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Merger Acquisition Approach XYZ Objectives Introduction

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					Merger & Acquisition
     Approach
XYZ M&A                                                                  Introduction
                                                                           Objectives




    • The purpose of this module is to allow new ACs and Consultants to:

      – obtain   a background understanding of M&A

      – understand    what XYZ does/doesn’t do in an M&A project

      – review   basic analytical tools required in different M&A projects at
       XYZ

      – develop,through an exercise, an important basic analytical skill
       often used in M&A projects




                                                                                   2
XYZ M&A                                               Introduction
                                                           Agenda


          •   Trends in M&A
          •   Guiding Principles for Successful M&A
          •   XYZ Approach
          •   Case Examples
                –   screening
                –   due diligence
                –   sale
          • Exercise on Synergy Calculation
          • Typical Watchouts
          • Key Takeaways

                                                                3
XYZ M&A                                               Introduction
                                                           Agenda


          •   Trends in M&A
          •   Guiding Principles for Successful M&A
          •   XYZ Approach
          •   Case Examples
                –   screening
                –   due diligence
                –   sale
          • Exercise on Synergy Calculation
          • Typical Watchouts
          • Key Takeaways

                                                                4
XYZ M&A                                                                              Trends
                                                                  Drivers of M&A Activity
        Macro-
                             Strategic                Financial                 Other
      economics

 •   Economy boom or    • Gain share            • Improve capital          • Greed
     recovery           • Eliminate              markets evaluation of     • Ego
 •   Over-capacity in    competitive threat      acquirer
     an industry        • Capture operating       –meet growth
 •   Cheap money         opportunities, e.g.,      targets
 •   Industry            scale efficiencies       –reduce portfolio
     consolidation      • Leverage existing        risk
 •   Globalization       business systems       • Invest idle cash
                          –forward/backwar
                            d integration
                          –start-up
                            alternative
                        • Diversify/balance
                         portfolio
                        • Retire excess
                         industry capacity

                                                                                         5
  XYZ M&A                                                                                                                                  Trends
                                                                                                   M&A Activity - U.S. vs. Europe
    European and US M&A activity is experiencing similar positive trends.



        800                                                                                                                         $759

                                                                                                                                                   CAGR
$B 700                                                                                                                    $641                  (1992-1997)

        600                                                                                                                                Europe 21%

        500                                                                                                                                US         41%
                                                                                                                $434

        400                                    $343
                                                                                                                                 $361
                                     $339
                                                                                                      $295
        300                                                                                                            $265
                        $241                                                                                 $230
                                                          $220
                                                                                            $193
        200                                 $145
                                                      $161        $163$157
                                                                              $137$136             $133
                                                                                         $112
                               $91
        100       $52


            0
                   1987        1988         1989       1990        1991        1992      1993      1994      1995      1996      1997



Note:   Transaction Value (including Net Debt of Target). Excludes split-offs. Europe
        includes 50 major countries                                                                                                               6
Source: SDC
XYZ M & A                                                                               Trends
                                                                                M&A Activity


    •   M&A activity has grown rapidly in nominal dollar terms, peaking in the U.S. in the
        late 1980s, and then matching those levels last year
    •   The ferocious merger activity of the late 1980s was driven in large part by the “easy
        money” afforded by the junk bond market. This resulted in huge, often
        unsubstantiated, premiums being paid for companies without regard to the value
        creation opportunities presented (or not presented, as the case may be) by the
        operations/underlying business of the target
    •   Growth in merger activity since 1992 has coincided with the economy’s recovery
        from recession
    •   Recent M&A activity benefiting from:
          – extended economic health with little recessionary pressure on horizon
          – a resulting corporate demand for growth
          – increase in international M&A activity as companies pursuing global strategies
    •   Since late 1997, U.S. and European markets have experienced the resurgence of
        junk bonds to facilitate the execution of deals getting larger and larger


                                                                                                7
XYZ M&A                                                                                                                Trends
                                                                                              M&A Activity by Country 1996/97
 US market dominates the global M&A activity.


                          $1,200B
                                           $1,028
                                                                                                                            1997
                                                                                                                            1996

                          $1,000B


                           $800B
                                    $687
    Billions of Dollars




                           $600B


                           $400B
                                                      $215



                                                                    $170
                                                    $152




                           $200B
                                                                            $88
                                                              $81



                                                                           $67




                                                                                     $57



                                                                                                $42
                                                                                    $38



                                                                                                $37




                                                                                                             $34



                                                                                                                    $22
                                                                                                            $19



                                                                                                                    $14
                             $0B
                                     USA             UK      Germanic      France   Benelux   Scandanavia   Italy   Spain
                                                             Countries
  Percent
  change:                           50%             41%      110%           31%      50%         14%         79%    57%

Note: Represents announced deals                                                                                                   8
Source: SDC
XYZ M&A                                                              Trends
                                         US M&A Activity by Seller Industry
                                                                  (1992-97)
 Value and volume of transactions vary across industries. For example, in the
 US, computer software and service industries tend to do many small deals.
 Telecommunications, broadcasting and leisure and entertainment have high
 transaction size.
                                                                      8,000
                   500
                                                                          Transactions
    Aggregate                                                             (line)
                   400
    Offered                                                           6,000
    Value
    ($ BN)
                   300
    (bars)
                                                                      4,000

                   200


                                                                      2,000
                   100



                      0                                               0




                                                                                9
Source: SDC ( March 98)
XYZ M&A                                                                                   Trends
                                                                  Multiples Paid for Acquisitions
Over the last five years, the prices paid for acquisitions have been increasing, and
reinforces the need for in-depth due diligence and analysis to ensure a fair price.

                                       EBIT Multiples Paid for Acquisitions

            10

              9                                                             8.6
Average
                             7.8
EBIT     8            7.4                                   7.2      7
Multiple 7                                            6.5
                                                6.1
              6                           5.4
                                                                                  Financial Buyers
              5
                                                                                  Strategic Buyers
              4

              3

              2

              1

              0
                       1988-89             1992-93      1995             1996

                                                                                                     10
Sources: The BUYOUTS Yearbook, XYZ Analysis.
XYZ M&A                                                                                                        Trends
                                                                                             Acquisition Success Rates
The majority of acquisitions have been deemed failures.

                               Percent of Acquisitions Failing* in First Five Years

                        80%    75%

                        70%                               67%

                        60%
                                                                                      50%           50%
     Percent of Total




                        50%

                        40%

                        30%

                        20%

                        10%

                        0%
                              Survey of                  XYZ &                    Harvard          London
                               CFOs                     Company               Business School     Business
                                                         Study                                     School


Notes: Failure defined as earnings less than cost of capital and/or subsequently divested.                          11
XYZ M&A                                                              Trends
                                                  Common Reasons for Failure
          • Poor strategic fit
             –combination does not provide competitive advantage
             –lack of understanding of the business
          • Overpay
             –imperfect information/wrong valuation
             –too optimistic in forecasts/synergies
             –unforeseen industry downturn/emerging technology
             –auction environment; failure to set/stick to ‘walk away’ price
             –CEO/management ego
                 revenue growth vs. profitability
                 emotion vs. analysis
          • Poor post acquisition integration
             –inadequate planning
             –failure to exploit revenue/margin potential
             –disrupted relations with customers, employers and suppliers
             –culture clash; failure to involve ‘acquired’ people


                  Strategic, financial and operating causes
                                                                               12
XYZ M&A                                                                                 Trends
                                                                                      Glossary
Merger                 • The legal combination of two (or more) formerly independent entities
Acquisition            • The acquisition by an independent entity of a control stake in another
                        entity. This is usually achieved by acquiring more than 50% of shares for
                        a public company
Divestiture            • The sale or closure of a particular entity
LBO                    • Leveraged buy-out: An acquisition made possible financially by large
                        issuance of debt, making the new entity highly “leveraged” or “geared”
                        (i.e., with a high ratio of debt to equity)
Private Equity Firms   • Investment firms managing private funds by running business portfolios
Junk bonds             • Bonds (or debentures, or coupon debt) issued by an entity without a
                        credit rating or with entities with “non-investment grade” rating
Credit Rating          • Financial markets use the service of credit rating firms such as Standard
                        & Poor’s and Moody’s to determine entities’ credit worthiness (i.e., the
                        ability for an entity to pay back their debt). Ratings are allocated from
                        AAA or Aaa (highest) to C (lowest)
                           –   Entities with Investment Grade Ratings (AAA down to B) are
                               considered stable
                           –   non-investment Grade entities (below B) present an investment risk
                               (e.g., third world countries, highly leveraged companies)

                                                                                                  13
XYZ M&A                                               Introduction
                                                           Agenda


          •   Trends in M&A
          •   Guiding Principles for Successful M&A
          •   XYZ Approach
          •   Case Examples
                –   screening
                –   due diligence
                –   sale
          • Exercise on Synergy Calculation
          • Typical Watchouts
          • Key Takeaways

                                                                14
XYZ M&A                                                                             Principles
                                                                            Guiding Principles
XYZ believes that a clear and disciplined approach to                                  (1 of 2)
the acquisition process is vital to ensure success.
                     Proactive Strategic
                                                                        Screening
                         Thinking
 Principles:   •   Acquisitions are made to improve     •   Look for all companies that
                   the strategic position of existing       potentially strengthen the
                   businesses or add to the core            corporation
                   competencies of the corporation      •   Don't allow a "transaction"
               •   Assess impact of acquisitions on         mentality to dominate the process
                   long-term shareholder value
               •   Use acquisition as a vehicle to
                   accelerate growth in key business
                   units
 Activities:   •   Define business segments             •   Look for targets that present best fit
               •   Diagnose key competencies                in terms of:
                   and any skill gaps                          – relatedness
               •   Analyze market dynamics                     – impact on market position
               •   Study cost of acquisition            •   Examine key success factors of
                   versus organic growth                    potential targets
                                                        •   Examine competitive position of
                                                            client vs. competitive bidders
                                                                                                     15
XYZ M&A                                                                       Principles
                                                                      Guiding Principles
XYZ believes that a clear and disciplined approach to                            (2 of 2)
the acquisition process is vital to ensure success.


                         Execution                              Capture Full Value

 Principles:     •   Make better decisions          •   Clearly communicate corporate vision
                     upfront through careful due        to target
                     diligence                      •   Begin integration process as early as
                 •   Strive to identify "deal           possible
                     breaker" issues as early as    •   Be objective to ensure a fair decision-
                     possible                           making process
                 •   Use information and insights   •   Create a set of short-term and long-
                     to provide confidence in           term objectives
                     making a bid

 Activities:     •   Quantify all potential         •   Provide a blueprint for capturing full
                     synergies and cost savings         potential value
                 •   Examine margin and             •   Support managerial integration team
                     revenue forecasts
                 •   Evaluate management of
                     target

                                                                                                 16
XYZ M&A                                                            Principles
                                                           Strategy and M&A
Acquisitions at both the corporate and business unit level need to be thought
of as an integral part of a company's growth strategy.
        • Corporate objectives
          – growth and financial   targets
          – competitive arena
        • Corporate strategy
          – strategic position
          – management of resources


                                                            Growth through
        • Business unit objectives                       corporate acquisitions
          – business definition
          – growth and financial   targets
        • Business unit strategy
          – strategic position
          – key success factors
          – sustainable competitive   advantage

                                                            Growth through
                                                             business unit
             Organic growth                                   acquisitions

                                                                                  17
XYZ M&A                                                                   Principles
                                                               Strategic Framework

The focus of strategic M&A activity should be in areas where there is the highest
value creation opportunity as well as the strongest parenting advantage.


              High


                                                      Focus


      Value
     Creation
    Opportunity




              Low
                     Low                                        High
                                  Parenting Advantage
              “Is value to our client higher than value to other parents?”

                                                                                  18
 XYZ M&A                                                           Principles
                                             M&A Value Creation Opportunities
 M&A value can arise from generating the full value of an undervalued entity
 or by adding value to under performing assets.




                        Buy cheap                     Add value




 Take advantage of                  Spot new market                 Generate
inefficiencies in the                 trends early                  synergies
       market




                                                                                19
XYZ M&A                                                                          Principles
                                                                            Critical Issues
XYZ assimilates the strategic process with
acquisitions by focusing on four key areas.



        (I) Relatedness              (II) Strategic Strength          (III) Market Dynamics


  •   Cost sharing                  •   Strength of key           •    Market growth
                                        competitors
  •   Customer sharing                                            •    Technology changes
                                    •   Relative cost position
  •   Competitor overlap                                          •    Product substitution
                                    •   Strengths and
  •   Experience sharing                weaknesses of acquirer    •    Barriers to exit and entry

                                                                  •    Supplier and buyer
                                                                       power


      (IV) Value:    Resolving these issues allows an accurate evaluation of a company


                                                                                              20
XYZ M&A                                                                                 Principles
                                                                Success Criteria - Diagnostic Tool
The ability to improve the strategic position of the acquirer, and grow
or complement its existing competencies are keys to success.


                             RMS                                                            III) Market Dynamics
                             >1.5x
 (Relative Market Share)
  (II) Strategic Strength




                                                                                                   Growth >
                             RMS                                                                   10%
                            1.5-1.0x                                                               Growth 5-
                                                                                                   10%
                                                                                                   Growth <5%
                             RMS
                             <0.5x


                                          Low <25%       Medium 25-50%    High >50%

                                         Relatedness (I) (Experience and/or Cost Sharing)


                                     (IV) Value Accurate evaluation based on NPV vs. Market Price

                                                                                                          21
XYZ M&A                                                                                             Principles
                                                                                      Success and Market Share
Acquisitions that increased market share
substantially were consistently more successful.                                                         Incidence
                                                                                                         of success
                                                                                                         Incidence
                                                                                                         of outright
          80%                                                                                            failure
                                                                                                   73%
                                                                                       70%
          70%
                                                                     61%
                                            58%
          60%

          50%
                  43%
Percent




          40%               35%

          30%
                                                      18%                   19%              18%
          20%

          10%
                                                                                                           3%
          0%
                       < 5%                     5-10%                  10-25%            25-50%      50%+

                                                                Market Share Bought


Sources: Porter (33 Large U.S. Corps.; Management Interviews)                                                     22
XYZ M&A                                                                                                              Principles
                                                                     Market Impact of Announced Transactions*
                              The stock market rewards companies that make
                              related and/or focused acquisitions.
                                      10.0%
 Average Percent Price Increases




                                                                                                          0.1
                                       5.0%

                                                                              0.0

                                       0.0%




                                      (5.0%)




                                     (10.0%)
                                                         (0.1)

                                   Definition:         Unrelated              Related                            Focused
                                                 • Minimal cost      • Medium degree of cost   • Significant amount of activity and
                                                   overlap between     overlap                   cost overlap between acquirer and
                                                   acquirer and      • Target derives >70%       target
                                                   target              of revenues from        • Target complements existing
                                                                       same business as          product line and adds to core
                                                                       acquirer                  competencies of acquirer
Note: * Two weeks before compared to one week after announcement                                                                  23
Source: Industry Literature Review, XYZ Analysis
XYZ M&A                                                            Principles
                                                       Examples of Failures
The M&A landscape is littered with unsuccessful acquisitions which    (1 of 2)
failed to adhere to the core guiding principles.
                                                         Transaction Acquisition
Industry                 Acquirer             Target     Value       Thesis               Reason for Failure
Consumer                 Quaker               Snapple     $ 1.7B    •   Leverage          • Inadequate due diligence
Goods                    Oats                                           distribution        – growth   cycle not well
                                                                        channels                understood
                                                                                              – brand strength
                                                                                                overestimated
Entertain-               Sony                 Columbia    $ 4.8B    •   Own up stream     • Inadequate due diligence
ment                     Matsushita           MCA         $ 6.1B        contents for          – over valued synergies
                                                                        downstream        • Strategically flawed and
                                                                        hardware            poor integration

Finance                  Sears                DeanWitter $ 6.7B     •   Build a "one-     • Inadequate due
                                                                        stop" financial     diligence
                                                                        supermarket          – limited cross-sell
                                                                                                potential
                         Amex                 Shearson    $ 900MM   •   Expand            • Poor integration
                                                                        distribution         – culture clash
                                                                        capabilities

                                                                                                               24




Sources: Industry literature; XYZ Analysis.
XYZ M&A                                                                                      Principles
                                                                                    Examples of Failures
                                                                                                 (2 of 2)
The M&A landscape is littered with failures which failed to adhere to
the core guiding principles.
                                                          Transaction Acquisition
Industry               Acquirer               Target      Value       Thesis             Reason for Failure

Retail                  Allied                Federated   $ 6.5B    • Expand             • Inadequate due
                                                                     geographically       diligence
                                                                                           – overvalued
                                                                                              potential
                                                                                              synergies and
                                                                                              brand value

Technology/             AT&T                  NCR         $ 7.5B    • Technology/        • Strategically flawed
Telecommu-                                                           telephony             – few  synergies
nications                                                            integration             between computer
                                                                                             hardware and
                                                                                             telephony
                                                                                         • Poor integration
                        Novell                WordPerfect $ 1.4B    • New market entry   • Poor integration
                                                                                           – culture   clash


Sources: Industry literature; XYZ Analysis.                                                                    25
XYZ M&A                                                     Principles
                                   Examples of Successful Acquisitions
However, many companies have created enormous value through    (1 of 2)
successful acquisitions.
                                                    Transaction      Acquisition               Reason for
 Industry            Acquirer                Target    Value           Thesis                   Success
Consumer Cadbury   Dr. Pepper/ $ 2.0B                             • Expand geographic • Careful due diligence
Goods    Schweppes 7-Up                                            distribution             – increased scale and
                                                                                             presence as a global
                                                                                             player
Financial          First Data           First     $ 6.6B          • Obtain scale        • Well-managed integration
Services                                Financial                   economies              – integration of credit card
                                        Management                                           processing services of
                                                                                             consumer and
                                                                                             commercial sides
                   Wells                Crocker      $ 1.07B      • Expand              • Careful due diligence
                   Fargo                                            geographical reach and integration
                                                                    and leverage back-     – capture of
                                                                    office                   synergies and cost
                                                                                             savings
Food               Tyson                Holly        $ 1.4B       • Extend product line • Good strategic fit
                                        Farms                                             and due diligence
                                                                                           – capture of cost-
                                                                                             sharing potential
Sources: Industry literature; XYZ Analysis
                                                                                                                  26
 XYZ M&A                                                    Principles
                                   Examples of Successful Acquisitions
However, many companies have created enormous value through    (2 of 2)
successful acquisitions.                                 Transaction       Acquisition                Reason for
    Industry                 Acquirer          Target       Value            Thesis                    Success
 High                     Cisco              Stratacom    $ 4.5B       • New technology        • Well-managed integration
 Technology                                                                                       – closeattention to
                                                                                                   culture match; open
                                                                                                   communication of
                                                                                                   strategic vision
 Healthcare               Columbia           HCA          $5.7B        • Build national        • Good strategic fit and due
                                                                        healthcare group        diligence
                                                                                                 – capture of cost-sharing
                                                                                                    and scale economies
 Manufacturing            Crown, Cork Carnaud             $ 3.9B       • Expand geographic     • Good strategic fit and
                          & Seal      (French)                          reach and leverage        due diligence
                                                                        product strengths            – strong
                                                                                                        understanding of
                                                                                                        market dynamic to
                                                                                                        improve strategic
                                                                                                        position
 Transportation           Union Pacific Chicago &      $ 1.1B          • Expand geographically • Good strategic rationale
                                        North Western                                             – pre-emptive strategic
                                        Transportation                                              move to maintain
                                        Company                                                     strategic position


Sources: Industry literature; XYZ Analysis                                                                             27
XYZ M&A                                               Introduction
                                                           Agenda


          •   Trends in M&A
          •   Guiding Principles for Successful M&A
          •   XYZ Approach
          •   Case Examples
                –   screening
                –   due diligence
                –   sale
          • Exercise on Synergy Calculation
          • Typical Watchouts
          • Key Takeaways

                                                                28
XYZ M&A                                                                      XYZ Approach
                                                                              Key Activities
 XYZ's approach to acquisitions follows a series of key steps.


  • Should an acquisition strategy be pursued?
  • What sector or region?
                                                         Strategy



  •The best candidate based on
                                                 Acquisition target screen
  attractiveness and availability




  • Validate screening assumptions                    Due diligence



                     Bid structure                                                  Integration
  •The right price and negotiations                  Target valuation
                                                                                   pre-planning



  • Getting full value                                  Integration

                                                                                            29
   XYZ M&A                                                                                                                  XYZ Approach
                                                                                                                          M&A Value Chain
   XYZ has considerable experience in the different skill sets needed at
   different stages in the acquisition process.

                               Acquisition
                                                                   Due Diligence                     Valuation                      Integration
                               Screening



Objective:        •   Identify potential candidates   •   Make better decisions         •   Understand full strategic     •   Implement strategic vision for
                      which present best fit in           upfront                           value of acquisition              merger that gives direction and
                      terms of:                       •   Provide agenda for post-          candidate                         impetus for change
                        – relatedness                     acquisition change                                              •   Definitive actions and role
                        – impact on market            •   Improve success in closing                                          definitions to speed integration
                          position                        deal                                                                process



XYZ Activities:   •   Industry profile                •   Business/strategic review     •   Quantify current operating    •   Pre-planning
                  •   Target screening                     – market trends                  value, stand alone                  – combined cash flows
                  •   Target approach                      – customers and suppliers        operating improvements,       •   Transition plan
                                                           – competitors                    and potential synergies       •   Cost reduction
                                                           – costs, technology                                            •   Revenue enhancement
                                                           – valuation/full potential
                                                             assessment

Common            •   Drawing up incomplete list of   •   Non-identification of "deal   •   Ignore market dynamics       •Reluctance to interfere in
Pitfalls:             candidates                          breaker" issues                   and competitor impact on      operations of acquiree
                  •   Use of screen process to        •   Misunderstanding of cost          future cash flows
                      develop a strategy                  savings and upside            •   Taking management
                                                          opportunities                     projections at face value




                                                                                                                                                                 30
XYZ M&A                                                                                                       XYZ Approach
                                                                                                XYZ and Other Advisors' Role
XYZ provides a neutral, third-party view and analysis on the primary strategic
and financial issues.

                                   Acquisition
                                                                       Due Diligence                      Valuation                 Integration
                                   Screening


Investment Banks:    •   Comb for potential               •   In tandem with                •   Value based on prices of     •   Little or no direct input in
                         acquisition candidates based         accountants, analyze              comparable businesses            post-merger activities
                         on availability                      financial projections based       recently bought or sold
                     •   Utilize contacts to build a          on managerial input           •   Multiple of earnings/cash
                         wide list of potential targets                                         flow, assets

Accounting Firms*:   •   Look for potential acquisition   •   Limited external research     •   Value based on prices of     •   Little or no direct input in
                         candidates based on                    – largely dependent on          comparable businesses            post-merger activities
                         availability                             managerial projections        recently bought or sold
                     •   Use contacts to build list of                                      •   Construct a basic DCF
                         potential targets                                                      model


XYZ's Role:          •   Determine targets based          •   Analyze quality of            •   Construct a discounted       •   Active involvement in
                         on corporate objectives              customer and supplier             cash flow model that             transition plan, cost
                         and strategies                       base                              values stand alone,              reduction and revenue
                     •   Identify acquisitions that       •   Look for potential cost           operating improvements           enhancement
                         enable the acquirer to:              savings and upside                and potential synergies          opportunities
                           – penetrate new markets            synergies                     •   Provide a reality check on   •   "Hands-on" driver of
                           – acquire capabilities         •   Understand market                 market valuations                change process to realize
                           – gain scale advantage             dynamics to better                                                 full value of merged entity
                           – improve relative                 project market and
                             market position                  company growth
                                                              objectives



Notes: *Consulting branches of Big Six Accounting Firms.                                                                                                        31
XYZ M&A                                                                                                                                        XYZ Approach
                                                                                                                                    Roles and Responsibilities
XYZ is an integral part of a dedicated team of M&A professionals.
                                   100%
                                                                                                              Investment Banks
                                                                              •   Market          •   How, what     •   Price       •   Support as       •   Presentation to
                                                                                  valuation           and when to   •   Terms           needed               board
                                   80%                                                                say
                                                     XYZ
                                                                                                                                                                                •   Prospectus
                                                                                                                                                                                •
    Percent of Professional Time




                                                                                                                                                                                    Other
                                                                                                                                                                                    document-
                                                                                                                                                                                    ation
                                   60%




                                   40%                                                                                              • Support as
                                                                                                                    Lawyers •           needed
                                                                                                                                        Legal Due
                                                                                                                                        diligence


                                                                                                                    •   Non-offer        •   Scripts         •   Presentation to
                                          •   Screening   •   Portfolio           •   Intrinsic   •   How, what         letter           •   Due                 both boards
                                   20%                                                                                                                                         • Letter of
                                              study       •   Norm bands              cash flow       and when to   •   Terms                diligence                              comfort
                                                          •   Key issues              valuation       say                                                                       • Due diligence
                                                              investigation                       •   Scripts

                                                                                                                    Accountants                                                 • Pro formas
                                    0%
                                               Identify           Due                 Valuation       Development       Develop              Negotiate             Board            Implement
                                              candidate        Diligence                               approach         offer and                                 approvals
                                                                                                                           deal
                                                                                                                        structure


                                                                                                                                                                                                    32




                                                                                                                                                                                                  848704a2d01-19
  XYZ M&A                                                               XYZ Approach
                                                                 Acquisition Screening
 Finding potentially attractive targets is the critical first step in an M&A process.



                   Acquisition
                                         Due Diligence   Valuation    Integration
                   Screening


Objective:    • Identify potential candidates which
               present best fit in terms of:
                – relatedness
                – impact on market position


XYZ           • Industry profile
Activities:   • Target screening
              • Target approach


Common        • Drawing up incomplete list of
Pitfalls:       candidates
              • Use of screen process to develop a
                strategy

                                                                                      33




                                                                                    848704a2d01-20
XYZ M&A                                                   XYZ Approach
                                                   Acquisition Screening
Inadequate screening of candidates is commonplace.   (Common Mistakes)

    Objective:     • Review all potential candidates and determine which ones
                    present the best fit in terms of:
                     – relatedness
                     – impact on market position

    Common         • Drawing up an incomplete list of candidates, excluding
    pitfalls:        divisions of large companies and very small companies
                   • Using the screening process to develop the strategy
                   • Saying
                      – "We can't buy it because..."
                      – "They have turned us down before"
                      – "The government won't approve it" or
                      – "It's family/state/competitor/or big company owned"
                   • Making the wrong contact at the target company
                   • Being impatient with acquisition process
                   • Assuming "no" really means "no"


                                                                                34
XYZ M&A                                                           XYZ Approach
                                                    Candidate Screening Process
XYZ's approach to screening involves careful analysis of the market,
competitors and the target.

              Broad screen                Fine screen           Thorough analysis


Focus of     Market position              Relatedness               Value creation
analysis:

Screening • Industry sector         • Key success factors      • Stand-alone value of
criteria: • Company size            • Competitive position       synergies/
          • Company growth            (costs/customers)          performance
          • Market share            • Opportunity for            improvement potential
          • Financial performance     synergies                • Management/cultural
                                                                 considerations


Objective: • Rapidly narrow down    • Provide shortlist of     • Detailed assessment
             universe of             candidates                 of remaining
             companies                                          candidates


                                                                                     35
XYZ M&A                                                                                               XYZ Approach
                                                                                                   Screening Criteria
The XYZ approach to screening evaluates the market dynamics
and the target's performance and fit with the acquirer.                                                            Partial examination

                                                                                                                 Complete examination



   Screen       Market Attractiveness             Market Position                Overlap                           Value Creation



                                       Key                       Relative                          Stand-alone Key     Availability
                  Growth Industry    Success          Relative   Market                             Financial Success      of        Value of
             Size Rate Concentration Factors   Size   Growth      Share Competitor Customer Cost   Performance Factors  Benefits    Relatedness




  Broad




  Fine



  Thorough




                                                                                                                                   36
 XYZ M&A                                                                     XYZ Approach
                                                                             Due Diligence
 XYZ goes beyond financial analysis to assess fully the competitive
 position of the target, and identify "deal breaker" issues .


                  Acquisition
                                    Due Diligence          Valuation       Integration
                  Screening

Objective:                      • Make better decisions upfront
                                • Provide agenda for post-acquisition
                                  change
                                • Improve success in closing deal

XYZ Activities:                 • Business/strategic review
                                  – market trends
                                  – customers and suppliers
                                  – competitors
                                  – costs, technology
                                  – valuation/full potential assessment

Common Pitfalls:                • Non-identification of "deal breaker" issues
                                • Misunderstanding of cost savings and upside opportunities
                                                                                              37
XYZ M&A                                                                                        XYZ Approach
                                                                                    Approach to Due Diligence
XYZ minimizes the risks of acquisitions with a thorough approach to due diligence.

  • Provide access to the XYZ world network to support pre-letter
      of intent go/no-go decisions
  •   Conduct exhaustive due diligence study of industry and
      company dynamics:
        – identify key cash flow drivers
        – quantify margin and revenue growth forecasts
        – quantify cost reduction potential
        – identify "deal breakers" and/or "red flags" causing bid
          adjustments
        – identify and quantify all upside opportunities
  •   Identify and evaluate potential exit options



                             • Assist in securing financing through development and
                               presentation of objective, third-party business analysis



                                                     • Create blueprint for Full Potential strategy


                                                                           • Generate enthusiasm and momentum for the deal
                                                                             within the target company




                                                                                                                             38
XYZ M&A                                                         XYZ Approach
                                                  Typical Due Diligence Issues
                                                                       (1 of 2)
A well-designed due diligence process involves answering a series of key
questions.

Business            What business is the target in? Who are the current and
Definition:         potential competitors?
Market Overview: Is this an attractive industry from size, growth, supplier power,
                 regulatory environment, business concentration and profitability
                 perspectives? Is this the right time to buy?
Key Success         How do you make money in this business today and in the
Factors:            future?

Company            How well positioned is the target company? (market share,
Overview:          management, products, company performance, customer
                   stability/defections, etc...)

Customer            What are key purchase criteria and how does our target perform
Evaluations:        relative to competitors? How might this change in the future?

                                                                                     39
XYZ M&A                                                       XYZ Approach
                                                Typical Due Diligence Issues
                                                                     (2 of 2)

Competitor       What strategies are key competitors pursuing? How successful
Review:          are they?


Operations:      How well managed is the business? Where can the company
                 improve margins and returns?


Growth:          What is the potential growth? Are there follow-on acquisitions
                 available?


Valuation:       How much is the company worth on a stand-alone basis? How
                 much value can be created?

Exit Strategy:   When applicable, is there a clear exit strategy?


                                                                                  40
XYZ M&A                                                                XYZ Approach
                                                      Typical Due Diligence Activities
Understanding of market dynamics, strategic fit, and company performance
requires an in-depth external and internal review.

              External Assessment                                  Internal Assessment

    • Blind interviews with customers, competitors,     • Interviews with target company's
      suppliers and market experts conducted by           management in:
      experienced, business-minded group                   – marketing/sales
      members                                              – finance/accounting
    • Exhaustive review of market research reports,        – operations
      company profile information, articles,               – etc.
      publications and other publicly available         • Comprehensive review of target
      sources                                             company's customer base, personnel
    • Analysis of above information to determine:         and operations
       – overall market growth potential                • Analysis of above information to
       – customer segmentation                            determine:
       – relative performance of target company vs.        – market share projections
         competitors based on customer needs               – potential margin changes
       – vulnerability in value chain (including           – relative cost position
         distribution channels)                            – salesforce effectiveness
                                                           – potential operational improvements



                                                                                             41
 XYZ M&A                                                               XYZ Approach
                                                                           Valuation
 XYZ's valuation process quantifies the full strategic value of an acquisition to
 ensure that the client can price with comfort and confidence.


              Acquisition
                               Due Diligence       Valuation        Integration
              Screening

Objective:                                     • Understand full strategic
                                                value of acquisition
                                                candidate
XYZ                                            • Quantify current operating value,
Activities:                                     stand alone operating
                                                improvements, and potential
                                                synergies
Common                                         • Ignore market dynamics and
Pitfalls:                                        competitor impact on future cash
                                                 flows
                                               • Taking management projections at
                                                 face value
                                                                                     42
XYZ M&A                                                                  XYZ Approach
                                                             The Value Creation Process
XYZ's approach to valuation encompasses three distinct steps that closely
examine the historical and future financial performance of the target.

                200%                                            •   Investment banking focus
                                           Financial deal             – leverage/gearing
 Percent of     180%                          structure               – type of financial products used
 Current                                                        •   Integration opportunities
 Market Value   160%                                                  – expanded distribution
 (Debt and                                  Synergies                 – plant consolidation
 Equity)        140%                                                  – eliminate redundant R&D
                                                                      – purchasing leverage
                                             Stand alone
                120%
                                              operating         •   Better management of assets
                          Premium                                    – plant best demonstrated practices
                                            improvement
                100%                                                 – reduced manufacturing complexity
                                                                     – outsourcing/move off shore
                80%                                                  – reduced working capital
                                              Current
                60%
                        Market value
                                             operating          •   Stand alone cash flow
                        of debt and                                   – domestic demand
                                               value                  – import penetration
                40%        equity
                                                                      – current market share
                                                                      – price per unit
                20%                                                   – variable cost per unit
                                                                      – fixed costs (R&D, advertising, etc.)
                 0%                                                   – capital expenditures
                        Current market   Maximum potential
                            value             value


                Difference between purchase price and post-
                    integration value to client represents
                          value creation opportunity
                                                                                                               43
 XYZ M&A                                                                                                            XYZ Approach
                                                                                                                Valuation Roadmap
   The valuation process must answer a set of key questions
   regarding capabilities, synergies, and strategic fit.

                 Develop Core                         Value Target as
                                                                                           Value Potential                Develop Required
                   Business                            Stand Alone
                                                                                             Synergies                    Capital Structure
                 Expectations                            Business
           XYZ Role:                              XYZ Role:                            XYZ Role:                          XYZ/Investment Bank Role:
           •Five year cash flow forecast          • Detailed financial due diligence   • Overall fit with strategy        • Combined cashflow forecasts
           •Critical areas of sensitivity            – historical financial analysis   • Cost reduction potential            – acquirer
              – market growth activity               – future protections                  – fixed                           – target
              – key customers/ products           • DCF analysis                           – variable                        – synergies
              – cost reduction                    • Comparable analysis                • Revenue synergies
              – capital expenditures              • Other potential buyers                 – positive                     Investment Bank Role:
                                                     – strategic                           – negative                     • Possible financing sources
                                                     – financial                       • Customer and competition             – equity
                                                  • Other options                        response                             – secured debt
                                                     – spin-off                        • Non-recurring costs                  – cashflow loans
                                                     – liquidation                                                            – seller financing
                                                     – etc.




           •   Development of conservative case   •   How much is the target worth     •   How much is the target worth   •   Can we afford it?
               requirements provides basis for        to the seller?                       to us?                         •   Does the increase risk make
               analyzing debt capacity                                                                                        sense?

Related    •   Cash flow                          •   Investment appraisal
BVU        •   BDP                                •   Cash flow
Modules:   •   Industry analysis
           •   3Cs
           •   RCP


                                                                                                                                                  44
XYZ M&A                                                          XYZ Approach
                                                   Valuation Potential Synergies
A key component in the valuation process is to quantify, as best as possible,
any upside opportunities on both the revenue and cost side.


                                     Bottom-Line
                                    Improvement

                                                       Cost Reduction
                                                     (“Hard synergies”)

  Revenue Enhancement
                                        Variable                           Fixed
    (“Soft” Synergies)
• Examination of sales       • Purchasing                        • Manufacturing
  distribution channels      • Labor productivity                • Sales & Marketing
• Product cross-selling      • Manufacturing efficiency          • Distribution
• Other                        benefits                          •G & A
                             • Consumer and trade
                               spending efficiencies
                             • Transportation efficiency

                          Assessed during due diligence

                                                                                       45
 XYZ M&A                                                                XYZ Approach
                                                                           Integration
 XYZ can assist in the integration process and maximize the value of the target.



              Acquisition
                               Due Diligence       Valuation          Integration
              Screening


Objective:                                     • Implement strategic vision for merger
                                                 that gives direction and impetus for
                                                 change
                                               • Definitive actions and role definitions
                                                 to speed integration process
XYZ                                            • Pre-planning
Activities:                                        – combined cash flows
                                               • Transition plan
                                               • Cost reduction
                                               • Revenue enhancement
Common                                         • Reluctance to interfere in operations
Pitfalls:                                        of acquiree



                                                                                           46
XYZ M&A                                                                                           XYZ Approach
                                                                                        Importance of Integration
    The ability to successfully integrate acquired companies is ranked
    the most important factor influencing acquisition success.


                              100%
                              90%

                              80%
       Degree of Importance




                              70%

                              60%
                              50%
                              40%

                              30%
                              20%

                              10%
                               0%
                                     Ability to   Evaluation    Management          Prior      Compatibility   Price
                                     integrate        of         abilities of    experience        of          paid
                                     company      acquisition     company          making      management
                                                   candidate      acquired      acquisitions     styles


Sample: 200 CEO's                                                                                                      47

Sources: Wall Street Journal
XYZ M&A                                               XYZ Approach
                                   Integration - Key Success Factors

          • Early planning
          • Take control swiftly
          • Constant communication
          • Ensure retention of key managers
          • Aggressive sharing of corporate vision
          • Respect for people and culture
          • Adopt merger principles
            – fact-based    and fair decision making

            – objectivity

            – two-way   communication



                                                                  48
XYZ M&A                                                        XYZ Approach
          Integration - Develop Short - and Long-Term Objectives


               Explicit expression of corporate
                   mission/vision by CEO



                     Long-term objectives

              • Articulate immediately when control is taken
              • Gives organization focus for new direction
              • Maintains impetus for change

                     Short-term objectives

               • Driven by due diligence and valuation
               • Reality check
               • Directs Transition Team in first weeks
                after the merger


               Top-down consistent approach

                                                                         49
XYZ M&A                                                                                                   XYZ Approach
                                                                                                        Typical Timeline
Integration is a complex process that must be done
quickly to produce tangible results.
                            (weeks)    0       2       4       6       8       10        12        14         16        18        20


• Preplanning                              1       3       5       7       9        11        13         15        17        19
   –   future cash flows
   –   industry analysis
   –   due diligence
• Strategy
• Transition Plan
• Communication Plan
• Culture Integration
• Finance Plan
   –   debt structure
   –   capex
   –   compensation
• Cost Reduction
   –   distribution     – purchasing
   –   production       – sales
   –   overhead
• Revenue Enhancement Plan
   –   cross-selling
   –   cross-marketing


                                                                                                                                   50
XYZ M&A                                                    XYZ Approach
                   Integration - Develop Short - and Long-Term Objectives
The acquisition premium paid can only be justified by making swift
changes. Yet there is a reluctance to interfere in the management and
operations of the target.




                                   Real/perceived
                                performance shortfall




 Acquiree morale declines   The "hands-off" doom loop      Acquirer becomes impatient
  and attrition increases                                     and storms acquiree



                             Morale collapse at acquiree




                                                                                        51
XYZ M&A                                               Introduction
                                                           Agenda


          •   Trends in M&A
          •   Guiding Principles for Successful M&A
          •   XYZ Approach
          •   Case Examples
                –   screening
                –   due diligence
                –   sale
          • Exercise on Synergy Calculation
          • Typical Watchouts
          • Key Takeaways

                                                                52
XYZ M&A                                           Case Example - Prepress
                                                  Screening/ Due Diligence
                                                                    (1 of 2)

   Client:           • Prepress's base business is the market
                      leader in the high-end electronic imaging
                      market

   Situation:        • Prepress has historically enjoyed high
                      margins and been able to remain market
                      leader

   Complication:     • Prepress base business is facing price
                       pressure from low-end systems.
                     • With $300MM of cash available, Prepress is
                       looking for growth opportunities to sustain
                       superior growth rates

   Recommendation:   • Assess core competencies of Prepress
                      relative to the competition and identify
                      potential acquisitions


                                                                          53
XYZ M&A                                        Case Example - Prepress
                                               Screening/ Due Diligence
                                                                 (2 of 2)


   XYZ           • Strategic assessment of core competencies
   activities:     relative to the competition
                 • Identify "long list" of industries to discuss
                   with client
                 • Prioritize "long list" in terms of industry
                   attractiveness in order to narrow to 3-5
                   industries
                 • Screen for new acquisitions in higher growth
                   industries

   Result:       • From “long list" of industries and discussion
                   with client, attractive industries were selected.
                 • Within designated industries, XYZ identified
                   financially attractive targets that matched
                   Prepress's strategic focus.



                                                                       54
XYZ M&A                                                                    Case Example - Prepress
                                                                                    Search Criteria
Along with the client, XYZ developed a set of criteria with
which to evaluate different industries.
                                       Information    Output    Companies that   Competitor    Prepress   Another
                                      Capture, and    Devices     Purchase       Industries   Customers   Prepress
       Potential Industries           Dissemination               Computer                                Industry
                                                                 Components,
                                                                Add Value, and
                                                                  Remarket

  Recording products                       X                          X             X
  Duplication products                     X             X            X             X             X
  Data enhancement/                        X             X            X             X             X
  manipulation/editing devices
  Data management (storage and             X                          X             X             X
  retrieval) devices
  Transmission originators                 X                          X
  Transmission carriers/controllers                                   X                           X
  Transmission receivers ("dumb')                                     X
  Intelligent digital processing                         X            X             X             X
  systems
  Interactive digital systems                            X
  Office automation/high potential                                                                           X
  customers


                                                                                                            55
XYZ M&A                                                             Case Example - Prepress
                                                                         In-depth Screening
After selection of the criteria, each industry was analyzed to determine its
attractiveness and potential fit with Prepress's existing business.

                 Is the industry                                     Do we offer a value-
                   attractive?                                       added proposition?
    • Systems orientation                                    • What drives industry's profitability?
    • What other technologies does this industry interface   • What do we bring to the table?
      with?                                                    Could our capabilities strengthen
    • Customers                                                the industry?
        – Who are they?
        – How do they buy? (channels, predictability)
                                                             • Could this industry serve as a
        – What do they buy?                                    platform to enter other markets?
    • Competitors                                            • Can we create a new system?
        – Who are they?
        – What is their share of their market?
        – How important is this industry to them?
    • Industry trends/dynamics
        – How cyclical/predictable is the industry?
        – How profitable is the industry?
        – What is the average selling price per component?
        – What is the percent value-added?
    • Viable acquisition candidates
        – Is one of "top 3" players "buyable"?
        – Are they profitable?

                                                                                                       56
XYZ M&A                                              Case Example - Prepress
                                            Magnetic Resonance Imaging (MRI)
                                                                      (1 of 2)
 The MRI industry was selected based on its attractiveness and potential fit
 with Prepress.
Industry Attractiveness:
Market Size:      –   $1.4B, worldwide (second largest medical imaging segment)
Growth rate:      –   9.1% (fastest growing segment)
Systems           –   Value-added system, but most manufacturers just sell component
orientation:
Customers:        –   Medical market
Competition:      –   Fragmented - over 200 equipment suppliers worldwide
                  –   Major players in X-ray, CT, SPECT, and PET do not dominate MRI
Industry
trends/dynamics: – ROS historically 9%, weak 3% now
                 – Highly competitive with intensified price cutting
                 – Anticipate industry consolidation and merging of manufacturing,
                   product development, and distribution functions

                                       Attractive
                                                                                     57
 XYZ M&A                                             Case Example - Prepress
                                            Magnetic Resonance Imaging (MRI)
                                                                      (2 of 2)
 The MRI industry was selected based on its attractiveness and potential fit
 with Prepress.
Prepress Value-added Proposition:
Similarity to – Same workflow
pre-press:    – Similar manufacturing (value-added resale of high-technology
                components linked by proprietary software and customer circuit
                boards or chips)
Linkage to    – Color imaging becoming increasingly valued system feature
other         – Signifies major move into medical imaging market
industries:   – Complements current client printer medical market strategy
              – Entry vehicle to data storage industry
              – No linkage to non-medical/other markets
Prepress      – System similarity (modular design, user-friendly, upgradeable, high
synergies:      quality)
              – Sales process similarity (system sell, proven ROI benefits)
              – Customer need similarity (high resolution images, low maintenance,
                strong price-value relationship)

                                      Attractive
                                                                                      58
 XYZ M&A                                                       Prepress
                                         MRI: Market Segment Competitors
Industry segments were classified and measured to identify potential targets.




                                                                     $100M

                                                                               $80M
                                                                                           Total: $1.4B
                      $550M                $500M      $150M                                Players:
             100%
                                                                                                A
Estimated
Percent of                                                                                      B
1993           80                                                                               C
Market         %        I
                        G
(1993                                                                                           D
Dollars)
                        F                   H                                                   E
               60                                         I                                     F
               %       E                    E
                                                          H
                                                                                                G
                                                                  H
                        C                                G
                                                                                                H
               40                                                              H
                                            D                                                   I
               %                                                   G
                                                         E                     I
                                                                                                Others
                        B                                                      G
                                                         C
                                                                   D
               20                                                                           F
               %                            C
                                                         B         B
                       A                                                       E
                                            B
                                                                    A
                                             A
              0%




                                                         OB/GYN


                                                                  Peripheral
                                                                   vascular

                                                                                   Other
                    Radiology            Cardiology




                                                                                                          59
 XYZ M&A                                                   Case Example - Prepress
                                                           MRI: Industry Dynamics
 The MRI market was then examined further in order to identify opportunities.


                             Attractive                             Unattractive

Track record:        • Dedicated players dominate           • G had (5.6%) ROS
                      market                                  – what's   driving losses?
                       – make money
                       – increasing sales
                       – focused R&D expenditures
Macro-environment:   • Offered by more hospitals (75%)      • Increasingly restrictive global
                       than any other digital imaging        government regulations for
                       technology                            medical spending and
                     • Majority of hospital CFOs operate     reimbursement
                       MRI profit centers
Industry trends:     • Ultra high-technology R&D            • Aggressive price-cutting
                       – leverage   super-computer          • Intensive competition
                          advances
                        – engineer for low cost, compact
                          size, long-term reliability
                     • Shake-out imminent

                                                                                           60
 XYZ M&A                                            Case Example - Prepress
                                          MRI: Target Acquisition Candidates
 After the creation of a market map, individual companies were
 assessed for their viability as an acquisition.




            Viable
          Acquisition                                  Not Viable
          Candidate


Company    Revenue Market Value
                                  Medical Imaging   Division of Large   Market Share
  A        $170MM       $200MM        Parent            Company          Too Small
                                      •I                  •D             • H •O
           $165MM       $100MM
  B                                   •G                  •E             • K •P
           $150MM       $100MM        •C                                 • L •Q
  F
                                      •J                                 • M •R
                                      •K                                 • N •S



                                                                                       61
XYZ M&A                                               Introduction
                                                           Agenda


          •   Trends in M&A
          •   Guiding Principles for Successful M&A
          •   XYZ Approach
          •   Case Examples
                –   screening
                –   due diligence
                –   sale
          • Exercise on Synergy Calculation
          • Typical Watchouts
          • Key Takeaways

                                                                62
XYZ M&A                                                      Case Example - Sand
                                                         Due Diligence/Valuation
   Client:           • A UK-based mining and minerals division of a
                      diversified company
   Situation:        • Acquirer has limited opportunities for internal
                      growth and is seeking growth through acquisition
   Complication:     • Target ("Ferret") purchased a divested division
                       from the client several years ago. Initial
                       hypothesis is that the target is a good acquisition
                       at the right price
   Recommendation:   • Industrial sand division was divided into 5
                       segments by end-user. Based on growth rates in
                       individual segments, target firm was valued at
                       approximately $100MM
   XYZ               • Market growth projections
   activities:       • Market share determination
                     • Assessment of possible synergies with acquiring firm
                     • Competitor analysis
                     • Analysis of business expansion opportunities
                     • Independent EBITDA forecast
   Result:           • A competitor bid was accepted
                                                                              63
XYZ M&A                                                                                                                                                            Case Example - Sand
                                                                                                                                                                     Industry Overview
Every market segment has been volatile. Only the frac segment has grown
significantly, but it is still below its 1985 peak.

                             14000
                                                                                                                                                                                                                     CAGR
                             12000                                                                                                                                                                                (1970-1993)
Volume ('000s Metric Tons)




                                                                                                                                                                                                        Glass       0.1%
                             10000

                             8000

                             6000                                                                                                                                                                       Foundry -1.0%


                             4000

                                                                                                                                                                                                        Abrasives 1.3%
                             2000
                                                                                                                                                                                                        Frac      8.5%

                                 0                                                                                                                                                                      Fillers     -5.6%
                                     1970
                                            1971
                                                   1972
                                                          1973
                                                                 1974
                                                                        1975
                                                                               1976
                                                                                      1977
                                                                                             1978
                                                                                                    1979
                                                                                                           1980
                                                                                                                  1981
                                                                                                                         1982
                                                                                                                                1983
                                                                                                                                       1984
                                                                                                                                              1985
                                                                                                                                                     1986
                                                                                                                                                            1987
                                                                                                                                                                   1988
                                                                                                                                                                          1989
                                                                                                                                                                                 1990
                                                                                                                                                                                        1991
                                                                                                                                                                                               1992
                                                                                                                                                                                                      1993
                                                                                                                                                                                                                      64




Sources: U.S. Bureau of Mines
XYZ M&A                                                                                                 Case Example - Sand
                                                                                                                Value Chain
Regional presence is crucial for both whole grain segments. The distribution
cost is the largest part of the frac and foundry whole grain segments.

                                                                          Manufacturers
                            Extraction                       Processing      Margin                   Distribution


                                                                                                                     End-User Price


Foundry                                  ManufctresMargin                   ir i
                                                                            s o
                                                                             tu
                                                                             i n
                                                                            Dtb                                        $40
Whole
                    Extracion
                   Procesing

grain:

Foundry                                                                                                                $150-250
                      xt
                      tc
                      ro
                       a
                      Ein                                      Ps
                                                               re
                                                               oi
                                                                cn
                                                                sg                                       ir i
                                                                                                         s o
                                                                                                          tu
                                                                                                          i n
                                                                                                         Dtb




                                                                                   ManufctresMargin
Resin coated:



Frac         xt
             Ei
             r o Ps
              a
             tc   cn
                  s
               n re
                 oig                                        nu
                                                            acr
                                                            Mte
                                                            M
                                                             f
                                                             a s
                                                             ur
                                                             ar
                                                              gn
                                                               i                   i n
                                                                                   tu
                                                                                  ir i
                                                                                  Dt
                                                                                  s o
                                                                                    b                                  $20-25
Whole Grain:


Frac Resin                                                                       Mte
                                                                                 acr
                                                                                 nu
                                                                                  ur
                                                                                  f
                                                                                  a s                                  $160-240
                              xt
                              tc
                              ro
                               a
                              Ein                               Ps
                                                                re
                                                                oi
                                                                 cn
                                                                 sg              Mar
                                                                                   gi
                                                                                    n                    i n
                                                                                                         tu
                                                                                                        s o
                                                                                                        ir i
                                                                                                        Dtb
coated:


                 %
                 0                    0
                                      %
                                      2                        0
                                                               %
                                                               4           6
                                                                           0
                                                                           %                          0
                                                                                                      %
                                                                                                      8              0
                                                                                                                     0
                                                                                                                     1%


Notes: In percent of end user price
                                                                                                                                  65
Sources: Ferret's budget; Customers Interviews
 XYZ M&A                                                                                                  Case Example - Sand
                                                                                                   Market Map by Sub-Segment

                                     $170M                                        $164M                 $100M                                                                                 $99M
                                                                                                                                                                                       $20M    $34M
                                  $141M              $29M                 $86M            $78M      $47M     $24M $29M                                            $37M            $35M    $10M
              100%                                                                                                                                                                            Other
                                                      Other                                                                                                      Others                                                          Total:




                                                                                                             Others
                                                                                                                                                                                              Ferret
                                                                                                    Others




                                                                                                                                                  Norton/Alcoa
                                                        s                                 Other




                                                                                                                       Fairmount Minerals
   Percent                                             Ferret                                                                                                                               Genstar                              $570M
                                                                                                                                                                 Ferret
   of Total                       Others             The Morie Co.




                                                                                                                                                                                              Foster
                                                                                                                                                                                              Dixiez
                                                        Unimin
               80%                                                                                  U.S.
                                                                                          Ferret    Silica




                                                                                                                                                                                                 Stanblast
                                    Ferret                                Other
                             Oglebay Norton                                                        Oglebay
                                                                                                   Norton                                                        Unimin
                             The Morie Co.




                                                                                                              Borden
               60%                                                                        Borden                                                                                Other

                               U.S. Silica                                                          Badger




                                                                                                                                             Carbo Ceramics
                                                         U.S. Silica   The Morie Co.                Mining
                                                                       U.S. Silica




                                                                                                                                                                                                Reed Minerals
               40%

                                                                         Unimin        In-House
                                                                                         resin                                                                   U.S.




                                                                                                             Ferret
                                                                                        coated                                                                   Silica         U.S. Silica
               20%                Unimin                                                            Unimin
                                                                                                                                                                                Unimin
                                                                                                                                                                                  The
                                                                                                                                                                                Morie Co
                                                                        Fairmount
                                                                         Minerals                                                                                                 Ferret

                 0%




                                                                                                                                                                                              Coal Slag
                                                                                                             Coated
                                                                                                              Resin




                                                                                                                                                                  Fillers and
                                                                                                                                                                  Extenders




                                                                                                                                                                                                                  Slag
                                                                                                                                                                                   Sand


                                                                                                                                                                                                                Copper
                                                                                                                                                                                   Silica
                                                 Performance




                                                                                                                                            Ceramics
                                 Primary                                   Whole          Resin-    Whole




                                                                                                                                                                                                                         Other
                                  Glass             Glass                  Grain          coated    Grain

                                    Glass                                     Foundry                Proppants                                                                       Abrasives

Note: 1995 estimated figures except for Abrasives (1992 figures)                                                                                                                                                                  66
       Ferret Abrasive share excludes Uniwest
Source: Tucker Anthony and U.S. Silica Information Reports
XYZ M&A                                                   Case Example - Sand
                                              Industrial Sand Market Overview


    Summary
      •   The overall silica sand industry has been notably cyclical with flat
          volume growth over the past twenty-five years; downturns generally
          track broader economic slowdowns

      •   Each market segment of the silica sand industry is volatile and only frac
          has shown significant long-term volume growth: However, frac volume
          is still below its 1985 peak

      •   Real industry revenues have fallen by 1.6% since 1980

      •   Real revenues per ton have fallen by 0.5% since 1980

      •   Extraction, manufacturing and distribution should be viewed as different
          businesses with unique returns, customers and competitors

      •   Future environmental and health risks appear to be limited - regulations
          limiting access to and use of silica sands are not expected to become
          more burdensome in the near future
                                                                                      67
XYZ M&A                                                     Case Example - Sand
   Summary
                                                                Ferret's Position

    •   Strong historical growth has been due to acquisitions and internal growth

    •   Ferret has focused primarily on the foundry and frac segments which
        account for over 60% of its contribution

    •   Profitability and cash flow (as a percent of sales) have recovered from 1993
        levels, but are still well below 1991 peaks

    •   Customers generally regard Ferret favorably - Ferret has been aggressive
        in increasing revenues per ton and is perceived by customers as being
        higher priced

    •   Because of high distribution costs, competition in most product lines is
        geographically limited and varies across Ferret's locations and market
        segments

    •   Ferret's key competitors do not own captive distributors - the key
        competitor in resin-coated sands, Borden, has no extraction capabilities

    •   Ferret has significant unutilized manufacturing capacity, but extraction
        capacity will be exceeded if the Bridgman permit is not renewed
                                                                                    68
XYZ M&A                                                              Case Example - Sand
                                                                     Investment Rationale
Communication to investors regarding the acquisition of Ferret
should focus on five key points:
      • Growth in client's existing markets is limited
        – products
        – geography
      • The US market is very large and is about to undergo the next phase of change
        – out-sourcing    of foundry resin-coating processes
         – growth in frac sands
         – cyclicality provides opportunity to consolidate in downturns
      • Dramatic change has occurred in the US market since client's exit
         – consolidation
         – shakeout of many competitors
         – emergence of Ferret
      • Ferret has taken advantage of the industry environment to compile a very attractive
        combination of reserves and manufacturing capabilities
      • Ferret represents an attractive platform for future growth
         – product synergies (#1 worldwide leader in silica proppants for the oil & gas industry)
         – further US acquisitions
         – international expansion: Mexico, South America, Pacific Rim
         – diversification across national economic cycles




                                                                                                69
XYZ M&A                                                        Case Example - Sand
                                                                Valuation Summary
Based on different scenarios a $100MM bid was made.



                                      Worst Case   Base Case        Best Case

 CAGR (1995-2000)

 Sales                                 -0.1%        3.8%              8.4%
 GP                                    -1.4%        3.1%              7.9%
 EBIT                                  -7.5%        2.7%              11.3%
 Operating Cash Flow                    1.4%        8.1%              14.3%




 DCF (@12%)                           $64.9MM      $91.3MM          $123.0MM



Notes: Assumes no growth perpetuity                                             70

Sources: XYZ model
XYZ M&A                                               Introduction
                                                           Agenda


          •   Trends in M&A
          •   Guiding Principles for Successful M&A
          •   XYZ Approach
          •   Case Examples
                –   screening
                –   due diligence
                –   sale
          • Exercise on Synergy Calculation
          • Typical Watchouts
          • Key Takeaways

                                                                71
XYZ M&A                                                                       Case Example - AMD
                                                                                       Summary
                                                                                          (1 of 2)
Situation:             • The client, a global asset management company with over $50B under
                         management, was losing market share across its businesses
                       • XYZ was approached to assist in developing a strategy to achieve profitable
                         growth

Approach:              • Phase I focused on defining the current state of the current business and its
                         environment
                           – in depth analysis of the client’s markets, channels and customers
                             established that client was losing share in many markets and was being out-
                             invested by competitors in core markets
                           – detailed profitability analysis across products, channels and markets
                             identified that only four businesses in the clients portfolio of 15 were making
                             significant contribution to group profits
                       • In Phase II, joint XYZ/client teams were formed in each business to develop
                         detailed five year business plans. The plans included required investment,
                         potential strategic moves and resultant profits, enabling the full potential of
                         each business unit to be determined on a comparable basis
                       • The individual business plans were integrated to quantify the overall opportunity
                         for the company. Corporate-level strategic options were then identified,
                         detailed and valued


                                                                                                         72
Source: XYZ & Company Experience Centre
XYZ M&A                                                                       Case Example - AMD
                                                                                       Summary
                                                                                          (2 of 2)
Conclusion:             • After detailed evaluation of strategic options, a decision was made to sell the
                          Asset Management Division (AMD) business. The asset management company
                          required significant investment in order to achieve profitable growth, and the
                          parent company was able to achieve higher returns by investing in other
                          businesses within its portfolio
                        • XYZ continued to support the client through the sale process by
                           – developing the offer memorandum, the business forecast and the
                             management presentation
                           – identifying the best new parent and quantifying their full-potential price
                           – supporting the bid negotiations


Impact:                 • The division was successfully sold, realizing $500M more in value from the
                          transaction than the parent would have been able to extract from the business
                          through continued ownership.




                                                                                                            73
 Source: XYZ & Company Experience Centre
XYZ M&A                                                                               Case Example - AMD
                                                                                   Profitability by Business

The client’s profits were concentrated in three businesses.


        US$ 100M
Cumulative
Profit
                       80


                       60


                       40


                       20


                        0
                              A            C       E       G         I         K       M       O       Total
                                    B          D       F        H        J         L       N       P
                                                               Business Unit
 Source: XYZ & Company Experience Centre                                                                       74
XYZ M&A                                                                                        Case Example - AMD
                                                                                        Asset Management Strategy
A successful strategy for the Asset Management business is:
                                           • Acquire to obtain   • Declining market     • Too late
                                             performance for       strategy
                                             wholesale channel   • Acquire to build
                         US                • Expand into new       dominant position
                                             channels              or sell
             Geography




                                           • Rationalise range   • Acquire to build     • Develop
                                           • Invest to grow        position in UK and     alliances to
                         Europe              offshore funds        Germany                prepare for
                                           • Acquire UK retail   • Focus on Offshore      launch
                                             fund manager          funds in Europe


                                           • Organic growth of   • Acquire to           • Develop to
                                             offshore funds        build position         prepare for
                         Asia
                                             across Asia         • Build alliance         launch
                                           • Build alliance in     in Japan
                                             Japan               • Exit Australia
                                           • Exit Australia

                                                    Retail             Institutional          401K/DC
                                                                        Product


                                The Asset Management Business would need to embark on an
                                aggressive and capital intensive acquisition program to build
                                    dominant and sustainable positions in core markets.


         Given the risk involved, selling the Asset Management division was recommended

                                                                                                               75
 Source: XYZ & Company Experience Centre
XYZ M&A                                                                                          Case Example - AMD
                                                                                    Management Selling Presentation (1)
The XYZ team helped the management prepare the selling presentations to the
investors.
                                  LGT Asset Management
                                  A Member of Liechtenstein Global Trust
                                                                                                                   Asset Forecast

                                                                            AMD
                           Asset growth is forecast to come from across the business.


                                       100
                          Assets
                        ($ Millions)                                                                                       78
                                                                                                               2    3
                                                                                             2      2
                                         75                                     7   1
                                                                   6
                                                     56

                                         50



                                         25



                                           0
                                                  1997              A       B
                                                                    Inst. Retail    C      D
                                                                                    Inst. Retail   EInst. Retail Frankfurt 2002
                                                                                                           F       G
                                                                           US           Europe          Asia

                         Note: 1997 is based on 10+2 forecast                                                                     99


                                                                                                                                       76
 Source: XYZ & Company Experience Centre
XYZ M&A                                                                                        Case Example - AMD
                                                                                  Management Selling Presentation (2)


                                                                                                           Core EBITDA Forecast

                        EBITDA is forecast to reach $200M over the next 5 years.

                                      250                                                                         $ 20 M
                                                                                                  $ 15 M
                    Core
                    EBITDA                                                                                                               $ 201 M
                    ($ Millions) 200                              $ 116 M
                                                                                                                               $ 201 M
                                                                                 ($ 39 M)
                                      150


                                      100          $ 88 M



                                        50


                                          0
                                                  1997            Revenue            IT            Productivity     CDSC        Other     2002
                                                 EBITDA            Growth       Investments       Improvement      Reduction             EBITDA

                      Note:   1997 is based on 10+2 forecast
                              Other includes bonus adjustment from profit sharing scheme ($35M)                                               106



Source: XYZ & Company Experience Centre                                                                                                             77
XYZ M&A                                                                                                 Case Example - AMD
                                                                                                          Bidder Evaluation
Detailed analysis of likely integration benefits identified ‘Company C’ as
the parent that would put the highest value on the client’s business.

                           2,000
   Net Present
   Value                                      Strategic Premium
                                              Revenue Synergy
                                                                     $1,529M                  $1,538M
                           1,500            $1,486M

                                                                                                         $1,248M
                                             Cost
                                            Synergy                                                                  $985M
                           1,000             Bain Cost
                                            Adjustment**




                              500           Management
                                               Plan*




                                  0
                                         Company A                 Company B                Company C   Company D   Company E


Notes: *Includes XYZ Revenue adjustment of ($254M) to reflect forecast fee rate decline
                                                                                                                                78
     **XYZ Cost adjustment varies across bidders to reflect strength of management in cost reduction
       NPV calculated using 5-year 14% discount rate and $561 M terminal value
XYZ M&A                                                                                                      Case Example - AMD
                                                                                                         Bidder Evaluation - Model
The analysis combined a re-evaluation of AMD business, a synergy
analysis by bidder and an estimation of strategic premium which bidders
would be ready to pay.
              AMD Purchase Value by Buyer                                                                       All figures in US$M
            Key Assumptions
            Discount Rate                         14%     percent
            Tax rate                              25%     percent
            Pay off equivalent                       1    year
            AUM                                   54.5    Billion
            Price adjustment                      (3%)     percent on top of -1%
                                             Stand
            Valuation                                          A              B             C              D               E
                                             alone
            AMD Plan                            1,090           1,090              1,090        1,090          1,090           1,090
            Revenue Adjustment                   (254)          (254)              (254)        (254)          (254)           (254)
            Cost Adjustment                        157            157                157          157              94              78
                 % achieved                     100%            100%               100%         100%            60%             50%
                 XYZ upside to client plan         157            157                157          157            157             157
                 Cost cut                            49             49                 49           49             49              49
                 Cost cut %                       17%            17%                17%          17%            17%             17%
            Cost synergies                         -              288                342          505            262               11
                 Cost cut                          -                67                 79         116              60               5
                 Cost cut %                        -             28%                33%          48%            25%              2%
            Revenue Synergies                      -              105                114          -                36            -
                 New markets                       -              -                  114          -              -               -
                 Brokerage                         -              105                -            -                36            -
             Strategic Premium                     -              100                  80           40             20              60
              Maximum Value                       992           1,485          1,528            1,537      1,247                985
            Difference from highest               (545)             (52)              (9)          -            (290)           (552)
            Percent of AUM                        1.8%             2.7%             2.8%         2.8%           2.3%            1.8%
              Percent in bid                      86%            73%                70%          73%        77%              84%
                  Base plan                       90%            90%                90%          90%        90%              90%
                  Price Adjustment               100%           100%               100%         100%       100%             100%
                  Operating Improvement           80%            80%                80%          80%        80%              80%
                  Cost synergy                    50%            50%                50%          50%        50%              50%
                  New Markets synergy             10%            10%                10%          10%        10%              10%
                  Brokerage Synergy               40%            40%                40%          40%        40%              40%
                  Strategic Premium               50%            50%                50%          50%        50%              50%
              'Realistic' Bid                     852           1,088          1,074            1,124           957             825
            Difference from highest               (272)             (37)             (50)          -            (167)           (300)
            Percent of AUM                        1.6%             2.0%             2.0%         2.1%           1.8%            1.5%

                                                                                                                                        79
     XYZ M&A                                                                                                                         Case Example - AMD
                                                                                                                                    Synergy Methodology
      Synergies from merging AMD with a potential bidder can be evaluated by
      examining each segment of the value chain separately.


                                                                                                     Corporate Overhead
                                                                                                 Business Unit Overhead


                                                         Manufacturing                                     Administration                             Marketing




•   Function             •   Corporate Centre                •   Investment Management           •   Administration                 •   Marketing and sales         •   Business Unit Overhead
•   Description          •   Central Management Human        •   Investment Managers             •   Portfolio accounting           •   Retail Marketing teams      •   Office costs
                             Resources                           Economists                          Fund administration                Client Servicing teams          IT support
                             Finance                             Dealers                             Transfer agencies                  Institutional Marketing         Local HR
                             Audit                               Research & support                                                     teams                           Local accounting

•   Rationale            •   Combining to similar sized      •   Investment management           •   Administration is mix of       •   Combining under one         •   Combining facilities enables
                             companies should result in          teams are largely fixed cost.       systems and variable labour.       brand eliminates ad spend       closure of offices and
                             significant economies of            Two operations with                 Can rationalise centres and        and rationalisation of          economise of scale
                             scale. Anticipate significant       identical teams should be           systems; some impact on            marketing teams                 amongst support functions
                             savings                             able to ‘cherry-pick’               headcount
                                                                 managers
•   Impact                   •   80-90%
    (Cost savings on                                             •   50-80%                          •   50-60%                         •   50-75%                      •   80-100%
    smaller operation)




                                                                                                                                                                                        80
 XYZ M&A                                                                       Case Example - AMD
                                                               Business Unit Synergies - Company C

                         Client                                  Company C                                                       Synergy
       Location     Office   Overhead     Office                                                                 Overhead
                     Size                            Description of activities                                                       Rationale
                             Costs ($M)    Size                                                                   Saving

North America
  • New York
  • San Francisco                              Retail client sales & service                                           Close Company C office

  • Toronto                                    Acquired Canadian operation in 1996 (5 offices)                         Rationalise office

  • Other                                      Major operations in Houston, Atlanta (c400) & Denver                    Opportunity to reduce number of
                                               (c400)                                                                  centres
                                               Regional offices in Boston, Louisville, Dallas, Miami, Portland


Europe
  • London                                     Regional head office                                                    Fold into Alban Gate

  • Frankfurt                                  Marketing office (opened 1997)                                          Close Company C office
                                               Offshore admin in Luxembourg
  • Dublin                                                                                                             Merge operations
                                               Offices in Paris, Milan (1996), Netherlands (1996) ,
  • Rep offices                                Jersey and Prague
                                                                                                                       Remove duplication e.g Netherlands

Asia
   • Hong Kong                                 Marketing team, investment management (c50 people)                      Merge operations

   • Tokyo                                     Marketing team, investment management                                   Merge operations

   • Sidney                                    Rep office                                                              Merge operations

   • Singapore                                 Rep office                                                              Merge operations

                                                                                                                       Combine rep offices in Taipei
   • Rep offices                               Taipei (1988), Bermuda, Buenos Aires (1996)



                                                                                                                                                       81
XYZ M&A                                                             Case Example - AMD
                                                    Manufacturing Synergies - Company C

                                Client                       Company C                            Synergy
    Asset Class        Assets    Staff   Costs   Staff        Comments              Cost     Rationale
                        ($B)             ($M)                                      Saving

Equity
  • Global               1        5?                     London / US offices?               Adopt AMD team
  • US                  25        66                     Houston, Denver, Boston            Close Chancellor operation
  • UK                   2         5                     London                             Combine both in one location
  • Germany              1        17                     London (?)                         Adopt AMD team ?
  • Europe               4        11                     London (?)                         Adopt AMD team ?
  • Asia                 5        25                     Hong-Kong                          Combine both in one location
  • Australia            1         4                     Hong-Kong (?)                      Adopt AMD team ?
  • Japan                2        10                     Tokyo                              Combine both in one location
  • Emerging markets     2         3                     London (?)                         Adopt AMD team ?


Fixed Income
  • Global                 3        5                    London                             Combine both in one location
  • US                    11       30                    Houston, Denver, Boston            Close Chancellor operation




Other
• Alternative Assets              12                                                        No impact
• Other                            3                                                        No impact
• Realty                                                 Houston, Denver, Boston            No impact




                                                                                                                    82
   XYZ M&A                                                                            Case Example - AMD
                                                                            Product Synergies - Company C


                                               Client                                Company C                                  Synergy
Business /            Product Range           Assets Marketing Admin                                                 Cost
Market                                                                                                                          Command
                                                $B   Cost $M Cost $M                                                Saving

Funds
   • US          • US Mutual funds                                     • 68 funds; intermediaries & direct ($94B)            Consolidate operations

   • Canada      • Canadian mutual funds                               • 14 funds through intermediaries ($1B)               Consolidate operations

   • UK          • UK Unit Trusts / Inv. Trusts                        • 23 Unit trusts ($7B)                                Consolidate operations

   • Germany     • German retail funds                                 • None (?)                                            Consolidate operations

   • Europe      • Offshore funds                                      • Offshore funds to F, I & NL ($2B)                   Consolidate operations

   • Hong Kong   • Offshore funds                                      • Funds in Hong Kong / Taiwan ($4B)                   None

   • Australia   • Australia unit / master trusts                      • None (?)                                            None

   • Japan       • Japan investment trusts                             • 33 Investment Trusts ($2B)                          Consolidate operations

Segregated
   • US          • Discretionary accounts                              • US pension funds ($45B)                             Close Chancellor operation
   • Europe      • Discretionary accounts                              • UK pension funds (across Europe?)                   None
   • Asia        • Discretionary accounts                              • Small Hong-Kong pension operation                   Close AMD operation
   • Japan       • Discretionary accounts                              • Japan pension accounts                              Consolidate operations


 Defined                                                               • 401K operation incl. admin ($33B)
 Contribution


                                                                                                                                               83
   XYZ M&A                                                                                              Case Example - AMD
                                                                                                 Soft Synergies - Company C


                         Client                                    Company C                      AUM                   Synergy
Business /            Product Range                                                              Upside
Market                                                                                                                  Rationale

Funds
   • US          • US Mutual funds                  • 68 funds; intermediaries & direct ($94B)            Share channels e.g. wirehouses
   • Canada      • Canadian mutual funds            • 14 funds through intermediaries ($1B)               Best product through both channels
   • UK          • UK Unit Trusts / Inv. Trusts     • 23 Unit trusts ($7B)                                Best product through both channels
   • Germany     • German retail funds              • None (?)                                            None
   • Europe      • Offshore funds                   • Offshore funds to F, I & NL ($2B)                   Best product through both channels
   • Hong Kong   • Offshore funds                   • Funds in Hong Kong / Taiwan ($4B)                   Best product through both channels
   • Australia   • Australia unit / master trusts   • None (?)                                            None
   • Japan       • Japan investment trusts          • 33 Investment Trusts ($2B)                          Limited

Segregated
   • US          • Discretionary accounts           • US pension funds ($45B)                             AMD international product through Company C relationships
   • Europe      • Discretionary accounts           • UK pension funds (across Europe?)                   Limited; strengthen pan-European operation
   • Asia        • Discretionary accounts           • Small Hong-Kong pension operation                   Limited
   • Japan       • Discretionary accounts           • Japan pension accounts                              Limited


Defined                                             • 401K operation incl. admin ($33B)
Contribution


                                                                                                                                                       84
XYZ M&A                                               Introduction
                                                           Agenda


          •   Trends in M&A
          •   Guiding Principles for Successful M&A
          •   XYZ Approach
          •   Case Examples
                –   screening
                –   due diligence
                –   sale
          • Exercise on Synergy Calculation
          • Typical Watchouts
          • Key Takeaways

                                                                85
 XYZ M&A                                                                                                                        Exercise
                                                                                                                             Background


               • XYZ was hired to help a Private Equity Fund which wanted to get
                 involved in consolidating the Garden Furniture industry (see note) in the
                 UK
                   – the purchase of 2 companies and the realization of synergies
                     between them is expected to create significant value above the
                     investment required
               • One of the major exercises in this project involved quantifying the net
                 value creation arising from synergies between potential target
                 companies
               • The approach followed by the team is shown in the Approach slide




                                                                                                                                     86
Note: This exercise is based on a real case. However, for confidentiality purposes, the actual industry has been disguised
XYZ M&A                                                                            Exercise
                                                                                Background
Most players in the Garden Furniture industry create value along the
following “value chain.”

                              Corporate Activities


                                                                          Sales &
         Purchasing          Manufacturing           Distribution
                                                                         Marketing


   • Raw materials    • Factories are      • There are 5 major • The Garden
    include mainly     typically located    channels                Furniture market is
                       across the UK                                national
     – wood                                  – DIY   shops
     – plastic                               – specialist
                                              retailers
                                             – builders
                                              merchants
                                             – private
                                             – public



                                                                                          87
XYZ M&A                                                                                 Exercise
                                                                                       Approach
Having selected 4 candidates, synergies were evaluated between
each combination of 2 players to determine the optimal scenario.


                                Potential
         Selection                                   Synergy               Integration of
                               Sources of
         Process                                    Evaluation                Results
                               Synergies


  • Select key         • Analysis of the    • Evaluation of         • Integration of
   consolidation        potential and        hard and soft           synergy valuation
   players based on     specific sources     synergies for           results
   first cut:           of synergies:        each combination       • Conclusions on
    – size               – hard              of 2 candidates         best potential
    – product mix        – soft                                      consolidation
    – geographic mix     – soft-soft
    – availability



   already done, 4                          focus of the exercise
      candidates
       selected
    (S,P,B and G)
                                                                                              88
 XYZ M&A                                                                                                        Exercise
                                                                                                  Background - ROS/RMS

 Given the large number of players performing with low relative channel
 share, there exists potential for consolidation in the industry.
                25%
                                                                                                             R² = 74%        £ 60M
Return on
                                                                                                                              1997
Sales      20%                                                                                                              Revenues
(Operating
Profit/
Turnover) 15%


                                                                                                         Leader
                10%

                                                   G           S
                  5%

                                 P                      B

                  0%


                (5%)
                       0.1                   0.2                           0.5            1          2                  5

                                                                        Relative Channel Share*

*Note: Relative Channel Share is the weighted average relative market share by channel;                                         89
ROS based on three year average to 1996/97, as available
Source: FAME; Company Accounts; Information Memoranda; MBD Report; XYZ analysis
XYZ M&A                                                                                       Exercise
                                                                        Background- Revenue by Product

Available players with a focus on Garden Furniture were selected.
                                £85.1M                      £21.1M         £105.2M     £35.0M
             100%

Percent of                                                    Other                                Click Here for
                                 Other                                      Other
Total Sales                                                                             Other         Back-up
               80%



               60%


                                                             Garden
               40%              Garden                      Furniture       Garden
                                                                           Furniture    Garden
                               Furniture                                               Furniture

               20%



                0%
                                   S                            P             B           G




Note: There is no overlap between players other than Garden Furniture                                      90

Sources: Information memorandum
XYZ M&A                                                              Exercise
                                    Question 1 - Typical Sources of Synergies

Using your knowledge of synergies, fill in types of synergies that
should be considered for hard, soft and soft-soft synergies.



               Hard                     Soft                 Soft-Soft


     •   Raw material           •                      •
         purchasing
                                •                      •
     •
                                •                      •
     •
                                •                      •
     •
                                •                      •
     •



                                                                          91
XYZ M&A                                                                  Exercise
                                          Answer 1 - Typical Sources of Synergies



              Hard                             Soft                      Soft-Soft

                                      In-Market     At Centre
   • Raw Material Purchasing • Portfolio clout • Best Practice       • Leveraging scarce
                                                      Sharing         specialist management
   • Manufacturing                • Avoiding                          talent at the Centre
    Rationalisation e.g., plant    margin erosion   • New Product
    closure                        due to higher      Development    • Leveraging scarce local
                                   power to                           knowledge
   • Distribution consolidation    buyers           • New business
                                                      development
   • Sales & Marketing            • Improved
     – media purchasing            category
     – salesforce efficiency       management

   • Headquarters/Overhead
    sharing

                                                                                             92
XYZ M&A                                                                      Exercise
                                                                 Sources of Synergies

For this example, the following specific sources of synergies were identified.

                   Hard                                          Soft


                                                Channel                     Portfolio
                                             Complementarity             Strengthening

        • Consolidation of salesforces    • Volume enhancements • More powerful portfolio
        • Consolidation of distribution     – in each distribution
                                                                      addresses the balance
        • Reduction in corporate and          channel, the weaker
                                                                      versus major distributors
          regional overheads                                          allowing consolidation to
                                              player will benefit
        • Consolidation of research and       from the other
                                                                      redefine customer
          development functions of                                    relationships to
                                              player’s distribution
          overlapping products                                         – realize cost efficiencies
                                              strength
        • Raw materials purchasing                                     – resist price pressure
          savings                         • Enhanced distribution      – grow share
        • Rationalisation of production     penetration                – invest more/account
          of overlapping product                                       – maintain more
                                                                         consistent prices
                                                                    • Growing share of account

                                                                                              93
XYZ M&A                                                             Exercise
                      Question 2 - Hard Synergy Quantification Example - S+P

Taking the example of the combination of S and P, we want to evaluate the
hard synergies achievable. The purpose of Question 2 is to use the
attached data to fill in the template below.
                                         Cost Synergy (£ 000s)

• Manufacturing                           £


• Materials Purchasing                    £


• Distribution                            £


• Sales & Marketing                       £


• Headquarter Consolidation               £


  Total                                   £
                                                                            94
 XYZ M&A                                                                                  Exercise
                                             Question 2 Data - Hard Synergy Quantification Method
  Brainstorming, “rules of thumb” and competitive interviews often
  enable one to get a good sense of basic input to the synergy model in
  terms of cost synergies.
                                                                    Materials                                            Sales &          Headquarters
                                    Manufacturing                                              Distribution
                                                                   Purchasing                                           Marketing         Consolidation

       Sources of                   consolidate                 increase raw                  improve smaller        consolidate          reduce smaller
       Integration                  manufacturing               material                      player's               smaller player's     player's back
       Savings                      facilities                  purchasing                    distribution cost in   sales & marketing    office
                                    dependent on                leverage                      overlapping            in overlapping
                                    current capacity                                          channels               channels
                                    utilisation

       Target Cost                           5%                          2%                         10%                    50%                  80%
       Savings

       Applied To                   combined entity             combined entity               smaller entity, by     smaller entity, by   smaller entity
                                                                                              channel                channel

       Key Data Input               sales by product*           sales by product*             sales by channel       sales by channel     sales by channel

       Timing of
       Realisation                        3 years                      1 year                      1 year                 3 years             3 years
       Delay **



Note: * In this exercise, players product sales overlap in garden furniture
      ** For this exercise, full impact on today’s EBIT is considered, rather than full NPV                                                                  95
      calculation
Source: XYZ experience; Industry interviews
 XYZ M&A                                                                                        Exercise
                                                               Question 2 Data - Candidates’ Cost Profiles

 The analysis of company accounts and other information available
 allowed the team to find the cost structure of each candidate.
                                                £85M               £21M    £105M    £35M
                             100%
            Percent                         Operating Profit
            of Total
                                            Other Overhead
            Sales                            Administration                                    Click Here for
                               80%         Sales & Marketing                                   Back-up Data
                                             Distribution



                               60%          Manufacturing




                               40%

                                              Raw
                                             Materials
                               20%



                                 0%
                                                   S                   P    B        G


Note: Sales and cost information are best estimates for 1997/98                                             96
Source: Company accounts; Information memorandum; FAME; XYZ analysis
 XYZ M&A                                                                                     Exercise
                                                    Question 2 Data - Candidates’ Distribution Profile

 The 4 potential candidates’ distribution profiles vary significantly.

                                     £85 M                      £21 M      £105 M   £35 M
                   100%                                                                      Click Here for
      Sales %                                                                                Back-up Data
                                    Social


                    80%


                                   Private
                    60%


                                Builders Merchant
                    40%


                                 Specialists
                    20%


                                      DIY
                      0%
                                         S                             P      B        G

Note: Sales and cost information are best estimates for 1997/98                                       97
Source: Company accounts; Information memorandum; FAME; XYZ analysis
XYZ M&A                                                                                                  Exercise
                                                                                        Question 2 - Methodology

Cost synergies are to be realized in areas of duplication between the current
activities of the businesses to be combined.

          Input
          Overlapping manufacturing, purchasing

          Overlapping costs of distribution, sales and
          marketing

          Dual head-office                                                                      Synergy
                                                                                                How much synergy is
          Related Costs                                                                         expected from combining
                                                                                                both entities?
          Assumptions
          Based on interviews and XYZ
          experience, how will synergies be
          realized




Note: Detailed analysis may be required depending on the need of the case. This would include a detailed                  98
      cost analysis e.g., cost of employees per function, factory cost breakdown, factory locations, etc
 XYZ M&A                                                                                  Exercise
                                                       Answer 2 - Hard Synergies Model Example S+P



                                                                          S+P                            Cost
   Area of synergy              S cost*             P cost*           combined cost    Synergies       Reduction Applied to
Production                       11,047               2,388              12,999             650               5% combined entity
Materials                        34,745               7,520              40,889             818               2% combined entity
Distribution                      8,486               1,948               8,505             195        see below
Selling & Marketing               3,437                789                3,299             395        see below
Admin                             2,636                607                2,713             486             80% smaller entity
TOTAL                                                                                      2,543


Distribution                      8,486               1,948                                     195

split by channel (based on revenue split) using % split of revenues
DIY                                364                   -                                        0         10%   smaller entity, on a channel-by-channel basis
Specialists                      2,893                   140                                     14         10%   smaller entity, on a channel-by-channel basis
Builders Merchant                  364                   140                                     14         10%   smaller entity, on a channel-by-channel basis
Private Contract                 3,062                 1,485                                    149         10%   smaller entity, on a channel-by-channel basis
Social                           1,803                   183                                     18         10%   smaller entity, on a channel-by-channel basis

Selling & Marketing               3,437                789                                      395

split by channel (based on revenue split) using % split of revenues
DIY                                147                   -                                      -           50%   smaller entity, on a channel-by-channel basis
Specialists                      1,172                    57                                     28         50%   smaller entity, on a channel-by-channel basis
Builders Merchant                  147                    57                                     28         50%   smaller entity, on a channel-by-channel basis
Private Contract                 1,240                   601                                    301         50%   smaller entity, on a channel-by-channel basis
Social                            730.5                  74.0                                   37.0        50%   smaller entity, on a channel-by-channel basis




Note: Costs for Garden Furniture have been prorated to total sales cost breakdown for cost by                                                       99
channel, percentage of revenue by channel was used
XYZ M&A                                                          Exercise
                                   Question 3 - Soft Synergy Quantification

Again using S + P combination, the question is to evaluate the potential
soft synergies as shown below. Use attached data for this question.


                               (£ M)


Channel
Complementarity:




Portfolio
Strengthening:




                                                                           100
 XYZ M&A                                                                            Exercise
                                        Question 3 Data - Soft Synergy Quantification Method
 Revenue benefits will depend on each player’s relative distribution
 strength in each channel. XYZ experience enabled the team to
 quantify the impact of a combined distribution on the revenues.


                                       h
                                       an
                                        n
                                       Cle                                 o
                                                                          Pori
                                                                            t
                                                                            fl
                                                                             o                  o
                                                                                               Pori
                                                                                                 t
                                                                                                 fo
                                                                                                  l
                                  t g Cm
                                  r
                                  S
                                  on   e r
                                      ma
                                      o et
                                       l n
                                       p tyi                              t gn
                                                                          Sh
                                                                           n g
                                                                          ee n
                                                                          rt i                 rt i
                                                                                               ee
                                                                                               Sh n
                                                                                               t gn
                                                                                                n g
                                       20
                                        %
                                       ( )                                 ()
                                                                            1
                                                                            %                    2
                                                                                                 %
                                                                                                ()



    Player 1 Relative                h
                                     a
                                     Cl
                                      n
                                      ne                                   o
                                                                          Pori
                                                                            t
                                                                            fl
                                                                             o                  o
                                                                                               Pori
                                                                                                 t
                                                                                                 fo
                                                                                                  l
      Distribution               d
                                 e
                                 M
                                 i   l n
                                     e r
                                  m o et
                                  u Cm
                                     p ty
                                    ma   i                                t gn
                                                                           n g
                                                                          Sh
                                                                          ee n
                                                                          rt i                 t gn
                                                                                               ee
                                                                                               rt i
                                                                                               Sh n
                                                                                                n g
        Strength                     10
                                      %
                                     ( )                                   (%
                                                                           05
                                                                            .)                   1
                                                                                                 %
                                                                                                ()



                                                                          h
                                                                          an
                                                                           n
                                                                          Cle                   Cl
                                                                                                h
                                                                                                an
                                                                                                 ne
                                    e
                                    W
                                    k
                                    a                   Nt
                                                        o
                                                        Up
                                                         l
                                                         i
                                                         f               Cm
                                                                          p ty
                                                                         ma
                                                                         o et
                                                                          l n
                                                                          e r i                 p ty
                                                                                               ma
                                                                                               o et
                                                                                               Cm
                                                                                                l n
                                                                                                e r i
                                                                          10
                                                                           %
                                                                          ( )                   20
                                                                                                 %
                                                                                                ( )


                                                          e
                                                          a
                                                          k
                                                          W                  M
                                                                             e
                                                                             d
                                                                             im
                                                                              u                 tg
                                                                                                r
                                                                                                o
                                                                                                Sn
          A
          p
          p
          lr
          is
          e
          d
          t
          o
          b
          oh Player 2 Relative
           p
           l
           a
           y
           e
           t
                                                                       Distribution Strength
          A
          p
          p
          la
          iy
          e
          d
          t
          o
          s
          ma
           l
           l
           e
           r
           p
           l
           eo
            n
            l
            y
            r

Note: Sales and cost information are best estimates for 1997/98                                         101
Source: Company accounts; Information memorandum; FAME; XYZ analysis
 XYZ M&A                                                                                              Exercise
                                                                       Question 3 Data - Revenue Uplift Quotes
 Revenue uplift would be achieved in combining businesses for 2 major
 reasons, depending on the specific situation: channel complementarity or
 portfolio strengthening.

 Channel                             "Our current focus is on only a few channels. The obvious growth for
 Complementarity:                    us would be to start going into others, but only if we had good access
                                     to them"
                                                                           –Operations Manager, Competitor




 Portfolio                           "Competitor X are very well known, and their brand has been a key lift
 Strengthening:                      for its acquired company"
                                                                                    –Sales Director, Retailer


                                     "I think G believe that by buying [target] some of their reputation could
                                     rub off onto G’s own [products]... [target] is a good name"
                                                                             –Marketing Manager, Competitor




Note: Sales and cost information are best estimates for 1997/98                                                  102
Source: Company accounts; Information memorandum; FAME; XYZ analysis
XYZ M&A                                                            Exercise
                                            Question 3 Data - UK Market Map
                                                                     (1997)
The UK market for Garden Furniture is mainly channelled through DIY stores.

                     G                                                         £23M
                         S
                             £353M        £135M         £120M   £70M £51M                Total = £750M
              100%
                             Other                               Other
                                                                  B
 Percent of
 Total                                    Other                          Other
                80                    P
                                                                  P
                                            B           Other
                60             B           G                               P


                                                                           S
                                                    P
                40                                      S

                                           S
                             Leader                         G
                20
                                                                  S


                0
                              DIY     Specialists       BMs     Private          Other
                                                                         Public



                                                                                                         103
XYZ M&A                                                              Exercise
                                Question 3.1 - Relative Distribution Strength
In order to select the appropriate type of soft synergies and potential sales
uplift, you would need to determine the relative distribution strength of each
candidate, by channel.

                       S        P         B        G              Key
                                                              Strong
      DIY
                                                              Medium
      Specialists
                                                              Weak
      BMS

      Private

      Public




                                                                                 104
XYZ M&A                                                            Exercise
                                Answer 3.1 - Relative Distribution Strength

Looking at the market map gives a straightforward answer to the relative
distribution strength of each candidate. In a less simple case, RMS could be
used by channel.


                       S        P        B        G            Key
                                                            Strong
       DIY
                                                            Medium
       Specialists
                                                            Weak
       BMS

       Private

       Public




                                                                               105
 XYZ M&A                                                                                                  Exercise
                                                                            Answer 3 - S+P - Soft Synergy - Answer
 Using the soft synergy assumption framework and knowing each player’s
 relative distribution strength, it is simple to calculate the incremental revenue
 due to synergy in the combined entity.
                                                                           Type of                S Revenue*     P Revenue*     Synergy
                          S Strength           P Strength
                                                                           Synergy                Base (£000s)   Base (£000s)   (£000s)

 DIY                                                                None                               –             –             –


                                                                    Channel complementarity
 Specialists                                                                                         29,987        1,061          106
                                                                    10% uplift for smaller
                                                                    player

 BMS                                                                None                               –             –             –


 Private                                                            Portfolio strengthening                                       366
                                                                                                     25,382        11,236
                                                                    1% uplift on total combined


 Public                                                             Channel complementarity
                                                                    10% uplift for smaller           14,950         1,381         138
                                                                    players

 Total
                                                                                                                                  610
                                                                                                                                  244
    – Channel complementarity
                                                                                                                                  366
    – Portfolio strengthening

Note: Revenues have been pro-rated to the share A Garden Furniture Sales                                                               106
  XYZ M&A                                                                                                 Exercise
                                                                                  Summary Answer - S+P Combination



        14                                                                                                                      Not quantified
EBIT                                                                                                £0.3 M            £0.3 M                               £13 M
                                                                   £0.6 M         £0.5 M                                                                 Revenue Uplift
(£ M)                                           £0.7 M
        12
                               £0.8 M                                                                                                                Cost Savings
                 £10 M
        10
                   P

         8
                                                                                                                                                                                   30%
         6                                                                                                                                               Combined                  EBIT
                                                                                                                                                           Entity
                                                      Cost Savings                                     Revenue Uplift                                                              Uplift
                   S
         4

         2

         0
                   1.               2.              3.                  4.            5.                6.              7.               8.                9.
                  Pre-           Materials     Production        Salesforce &    Headquarters        Portfolio       Channel      Other Strategic    Post-Synergy
               Combination   Purchasing Scale Scale Benefits      Distribution   Consolidation    Strengthening   Complementarity    Benefits         Realization
                  EBIT           Benefits                        Consolidation                                                                           EBIT



Key Drivers:                    •Overlapping    •Production                        •Overhead        •Sales in each    •Sales in each    •Other              •Reality check
                                 materials       costs for all                      costs for        channel           overlapping      benefits             against rules
                                 purchasing     overlapping                        overlapping      increased due       channel           –qualitative       of thumb
                                costs reduced    products                          geographical      to product        improved due       (capability
                                                 reduced                           sales of all     complimentarity    to increased        sharing,
                                                                                    products                            market            knowledge
                                                                                    reduced                             presence           transfer,
                                                                                                                                           etc.)




                                                                                                                                                                             107
XYZ M&A                                                            Exercise
                                     Consolidation Benefits - UK Market Map
                                                                      (S+P)
A combination of S+P would dominate the public
channel but have minimal presence in DIY.
                  G                                                              £23 M
                      S+P                                                                  Total =
                            £353 M         £135 M      £120 M     £70 M £51 M              £750 M
           100%
Percent                      Other                               Other
                                                                  B
of Total
                                           Other                          Other
           80%

                                             B         Other
           60%                B              G




                                                                                   Other
                                                                           S+P

           40%
                                                        S+P
                                            S+P
                            Leader                      G
                                                                 S+P
           20%



            0%
                             DIY         Specialists    BMs     Private          Other
                                                                          Public


                                                                                              108
 XYZ M&A                                                                                                        Exercise
                                                                                                         S+P - ROS/RMS

 Consolidation of S+P’s positions would create significant ROS improvement
 thanks to the realization of synergies.
                25%
                                                                                                          R² = 74%        £ 60M
Return on
                                                                                                                           1997
Sales      20%                                                                                                           Revenues
(Operating
Profit/
Turnover) 15%

                                                                  S+P
                                                                                                      Leader
                10%

                                                   G
                  5%                                       B


                  0%


                (5%)
                       0.1                   0.2                           0.5            1       2                  5

                                                                        Relative Channel Share*

*Note: Relative Channel Share is the weighted average relative market share by channel;                                      109
ROS based on three year average to 1996/97, as available
Source: FAME; Company Accounts; Information Memoranda; MBD Report; XYZ analysis
 XYZ M&A                                                                                           Exercise
                                                                        Summary of Two-Company Combinations
 Analysis of all combinations enabled the XYZ team to highlight the best
 consolidation option. The S and B combination shows the highest hard as well as
 soft synergy potential. However, the difference of value created in each
 combination is limited. A close analysis of the practical aspects of each
 combination and ease of implementation is required as a next step.
                 Percent Change in
                  Operating Profit                      S                            P                            B               G

                           S                                                      26%                          31%                28%

                           P                   23%            3%                                               25%                28%

                           B                   27%            4%           25%             1%                                     27%

                           G                   25%            3%           26%             2%           24%             3%



                                                            Hard Synergy                 Soft Synergy




*Notes:   More refined synergy analysis using the measure of product complementing was used in the project, which makes figures         110
          different from that of the exercise
XYZ M&A                                                                              Exercise
                                                                                 Back-Up Data

          Total Revenue Breakdown
          (£000s)                            S       P         B         G
          Total Sales                       85,140   21,110   105,200   35,040

          Cost breakdown
          Production                        13,370    3,420   17,730     3,940
          Materials                         42,050   10,770   55,770    18,450
          Distribution                      10,270    2,790   11,600     4,580
          Selling & Marketing                4,160    1,130    4,500     1,860
          Admin                              3,190      870    3,700     1,420
          Other                              3,040      830    3,600     1,350

          Total Garden Furniture Revenues   70,350   14,740   77,130    27,100



          Revenue Breakdown by Channel
                                             S        P       B          G
          DIY                                   4%       0%     90%         5%
          Specialists                          34%       7%      7%        65%
          Builders Merchant                     4%       7%      0%        30%
          Private Contract                     36%      76%      3%         0%
          Social                               21%       9%      0%         0%
          Total Revenues (£000s)            85,140   21,110 105,200     35,040



                                                                                           111
XYZ M&A
                                                      Agenda


          •   Trends in M&A
          •   Guiding Principles for Successful M&A
          •   XYZ Approach
          •   Case Examples
                –   screening
                –   due diligence
                –   sale
          • Exercise on Synergy Calculation
          • Typical Watchouts
          • Key Takeaways

                                                          112
XYZ M&A
                                                             Typical Watchouts
                                                                        (1 of 2)


Screening:       • Always start with an exhaustive list. Do not eliminate candidates
                   before applying rigorous screening criteria

                 • Remain open minded about companies’ availability. For instance,
                   do not take a “no, we are not for sale” quote a definite non-
                   availability

Due diligence:   • Typical analysis includes a thorough company “check-up” using
                   the complete range of basic XYZ strategic tools, from internal and
                   external perspectives




                                                                                 113
XYZ M&A
                                                                 Typical Watchouts
                                                                            (2 of 2)
Valuation:    • Full value quantification should include three steps:
                 –stand alone value: assuming current performance going forward. This
                  takes into account market dynamics factors
                 –stand alone operating improvement (or full potential): additional value
                  created by managing the entity better, e.g., according to BDPs
                 –integration opportunities: valuation of synergies (cost/“hard” synergies
                  and revenue enhancement/“soft” synergies) generated by the
                  combination of two businesses
Integration: • Carefully thought-of integration process is a major factor of success in
               M&A
             • Key success factors include early planning, constant communication,
               retention of key managers, aggressive sharing of corporate vision,
               respect for people and culture
             • Short-term objectives should be consistent with long-term goals
             • Swift changes are required and acquirer should avoid falling in the
               “hands-off” doom loop (drop in performance, pressure on acquiree,
               morale collapse at acquiree, lower performance…)
                                                                                      114
XYZ M&A
                                                      Agenda


          •   Trends in M&A
          •   Guiding Principles for Successful M&A
          •   XYZ Approach
          •   Case Examples
                –   screening
                –   due diligence
                –   sale
          • Exercise on Synergy Calculation
          • Typical Watchouts
          • Key Takeaways

                                                          115
XYZ M&A
                                                              Key Takeaways
                                                                      (1 of 3)

Trends:   • M&A activity has been booming over the past decade
            and has become a major part of corporate activities

          • Failure rate remains high however, driven by poor
            strategic fit, integration failure and overpayment.
            Prices (usually as earnings multiple) have been on the
            increase, making adequate consulting support
            increasingly important to the M&A process




                                                                            116
XYZ M&A
                                                                    Key Takeaways
                                                                            (2 of 3)


Guiding       • M&A should be thought of as an integral part of a company’s growth
Principles:     strategy
              • A clear and disciplined approach is vital to ensure success, including
                proactive strategic thinking; careful screening, due diligence and
                execution process; clear definition of full value
              • M&A opportunities should be prioritised against the value creation
                potential vs. parenting advantage
              • In order to ensure accurate evaluation of a company, the critical
                issues to consider are:
                  –relatedness: how much synergy can be generated by the merger?
                  –strategic strength: what is the full potential performance of the
                   acquiree?
                  –market dynamics: how attractive is the underlying industry? Will
                   the acquiree provide privileged access to an attractive sector?



                                                                                     117
 XYZ M&A
                                                                         Key Takeaways
                                                                                 (3 of 3)
Approach: • Major steps in an M&A in which XYZ may be involved are:
             –strategy development: should an acquisition be pursued? in which sector
              or region?
             –target screening: who is/are the best candidate(s) based on
              attractiveness and availability?
             –due diligence: how comfortable are we with the screening hypothesis?
             –valuation: what is the full value of the entity? what is the right price for it?
             –integration: how will we ensure that full value is achieved?

             • XYZ role is complementary rather than competing with other advisors’ role:
                –XYZ focuses on strategic issues and full value quantification
                –investment banks concentrate on the financial aspects of the deals:
                 market-related information gathering and analysis, valuation, deal
                 financial structuring, production of information memorandum, etc.
                –lawyers deal with legal matters, including due diligence at the time of the
                 transaction (confirming that the information memorandum reflects reality,
                 for instance)
                –accountants are occasionally involved in the deal structuring

                                                                                          118

				
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