Advanced Corporate Finance Lorenzo Parrini May 2017 1 - PowerPoint PPT Presentation

Advanced Corporate Finance Lorenzo Parrini May 2017 1

Introduction Course structure Course structure 3 credits – 24 h – 6 lessons 1. Corporate finance 2. Corporate valuation 3. M&A deals 4. M&A private equity 5. IPOs 6. Case discussions 2

Lesson 3 M&A Deals 3

Lesson 3 Summary M&A Overview 1 Introduction M&A scenario Global M&A scenario in Italy 2 M&A Process Negotiation 3 Closing 4 5 Post merger integration 4

M&A Overview Introduction An M&A transaction is usually a pooling of economic interests, often achieved by combining two companies It’s a complex and iterative process involving multiple skills set: Finance Multi languages/multi cultural/multi time Tax and Legal zones Execution/ M&A Strategy Process Management Tactics Accounting Stock Market 5

M&A Overview Introduction To correctly define extraordinary operations it’s necessary first of all to analyze three aspects which can variously combine Promoter of the Financier operation (external/internal) (financial/strategic) Nature of the financial tool (debt/equity/hybrid) The term M&A is usually improperly used referring to all corporate finance operations. However it would be suitable to narrow down the term to: o Acquisitions/divestitures o Contributions o Mergers/joint ventures that involve third parties o Corporate reorganizations (mergers/spin off between group companies) o Privatizations 6

M&A Overview Introduction Features of an M&A operation can be significantly influenced by the promoter of the operation Industrial Investment Public investors operators company Strategic investor Financial investor perspective perspective Shareholders Funds Merchant bank Strategic investor Financial investor  Usually a competitor or a company which operates in  Usually PE funds, investment company or financial the same supply chain or commercial network holdings  Prevalence of motivations relative to business strategies  Prevalence of motivations related to value growth in the short period (3-5 years) Market share/ Market leadership Financial source injection to finance the business development/restructuring Economies of scale Optimization of the financial structure Horizontal/vertical integration Buy & Build Commercial synergies (channel, sales mix, etc.) Productive synergies or synergies related to Cash generation complementary use of the resources Structure efficiency Exit opportunities 7

M&A Overview Introduction Financial sources used for financing company’s activity can be classified by:  financing tool nature;  financier nature Nature of the Financier External Internal bank side market side Traditional bank Bond loan Shareholders loan debt Mini bond • short term Debt Debt • medium-long term Structured finance Structured finance Project Financing Securitization Mezzanine Convertible B.L. Participation financial Nature of the Financing tool tools Hybrid B.L with warrant Hybrid Participating financial tools Ownership Equity Self financing ( Private Equity / Venture Shares (shareholder’ s Capital/ IPO/ new strategic Equity capital increase) investors ) Warrant Warrant 8

M&A Overview M&A scenario Global Global M&A - Prices and Volumes (2011 - 2016) 7.000.000 120.000 6.500.000 110.000 6.000.000 100.000 5.500.000 90.000 5.000.000 80.000 4.500.000 70.000 4.000.000 3.500.000 60.000 3.000.000 50.000 2.500.000 40.000 2.000.000 30.000 1.500.000 20.000 1.000.000 10.000 500.000 0 0 2011 2012 2013 2014 2015 2016 Deal value ($mln) #deals M&A Western Europe - Prices and Volumes (2011 - 2016) 1.800.000 30.000 1.600.000 25.000 1.400.000 1.200.000 20.000 1.000.000 15.000 800.000 600.000 10.000 400.000 5.000 200.000 0 0 2011 2012 2013 2014 2015 2016 Deal value ($mln) #deals 9 Source: Zephyr (Bureau van Dijk) "Global, FY 2016"

M&A Overview M&A scenario in Italy (1/3) M&A in Italy - Prices and Volumes (2007 - 2015) 700 140 583 600 543 120 495 459 500 100 381 400 340 329 80 279 300 60 197 200 40 100 20 148 56 34 20 28 26 31 50 56 0 0 2007 2008 2009 2010 2011 2012 2013 2014 2015 Deal value ( € mld) #deals Domestic M&A - Prices and Volumes (2007 - 2015) 60 400 350 50 285 300 256 252 256 40 250 205 186 30 200 158 149 117 150 20 100 10 50 60 24 13 7 7 17 14 10 14 0 0 2007 2008 2009 2010 2011 2012 2013 2014 2015 10 Deal value ( € mld) #deals

M&A Overview M&A scenario in Italy (2/3) M&A Cross border - Foreign countries on Italy (2007 - 2015) 30 250 202 201 25 200 20 150 116 109 15 106 91 83 82 100 10 38 50 5 28 12 7 10 18 7 13 27 32 0 0 2007 2008 2009 2010 2011 2012 2013 2014 2015 Deal value ( € mld) #deals M&A Cross border - Italy on Foreign Countries (2007 - 2015) 123 121 60 130 110 97 50 89 90 40 70 63 62 70 30 47 42 50 20 30 10 10 60 20 13 2 3 2 4 13 10 0 -10 2007 2008 2009 2010 2011 2012 2013 2014 2015 11 Deal value ( € mld) #deals

M&A Overview M&A scenario in Italy (3/3) M&A breakdown by sector of the Bidder ( € mln) 41 33 105 103 70 54 52 27 17 22 #deals 87 76 99 114 29 33 82 81 13,9 12,0 11,3 11,3 10,7 7,3 7,0 5,5 5,0 4,5 3,9 3,5 3,4 2,8 2015 2,0 1,1 1,0 2014 0,0 Energy & Utilities Financial Services Consumer Markets Industrial Markets Stock Market Technology Media Private Equity Support Services & Private Investors & Telecomm Infrastructure M&A breakdown by sector of the Target ( € mln) - - 52 49 70 54 163 174 134 174 93 81 - - 70 38 #deals - - 20,4 14,1 12,4 11,8 10,0 7,5 6,8 6,2 5,5 5,1 2015 5,0 1,5 2014 - - - - - - Energy & Utilities Financial Services Consumer Markets Industrial Markets Stock Market Technology Media Private Equity Support Services & Private Investors & Telecomm Infrastructure 12

Lesson 3 Summary 1 M&A Overview M&A Process 2 Phases of an M&A Deal M&A deals: Buy side - Sell side M&A documents Configuration of the sell process 3 Negotiation 4 Closing Post merger integration 5 13

M&A Process Phases of an M&A deal M&A process checkpoint: Targeting  Blind profile (teaser) Preliminary contacts  Non disclosure agreement  Information memorandum  Business plan Preparatory activities  Valuation (range of value) Non Binding Offer Short list of potential counterparts * Competitive Auction/ Private negotiation Process checkpoint limited (one-to-one) Vendor due diligence Letter of intent Binding offers (SPA can be attached) Due diligence Counterpart selection Signing of Acquisition agreement Closing Notes: It’s more frequent in case of industrial investors, in particular in the circumstance that the seller (buyer) has since the beginning of the process a clear idea of the selected counterpart for specific strategic or personal reasons. 14

M&A Process M&A deals: Buy side - Sell side Buy side Pre-Deal Post Deal Deal Execution • • Strategic Direction • Speed of execution Integration • • Deal Origination • Competing against other bidders Customer retention • • • Buying from Private Equity Measuring value Governance and cost • • • Auction process Optimizing value Identifying and evaluating risks and • • Managing Price rewards Key Learning • • Ownership structure Synergy benefits • • External environment Competition clearance • • Organization structure Financing • Managing the SPA process Sell side Pre-Deal Deal Execution Post Deal • • • Deal origination Price maximisation Clean break • • • Strategic positioning Speed of execution Customer retention • • • Auction process Process control Measuring value • • • Carve out Minimising business disruption Key Learnings • • Confidentiality Governance and costs • • Transitional Service level Agreement Pensions • • Early issues identification Rewarding management on exit • • Building a business case Managing the SPA process 15

M&A Process M&A documents After the Targeting activities the Company’s Advisor draws up some documents to start the first contacts with potential investors Information Memorandum Blind profile (Teaser) Non disclosure Agreement A teaser is a blind profile of Information memorandum When a counterpart wants to proceed on the contact it’s contains more complete and the target company that is sent to players that seem to specific information about the necessary to draw up a legal be interested in the operation target Company, as well as contract through which the personal data. It’s useful to (or supposed to be on the parties agree not to disclose basis of facts and give: confidential information information available) covered by the agreement  Detailed  Reference market  Confidentiality of given Company  Activity Profile information  Company’s  Main financial data  Ban market of using position information in someone  Company’s economic personal interest  Ban of submitting and financial situation job  Company’s potentialities proposal to management 16