M&A Sale Process

Chapter 6
 📑 Table of Contents
1.Overview of the M&A Process
1. Role of investment banks
2. Sell-side vs. buy-side advisory
2.Sell-Side M&A Process
1. Preparation phase
2. Buyer outreach
3. Management presentations
4. Final bidding and closing
3.Buy-Side M&A Process
1. Strategic rationale and screening
2. Valuation and initial approach
3. Negotiation and due diligence
4. Final agreement and execution
 📑 Table of Contents
4. Key Documentation in M&A
1. Confidential Information Memorandum (CIM)
2. Indication of Interest (IOI)
3. Letter of Intent (LOI) / Term Sheet
4. Definitive Purchase Agreement (DPA)
5. Role of Advisors in M&A
5. Investment bankers
6. Legal counsel
7. Accountants and consultants
6. Due Diligence and Valuation
8. Financial, legal, and operational due diligence
9. Synergies analysis
10.Valuation using DCF, precedent transactions, and trading comps
 📑 Table of Contents
7. Financing the Deal
1. Cash vs. stock considerations
2. Debt financing
3. Bridge financing
8. Deal Structuring and Considerations
4. Friendly vs. hostile transactions
5. Asset vs. stock purchase
6. Regulatory and antitrust issues
9. Deal Closing and Integration
7. Signing vs. closing
8. Integration planning
9. Post-deal performance measurement
 🎯 Learning Objectives
Understand the Full M&A Process:
Describe the end-to-end process of a merger or acquisition from the perspective of both
the buyer and the seller.
Differentiate Between Buy-Side and Sell-Side Engagements:
Recognize the distinct roles, objectives, and steps followed by investment bankers in
buy-side vs. sell-side transactions.
Evaluate Strategic Rationales for M&A:
Identify key motives for acquisitions, including growth, synergy realization,
diversification, and cost efficiency.
Interpret and Prepare M&A Documents:
Understand the purpose and contents of core M&A documents such as the CIM, IOI, LOI,
and Definitive Agreement.
Apply Valuation Techniques in M&A Contexts:
Perform valuations using DCF, precedent transactions, and comparable company
analysis tailored to M&A scenarios.
 🎯 Learning Objectives
Analyze Deal Structures and Payment Methods:
Compare cash, stock, and hybrid consideration in M&A deals and assess their
implications for both acquirer and target.
Understand the Importance of Due Diligence:
Conduct financial, legal, and operational due diligence to evaluate deal viability and risk.
Explain the Role of Investment Bankers and Other Advisors:
Clarify the responsibilities and deliverables of financial advisors throughout the M&A
lifecycle.
Identify Regulatory and Legal Hurdles:
Assess the impact of antitrust laws, shareholder approvals, and jurisdictional issues on
deal closure.
Discuss Post-Merger Integration:
Recognize the significance of integration planning and execution for deal success and
long-term value creation.
AUCTIONS

• An auction is a staged process whereby a target is marketed to

multiple prospective buyers (“buyers” or “bidders”).
• The auction process may have potential drawbacks, including
information leakage into the market from bidders, negative impact
on employee morale, possible collusion among bidders, reduced
negotiating leverage once a “winner” is chosen (thereby
encouraging re-trading), and “taint” in the event of a failed
auction.
AUCTIONS

• There are two primary types of auctions—broad and targeted.

• Broad Auction: As its name implies, a broad auction maximizes
the universe of prospective buyers approached. This may involve
contacting dozens of potential bidders, comprising both strategic
buyer and Financial buyer
• Targeted Auction: A targeted auction focuses on a few clearly
defined buyers that have been identified as having a strong
strategic fit and/or desire, as well as the financial capacity, to
purchase the target.
Advantages and Disadvantages of Broad and Targeted Auctions
ORGANIZATION AND PREPARATION

• Identify Seller Objectives and Determine Appropriate Sale

Process
• Perform Sell-Side Advisor Due Diligence and Preliminary
Valuation Analysis
• Select Buyer Universe
• Prepare Marketing Materials
• Prepare Confidentiality Agreement
 Identify Seller Objectives and Determine Appropriate Sale
Process

Sell-side advisor works with the seller to identify its objectives,

determine the appropriate sale process to conduct, and develop a
process roadmap.
The advisor must first gain a clear understanding of the seller’s
priorities so as to tailor the process accordingly.
Perhaps the most basic decision is how many prospective buyers to
approach
 Perform Sell-Side Advisor Due Diligence and Preliminary
Valuation Analysis

• In-depth session with target management.

• The sell-side advisor must have a comprehensive understanding
of the target’s business and the management team’s vision prior
to drafting marketing materials and communicating with
prospective buyers.
 Select Buyer Universe

When evaluating potential financial sponsor buyers, key criteria

include investment strategy/focus, sector expertise, fund size, track
record, fit within existing investment portfolio, fund life cycle, and
ability to obtain financing.
 Prepare Marketing Materials
• Marketing materials often represent the first formal introduction of the
target to prospective buyers.
• Providing supporting evidence and basic operational, financial, and other
essential business information
• Teaser; is the first marketing document presented to prospective buyers. It
is designed to inform buyers and generate sufficient interest for them to do
further work and potentially submit a bid. The teaser is generally a brief
one- or two-page synopsis of the target
• It also contains contact information for the bankers running the sell-side
process so that interested parties may respond.
 Prepare Marketing Materials
.
• Confidential Information Memorandum The CIM is a detailed written description
of the target (often 50+ pages) that serves as the primary marketing
document for the target in an auction.
• Financial Information
• The sell-side advisor also helps develop a set of projections, typically five
years in length, as well as supporting assumptions and narrative.
• The sell-side advisor must gain sufficient comfort that the numbers are
realistic and defensible in the face of potential buyer skepticism.
 Prepare Confidentiality Agreement
• A confidentiality agreement (CA) is a legally binding contract between
the target and each prospective buyer that governs the sharing of
confidential company information.
• A typical CA includes provisions governing the following:
• Use of information
• Term
• Permitted disclosures
• Return of confidential information
• Non-solicitation/no hire
• Standstill agreement
 FIRST ROUND

• Contact Prospective Buyers

• Negotiate and Execute Confidentiality Agreements with Interested
Parties
• Distribute Confidential Information Memorandum and Initial Bid
Procedures Letter
• Prepare Management Presentation
• Set up Data Room
• Prepare Stapled Financing Package (if applicable)
• Receive Initial Bids and Select Buyers to Proceed to Second Round
 Contact Prospective Buyers

This typically takes the form of a scripted phone call to each

prospective buyer by a senior member of the sell-side advisory
team
 Negotiate and Execute Confidentiality Agreement with
Interested Parties

• Upon receipt of the CA, a prospective buyer presents the

document to its legal counsel for review.
 Distribute Confidential Information Memorandum and Initial
Bid Procedures Letter

• Depending on their level of interest, prospective buyers may also

engage investment banks (as M&A buy-side advisors and/or
financing providers), other external financing sources, and
consultants at this stage.
• Buy-side advisors play a critical role in helping their client,
whether a strategic buyer or a financial sponsor, assess the target
from a valuation perspective and determine a competitive initial
bid price.
 Initial Bid Procedures Letter
• Indicative purchase price (typically presented as a range) and
form of consideration (cash vs. stock mix)
• Key assumptions to arrive at the stated purchase price
• Structural and other considerations
• Information on financing source
• Treatment of management and employees
• Timing for completing a deal and diligence that must be
performed
• Key conditions to signing and closing
• Required approvals
Prepare Management Presentation
Set up Data Room

• Data rooms generally contain a broad base of essential company

information, documentation, and analyses.
 Prepare Stapled Financing Package

• The investment bank running the auction process (or sometimes a

“partner” bank) may prepare a “pre-packaged” financing
structure in support of the target being sold.
 Receive Initial Bids and Select Buyers to Proceed to Second
Round

• On the first round bid date, the sell-side advisor receives the initial
indications of interest from prospective buyers.
• Over the next few days, the deal team conducts a thorough
analysis of the bids received, assessing indicative purchase price
as well as key terms and other stated conditions.
• Once this analysis is completed, the bid information is then
summarized and presented to the seller along with a
recommendation on which buyers to invite to the second round
 Valuation Perspectives – Strategic Buyers vs. Financial
Sponsors

• Financial sponsors use LBO analysis and the implied IRRs and cash
returns, together with guidance from the other methodologies, to
frame their purchase price range
• While strategic buyers also rely on the fundamental
methodologies to establish a valuation range for a potential
acquisition target, they typically employ additional techniques.
 SECOND ROUND

• Conduct Management Presentations

• Facilitate Site Visits
• Provide Data Room Access
• Distribute Final Bid Procedures Letter and Draft Definitive
Agreement
• Receive Final Bids
 Conduct Management Presentations

• At the presentation, the target’s management team presents each

prospective buyer with a detailed overview of the company,
ranging from basic business, industry, and financial information to
competitive positioning, future strategy, growth opportunities,
synergies (if appropriate), and financial projections.
• The core team presenting typically consists of the target’s CEO,
CFO, and key division heads or other operational executives, as
appropriate.
 Facilitate Site Visits

• Prospective buyers may also request visits to multiple sites to

better understand the target’s business and assets.
• The typical site visit involves a guided tour of a key target facility,
such as a manufacturing plant, distribution center, and/or sales
office.
Provide Data Room
Access
Distribute Final Bid Procedures Letter and Draft Definitive
Agreement
 Definitive Agreement

• The definitive agreement is a legally binding contract between a

buyer and seller detailing the terms and conditions of the sale
transaction.
• In an auction, the first draft is prepared by the seller’s legal
counsel in collaboration with the seller and its bankers
 Receive Final Bids

Upon conclusion of the second round, prospective buyers submit

their final bid packages to the sell-side advisor by the date
indicated in the final bid procedures letter.
These bids are expected to be final with minimal conditionality, or
“outs,” such as the need for additional due diligence or firming up
of financing commitments.
 NEGOTIATIONS

• Evaluate Final Bids

• Negotiate with Preferred Buyer(s)
• Select Winning Bidder
• Render Fairness Opinion (if required)
• Receive Board Approval and Execute Definitive Agreement
 Evaluate Final Bids

• The sell-side advisor works together with the seller and its legal
counsel to conduct a thorough analysis of the price, structure, and
conditionality of the final bids.
• Purchase price is assessed within the context of the first round
bids and the target’s recent financial performance, as well as the
valuation work performed by the sell-side advisors
 Negotiate with Preferred Buyer(s)

• Skillful negotiation on the part of the sell-side advisor at this stage

can meaningfully improve the final bid terms.
• While tactics vary broadly, the advisor seeks to maintain a level
playing field so as not to advantage one bidder over another and
maximize the competitiveness of the final stage of the process.
 Select Winning Bidder

• The sell-side advisor and legal counsel negotiate a final definitive

agreement with the winning bidder, which is then presented to the
target’s board of directors for approval.
• Not all auctions result in a successful sale.
 Render Fairness Opinion

• In response to a proposed offer for a public company, the target’s

board of directors typically requires a fairness opinion to be
rendered as one item for their consideration before making a
recommendation on whether to accept the offer and approve the
execution of a definitive agreement
Receive Board Approval and Execute Definitive Agreement

• Once the seller’s board of directors votes to approve the deal, the
definitive agreement is executed by the buyer and seller.
• A formal transaction announcement agreed to by both parties is
made with key deal terms disclosed depending on the situation
 CLOSING

• Obtain Necessary Approvals

• Financing and Closing
 Obtain Necessary Approvals

• Regulatory Approval
• Shareholder Approval
 Financing and Closing

• In parallel with obtaining all necessary approvals and consents as

defined in the definitive agreement, the buyer proceeds to source
the necessary capital to fund and close the transaction.
• The acquirer may also use bridge financing to fund and close the
transaction prior to raising permanent debt or equity capital.
• Once the financing is received and conditions to closing in the
definitive agreement are met, the transaction is funded and
closed.
 NEGOTIATED SALE

• In a negotiated sale, the seller understands that it may have less

leverage than in an auction where the presence of multiple
bidders throughout the process creates competitive tension.
Advantages and Disadvantages of a Negotiated Sal