M&A Deals - Integration of Employees

in Acquisitions

M&A Deals - Integration of Employees in Acquisitions

In M&A deals - integration of employees in acquisitions is critical. In many cases, retaining personal is an overlooked aspect by the new owners of an acquired business. For some reason, this neglect starts during the due diligence phase. Buyers keep saying that the people are important, but do little to prove it. Frequently, employment agreements are the very last documents that a buyer submits to the seller and/or the employees. It’s a pity because the people are very important “assets” and have feelings. By contrast, the accounting details or legal matters don’t care if they’re verified first or last. It’s important for the buyer to send strong signals to employees that they will keep. As they say, action speaks louder than words.

Emphasis needs to be placed on making the employees to be acquired comfortable in knowing that they will be kept. This usually means talking with them directly and presenting fair and reasonable employment agreements. For most acquisitions, keeping key employees from leaving is essential to ensure a successful transaction. In most middle market M&A deals, the employees have been with the business for years and have special expertise in the company’s day to day operations. The experience and information that these employees have can be invaluable to a new management team. In many cases, existing employees have good ideas on how to improve customer service or create other efficiencies so new management should be open to their suggestions.

Interviewing and listening to employees is also a good way for management to evaluate newly acquired personal and see which ones take initiative and are really dedicated to their jobs. Employees are important “assets.” The most successful M&A transactions use this as a cardinal rule and deploy these people in an appropriate and mutually beneficial way. Furthermore, smart acquirers show these employees respect from an early stage in the transaction.
Newly merged companies need to work towards building a winning team-oriented attitude within the company culture. This encourages teamwork and builds mutual respect between employees and management. Post-acquisition, it is important that management is transparent with employees about possible changes within the company. If management is honest with the employees about these changes, then the employees will be more receptive to new ideas and strategies within the company. Furthermore, in many cases, the employees will actually embrace the changes and help the company to achieve its objectives.

M&A deals can be complex; however, if well thought out and executed properly, they can be very productive for the acquiring company. An experienced M&A advisor can help the acquiring company with these details because they’ve seen different buyers implement different strategies and generally know what works and what doesn’t work. The most successful managers are those that seek advice from their advisors and listen carefully to the input.

M&A Deals - Q1 IT Update

M&A Deals - Q1 IT Update

With regard to M&A deals - Q1 IT update, IT deals for the first quarter of this year are slightly ahead of the same period last year in terms of both volume and value. Approximately 1,500 transactions were closed with a value of approximately US$67.8 billion.

By region, 616 of the approximately 1,500 transactions (or about 41 percent) were announced in the US and Canada. Europe accounted for 461 transactions or about 31 percent. Approximately 348 transactions were announced in the Asia Pacific region for about 23 percent. Here are the details:

Versailles Group, founded in 1987, is an expert at closing successful M&A deals. Software transactions have included the sale of Bedford Software, a Toronto Stock Exchange listed company, the sale of Layered Inc., a company owned by Mr. Paul Allen, co-founder of Microsoft, the sale of BEZ Systems, the sale of a software business for Logica plc, etc. Versailles Group's forte is to listen to its clients objectives and works diligently to find the appropriate buyer. In these cases, high valuations are achieved and both buyer and seller are happy with the results.

Versailles Group was founded by Mr. Donald Grava, who has an extensive background in accounting, finance, M&A, and other matters. Mr. Grava started his M&A career on Wall Street in New York, where at an early stage in his career, he was exposed to international companies and cross-border transactions. As a result, many of Versailles Group's transactions have been cross-border.

M&A Deals - Locked Box

Locked Box

In M&A deals, buyers and sellers are always looking for ways to reduce what is often a lengthy process of preparing, reviewing, and agreeing on final price adjustments derived from the closing accounts. In order to simplify this process, more M&A transactions are beginning to implement a “locked box” pricing mechanism. The locked box mechanism negates the need for preparing and reviewing final price adjustments post-closing and allows the buyer and seller to allocate their resources into other aspects of the M&A deal.

The Locked Box M&A deal is an essentially a fixed price transaction. This means that the equity price is fixed in the sale and purchase agreement at signing based on the historical balance sheet at the pre-signing date or “locked box date.” Protection against any “leakage” of value between the locked box date and the closing is provided by the seller through representations and warranties written into the sale and purchase agreement and are usually supported by indemnification. This “leakage” of value can be in the form of dividends, management fees, or the transfer of assets. By using this mechanism, no closing accounts are required. Therefore, there are no adjustments made between the locked box date and closing; the price the buyer is paying is the price agreed upon at the locked box date.

There are several benefits from both the buyer and seller’s point of view with regard to the locked box. It offers price certainty as the price is fixed from the locked box date which makes the deal simpler as there is no closing mechanism. There are fewer costs associated with this deal structure as the creation of a definitive agreement takes a shorter amount of time. Another benefit is that management’s time is not tied up post-closing. Provided the seller can offer appropriate comfort in terms of the integrity of the locked box balance sheet as well as relevant warranties over locked box accounts, the locked box will be beneficial for both parties.

As in all M&A deals an experienced M&A firm can help take care of these details. Many think that their lawyer can handle these points, and they’re right. But, the most successful transactions are completed by a team and the most successful entrepreneurs and corporate managers know this. When the team addresses these types of complex issues, the client always wins!

M&A Deals Telecom

M&A Deals - Telecom Industry - Q1 Update

M&A deals in the telecom space are off to a good start this year. Through March 23, 2015, there have been 90 M&A deals - telecom closed or announced worldwide. With approximately one more week left in the quarter, this is more transactions than either Q1 2013 or Q1 2014.

Here’s a chart showing the activity by quarter from 2013 to date.

With regard to value, through March 23, 2015, US$663.2 billion of M&A deals were closed.

Europe saw the most M&A deals with 43 of the 90 transactions. Asia was next with 19 transactions. Here is a chart with the number of transactions by region.

M&A Deals

Healthcare M&A Deals

Healthcare M&A deals are off to an excellent start this year as evidenced by the chart below, which shows the increase in value of M&A deals from January 1 to March 19 of this year as compared to the same period last year.

This strong M&A activity continues a trend of increasing transaction values in the Healthcare sector. Since 2012, the aggregate value of healthcare M&A deals has grown 157 percent.

In terms of revenue multiples, and M&A deals, the following segments had the highest multiples:

In terms of EBITDA multiples and M&A deals, the following segments had the highest multiples:

Most people watching healthcare M&A deals in 2015 believe that it will be a very strong year in terms of numbers of transactions and the value of such transactions. The Affordable Care Act is pushing companies to get larger and larger to achieve economies of scale in order to compete effectively. From our vantage point, it appears that healthcare companies need to get larger or they won’t be able to compete in today’s more demanding marketplace.

For companies on the acquisition “trail,” it’s imperative to have an experienced M&A advisor on the team to help refine the acquisition criteria so that important transactions are not missed. With clear criteria, targets can be identified and contacted quickly to make the process as efficient as possible. Furthermore, if a number of targets are contacted at once, the buyer gains valuable strategic market information, can complete comparison “shopping,” and conclude the best possible M&A deal.

For healthcare companies interested in selling, it’s important to have an M&A advisor that can properly identify, worldwide, every possible buyer in order to create the best possible auction. An experienced Investment Bank should be able to create a worldwide, silent auction in order to make sure that a proper market is made for the seller. The second and third bidders will also keep the “winner” honest during the due diligence phase. Furthermore, should the “winner” not be able to complete the transaction, for any reason, the second and third place bidders should be considered as excellent back up buyers.

M&A Deals

Cross Border M&A

The world is getting smaller, at least from an M&A perspective! Increased competition and globalization in almost all industries has fostered in an era of friendly M&A deals without borders. Strategic buyers have been the primary source of M&A transactions in recent years as many firms look to remain competitive in an increasingly global landscape. Most of the time, M&A deals are completed for either offensive or defensive reasons. And, post-recession, the companies with cash have wanted to deploy it quickly and efficiently. Most of the time, the best way for a company to invest is by buying another company. In the “old” days, a company would create a strategy and business plan to expand their business. This would include acquiring or building new plant and equipment. In today’s environment, that takes too long and is too risky for most companies. Therefore, buying another business is a faster, more direct, and less risky approach to expanding a business.

As technology continues to make communication throughout the world easier, companies have not hesitated to do transactions in other countries and continents. These cross-border deals have further fueled M&A in recent years. Acquisitions provide the buying company with an opportunity to expand their global reach in order to generate new sources of revenue, acquire new technology or products, etc.
It is important to note that unlike the M&A deals of the 1980’s, the transactions taking place today are much more friendly in nature as strategic buyers look for target firms that can complement their core competencies.
The role of investment banks in M&A transactions has also evolved with the motivation of buyers and sellers. Today, more than ever, investment banks are required to be global in their reach. Investment banks that fail to offer cross border services are proving to be less valuable to strategic buyers who are looking to expand their businesses across the globe. It’s imperative to work with a firm with many years of cross border M&A experience as there are many nuances and cultural factors that play into closing a successful transaction. This is true whether it’s hiring an investment bank on the buy-side or the sell side.

M&A Deals

Activist Investors and M&A

M&A deal making, over the years, has been affected by activist investors. This is particularly true for financial sponsor buyers such as private equity firms. In most cases, financial sponsors are more sensitive to changes in the valuation for a target company as compared to strategic buyers. There are two primary reasons for this. First, the shorter investment horizon for financial buyers makes it difficult for a financial buyer to add enough value and to sell out with a gain within three to five years. Strategic buyers, on the other hand, are usually making acquisitions for the long haul, which means they don’t have to face that issue. Second, strategic buyers are able to achieve economies of scale on many fronts, which means they can afford to pay more, up-front, for the target.

Activist investors have deterred some financial sponsors or private equity firms from completing M&A deals by bidding up share prices of target companies that the activist investors view as too low. Run ups in the share price of potential target companies makes acquisitions too costly for some financial sponsors, thus discouraging M&A transactions. While strategic buyers have proven to be more flexible in purchase price, they too are finding it harder to complete deals where activist investor presence is strong. The activist investors’ demand for a higher purchase price has made obtaining shareholder approval to complete an M&A transaction more challenging.
The key to getting M&A deals done amidst strong shareholder activism is through detailed target selection and management’s need to pitch the deal to their shareholders from inception. These are not easy tasks and having an experienced financial advisor to guide the management team through the M&A deal is invaluable. An investment bank with decades of experience will be better suited to help management successfully complete an M&A transaction even in the presence of strong shareholder activism or other challenges.

M&A Deals

Mortgage Backed Securities

A mortgage backed security, or MBS, is an asset backed investment that is secured by one or more mortgages. This type of financing is rarely used to complete M&A deals; however, it’s an interesting investment. Occasionally, we like to inform our readers of interesting financial instruments or other matters of interest.

Investing in an MBS is similar to lending money to a homebuyer taking on a mortgage. However, instead of receiving a mortgage that is financed solely by the bank, the mortgage is funded by an open market of investors. Investors reap a return on their investment via the interest rate associated with monthly payments on the mortgage. Because of this functionality, it is clear why a MBS can also be referred to as a “mortgage pass through.” Mortgage backed securities generally achieve a rate of return that is slightly better than government treasury bills or high grade corporate debt.

The greatest risk to investing in an MBS is known as “prepayment risk,” or the chance that the mortgage is repaid ahead of time. Prepayments of mortgages are most likely to happen in a low interest rate environment or when interest rates are declining as homeowners refinance their mortgages at a lower interest rate. The acceleration of prepayments creates a “reinvestment risk” for the investor who must reinvest the principal that has been pre-paid in a now lower interest rate environment. Due to the reduction of interest rates, it is difficult for the investor to reinvest the principal at a rate comparable to the original rate of the original MBS investment.

The opposite of prepayment risk is “extension risk.” This is the risk that the mortgage repayment takes longer than expected. This scenario is most common in a rising interest rate environment as homeowners are less likely to make the required principal payments on their mortgages. This, in effect, extends the life of a low yielding investment in an environment where interest rates are increasing.
 

M&A Deals

Acquisitions

There are several reasons why companies make, or should consider making, acquisitions. Among the more important reasons are the following:

Accelerate market access for existing products. For example, for a non-US company, the US and Canada combined would provide exposure to one of the largest and most vibrant markets in the world.

Obtain skills or technology faster or at lower cost than they can be developed.

Acquire products in other geographies that can be manufactured and sold in the company's home territory.

Increase market share and/or reduce competition.

Diversify product portfolios or add entirely new products.

Achieve economies of scale for production, sales, etc.

Develop cross-selling opportunities.

Enable vertical integration.

M&A deals require focus and attention to detail. A well-experienced investment banker can help a company refine its objectives with regard to an acquisition and help them complete a successful transaction.

Over the years, many prospective clients have come to us with an idea that they'd like to acquire another company. In many cases, the idea hasn't been a bad one, but not worth pursuing. Some CEOs believe that an acquisition will fix an unprofitable or troubled business. Yes, that's possible, but not likely. In other words, one should consider acquisitions carefully, define the goals of acquiring a company, and then devise a strategy and tactics to achieve it. Buying something for the sake of it, will not increase shareholder value. And, certainly buying a company without carefully defined objectives will only exacerbate profitability or other problems at the acquiring company.

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.