M&A mandates

Buy Side and Sell Side

November 2007

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How an M&A idea is generated

“Rumours”/
Industrial/Sector Other M&A
“Gossip” on the Clients Public Authority
team processes
market

M&A Department

Sell side M&A Deal Buy side

Shareholders/ Target
Buyer
Parent Company Companies

21-Nov-07 – 1
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Acquisition rationale

Rationale
„ Horizontal/lateral integration
– Same customer
– Same product
Integration – Geographic expansion
„ Vertical integration
– Acquisition of supplier
– Acquisition of customer
Description
„ Galbani/Lactalis, Telecom
Italia/AOL, Weather/Wind,
Unicredit/HVB
„ AEM/Edison, Luxottica/Cole

„ Product/technology expansion „ Saipem/Snam Progetti,

– Different product/technology
– Same customers
Diversification „ Conglomerate (new products, new
customers, possible new location)
„ Financial sponsors
Capitalia/Fineco, Erg/Enertad
„ Benetton/Autostrade,
De Agostini/Toro

„ Acquisition of direct competitors „ Gas Natural/Endesa (pending)

Defensive – Enlarge company size „ ENEL/Endesa
– Anticipate competitors move

Acquisitions are aimed at improving company profitability, defending competitive advantages, preserving
business positioning and market share in the long term, creating additional value for the shareholders

21-Nov-07 – 2
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Divestment rationale

„ Debt overload (excess in company leverage)

„ Change of strategy

– Refocus of business

– Refocus of strategy

„ Succession issues / family disputes

„ Assets swap

„ Opportunism

„ Regulatory / legal issues

„ Financial sponsors activity

21-Nov-07 – 3
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Participants role in a M&A deal

Seller
(Shareholders Target
Buyer/s
Parent Company
Company)

21-Nov-07 – 4
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Roles & responsibilities

Team members Responsibilities

„ Top management „ Supervise the process
„ BoD members „ Operative coordination of internal
Seller „ Corporate development resources
(Parent company)
„ Involvement in the final phases of
the negotiation
„ Top management „ Cooperation with advisors in
„ Divisional functions initiation and execution
Target „ Finance and Control function „ Presentation of activities and
„ Seller/Target auditors economic financial data to advisors
and potential bidders
„ Top management „ Business insight/analysis
„ BoD members „ Jointly with Financial Advisor
„ Corporate development define target approach and solve
Buyer financing issues
„ Involvement in final negotiation

21-Nov-07 – 5
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Roles & responsibilities (continued)
Team members
„ Local professional team
(relationship with Seller & Target)
Financial „ Industry team (sector expertise)
Advisors „ M&A team coordinates procedure
Seller „ Professional from global network to
identify potential bidders/partners
„ Local professional team
Financial (relationship with Buyer)
Advisors „ Industry team (sector expertise)
Buyer „ M&A team valuation
„ Professional team specialized in
these kind of transactions
Legal
advisors
21-Nov-07 – 6
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Responsibilities
„ Approach potential buyers
„ Definition of transaction structure
„ Coordinate procedure and due
diligence
„ Assist negotiation phase jointly with
legal advisors
„ Analyse transaction structure
„ Coordinate due diligence
„ Valuation
„ Assist negotiation phase jointly with
legal advisors
„ Transaction structure and timetable
„ Legal due diligence report
„ Negotiation activities
„ Finalisation of the SPA
„ Fulfilment of Authorities’ requests
Roles & responsibilities (continued)

Team members Responsibilities

„ Professional team specialized in „ Accounting and tax due diligence
Tax and these kind of transactions reports
accounting „ Preparation of pro-forma figures
advisors (usually for the closing)
„ Identification of optimal tax structure

„ Lending/Leveraged finance team „ Transaction structure analysis

(buyer and target figures)
„ Negotiate financing terms and
Lending
conditions with buyers (i.e. covenants)
Banks „ Drafting of reliance letters
„ Issuance of financial commitment /
resources

„ Professional team specialized in „ Specific issues analysis (i.e. real

Specialist these kind of transactions estate, IT)
Advisors „ Assessment of assets quality
(strategic/operational „ Business due diligence report release
real estate)

21-Nov-07 – 7
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Available Process Typology

„ Confidential negotiation

Driven by „ Few parallel private negotiations

Seller „ Private auction
„ Public auction

„ Unsolicited offers:

Driven by – Friendly
Buyer – Hostile (only public)

21-Nov-07 – 8
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Procedure selection process

Pros Cons
„ Perfect in presence of a “preferred” „ Lower probabilities to maximize the
bidder price
Private „ Guarantee of exclusivity „ It could need more time than
„ Easy to control expected
negotiation „ Relatively easy to be interrupted „ Lower seller’s negotiation power
because of lack of competition

„ It introduces competition in the „ Lower seller’s negotiation power

process because of reduced competition
Few parallel „ High level of uncertainty on the „ Management of different bidders,
private status of the process who ask exclusivity, could result
negotiations „ It allows to maintain confidentiality difficult to achieve
„ Relatively easy to be interrupted „ Still low seller and advisor’s
negotiation power because of lack
of competition

21-Nov-07 – 9
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Procedure selection process (continued)

Pros Cons
„ Perfect in case of numerous „ Process difficult to be interrupted
potential bidders „ Risk of information leakage
„ Good chance to maximize value
Private
„ High control by the seller in
auction negotiating terms of the agreement
„ Rapid process

„ Open to all potential buyers „ Risk of damaging business’s

„ Highest probability of price reputation if the sale is not
maximisation successfully completed
Public
„ High perception of “fairness” „ Lack of flexibility to interrupt the
auction process

21-Nov-07 – 10
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Procedure selection process (continued)

Pros Cons
„ Negotiations efforts with only „ Execution risk - bidder may not
controlling counterpart/s reach optimum control threshold
Unsolicited „ Price offered previously agreed (i.e. debt push down)
with controlling shareholders „ If target is public an unconditional
Offer mandatory offer could be required
(Friendly)
„ Certainty to acquire an identified
stake of target

„ Price solely fixed by Buyer on the „ Poison Pills

basis of its objectives „ Risk of interlopers and counterbids
Unsolicited „ Possibility of conditional bid „ Uncertainty of results until the end
„ Certainty of acquiring desired of the bid period
Offer control threshold (debt push-down) „ Delicate to be executed
(Hostile voluntary
offer) „ If successful likely probability of
take-private or free float restoration

21-Nov-07 – 11
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Activity focus: due diligence

„ Objectives
– Verify operational aspects (synergies, integration, economic prospective results, etc..)
– Definition of necessary contractual guarantees

„ Data room preparation: documentation relating to operational, auditing, tax

and legal aspects in order to allow potential buyers’ analysis
„ Bidders have generally access to data room for a limited period of time and
rely on external advisors consultancy
„ Visits and meetings with management

21-Nov-07 – 12
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 Buy Side

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Financial advisory role

„ Strategic fit analysis

„ Target valuation
„ Synergies analysis
– Value (economies of scale, organisational synergies, cross selling opportunities,
etc.)
Advisor
– Timing
activities
„ Transaction execution activities
„ Buyer’s shareholders: value creation analysis (EPS accretion/dilution,
etc.)
„ Buyer re-rating post transaction

21-Nov-07 – 14
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Unsolicited bid process

Target analysis Impact on buyer analysis

„ Strategic fit „ Financial analysis
„ Business analysis „ Likely consideration
Idea „ Anti-trust issue „ Financing/credit
„ Poison pills „ Accretion/Dilution
„ Valuation
„ Synergies

Target availability analysis

„ Management team
assessment
„ Shareholding analysis
Proposal
„ “Informal” sounding

21-Nov-07 – 15
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Hostile vs Friendly target approach

Shares pledged/
Hostile Offer to shareholders
acquired
Target acquisition

Shares
Board Target
Friendly Due diligence Negotiation
involvement
pledged/
acquisition
acquired

21-Nov-07 – 16
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 Value vs price: a quick lesson to learn
Target price

Over valuation
Under valuation

Enterprise NFP Other Fair Market cap/ Synergy Strategic/ Buyer bargain Price
Value liabilities value Valuation with buyer control power paid
premium

21-Nov-07 – 17
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Timetable

Regulatory steps

Informal
Prospectus Consob Issuer’s opinion Announcement of
meeting with
deposited approves (same day of acquisition of
Consob and
with Consob prospectus OPA’s start) tendered shares
Antitrust
5 days of open
stock exchange
15 – 30 days 5 days 5 days 5 days

Between 15 and 45
working days
(to be decided
Disclosure requirements Prospectus Deadline for Announcement of
OPA starts with Consob)
Meeting with Borsa Italia published counter offer results
and
delivered to
issuer
Payment
OPA closes
tendered shares

‘Market’ steps

21-Nov-07 – 18
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 Sell Side

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Sell side: key issues to address

„ Key aspects
– Company nature (sale perimeter)
– Transaction structure (majority/minority stake, JV,...)
– Timing
– Specific elements to address in the industrial sector of reference
– Price
– Terms of payment
– Privacy
– Legal / tax aspects

21-Nov-07 – 20
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Identification of potential buyers

„ Trade buyers

„ Private Equity funds (MBO,LBO,MBI,BIMBO)

„ Institutional Investors

„ Others

21-Nov-07 – 21
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Timetable (auction)

4 – 6 weeks

Preparation and planning of the process

Preparation Planning
„ Company analysis „ Analysis of potential buyers and market
„ Business comprehension sentiment

„ Information gathering „ Simultaneous approach of potential buyers

„ Preparation of Business Plan
„ Preparation of Information Memorandum
„ Company valuation
„ Preparation of Data Room
„ Draft of management presentation
(Teaser)
„ Distribution and sign off of confidentiality
agreement
„ Draft of Sale & Purchase agreement
„ Draft of due diligence rules
„ Preparation of procedure letter

21-Nov-07 – 22
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Timetable (auction)

4 – 6 weeks 3 – 4 weeks 4 weeks

Preparation and planning Auction period

Non-binding Binding
offer offer

“Non-binding” phase “Binding” phase

„ Distribution of Information Memorandum „ Analysis of different offers (advisor and seller’s
„ Distribution of procedure letter management)

– SPA „ Selection of potential buyers to be admitted to

– management presentation
– data-room material
„ Delivery of non-binding preliminary offers
the “binding” phase
„ Distribution of the contract to acquirors
„ Data room
„ Visits of production sites and facilities
„ Management presentation
„ Delivery of final binding offers

21-Nov-07 – 23
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Timetable (auction)

4 – 6 weeks 3 – 4 weeks 4 weeks 4 weeks

Preparation and planning Auction period Selection & closing

Closing

Final Phase and closing

„ Selection of bidder/s
„ (Possible competitive auction)
„ (Possible final choice of the buyer)
„ Internal approval
„ Final negotiations
„ Signing of SPA
„ Press release
„ Antitrust approval

21-Nov-07 – 24
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 Example: main steps of an auction process – sell side
Approach
potential buyers
„ Coverage of all potential
buyers to maximize
competition
Rationale
„ Wide coverage of market
Key success
factors
„ In-depth knowledge of the
sector with easy access to
Advisor potential buyers
contribution
„ Management of press and of „
institutional interests
21-Nov-07 – 25
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Distribution of Procedure
info pack
„ Monitoring of confidential
information flow
„ Availability of financial
information necessary for a
preliminary valuation
„ Clarification of procedure
„ Minimization of document
circulation
„ Professional approach
„ Sector knowledge
„ High quality Info Memo in
terms of analysis and
presentation
High discretion
„ Involvement of right candidate
Distribution of additional
information
„ Monitoring of the flow and
uniformity in the information
distribution
„ Minimize Management exposure
to buyers’ requests
„ It allows a systematic revision of
information provided
„ Contacts with acquirers
„ Effective interaction with all the
acquirers involved in the process
„ High control of the due diligence
phases
 Example: main steps of an auction process – sell side

Delivery of preliminary offers and

Drafting of sale contract Binding offer
meetings with management

„ Interests check „ Check of contract format and „ Maximise competition and

„ Control of interaction between
management and potential
Rationale buyers
„ Allow the acquirers to test
management and to visit the
company
content
„ Key element for negotiations
„ Minimization of time period
between acquirer selection
and signature of the contract
forces interested acquirers
to maximise price
„ Perception of a fair and
correct process
„ Provide clear rules on
procedures

„ Management of the process „ Experience in negotiations „ Clear management of

Key success auction process
factors

„ Tailored approach according to „ Consolidated experience in „ Excellent reputation in fair

acquirers and sector features similar transactions management of potential
Advisor „ Coordination with lawyers and „ Negotiation strategy planning buyers
contribution auditors „ Solutions to “impasse” „ Capability to settle
„ Coordination of management situations different positions
presentation

21-Nov-07 – 26
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 Possible Timetable

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 Timetable - Procedure

F M T W T F M T W T F M T W T F M T W T F M T W T F M T W T F M T W T F
10 13 14 15 16 17 20 21 22 23 24 27 28 29 30 31 3 4 5 6 7 10 11 12 13 14 17 18 19 20 21 24 25 26 27 28
Kick-off meeting
Steering Committee
Equity investment committees
Submission of binding offer

21-Nov-07 – 28
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 Timetable - Due diligence

F M T W T F M T W T F M T W T F M T W T F M T W T F M T W T F M T W T F
10 13 14 15 16 17 20 21 22 23 24 27 28 29 30 31 3 4 5 6 7 10 11 12 13 14 17 18 19 20 21 24 25 26 27 28
List of attendants sent to advisor
Clarifications on data room contents sent to advisor
Management presentation
Data room and daily meeting
Circulation of draft due diligence reports
Indicative model inputs
Comments to draft due diligence reports
Data room
Final due diligence reports
Site visits
Circulation of site visits report

21-Nov-07 – 29
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 Timetable - Business Plan/Valuation

F M T W T F M T W T F M T W T F M T W T F M T W T F M T W T F M T W T F
10 13 14 15 16 17 20 21 22 23 24 27 28 29 30 31 3 4 5 6 7 10 11 12 13 14 17 18 19 20 21 24 25 26 27 28
Circulation of model template
Meeting to agree on model structure
Update model template following data room review
Data room output into the model
Circulation of preliminary valuation results
Valuation upd. (final due diligence/financing terms)

21-Nov-07 – 30
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 Timetable - Legal

F M T W T F M T W T F M T W T F M T W T F M T W T F M T W T F M T W T F
10 13 14 15 16 17 20 21 22 23 24 27 28 29 30 31 3 4 5 6 7 10 11 12 13 14 17 18 19 20 21 24 25 26 27 28
Legal due diligence
Circulation of first draft of legal due diligence report
Legal due diligence
Circulation of final due diligence report
Receive SPA from seller
Mark-ups SPA
Finalise SPA
Drafting/mark-ups of the offer letter

21-Nov-07 – 31
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