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Mergers _ Acquisitions Overview - Solvability

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					Mergers & Acquisitions
      Overview

                    Tom Noojin
           Noojin Company, LLC
              Business Support
    Noojin Company, LLC
                             Distinction Between a
                          Merger and an Acquistion


Merger – two or more companies join together and re-
organize a new entity.

Acquisition – a buyer acquires the target company for
either cash or stock. The target company ceases to exist.


  The logic behind these business combinations is based upon the
  concept of ‘synergy’, where the perceived value of the combined
        entities is greater than the sum of the two (1 + 1 ≥ 2).



                                                                    2
 Noojin Company, LLC        Assumptions


Strategic Buyer – Generally in the
same or related line-of-business.


Financial Buyer – Normally consists of
an investor whose primary interest is
return-on-investment.

                                         3
    Noojin Company, LLC
                          Reasons for a Strategic
                              Acquisition/Merger

•    Geographic Expansion
•    Enhanced Scale
•    Client Acquisition
•    Cross-selling Opportunities
•    Broader Product or Service Lines
•    Access to New Technologies
•    Control of Patents or Other Intellectual Property
•    Retention of a Key Supplier or Customer
•    Enhanced Research and Development Capabilities


                                                         4
Noojin Company, LLC              Seller Considerations

Strategic Buyer
   •    Often pays more (cash and/or stock)
   •    Immediate realization of synergy
        q    Economy of scale
        q    Elimination of duplicate functions
   •    Target is integral to Buyer’s business plan
   •    Often relatively low-cost of capital

Financial Buyer
   •    Generally cannot exploit synergies
   •    Shorter time horizon
   •    Higher cost of capital
   •    Cash and seller notes generally only currency
                                                        Page 5
Noojin Company, LLC                          IDEAL Target



History of:
        •    Sustainable Level of Revenues
        •    Multi-year Contract(s)
        •    Stable Labor Force
        •    Profitability
        •    Revenue Growth
        •    Positive Cash Flow
        •    Audited Numbers



                                                        6
 Noojin Company, LLC




Once Target is Identified
  •    Perception of value always an issue
  •    Futures will always be part of discussion

Tools Often Used
  •    Comparable Companies
  •    Precedent Transactions
  •    Discounted Cash Flow Analysis (DCF)
  •    Proforma Analysis (including sensitivity analysis)


                                                            7
Noojin Company, LLC
                      Current Multiples (Public)
                               Services Sector

                            2011              2012

     Revenue Growth         10.3 %             6.8 %


     EBITDA                  9.3 %             9.4 %


     Price/Earnings          13 X              11.9 X


     EV/EBTTDA               7.1 X             6.3 X


Applying public multiples to private companies requires highly
                     subjective discounts.

                                                                 8
 Noojin Company, LLC                    Deal Structure


Taxes are a primary influence on structure.
Stock Sale
  •    Usually preferred by seller
  •    Buyer acquires all assets and liabilities
  •    Only taxed one time, when securities are sold

Asset Purchase
  •    Usually preferred by buyer
  •    Only negotiated liabilities assumed, if any
  •    Taxed twice, if not a pass-through entity
                                                       9
 Noojin Company, LLC                            Currency


Cash Buyout
  •    Simplest type of deal
  •    Target ceases to exist
  •    Creates an immediate taxable event for seller

Acquisition with Stock
  •    Target shares are tendered for buyer shares
  •    Transaction usually tax-free until shares are sold




                                                            10
Noojin Company, LLC                   Transaction Types

                      Consolidation Merger



         Company
            A

                                          Company
                                             C


         Company
            B



                 Generally, a tax-free transaction.
                                                      11
      Noojin Company, LLC
                                            Transaction Types,
                                                     continued
                      Forward Triangular Merger


                  Buyer                                Target




                                                    Shares Exchanged




               Subsidiar                            Subsidiary
               y of Buyer                            Survives




Subsidiary merger with target (seller): subsidiary survives, target is liquidated.
                                                                                 12
     Noojin Company, LLC
                                          Transaction Types,
                                                   continued
                     Reverse Triangular Merger



                 Buyer                              Target




              Subsidiar             Shares          Target
              y of Buyer          Exchanged        Survives



Buyer’s subsidiary merger into seller: target company is the surviving entity.

                                                                                 13
 Noojin Company, LLC
                            Economics of
                             Transaction


• Remove any emotional attachment
• Numbers must make sense
• Cost of capital + desired return =
  hurdle rate
• If you can’t exceed the hurdle rate,
  don’t do the deal


                                         14
    Noojin Company, LLC                   Current Project


 • Early stage services contractor
 • Patented IP
 • Fills very unique and sole source need
 • Cash for stock (C Corp)
               2011       2012    2013       2014      2015


Revenue         6.0       17.3    32.25      60.38    102.646


EBITDA         (1.0)      1.605   5.317      12.267   20.529

                                                              15
Noojin Company, LLC
                             Current Project,
                                  continued


 Terminal Value            $ 87.358

 PV Terminal Growth Rate   = 22.644

 NPV EBITDA                = 11,931

                           = 34,575   at 100%
 Enterprise Value
                           = 24,203   at 70%




                                                16
  Noojin Company, LLC
                                       Current Project,
                                            continued



               Terminal Growth Rate = 7.5 %

5 Yr. Terminal Value @ 8X EBITDA = 164,232 million

   Internal Rate of Return = 51.6 % compounded

                        Hurdle Rate = 18 %




                                                     17
  Noojin Company, LLC          Current Project, continued




                        Sales Price = $14 MM

                         At closing: $8 MM

3rd Year Proportional: $6 MM         (step transaction rule/interest)




                                                                        18
     Noojin Company, LLC




                              Local Transaction
                           Sales                $ 30 MM
                            Cash                $ 13 MM
                      Liabilities               $ 65 MM
                           Union

Solution:
    •       Talk seller into keeping $ 60 MM in pension retirement liabilities.
    •       Talk UAW into allowing an Aerospace Union in the plant (reduce
            wages by half).
    •       Talk seller into early retirement or retention of UAW workers.
    •       Simple!
            Purchased stock for $17 MM with $ 4 M of new equity input.
                                                                                  19
   Noojin Company, LLC          Use of Advisors


Should be engaged early in the process.
Buyers usually enter negotiations with a full staff
of supporting professionals.
   • Attorneys
   • Accountants
   • Commercial Bankers
   • Investment Bankers


                                                      20
    Noojin Company, LLC         Typical Considerations

•      Tax advice at the Letter of Intent stage
•      338(h)(10) Election
•      Loss disallowance rule
•      Applicable high-yield discount obligation
•      Continuity of interest requirement
•      Continuity of business enterprise requirement
•      Step transaction
•      Due Diligence
•      Money laundering
•      OFAC
•      Chicago Crime Commission
                                                       21
    Noojin Company, LLC         Investment Bankers


•      On point experience
•      Interview several
•      Size of firm should fit size of transaction
•      Understand fee structure and minimum fees
•      Not all are equal; check references
•      Engagement letter generally full of problem areas




                                                           22

				
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posted:1/19/2014
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