Historical Financials Pro Forma for Bell South and At by nlw42240


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									Preparing Your Company for Sale
By Thomas J. Wilson

There are five action items that a board should consider to bolster its company’s value and to
improve the sales process.

                              ebt is          This data and other empirical and         it is certainly crucial in private equity
                              a vital         anecdotal evidence suggest that,          transactions and is the prime factor
                              component       absent a major global economic or         in most deals. Most transactions
                         for most M&A         political crisis, the year 2010 and       are priced based on a multiple of a
                         activity and the     beyond should see an increase in          company’s earnings before interest,
                         rise and fall of     M&A activity. It is unlikely, however,    taxes and amortization, or “EBITDA.”
                         M&A activity         that the hyperactive price bidding        However, companies in certain
                         has been             and manic auction process of the past     industries may be valued based on
                         directly related     will return soon, if at all. Therefore,   revenue, unique website visitors, order
        Thomas J. Wilson to the vitality of   any company contemplating putting         backlog or the uniqueness and/or
the credit markets. The availability of       itself up for sale or seeking to divest   value of inventory. Still, in most cases,
easy credit fueled the M&A bonanza            itself of a major division should         an acquirer will carefully scrutinize
from 2003 through the credit crash of         consider taking certain actions that      a target’s financial data and through
2008, just as the demise of Lehman            could enhance its attractiveness to a     pro forma adjustments ascertain the
Brothers froze credit markets and sent        potential suitor and to optimize the      true EBITDA of the business. It is not
the M&A market into hibernation.              M&A process.                              uncommon for a buyer to attempt to
                                                                                        renegotiate a purchase price after a
More than one year later, the credit          There are five action items that a        letter of intent has been signed due to
market seems to be reawakening.               board of directors should consider        the buyer’s “appropriate” adjustments
Banks have de-levered their balance           to bolster its company’s value and        to EBITDA. A company that can
sheets and as a result of stimulus            to improve the sales process. These       demonstrate increased operating
money and other liquidity provided            actions are can be loosely categorized    income and reduced operating cost
by the Federal Reserve Bank,                  as financial performance, customers       will find its business perceived more
banks appear to be lending again.             and suppliers, management,                valuably by an acquirer. Acquirers
This development bodes well for               regulatory matters and contractual        generally will use the trailing twelve
future M&A activity. According to             arrangements. Some of these actions       months data to determine an average
businessworld.com, worldwide M&A              require considerable planning and         historical EBITDA.
activity rose to $520.4 billion in the        are not easily obtainable. The board
first quarter of 2010 and the number          of directors should weigh carefully       The multiple applied to a business is
of announced deals increased by               the time and resources that could         determined by many factors, including
18% worldwide from the same                   be devoted to any particular action       the attractiveness of the business, its
period in 2009.                               against the deal-enhancing potential      prospects and sometimes by industry
                                              of any such action.                       norms. Within an industry there may
In addition, the KPMG LLP and the                                                       be a range of multiples that might
Deal LLC Annual M&A Survey 2010               Financial Performance                     apply and a good investment banker
indicates that 61% of respondents                                                       can help guide the board of directors
believe that financial sponsored M&A          To a large extent, it is all about        through this process.
activity will increase in 2010 and            the numbers: Has your company
30% believe it will hold steady. In the       performed financially and what are its    The future financial prospects of a
same survey, 70% of the respondents           future financial prospects? Although      business can be just as important
were more optimistic about the deal           this concern may not be as important      as the historical financials. Most
environment today than they were              in some strategic acquisitions (for       acquirers want to see a company
one year ago.                                 example, eliminating a competitor),       with solid projections. If a company

                                        BOARDROOM BRIEFING: MERGERS & ACQUISITIONS 2010
cannot fully justify its projections,     In some cases a buyer will have an          for all of its commercial arrangements
the purchase price for that business      existing senior management team             and these contracts will verify
will suffer. It is also not uncommon      to take over the business. In those         matters stated by the target company.
for a buyer to attempt to renegotiate     circumstances the board of directors        Establishing and maintaining a
a purchase price due to the lack of       should consider transitional issues         system of orderly documentation
solid projections. Projections can be     and the adoption of a retention plan        can not only facilitate the buyer’s
highly subjective and therefore are       to make sure any deal does not fail         due diligence process and save
often the subject of disputes between     due to the lack of continuity. These        transactional cost for both parties,
prospective buyers and sellers.

                                                Absent a major global economic or political crisis,
Customers and Supplies
                                                     the year 2010 and beyond should see
A business’ customers and suppliers
are significant considerations in
                                                          an increase in M&A activity.
the discussion of projections. Most
acquirers, particularly financial         issues are particularly important           it also reflects on the company and
buyers, like to see that a target has a   when an earn-out or other contingent        its management. Any company that
solid customer backlog. In industries     purchase price arrangement has been         has a concentration of key customers
where long term contracts are not         stipulated.                                 and/or suppliers should make sure
customary and therefore a backlog                                                     that those contractual arrangements
is not feasible, a buyer most likely      Regulatory Issues                           are in order prior to commencing the
will focus on the company’s future                                                    sales process. A buyer may insist on
business plan compared to past            Many acquisitions concerning                having complete copies of all major
performance and will scrutinize           targets that are subject to industry        contracts. Obtaining these documents
the company’s capacity to execute         regulation are derailed or delayed due      after the deal process has begun can
its plan. Having solid, long term         to regulatory issues. It is important for   be complicated; especially because
relationships with top customers that     the board of directors to focus on the      a target usually does not want it
can be demonstrated during the due        quality of the company’s regulatory         publicly known that it is for sale.
diligence process is extremely helpful.   compliance. Lapses in compliance            Accordingly, a buyer’s reasonable
Likewise, demonstrating that your         tend to persist unnoticed for many          insistence on having these contracts
business has and can manage its costs     years and are not easy to discover or       can delay and complicate a closing.
through long term, favorably priced       correct; and once discovered they can
supply contracts may enhance a            be very costly or impossible to correct.    While there are many components
target’s value.                           If a buyer decides to close a deal in       of an M&A deal that will factor into
                                          light of regulatory compliance issues,      its successful completion, the board
Management                                the costs to correct these problems         of directors that focuses on the five
                                          usually are borne by the seller,            action items above can position itself
Solid senior management is the key        either through a specified escrow           favorably in the deal market and can
to any well run endeavor. A strategic     arrangement or strict indemnification       increase the odds for a successful
buyer may have its own senior             provisions. A company’s regulatory          conclusion. Credit markets are
management team in place, but most        counsel should be engage to review          beginning to thaw, acquisition activity
private equity acquirers will not. The    the company’s current compliance            is heating up—the time to take action
board of directors should establish a     regime to uncover any potential             is now.
development and succession plan to        problems so that they can be rectified
make certain that senior management       prior, or managed properly during, the      Thomas J. Wilson is a partner with Golenbock
is well equipped to develop and           sales process.                              Eiseman Assor Bell & Peskoe LLP. His experience
execute strategies for the long term                                                  ranges from complex acquisitions and divestitures,
growth of the business. A capable         Contracts                                   middle-market private debt and equity financings
management team will be required                                                      to advising clients on a range of various day-to-day
to execute the company’s existing         Contracts are very important to             issues. He has represented foreign and U.S. clients
business plan or the plans developed      an acquirer and its lawyers. The            in connection with the acquisition of businesses in
by the buyer.                             contracts of a business form the basis      Europe, U.K., South America and the Middle East.

                                  Reprinted from Directors & Boards® Second Quarter 2010

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