M&A Deals

Confidential Information Memorandum

A Confidential Information Memorandum (“CIM”) (also known as an Offering Memorandum) is used as the primary marketing tool for the selling company in an M&A transaction. It is a written and detailed description of the company that is for sale. Frequently, the CIM is greater than fifty pages long and contains information about the company’s products or services, markets, technology, manufacturing, sales and marketing efforts, staffing, financial information, etc.

The selling company’s management team along with an experienced team of M&A advisors will work together to develop an accurate and comprehensive CIM that details the most important features about the company for sale. Typically, a significant amount of time is spent preparing the CIM before it is deemed to be complete and ready for distribution to interested buyers, who will have executed non-disclosure agreements in order to receive the information.

The objective of the CIM is to give potential buyers a strong understanding of the company for sale. Sometimes modified versions of a CIM are created which will be presented to strategic buyers in instances where the seller may be concerned about sharing specific confidential information with a competitor.

The financial information provided in the CIM is one of the most important sections. It always includes both historical and projected financials, which help prospective buyers determine an initial valuation for the company. The projections that are created need to be defensible and there should be a clear explanation as to how the selling company plans on reaching those goals. Potential buyers will look closely at these numbers as they are a major factor in their determination of an initial valuation of the company.

M&A Deals - Entrepreneurs

Versailles Group is pleased to announce the publication of its newest Ebook - Five Common Fears That Entrepreneurs Have When Selling Their Business." This Ebook is designed to help entrepreneurs complete M&A deals, in particular, the sale of their company.

Entrepreneurs, after spending a lot of time and effort to build a company, always have many uncertainties regarding the possible sale of their "baby." This eBook addresses several points including:

How value concerns can be mitigated with deal structure

Buyer motivation

What happens to employees and customers after a sale

What happens to employees and customers after a sale

How confidential information is kept safe throughout the sales process

M&A Deals - Leveraged Buyouts

M&A deals can take many different forms; however, leveraged buyouts (also known as an LBO), especially now with easy credit and low interest rates, have been a good way to help buyers purchase companies. Of course, the endgame for any buyer of a company is to make exceptional returns.

A leveraged buyout is the acquisition of another company using a significant amount of debt in order to finance the acquisition. In most cases, both the assets being acquired and the assets of the acquiring company are used as collateral to back the large loans required to finance the deal. The amount of capital contributed by the acquiring firm is usually minimal and it is not uncommon to see debt to equity ratios of greater than ten to one. The goal of the investors in a leveraged buyout is either to resell the acquired company for a substantial return or bring the company public after all or some of the debt is paid down or once it has become more profitable. Due to the limited equity contributed to the acquisition, these leveraged transactions can generate very large returns for the investors.

The reason companies like leveraged buyouts is that it allows them to make large acquisitions without having to commit a significant amount of their own capital. Leveraged buyouts in recent years have been far more common among two main groups; corporations and LBO funds, many of which are financial buyers. Corporations oftentimes find it easier to buy a company than to build one; an LBO can be an efficient way to acquire an existing company without tying up large amounts of equity. In contrast, LBO funds generally take companies private and sell off divisions in hope of yielding high returns, in many cases 40 percent or more.

M&A Deals

2015 Update

For the first two months of 2015, M&A deals have maintained similar volumes to the first two months of last year (2014).

In terms of the number of transactions, 10,465 transactions were completed in the first two months of this year versus 10, 915 deals n the first two months of last year. The reduction is statistically insignificant. Interestingly, as you'll note in the charts below, the number of transactions by region was nearly identical between the two time periods. With transaction count, the number of transactions in Europe was two percent lower while the number of transactions in Asia was two percent higher.

M&A Deals - 2015

M&A Deals - 2014

With regard to transaction values, approximately US$490.6 billion of transactions were completed in the first two months of 2015. In comparison, the transaction value for the first two months of 2014 was US$511.5 Billion. This was a slight decrease and because the number of transactions between the two relevant time periods actually decreased in the same period, it portrays a scenario where the average deal size increased from 2014 to 2015.

M&A Deals - 2015

M&A Deals - 2014

With regard to value in the first two months of 2015, M&A deals in Asia increased by approximately 82 percent compared to the first two months of 2014. This offsets a decrease in the value of transactions in the US, Europe, and Africa/Middle East. As you will note in the chart above, the percentage of US deals dropped from 54 percent in 2014 to 43 percent in 2015.

M&A Deals - Conclusion

Data is data and is always subject to revision, errors, and manipulation. That being said, M&A activity has been quite strong and is expected to stay that way for some time. There are always economic or political events that can have sudden impacts. No one knows exactly what will happen when the US Federal Reserve Bank starts to raise interest rates in the US. Buyers and sellers of companies both agree that they're hoping it won't have an impact.

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M&A Deals

Purchase and Sale Agreement

A Purchase and Sale Agreement is the contract that documents all of the terms agreed upon between the buyer and the seller in an M&A transaction. Sometimes, this document is referred to as the Definitive Agreement. In M&A deals, this is THE document as it controls the actual closing and any open or unresolved issues part-time.

A purchase and sale agreement can take the form of a merger agreement, tender offer document, or a stock or asset purchase agreement. All of these forms of purchase and sale agreements contain a number of important clauses and terms relating to the transaction. Therefore, it’s important for both the buyer and seller to have an experienced lawyer and a good M&A team to make sure the agreement is fair for both parties. Obviously, some of the terms are more important than others.

There are several key sections of a purchase and sale agreement including the following: valuation/consideration, execution provisions, representations and warranties, covenants, conditions to closing, termination provision, break-up fees, etc.

• Execution provisions detail the way in which the deal is structured and the form of consideration. For example, an asset purchase and an all cash consideration.

• Representations and warranties outline exactly what is being sold and that the seller is delivering a clean title which is proof of ownership.

• Covenants are the agreements made between the buyer and seller. For example, a seller could be required by the buyer to keep certain employees.

• Conditions to closing are conditions that must be met such as regulatory approval prior to the closing of the transaction.

• Termination provisions are conditions in which the transaction could be terminated. For example, if the buyer cannot finance the acquisition.

• Break-up fees are the fees that must be paid in the event that one party backs out of the transaction.

These are only some of the many topics covered in a purchase and sale agreement. These agreements are comprehensive documents that are legally binding to all parties involved in the transaction. An experienced M&A advisor knows, from experience, when and where to compromise on certain issues. Furthermore, a good M&A advisor will work closely with their client's lawyer to make sure that whether the client is on the buy-side or the sell-side that they receive a fair document for closing.

M&A Deals - Confidentiality

A confidentiality agreement or Non-Disclosure Agreement (“NDA”) is a legally binding contract between the company interested in selling and the potential buyer. The NDA governs the sharing of confidential company information and prohibits certain other activities. Typically the confidentiality agreement is drafted by the selling company’s M&A advisor or the company’s attorney. It is distributed to potential interested buyers along with a teaser of the target company, which provides some details on the acquisition opportunity, but not enough so that the company for sale can be identified. Upon execution of the confidentiality agreement or NDA, a detailed confidential information memorandum (“CIM”) of the selling company is released to the potential acquirer. It also paves the way for the buyer and seller to have frank conversations about the selling company’s business.

Typically, the NDA will include the following governing provisions: how the information may be used, the term, permitted disclosures, non-solicitation of employees, no contact provisions for customers, suppliers, etc., and return of confidential information when negotiations cease. In some cases, the buyer is allowed to destroy the confidential information and may be required to supply a certificate indicating that the information was, in fact, destroyed.

The use of information provision states that any disclosed information is confidential and can be used only to make a decision with regard to a proposed transaction. There is usually a term of one or two years for which the information must remain confidential. The permitted disclosures outline what confidential information a potential buyer can disclose and prohibits the disclosure of negotiations for a possible transaction between the buyer and seller. The non-solicitation provision prohibits the hire of the selling company’s employees by the potential buyer for a particular period of time. Many times, the buyer will “carve out” certain hiring, like general solicitations that do not target the selling company or the permitted hiring of people that have been terminated or have left the selling company.

A good M&A advisor should be able to advise you as to what provisions are important and how to negotiate this very important document. The M&A advisor does not replace your attorney or good common sense; however, they do know what is reasonable and what buyers are willing to accept as they work with hundreds or thousands of buyers each year. The key is to obtain as much protection as possible, but also not to make it so impossible that buyers won’t give your potential transaction the attention it deserves.

M&A Deals - Buyer Motivation - Synergy

What is the primary motivation for the acquisition of another firm? The answer can vary significantly depending on the buyer’s strategies and the structure of the business. Most of the time, M&A transactions are utilized in order to achieve synergies between two companies. Synergy can be realized through multiple sources including operating economies, differential efficiency, financial economies, tax effects, and increased market share. Each of these sources can lead to cost reductions or revenue growth synergies. If done properly, the acquiring company will be more cost effective and will enhance its opportunities for growth.

Cost synergies can be achieved through economies of scale and economies of scope between the two firms. The newly combined company should be able to reduce fixed costs as more units will be produced at a lower cost. The average total cost of production will also decrease as the company spreads costs across its now expanded product line. Furthermore, as the new company removes duplicate departments or operations, the overhead expenses will be reduced thereby increasing profit margin. Revenue synergies can be achieved by selling new products through existing distribution channels which creates new opportunities for growth. Another way revenue synergies can be reached is by utilizing the acquired firm’s technology or geographic reach to improve the acquiring company’s existing products or services or the delivery thereof.

Both revenue and cost synergies can ultimately be realized as a result of differential efficiency. This is the concept whereby the targets firm’s assets will be better utilized because the acquiring firm has a more efficient management team. During the process of an M&A transaction, this is usually a key buyer motivation as it will greatly benefit the shareholders of the acquiring company and some of that potential value can be paid to the shareholders of the company being acquired. Of course, the more value that can be paid to the shareholders of the target company, the more likely they are to agree to being acquired.

It is critical that the investment bank assisting the buying company understand the buyer’s motivation in an M&A transaction. This will help in the process of selecting target firms and valuing acquisition targets based on the potential synergies. A team of highly skilled and experienced M&A advisors will be crucial in assisting buyers in this regard. Similarly, an experienced M&A firm would be able to assist the target or selling company to realize the full value for their company.

M&A Factoid - LLC and C Corporation

Limited Liability Company (LLC)

A Limited Liability Company is a type of corporate structure designed to limit the founders’ losses to the amount of their investment. It is a hybrid structure that combines the characteristics of a corporation and sole proprietorship. An LLC does not pay taxes like a traditional corporation; instead, its owners pay taxes on their proportion of the LLC profits at their individual tax rates. Unlike a corporation, an LLC must be terminated upon the death or bankruptcy of a member. An LLC is not an appropriate corporate structure if the company hopes to go public in the future. It should also be noted that the limits on liability could be exceeded if there is fraud.

C Corporation

A C Corporation or C-Corp is a type of ownership structure that allows any number of individuals or companies to own shares. It is a stand-alone entity that limits its owner’s legal and financial liabilities that may arise due to the actions of the company. In this type of corporation, income is taxed at the corporate level and is taxed again in the form of income taxes when it is distributed to its shareholders. While double taxation is a drawback of this corporate structure, the limited liability it provides to owners as well as the ability to reinvest profits in the company at a lower corporate tax rate are advantages of C Corporations. Once again, it should be noted that the limitation on liability could be exceeded if there is fraud.

M&A Deals - 2014

M&A deal volume in 2014 was quite robust – almost US$4 trillion of transactions were completed worldwide, which was an increase of over 50 percent from 2013.
43,613 transactions were completed across the globe in 2014. The Americas and Europe experienced approximately the same M&A volume with Asia Pacific trailing by a few points.

2014 M&A Deals By Region

 
By sector, excluding financials, high tech was the most active followed by industrials, consumer products and services, and materials. Although telecom had the lowest number of transactions completed in 2014, deals in this sector were very large, resulting in over US$260 billion of deal value.

2014 M&A Deals by Sector

About Versailles Group, Ltd.

For over 28 years, Versailles Group's skill, flexibility, and experience have enabled it to successfully close M&A transactions for companies with revenues between US$2 million and US$250 million. Versailles Group has closed transactions in all economic environments, literally around the world.

Versailles Group provides clients with both buy-side and sell-side M&A services, and has been completing cross-border transactions since its founding in 1987.

Advantages of a Reverse Triangular Merger

During an M&A transaction, a possible purchasing tactic that can be used by an acquiring company is a reverse triangular merger. A reverse triangular merger is when the buyer forms a wholly-owned subsidiary which in turn works as a purchasing vehicle to acquire the target firm. To execute the deal, the target firm and wholly-owned subsidiary will merge giving the acquiring firm control of the target company. This newly merged company will function as a wholly-owned subsidiary of the acquiring firm so it will own all of its assets (tangible and intangible), liabilities, contracts, etc.

The advantages and disadvantages are the same as a direct merger; however, this type of acquisition is easier to execute since the only shareholder of the acquisition subsidiary is the purchasing firm which provides certain advantages, e.g., shareholder approval easy to obtain.

A reverse triangular merger allows the acquiring firm to gain control of the target company’s non-transferable assets and contracts which is not always possible with other acquisition techniques. Typically, acquirers have difficulty transferring contacts, particularly contracts with the government or governmental agencies when it is an asset transaction. This technique, i.e., utilizing a reverse triangular merger, while not perfect, does help. The downside is that the acquiring company does acquire all of the liabilities of the company as it is essentially a stock transaction.