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1、M&AMarch19981Bain M&AObjectives IntroductionThe purpose of this module is to allow new ACs and Consultants to:obtain a background understanding of M&Aunderstand what Bain does/doesnt do in an M&A projectreview basic analytical tools required in different M&A projects at Baindevelop, through an exerc

2、ise, an important basic analytical skill often used in M&A projects2Bain M&AAgenda IntroductionTrends in M&AGuiding Principles for Successful M&ABain ApproachCase Examples screeningdue diligencesaleExercise on Synergy CalculationTypical WatchoutsKey Takeaways3Bain M&AAgenda IntroductionTrends in M&A

3、Guiding Principles for Successful M&ABain ApproachCase Examples screeningdue diligencesaleExercise on Synergy CalculationTypical WatchoutsKey Takeaways4TrendsF PEC G 80306 01Drivers of M&A ActivityBain M&AEconomy boom or recoveryOver-capacity in an industryCheap moneyIndustry consolidationGlobalizat

4、ion StrategicFinancialOtherGain shareEliminate competitive threatCapture operating opportunities, e.g., scale efficienciesLeverage existing business systemsforward/backward integrationstart-up alternativeDiversify/balance portfolioRetire excess industry capacity GreedEgo Improve capital markets eval

5、uation of acquirermeet growth targetsreduce portfolio riskInvest idle cashMacro-economics5M&A Activity - U.S. vs. Europe$BEuropeUSCAGR(1992-1997)21%41%European and US M&A activity is experiencing similar positive trends.Note:Transaction Value (including Net Debt of Target). Excludes split-offs. Euro

6、pe includes 50 major countriesSource: SDCTrendsBain M&A6M&A ActivityM&A activity has grown rapidly in nominal dollar terms, peaking in the U.S. in the late 1980s, and then matching those levels last yearThe ferocious merger activity of the late 1980s was driven in large part by the “easy money affor

7、ded 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 targetGrowth in merger activity since 1992 has

8、 coincided with the economys recovery from recessionRecent M&A activity benefiting from:extended economic health with little recessionary pressure on horizona resulting corporate demand for growthincrease in international M&A activity as companies pursuing global strategiesSince late 1997, U.S. and

9、European markets have experienced the resurgence of junk bonds to facilitate the execution of deals getting larger and largerTrendsBain M & A7Bain M&AM&A Activity by Country 1996/97Note: Represents announced dealsSource: SDCUS market dominates the global M&A activity.TrendsPercent change:50%41%110%3

10、1%50%14%79%57%8 TrendsUS M&A Activity by Seller Industry(1992-97)Source: SDC ( March 98)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 entertainmen

11、t have high transaction size.Aggregate Offered Value ($ BN)(bars)Transactions(line)Banking & financeTelecommunicationsBroadcastingBusiness ServicesLeisure & EntertainmChemicals & DrugsInsuranceRetailHealth ServicesElectronic, ElectricOil & GasUtilitiesMeasuring, Medical, Food ProcessingAerospace & A

12、ircraftOffice EquipmentPrepackaged SoftwareMiscellaneous010020030040050002,0004,0006,0008,000Bain M&A9Trends Multiples Paid for Acquisitions Sources: The BUYOUTS Yearbook, Bain Analysis.Over the last five years, the prices paid for acquisitions have been increasing, and reinforces the need for in-de

13、pth due diligence and analysis to ensure a fair price.Average EBIT MultipleBain M&A10TrendsAcquisition Success Rates Harvard Business SchoolSurvey of CFOsLondon Business SchoolBain & Company StudyPercent of Acquisitions Failing* in First Five YearsPercent of TotalThe majority of acquisitions have be

14、en deemed failures.Notes: Failure defined as earnings less than cost of capital and/or subsequently divested. Bain M&A11Common Reasons for Failure Poor strategic fitcombination does not provide competitive advantagelack of understanding of the businessOverpayimperfect information/wrong valuationtoo

15、optimistic in forecasts/synergiesunforeseen industry downturn/emerging technologyauction environment; failure to set/stick to walk away priceCEO/management egorevenue growth vs. profitabilityemotion vs. analysisPoor post acquisition integrationinadequate planningfailure to exploit revenue/margin pot

16、entialdisrupted relations with customers, employers and suppliersculture clash; failure to involve acquired peopleStrategic, financial and operating causesTrendsBain M&A12Glossary TrendsCredit RatingThe legal combination of two (or more) formerly independent entitiesThe acquisition by an independent

17、 entity of a control stake in another entity. This is usually achieved by acquiring more than 50% of shares for a public companyThe sale or closure of a particular entityLeveraged buy-out: An acquisition made possible financially by large issuance of debt, making the new entity highly “l(fā)everaged or

18、“geared (i.e., with a high ratio of debt to equity)Investment firms managing private funds by running business portfoliosBonds (or debentures, or coupon debt) issued by an entity without a credit rating or with entities with “non-investment grade ratingFinancial markets use the service of credit rat

19、ing firms such as Standard & Poors and Moodys 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 stablenon-investment Grad

20、e entities (below B) present an investment risk (e.g., third world countries, highly leveraged companies)MergerJunk bonds AcquisitionDivestitureLBOPrivate Equity FirmsBain M&A13Bain M&AAgenda IntroductionTrends in M&AGuiding Principles for Successful M&ABain ApproachCase Examples screeningdue dilige

21、ncesaleExercise on Synergy CalculationTypical WatchoutsKey Takeaways14PrinciplesGuiding Principles(1 of 2)Bain believes that a clear and disciplined approach to the acquisition process is vital to ensure success.Principles:Acquisitions are made to improve the strategic position of existing businesse

22、s or add to the core competencies of the corporationAssess impact of acquisitions on long-term shareholder valueUse acquisition as a vehicle to accelerate growth in key business unitsActivities:Proactive Strategic ThinkingScreeningLook for all companies that potentially strengthen the corporationDon

23、t allow a transaction mentality to dominate the processLook for targets that present best fit in terms of:relatednessimpact on market positionExamine key success factors of potential targetsExamine competitive position of client vs. competitive biddersDefine business segmentsDiagnose key competencie

24、s and any skill gapsAnalyze market dynamicsStudy cost of acquisition versus organic growthBain M&A15PrinciplesGuiding Principles(2 of 2)Bain believes that a clear and disciplined approach to the acquisition process is vital to ensure success.Principles:Activities:ExecutionCapture Full ValueMake bett

25、er decisions upfront through careful due diligenceStrive to identify deal breaker issues as early as possibleUse information and insights to provide confidence in making a bidClearly communicate corporate vision to targetBegin integration process as early as possibleBe objective to ensure a fair dec

26、ision-making processCreate a set of short-term and long-term objectivesQuantify all potential synergies and cost savingsExamine margin and revenue forecastsEvaluate management of targetProvide a blueprint for capturing full potential valueSupport managerial integration teamBain M&A16Principles Strat

27、egy and M&ACorporate objectivesgrowth and financial targetscompetitive arenaCorporate strategystrategic positionmanagement of resourcesBusiness unit objectivesbusiness definitiongrowth and financial targetsBusiness unit strategystrategic positionkey success factorssustainable competitive advantageOr

28、ganic growthGrowth throughbusiness unit acquisitionsGrowth throughcorporate acquisitionsAcquisitions at both the corporate and business unit level need to be thought of as an integral part of a companys growth strategy.Bain M&A17PrinciplesStrategic FrameworkThe focus of strategic M&A activity should

29、 be in areas where there is the highest value creation opportunity as well as the strongest parenting advantage.LowLowHighHighParenting Advantage“Is value to our client higher than value to other parents?Value Creation OpportunityFocusBain M&A18Principles M&A Value Creation OpportunitiesBuy cheapM&A

30、 value can arise from generating the full value of an undervalued entity or by adding value to under performing assets.Add valueTake advantage of inefficiencies in the marketSpot new market trends earlyGenerate synergiesBain M&A19PrinciplesCritical Issues Resolving these issues allows an accurate ev

31、aluation of a companyCost sharingCustomer sharingCompetitor overlapExperience sharingStrength of key competitorsRelative cost positionStrengths and weaknesses of acquirerMarket growthTechnology changesProduct substitutionBarriers to exit and entrySupplier and buyer power(I) Relatedness(II) Strategic

32、 Strength(III) Market Dynamics(IV) Value:Bain assimilates the strategic process with acquisitions by focusing on four key areas.Bain M&A20PrinciplesSuccess Criteria - Diagnostic Tool(IV) Value Accurate evaluation based on NPV vs. Market Price(II) Strategic Strength(Relative Market Share)Relatedness

33、(I) (Experience and/or Cost Sharing)The ability to improve the strategic position of the acquirer, and grow or complement its existing competencies are keys to success.RMS1.5xRMS1.5-1.0 xRMS0.5xLow 50%Growth 10%Growth 5-10%Growth 70% of revenues from same business as acquirerSignificant amount of ac

34、tivity and cost overlap between acquirer and targetTarget complements existing product line and adds to core competencies of acquirerAverage Percent Price IncreasesBain M&A23Examples of Failures(1 of 2)PrinciplesIndustryAcquirerTargetTransaction ValueAcquisition ThesisReason for FailureEntertain-men

35、tSonyMatsushitaColumbiaMCA$ 4.8B$ 6.1BOwn up stream contents for downstream hardwareInadequate due diligenceover valued synergiesStrategically flawed and poor integrationFinanceSearsDeanWitter$ 6.7BBuild a one-stop financial supermarketInadequate due diligencelimited cross-sell potentialConsumer Goo

36、dsQuaker OatsSnappleInadequate due diligencegrowth cycle not well understoodbrand strength overestimatedLeverage distribution channels$ 1.7BSources: Industry literature; Bain Analysis.The M&A landscape is littered with unsuccessful acquisitions which failed to adhere to the core guiding principles.B

37、ain M&AAmexShearson$ 900MMExpand distribution capabilitiesPoor integrationculture clash24Examples of Failures(2 of 2)PrinciplesIndustryAcquirerTargetTransaction ValueAcquisition ThesisReason for FailureSources: Industry literature; Bain Analysis.RetailAlliedFederatedTechnology/Telecommu-nicationsAT&

38、TNCR$ 6.5BExpand geographicallyInadequate due diligenceovervalued potential synergies and brand valueTechnology/ telephony integrationStrategically flawedfew synergies between computer hardware and telephonyPoor integration$ 7.5BNew market entryNovellWordPerfectPoor integrationculture clash$ 1.4BThe

39、 M&A landscape is littered with failures which failed to adhere to the core guiding principles.Bain M&A25PrinciplesExamples of Successful Acquisitions(1 of 2)IndustryAcquirerTargetTransaction ValueAcquisition ThesisReason for Success Wells FargoCrocker$ 1.07BExpand geographical reach and leverage ba

40、ck-officeCareful due diligence and integrationcapture of synergies and cost savingsFoodTysonHolly Farms$ 1.4BExtend product lineGood strategic fit and due diligencecapture of cost- sharing potentialConsumer GoodsCadbury SchweppesDr. Pepper/ 7-Up$ 2.0BExpand geographic distributionCareful due diligen

41、ceincreased scale and presence as a global playerFirst Financial ManagementFinancial ServicesFirst Data$ 6.6BObtain scale economiesWell-managed integration integration of credit card processing services of consumer and commercial sidesSources: Industry literature; Bain AnalysisHowever, many companie

42、s have created enormous value through successful acquisitions.Bain M&A26PrinciplesExamples of Successful Acquisitions(2 of 2)IndustryAcquirerTargetTransaction ValueAcquisition ThesisReason for SuccessHigh TechnologyCiscoStratacom$ 4.5BNew technologyWell-managed integrationclose attention to culture

43、match; open communication of strategic visionManufacturingCrown, Cork & SealCarnaud(French)$ 3.9BExpand geographic reach and leverage product strengthsGood strategic fit and due diligencestrong understanding of market dynamic to improve strategic positionTransportationUnion PacificChicago & North We

44、stern Transportation Company$ 1.1BExpand geographicallyGood strategic rationalepre-emptive strategic move to maintain strategic positionSources: Industry literature; Bain AnalysisHealthcareColumbiaHCABuild national healthcare groupGood strategic fit and due diligencecapture of cost-sharing and scale

45、 economies$5.7BHowever, many companies have created enormous value through successful acquisitions.Bain M&A27Bain M&AAgenda IntroductionTrends in M&AGuiding Principles for Successful M&ABain ApproachCase Examples screeningdue diligencesaleExercise on Synergy CalculationTypical WatchoutsKey Takeaways

46、28Bain ApproachKey ActivitiesStrategyAcquisition target screenDue diligenceTarget valuationIntegrationWhat sector or region?The best candidate based on attractiveness and availabilityThe right price Getting full valueBid structure and negotiationsIntegration pre-planningBains approach to acquisition

47、s follows a series of key steps.Should an acquisition strategy be pursued? Validate screening assumptionsBain M&A29Bain ApproachM&A Value ChainObjective:Identify potential candidates which present best fit in terms of:relatednessimpact on market positionUnderstand full strategic value of acquisition

48、 candidate Implement strategic vision for merger that gives direction and impetus for changeDefinitive actions and role definitions to speed integration processBusiness/strategic reviewmarket trendscustomers and supplierscompetitorscosts, technologyvaluation/full potential assessmentBain Activities:

49、Industry profileTarget screeningTarget approachQuantify current operating value, stand alone operating improvements, and potential synergiesPre-planningcombined cash flowsTransition planCost reductionRevenue enhancementMake better decisions upfrontProvide agenda for post-acquisition changeImprove su

50、ccess in closing dealCommon Pitfalls:Drawing up incomplete list of candidatesUse of screen process to develop a strategyNon-identification of deal breaker issuesMisunderstanding of cost savings and upside opportunitiesIgnore market dynamics and competitor impact on future cash flowsTaking management

51、 projections at face valueReluctance to interfere in operations of acquireeBain has considerable experience in the different skill sets needed at different stages in the acquisition process.IntegrationValuationDue DiligenceAcquisition ScreeningBain M&A30Bain Approach Bain and Other Advisors RoleBain

52、s Role:Analyze quality of customer and supplier baseLook for potential cost savings and upside synergiesUnderstand market dynamics to better project market and company growth objectivesConstruct a discounted cash flow model that values stand alone, operating improvements and potential synergiesProvi

53、de a reality check on market valuationsActive involvement in transition plan, cost reduction and revenue enhancement opportunitiesHands-on driver of change process to realize full value of merged entityIn tandem with accountants, analyze financial projections based on managerial inputInvestment Bank

54、s:Value based on prices of comparable businesses recently bought or soldMultiple of earnings/cash flow, assetsLittle or no direct input in post-merger activitiesLimited external research largely dependent on managerial projections Accounting Firms*:Determine targets based on corporate objectives and

55、 strategiesIdentify acquisitions that enable the acquirer to:penetrate new marketsacquire capabilitiesgain scale advantageimprove relative market positionComb for potential acquisition candidates based on availabilityUtilize contacts to build a wide list of potential targetsLook for potential acquis

56、ition candidates based on availabilityUse contacts to build list of potential targetsValue based on prices of comparable businesses recently bought or soldConstruct a basic DCF model Little or no direct input in post-merger activitiesBain provides a neutral, third-party view and analysis on the prim

57、ary strategic and financial issues.Notes: *Consulting branches of Big Six Accounting Firms. IntegrationValuationDue DiligenceAcquisition ScreeningBain M&A31Bain ApproachRoles and Responsibilities848704a2d01-190%20%40%60%80%100%Percent of Professional TimeScreening studyPortfolioNorm bandsKey issues

58、investigationIntrinsic cash flow valuationHow, what and when to sayScriptsNon-offer letterTermsSupport as neededLegal Due diligenceProspectusOther document- ationScriptsDue diligencePresentation to both boardsMarket valuationHow, what and when to sayPriceTermsSupport as neededPresentation to boardLe

59、tter of comfortDue diligencePro formasAccountantsBainLawyersInvestment BanksIdentify candidateDue DiligenceValuationDevelopment approachDevelop offer and deal structureNegotiateBoard approvalsImplementBain is an integral part of a dedicated team of M&A professionals.Bain M&A32Bain Approach Acquisiti

60、on Screening848704a2d01-20Objective:Identify potential candidates which present best fit in terms of:relatednessimpact on market positionBain Activities:Industry profileTarget screeningTarget approachCommon Pitfalls:Drawing up incomplete list of candidatesUse of screen process to develop a strategyF