving credit facilities Second lien notes Mezzanine

High-yield bonds Subordinated debt with deferred interest: PIKs, step-ups

Subordinated debt with equity options: warrants, converts, participating

Seller note Equity

Hybrid capital note financing and preferred Common stock: Sponsors; “stub” (previous owners’ share);

managers



PRICING – CREDIT SPREADS



HIGH YIELD DEBT

Unsecured bonds rated less than investment grade

Tenor of 7 – 10 years (sometimes 12 years) with bullet payment

Size: € 100 million plus ~ high set up costs

Usually limited to 1 - 1½ times EBITDA

Fees: 2 – 3% upfront

May require a bridging loan in an LBO transaction

High early redemption costs ~ maybe as much as 112% premium



HIGH YIELD BRIDGE

Expensive and the cost usually explodes if not replaced with high yield bond on time (usually 6-12 months)

Target yield of 22%-24% from LIBOR + 50bps and warrants

Risky bridging finance

Typical amount is the target bond issue

New trend – convert bridge to mezzanine if the high market is closed



TRADITIONAL MEZZ

Reaches the parts that equity won’t and senior debt shouldn’t

Definition (original)

A floating rate contractually subordinated, 2nd secured, illiquid debt instrument which ranks after senior but before equity



MEZZANINE FINANCE

Anything between equity and secured debt Typically subordinated debt with a warrant attached or

redemption premium Cost is based on IRR of 15-20% Tenor typically 8 – 10 years Interest: LIBOR + 7% to 11% and some maybe rolled

up into a PIK contract Bullet payment Usually carries a second or third charge on assets Fees around 3% up front



MEZZANINE FINANCE

Size of deals: € 3 to € 1000 million with larger deals syndicated

Typically achieve 1 - 1½ times EBITDA or more High cost limits the amount of mezzanine finance Junior mezzanine may be structured as pay-if-can with

payment holidays up to 3 years Toggles – switch the cash payment on or off Usually only 50% of the interest can be toggled



STRUCTURING MEZZANINE

Attempt to achieve higher return without infringing owner / sponsor control

Target lower interest rate with participation in equity or performance

Warrants

Payments linked to turnover, EBITDA or after tax profit

May have a floor and/or a cap



NEW MEZZ - BROADER SPECTRUM

216

Equity

Junior debt

Debt

PIK (Pay in kind)PIYC (Pay if you can)

Mezzanine notesWarranted mezz

Warrantless mezzSecond lien



TYPICAL TERMS FOR TRADITIONAL MEZZ

The 4’s rule: aim for 12% over LIBOR

Cash margin of 4%

PIK accrued of 4%

Warrants giving a further 4% return

Arrangement fees of 3% but varies

Prepayment fees of 3% but varies



WARRANTLESS MEZZANINE – VITERRA ENERGY

€197.5m mezz split into two non-warranted tranches with different call features (first time in Europe)

The sponsor obtained a lower cost of interest and investors requests for call protection were met

218

Call protected Limited call protection

Size (m) 84.0 113.5Cash coupon 5.00% 5.50%PIK coupon 6.00% 6.00%Warrants n/a n/aTotal IRR 14.5% range 15% rangeCall protection Non call 2.5 years



HYBRID MEZZANINE -- ONTEX

€165m mezz 10 year bullet, subordinated, 2nd charge, tranches A&B pari passu

Tranche A €82.5m Cash interest of Euribor + 400bps PIK interest of 400bps Warrants to provide a total return of 11.5% over cost of funds Prepayment fees of 2% year 1 and 1% year 2

Tranche B €82.5m Cash interest of Euribor + 400bps PIK interest of 7.5% No warrants Prepayment fees of 3% year 1, 2% year 2 and 1% year 3



PIK’S

Non standard, hybrid instrument

Total return target of 20-25 % IRR in two parts

Contractual return – semi annual accretion

Warrants

Usually structurally subordinated to debt

Some prepayment restrictions



ACQUISITION OF MANCHESTER UNITED

221

Now halved to £135 million in a refinancing with a reduction ininterest costs from £90million to £60 millionbut an increase in overall debt to £660Million; 2012 IPO

PIK notes had a 15-year maturity with a premium for redeeming the notes on or before 12 May 2007. If the notes had remained outstanding for 63 months after 12 May 2005, Glazer had to sell 30 per cent of his stake to the hedge funds holding the PIK notes.



SECOND LIENS

No standard, situation specific junior debt hybrid

US import structured as loan, bond or both

Hedge fund buyers and some CDO’s

Typical features Contractual subordination

Cash margin of 450-600bps - lower than mezz and high yield

Financial covenants similar to mezz

Call protection varies



SECOND LIEN NOTES

Loaned against remaining value of collateral, sometimes more

Not subordinated in right of payment to first lien lenders

May have second lien claim on most liquid assets, like receivables, but first lien on equipment

Higher rates than senior, but less costly than mezzanine

No warrants or equity kickers

Investor base includes hedge funds, specialized investment funds and mutual funds (unit trusts)

But may have complex inter-creditor agreements



MEZZANINE IN ACQUISITION FINANCING



FINANCIAL STRUCTURING

Match term to asset life Don’t fund long term assets with overdraft Determine maximum senior debt

Cashflow cover for interest and repayment Debt service cover ratio (DSCR) or cashflow available for

debt service (CFADS) Asset cover for security Consider break up value (BAV) for separate asset categories

How much equity is available ? Management input and others



VALUE ENHANCEMENT THROUGH AN LBO

With pay down of debt

226

Market valuebefore buyout

Assets500

150Debt

350Equity

Assets500

400Debt

100Equity

Assets700

200Debt

500Equity

Increase total value = 40%Increase in equity value = 500%

LBO value

Exit value



MODERN FINANCIAL PRODUCTS

227

Ret

urn

Risk

Secured debt

Unsecured debt

Subordinated debt

Convertibles

Preference and loan stock

Junk bonds

Quasi equity

Preference shares

PIK’s

Equity kickers

Ordinary shares

Venture capital

Options



TYPICAL MBO FINANCING STRUCTURE

Line of credit financing

Secured by: inventory and receivablesInterest rate: L+1% - 1.5%Term: 1-3 yearsRepresents: 15% - 35% of totalLender: Bank or finance company

Lowest cost financing because it is secured by highly liquid assets

228

Equity

Subordinated debt

Senior debt

Secured by inventory

Secured byreceivables }




Secured by: fixed assetsInterest rate: L+1% - 2%Term: 5-10 yearsRepresents: 25% - 50% of totalLender: Bank or finance company

Second lowest cost financing because it is secured by highly liquid assets

229

Equity

Subordinated debt

Senior debt


Secured byreceivables

}




Secured by: second charge on fixed assets, subordinated to senior debt, based on excess cashflow

Interest rate: cash coupon of L+3% - 7%, with target IRR of 15% - 25%

Term: 5-10 years matures after seniorRepresents: 10% - 25% of totalLender: Debt funds, insurance companies, pension

funds, seller

High cost debt because of poor quality security

230

Equity

Subordinated debt

Senior debt



}




Secured by: unsecuredInterest rate: target IRR of 30% - 40%Exit target: 3-7 yearsRepresents: 10% - 20% of totalSource: Management, employees, seller, PE or other

external investors

Highest risk with commensurate high target returns

231

Equity

Subordinated debt

Senior debt



}



STRUCTURING PARAMETERS

232

% approach EBITDA x Target returns

Equity 40%Equity

2x EBITDA

EquityIRR 25% - 30%

3-4x cash

Mezz 10%

Mezz IRR 15%-20%LIBOR + 12%

1.6x cash

Mezz 1x EBITDA

Senior debt50%

Senior debt3.5x EBITDA

Senior debtIRR 7%

LIBOR + 2.5%



TYPICAL BUYOUT EXIT ROUTES

The Good Stock market listing Trade sale

The Bad Secondary buyout (“BOBO” or “SBO”) – but increasingly

seen as attractive by both buyer and seller New funds urgently seeking investment opportunities Existing funds urgently needing to monetise gains

Re-leveraging the debt (or “REBO”)

The Ugly No available exit for value, but no threat of liquidation either

(the “Living Dead”) Receivership and liquidation



SELLER NOTES

…or “hope-we-get-paid-some-day finance”

“Save the deal” financing -- usually because the seller has few choices

Deeply subordinated, no x-default, may be PIK, may be structurally subordinated May be cheap Keeps seller honest

“True” financing -- buyer has few choices, so seller offers financing on market terms

Subordinated, transferable, has usual set of covenants, may be at market rates



DEBT TO EQUITY SWAP

Many second-lien lenders are willing to convert debt to equity in a workout situation , in fact, the term “loan to own” was coined to reflect their desire for this outcome in certain situations

Senior lenders may consider a swap where the lender is unlikely to be able to recover fully upon insolvency

The logic of the swap is twofold Reduces the cash costs of interest Provides future upside when the current position is underwater

Another benefit where the debt outstrips the assets is to ensure that the directors are not guilty of wrongful trading which is where a company continues to trade in the knowledge that it will be unable to meet its debts when they fall due



DISTRESSED DEBT PRICING



COVENANT TRENDS

Tighter covenant control is likely over borrower and sponsor execution of the business plan.

There will be more limited freedom to make additional acquisitions or otherwise change the original business model.

Committed further acquisition facilities will be smaller. Uncommitted acquisition facilities may disappear or become

prohibitively expensive if any enhanced economics that apply to them have to be applied to committed acquisition facilities too.

Reinvestment of proceeds in the business will be subject to more control. In some instances proceeds may have to be parked in a blocked account rather than used in the business pending reinvestment



COVENANTS

There are three primary types of covenants Affirmative

Action which must be taken to comply Pay interest, maintain insurance, pay taxes, etc

Negative Limit activities in some way

Type and amount of new investment, new debt, liens, asset sales, acquisitions, guarantees

Financial Quarterly maintenance covenants are a feature of loans but NOT bonds

Minimum cashflow, debt service cover, maximum debt to EBITDA, current ratio, tangible net worth, maximum capex, etc



HAIRCUTS

Mezzanine debt may have identical covenants to first ranking debt or may have a haircut

The haircut refers to how much looser the covenants are compared to senior debt

Standard haircut is around 10%



COVENANT HEADROOM

Covenant headroom compares the credit statistics from the projected financials (one year out) with the first covenant compliance levels

To avoid the risks associated with technical defaults, borrowers prefer to have extra leeway on the covenants incorporated in the original credit agreement

Headroom has grown from the 1999 average of 18% up to 25% or even 30% in the heady credit days but now banks are back to around 20%



DEBT BUYBACK

Recently the Loan Market Association inserted language into its recommended form of leverage facility agreement to regulate borrower and sponsor debt buy back at a discount.

Two mutually exclusive options are provided for in the document. One option prohibits buy backs altogether. The second option provides two processes to facilitate the debt

buy back but strives to maintain equality of treatment between lenders willing to sell.

The technical uncertainties surrounding borrower debt buy back are largely solved by these new provisions.

It remains to be seen how heavily the new terms will be negotiated by borrowers and sponsors



COVENANT LITE

The growth of non-bank lenders in leveraged deals has had a number of significant effects on deal structures and documentation, particularly in terms of tax and security issues, public/private side information issues and also in what have become known as the "syndicate management" provisions such as “Snooze you lose" and "yank the bank“ where not all lenders are sufficiently well

resourced to respond promptly to requests for consents or waivers.

If the main group of investors who are going to invest in a particular credit May not want to receive the non-public information on the basis of which the

banks would have granted amendments or waivers May not respond to a request for an amendment or waiver

Then there may be good reasons to use a covenant-lite package; particularly if most of those investors are also frequent buyers of high yield bonds and, therefore, presumably comfortable with a high yield covenant and default package.



P/E DRIVEN CLAUSES

The “yank the bank” clause allows for a company seeking financial restructuring to pay off dissenting lenders. Without this, one dissident creditor could force the company to pay back all lenders rather than restructuring Will become less popular unless the bank is replaced in the syndicate

The “snooze and lose” clause was devised to counteract stalling tactics used by hedge funds that disagree with restructuring plans May become more popular as agents see the need for a quick response

Equity cures permit sponsors to put in additional equity to "cure" a cash flow shortfall or even an EBITDA shortfall in the context of a financial covenant breach. Some recent deals put no limit on the number of times the cure can be used, or the frequency with which the cure rights are able to be employed.

The infamous Mulligan clause allows financial covenants to be breached without being treated as a default unless the same covenant is breached a second time

An absence of upward flex rights - reverse flex has characterised deals in recent times, with lenders sometimes foregoing rights to raise the price of debt in the instance of troubled syndications



DEBT INCURRENCE

Borrowers do not want a fixed charges cover ratio or a leverage ratio that is tested all the time – a "maintenance" covenant, which exposes the borrower to the risk of default if, for example, EBITDA declines as a result of trading conditions or a delay in the delivery of the sponsor’s business plan.

High yield bonds use an "incurrence" covenant. This will provide that the borrower cannot incur debt (as defined, and subject to a long list of exceptions) unless the chosen financial ratio is below a stated level.

Therefore, as EBITDA increases, the ability to borrow increases. Conversely, the covenant is not tested unless the borrower seeks to incur further "ratio debt".

If the borrower lists out all possible incurrences of debt that are likely to occur and provides that these are all to be disregarded, it may be a long time before the covenant is tested (if it is tested at all).



STANDSTILL AGREEMENT

This expression covers a variety of arrangements: In a takeover situation, it is an agreement between a company and a

shareholder which restricts the shareholder’s ability to acquire further shares in the company

In a restructuring of a company’s debts, it is an agreement between creditors to give the company time for information to be collected and for a survival strategy to be put together with a view to establishing a formal restructuring

In the context of limitation, a standstill agreement is an agreement which has the effect of suspending or extending a statutory or contractual limitation period

Standard standstill periods for mezzanine debt are either 60/90/120 days or 90/120/150 days for payment defaults, financial covenant defaults and other covenant defaults



EXAMPLE OF STANDSTILL

246

JJB Sports lenders received £8.3 million just for extending the standstill agreement



COVENANT BREACHES

If a business has debt facilities in place, distress or other unforeseen circumstances may give rise to the potential for a breach of banking covenants: Is it a "blip" where a one-off waiver will suffice? Or is it something which will

require a re-setting of the covenants? Is a "standstill" agreement (allowing enough time to reforecast and properly re-

set realistic covenants) needed? Check any facilities agreement – does it allow for an equity cure? Are there any assets which can be readily converted into cash?

Remember that any bank consent or waiver will generally only be given in return for a consent fee and margin increases

Consider own debt purchases as a way of de-leveraging. In the current market the chance to buy one's debt at less than face value may be attractive, although tax and accounting issues need careful consideration



CONCLUSIONS ON STRUCTURING

Credit crunch for debt markets and deal pipeline stalled for leveraged deals

This will continue to put pressure on pricing and structures in the short term

“Trickle down” effect to smaller and mid-size deals 2009 started to see some of the recent structures

unravel, and this continued in 2010 and 2011, with little change (albeit positive) in 2012.





STRATEGIC VALUATION, INCLUDING SYNERGIES



SYNERGIES IN M&A DEALS

Revenues: 5+5=11

+10%

Expenses: 3+3=5-17%

Profit: 2+2=6+50%



SYNERGIES

Definition of a “Synergy” A synergy (or a “benefit”) is an improvement in the efficiency of

The target’s business, or The acquirer’s business, or Both businesses

The “efficiency” must be brought about only through the putting together of the two businesses

Synergies will (almost!) always be cost-savings, rather than revenue enhancements

Before being able to analyse the synergies likely to be available in any specific deal, we have to understand the type of deal we are undertaking



SYNERGIES

Types of Deals

Buyer’s Position: all deals can be classified from the buyer’s point of view as one of four generic types

Horizontal

Vertical (upstream/downstream)

Conglomerate/diversification

Financial

An important modifier to the above types is

Domestic/ “home” (sometimes called “in-market”), or

International (sometimes called “out-market”)



SYNERGIES DIFFER BY TYPE OF DEAL:HORIZONTAL ACQUISITION

Target has Same products, and/or

Same services

Same margin level of business

Rationale Acquirer sticks to a sector it knows

Horizontal deals likely to have more competition issues than other types

Note: Far more deals are called “horizontal” than actually are: in particular, acquisition of another business which has only the same customers is probably not a horizontal deal



SYNERGIES DIFFER BY TYPE OF DEAL:VERTICAL ACQUISITION

Target is Supplier (upstream)

Distributor/Customer (downstream)

Rationale Protect the upstream or downstream supply chain

Retain the margins that would otherwise be lost

Note: A deal that is not horizontal is not (for that reason alone) likely to be vertical -- it is much more likely to be a conglomerate merger



SYNERGIES DIFFER BY TYPE OF DEAL:CONGLOMERATE / DIVERSIFICATION

Target has

Different product or different services

Different customers

Rationale

Management of acquirer wants to spread “risk”

But whose risk are they really spreading? In the private sector, institutional investors don’t need management to do their portfolio investment for them

Note: These deals also known (semi-seriously) as “diworsification”

Conglomerates suffer in the stock markets from the “diversification discount”, estimated to be (on average) 10-15%



TYPES OF SYNERGIES

All synergies in any deal can be classified as one of three generic types Operational Financial Tax

In general

Occurrence and level/amount of synergies will depend on the circumstances of each particular deal, but Operational Synergies are likely to be meatier and more tangible than the other

two types

It is much harder to realise synergies in an international deal (of any type) than a “home-country” deal

“Cut the fat, not the muscle”



SYNERGIES

Operational Synergies

257

CostSynergies

RevenueSynergies



“THE MAGNIFICENT SEVEN” OPERATIONAL COST SYNERGIES

258

1. Central administrative overheads (HQ and back office)

2. Manufacturing/production capacity

3. Purchasing power

4. Research and development

5. Advertising

6. Distribution

7. Selling and marketing



OPERATIONAL REVENUE SYNERGIES

There may be Operational Revenue Synergies

If there are, they will be because the enlarged group has Increased sales (that is, number of units sold) at the same price, or Increased prices (that is, price per unit sold) with the same number of

units sold, or Increased number of units sold at higher prices



BUT IT ISN'T SIMPLE…



SYNERGIES: PROBLEMS OF PREDICTION

Human nature, and nature of buyers

Increase of predicted synergies as “deal crisis” approaches Sunk costs Sunk management time Buyer’s ego

Lack of reliable information Friendly: buyer encouraged to overpay Hostile: buyer has to guess

Advice: model synergies “top down not bottom up”



SYNERGIES: PROBLEMS OF ACHIEVEMENT

Target management often leave (even if acquirer doesn’t want them to)

Buyers often see the acquisition as the end of the transaction, rather than the beginning: problems arise from Sustainability of effort The human factor Unforeseen problems of achievement

Five of the seven operational cost synergies require job cuts, so this may be politically / regulatorily / socially difficult



EXECUTIVE ATTRITION RATE DOUBLES

0%

5%

10%

15%

20%

25%

30%

-5 -4 -3 -2 -1 0 1 2 3 4 5 6 7 8 9

Nonmerged Firms

Merged Firms

263Source: Accenture (2005)



SYNERGIES: PROBLEMS OF TIMING

The timing to achieve the synergies is usually very uncertain during the planning phase New information becoming available changes the timing, as

do exogenous factors

Credibility issues if timing missed

Should extra time be built into the plans? Should the publicised schedule be different from the internal plans?



SYNERGIES: PROBLEMS OF COSTS

Synergies cost money, which are often underestimated/ignored Redundancy Property Environmental, etc

The costs come before the savings, and so have a higher discounted (negative) value

There is often the possibility of “negative synergies” (e.g., Deutsche Bank / Bankers’ Trust, Daimler Benz / Chrysler)

Don’t forget the costs of doing the deal in the first place

Don’t forget: operational cost and revenue synergies are usually taxable, so don’t over-estimate their value



SYNERGIES CASE STUDY: KRAFT / CADBURY



SYNERGIES CASE STUDY:RBS / ABN AMRO

RBS' acquisition in 2007 of ABN Amro Purchase price of €72 billion Overall €2.0 billion in synergies 19,000 redundancies expected due to the acquisition (including with

Fortis and Santander)

Wholesale / investment bank synergies €27 billion of the purchase cost with €1.2 billion (65%) of the synergies 58 initiatives Four principal areas of 'de-duplication and efficiency savings'

IT and Operations: €632 million Functional Support: €166 million Procurement and Property: €123 million Undisclosed front office savings: €379 million

Wholesale / investment bank revenue improvement RBS generated 1.7x ABN Amro's income per customer …and 2.6x income per front office employee



Day 2 Mergers, Acquisitions & Divestitures


STRUCTURING: CASE STUDY


The Dubai Ports World Debacle and Its Aftermath

The Dubai Ports World Debacle and Its Aftermath



The Bidder: • Dubai Ports World (DPW)

Target: • Peninsular and Oriental Steam Navigation Company (P&O)

DPW’s Objective: • Become 4th largest world port operator • Expand DPW ports operations mainly in China (supplementary acquisition)

Other P&O facts:• On top of other operations worldwide, P&O has also 5 ports in the US

(=10% of P&O operations)• Total P&O Profits 2004: USD 276 million profits

273

About P&O• Fourth largest port operator in the world• Operating 29 global port terminals• Run container terminals and provide stevedoring and luggage services at a number of U.S. ports.

Introduction


274

IntroductionAbout Dubai World• Established international developer of container ports• Owned by The Corporate Office (TCO) government holding company• In 2005, the Dubai Port Authority and Dubai Ports International (DPI) were merged into DP World• In January 2005, DPI completed a $1.15 billion acquisition of the global port assets of American‐based CSX

World Corp., giving the company a strong presence in Asia• USD 2.7 bn revenues in 2007, Profit before tax USD 509 mn• DP World has established its presence around the globe


275

Jan 2005• Acquired US‐Based CSX Corporation at $1.14bn• Becomes 6th largest port operator

October 2005•DP World interested in acquiring P&O

• P&O recommended its shareholders to approve initial bid

Jan 26, 2006• Singapore based, PSA put a bid of $6.3 bn Jan 26, 2006

•DP Revises offer to $6.8 bn

Feb 14, 2006• Senator Charles Schumer criticises

foreign ownership of ports as a national security issue

Feb 13, 2006• P&O shareholders accept D$6.8bn DP offer

Feb 27, 2006•DP World requests for 45‐day CFIUS investigation

Mar 9, 2006•Sheikh Mohammed

announces, ”transfer” of its US operations

to a ”US entity”

A ‐ DAY

P&O Acquisition Timeline

WITHDRAWAL

Dec 11, 2006•DP World sells P&O assets at US ports to AIG, for an undisclosed amount

276

Transaction Overview

No. 6

No. 436.6 mln TEU*

Nature of acquisitionNature of acquisition

Horizontal

PurposePurpose Supplementary

Strategic intent

Strategic intent

Acquisition

AttitudeAttitude Friendly

* 20 foot equivalent units – a standard 20 ft container equals 1 TEU

Strategic Acquisition taking DP World from the 6th largest ports operator In the world to the 4th largest


277

Transaction Timeline

.. Jan 2005 Oct2005 26 Jan 2006 13 Feb 2006 Mid 2006 8 Mar 2007 9 Mar 2007 15 Mar 2007

DP acquires US based CSX Corporation Covers:

‘A‐Day’First DP Offer of $ 5.8 bn.

PSA puts in rival bid of $ 6.3 bn.

DP revises offer to $ 6.8 bn.

P&O accepts offer

DP Word (inc. P&O) envisaged to cover

House of Republicans blocks the deal

Shaikh Mohammed announces transfer of acquired US assets

DP announces to operate independently Lawmakers introduce more bills effecting future foreign investments

India

S. Africa

P&O initially accepts DP offer

17 JanCFIUS approves

the deal

China.

Australia

Germany

Dominican Republic

Venezuela

Peru

Deals become subject of controversy


278

External Factors

Control on foreign investments(Exon‐Florio Amendment ‐50)

Deal was approved by CFIUS

Ambiguity on port security responsibility (between local authorities and coast guard)

Reaction from teamsters and longshoremen Eller & Co initiated lobbying against the deal Public opinion and media against the deal on the back of UAE’s alleged role in 9/11 events

Legal & Regulatory Requirement

Politics

Lobbying

External Factors

Public Opinion

Legislative threat for anti‐deal bill Financial muscling of Hurricane Katrina bill –by House appropriation committee



Post 11th

September

US politics

Iraq war

UAE recognised

Taliban

Connection with

“terrorist”/link with Al Qaeda

PresidentBush:

dropping in popularity

Bad perception of US public regarding the Middle East

US anti -foreign

ownership

Timing of the transaction


280

External Factors

The importance of public opinion

• President Bush criticised for allowing right to run six US• Dubai offers is USD 6.8 bn (this is the total offer not for US assets only)• A lot of Americans complain • Why we can’t run our ports ourselves?

http://www.youtube.com/watch?v=lIDrJn9LDek



• “Middle East countries are all similar” (esp. post 9/11)

• P&O acquisition as a threat to US Security ( UAE did not stop a nuclear shipment going to South Africa)

• Perception that Dubai had served as a hub of nuclear trades in the past

• UAE was among one of only 3 countries recognising the Taliban

• Alternative motives behind the acquisition as the US ports provided only 10.2% of total P&O profits

• Senator Schumer – ‘homeland security is a risky proposal’

• US Ally• Stable business partner• Acquire P&O to complement

China operations• Expand global presence and

business through acquisition of other ports world wide

• Provide a peaceful and safe heaven in the Middle East

• DP world helped develop a technology to screen containers for nuclear material

US View UAE View


• To understand the political and legislative framework in the US and decision making process beyond CFIUS

• To understand any political ‘hot potatoes’ US that may have a bearing on the deal.

• To better understand the perception of Dubai and the UAE amongst the US public, and US politicians.

• To look at potential blockers to deal not just where P and O was registered (i.e. UK) but in all countries with operations.

• To understand blockers to the deal through investigating issues with P and O partners and suppliers – e.g. Eller Law.

Due Diligence


• Some scenario planning to anticipate potential issues with DP World involvement in US Ports based on due diligence, and develop strategies on how to overcome these barriers.

• To lever the relationship between Dubai and US Government to create a more favourable environment for the deal well in advance.

• To use their existing management team to do informal fact finding, and develop important networks and relationships with key stakeholders.

• To employ lobbyists, PR and Communication consultancies well in advance to improve reputation and perception of Dubai.

Longer term strategy and tactics


•To get P and O to undertake lobbying in support of the deal once they had won the bidding war

•Sell benefits of security enhancement

•Ensure bullet-proof approvals from Authorities, check - recheck

•Focus on communication, PR

•Consider changing name of the company (Dubai Ports World, drop “Dubai”?)

•To ensure successful post-acquisition transformation, the acquirer needs to understand the culture of the target company.

•By overlaying the culture analysis of DPW, P&O Global, and P&O USA, we can identify which of its elements might be an obstacle to successful post-acquisition integration.

Once in negotiation Consider cultural aspects


Prior to bidding for P & O, DP World could have:• Understood potential other bidders, their potential tactics, any damaging

information on competitors. • Considered whether P & O was the right target for DP World objectives.

Tactics to avoid US difficulties could have included:• Announcing intention to divest US ports on deal closure• Partnering with a high profile US partner to be the face of the brand in

the US.

Alternatives to acquisition of P & O included:• Undertake a minority investment in P & O first to gain more information.• Go into JV with P & O to start a relationship. • Purchase a competitor (e.g. PSA) and focus on a more familiar region -

e.g. Asia. • Buy a division or geographical operations rather than all of P & O - e.g..

Chinese operations only.

286

Alternatives : What DP World could have done differently

• Effective due diligence : Different Types– Evaluate the information available– Assess ownership of assets, validity to licenses and compliance regulations– Manage authorities and leverage relationships– Don’t overpay

• Adopting a pre‐emptive strategic approach to turn around the situation to itsadvantage by having a PR communication activity at various platforms(employees directly affected, investors’, political lobby, media, etc.) prior toentering into the cross‐border

• Entered into a Joint Venture/ Strategic alliance with the company that hasoperations in the US (Overcoming political, cultural and legal obstacles)

• Taken a measured approach in the US market – may be, by securing aminority position or “Doing Nothing”

• Ventured into different markets, rather then US – due to the timing factor• Emerging markets like India and China (where DP World has its presence)

offered a opportunity to explore organic growth• Negotiated their position rather than walking away from the deal without any

confrontation (legal actions).


• Even when the deal is closed, it may not be closed.

• Primacy of ‘political’ due diligence for overseas M & A.

• Importance of perception, lobbying, and communication in securing agreement.

• Scenario and contingency planning vital.

• There are many ways to achieve the same objective - an extra $1bn worth it?

• Does overseas expansion provide enough synergies to justify reputational issues and high price?

• Culture: soft aspects of the deal to be looked at prior to the deal closure (national culture and identity)

• Never underestimate public opinion in a deal


• How to approach acquisitions with operations in many countries?

• How to anticipate politics and address politics issues?

• Is it possible to influence public opinion?

• How much cultural integrations ….post acquisitions?

• How do you know if you can close a deal?


9


Pre-P&O Acquisition

DP World pre-P&O Acquisition• 22 container terminals in 15 countries• Number 7 in global port operator rankings• Growth averaged > 20% pa over previous 3 years• Operations in Africa, Asia, Australia, Europe, Latin America and the

Middle East• Total capacity of 20m TEU• Market share 3.2% in 2004

290


Pre-P&O Acquisition

P&O pre-acquisition by DP World• 29 container terminals in 18 countries, including terminals in Baltimore,

Miami, New Jersey, New Orleans and Tampa in the US (along with stevedoring operations in 16 locations along the East and Gulf coasts and a passenger terminal in New York City)

• Number 4 in global port operator rankings• Market share 6.1% in 2004

291


Pre-P&O Acquisition

292

Number of terminals 22 29 51

Number of countries 15 18 30

Gross capacity (TEUm) 20 30 50

Global ranking No 7 No 4 No 3

DP World P&O Combined

DP World post-P&O acquisition:• 51 terminals in 30 countries on five continents• Capacity of 50 million TEU• Number 3 in global port operator rankings


293

History of the Deal

Feb 2005

• CSX acquisition completes. $1.14b, takes DP World to 6th largest operatorNov 2005: DP World announces a recommended cash offer for P&O• 443p in cash for each unit of Deferred Stock• a premium of 46% to the pre-speculation stock price of 303.5p• a 2004 price/earnings multiple of 24.5x • valuing the existing Deferred Stock at approximately £3.3 billionJan 2006: PSA makes a counter bid• offers 470p for each unit of Deferred StockSame day: DP World raises offer• 520p in cash for each outstanding unit of Deferred Stock• a premium of 71.3% to the pre-speculation stock price of 303.5p• equity value of bid = £3.9 billion ($6.8 billion)Dec 2006: US terminals sold• Following political storm in the US, DP World sells POPNA to AIG• Estimated value $565m - $700m. AIG said price was ~$1.2 billion


Global Trade

294

Global Trade: Quarterly container growth by region 2008 - 2010


Global Trade

295

Quarterly container growth by region 2007 - 2009


2004 Portfolio

296


2005 Portfolio

297


2006 Portfolio

298


299• 49 terminals and 9 new developments and major expansions across 31 countries• Capacity set to rise to ~92m TEU by 2020 (timing dependent on market)

Portfolio Today


DP World Today

New terminals and new developments post-merger

300

AlgeriaAlgiersDjen Djen

BrazilSantos

DjiboutiDoraleh

EgyptSokhna

IndiaVallarpadam (ICTT)

NetherlandsRotterdam

PeruCallao

SenegalDakar

SpainTarragona

TurkeyYarimca

YemenAden


DP World Global Throughput

301

12.8

36.8

43.346.2

43.4

49.6

0

10

20

30

40

50

60

2005 2006 2007 2008 2009 2010

Throughput 2005 – 2010 in TEU (million)

TEU = twenty footequivalent containerunits


302

EBITDA Multiples

From Drewry’s Annual Review of Global Container Terminal Operators 2009:In the peak period of demand growth and interest in acquiring terminals during 2005-2007, port companies were being valued (and paid for) at EBITDA multiples in excess of 20 times. With the crash in demand and the credit crunch, these days are over, at least for the time being. Anecdotal evidence suggests that multiples of around 8-12 times EBITDA are the new benchmark.

DP World recently monetised 75% of its share in DP World Australia. The transaction valued DP World Australia at an enterprise value of A$1.8 billion.

For the twelve months to 31 December 2009, DP World Australia generated equity-adjusted (i) EBITDA of A$96 million.

1.8bn / 96m = an EBITDA multiple of 18.75.

i - Equity adjusted EBITDA takes into account 60% ownership of Adelaide and 90.37% ownership of Sydney

M&A Strategy and Valuation, Oct 3 and 4 - 2012

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