GRUBISIC & Partners will act as a project manager and financial advisor and accordingly will provide you with support in structuring, preparation, managing and closing of any company acquisition. Although, each transaction is unique we have listed below the short description of steps which are common to each transaction in the organised process of acquisition of privately owned, unlisted company. These steps could be adjusted to the circumstances specific for each transaction. Before you proceed with further reading of the steps, we advise you to read the part on Company Sale, for the purposes of better understanding of processes, actions and documentation in company acquisition.
- A structured process of company acquisition starts with identification of the target firm. If the client has not identified potential candidates for acquisition, GRUBISIC & Partners can perform systematic screening on the selected markets, in order to create the list of all potential targets.
- First step in the process of market screening is formation of preferred target profile (geographic area, size, production capacity, indicative transaction value, etc.).
- If the target is in formal process of public sale (which includes participation of a number of interested buyers) the representatives of the seller will contact potential buyers and send initial information on the subject of the transaction (teaser).
- If the target is not in the formal process of sale, GRUBISIC & Partners will initiate contact with the target or the target’s representatives. Some owners, especially the owners of family businesses, hesitate to communicate their willingness to sell the company. Consequently, this process assumes maximum professionalism and confidentiality from all interested parties. Hence, seriously interested buyers will be prepared to sign a confidentiality agreement, including the fact that the target is in the formal process of sale or that the target has already started negotiations with other potential buyers.
- In the process of public sale, the seller’s representatives will deliver information memorandum to all interested buyers. The information memorandum includes detailed description of company’s business, products and services, financial information including historic data and forecasts, etc. Buyers should also request the report i.e. conclusions of vendor due diligence, if one has been performed.
- Based on the documentation provided, GRUBISIC & Partners will perform the initial valuation of the target company using one or combination of the following methods: (1) discounted cash flow (DCF) model; (2) valuation using comparable transaction multiples in the same industry; (3) valuation based on the trading indicators for comparable companies listed on the stock exchange.
- If the sale process is not a public (auction) one, GRUBISIC & Partners will request from the target company data and information similar to those listed in the information memorandum. In order to ensure that the regular business of the target is performed without interruptions and to allow for better communication and understanding in the sale process GRUBISIC & Partners' suggestion to target’s representatives would be to appoint the advisor which is specialised in mergers and acquisitions.
- Based on the information stated in the information memorandum, answers from additional questions and results of indicative valuation, the buyer would, in case of further interest, jointly with its legal and financial advisor create an indicative, non-binding offer, which would be given to the seller. The offer should clarify the important assumptions used in the indicative valuation, describe sources of financing for conclusion of transaction and list all (pre)conditions for closure of transaction, which buyer plans to incorporate in obligatory offer.
- In general, if the seller considers the indicative offer acceptable, the buyer is interested to obtain additional details on target through due diligence process.
- As part of due diligence process, it is usual that the seller prepares data room where the buyer is provided with all documentation relevant for the transaction assessment. Buyer’s advisors and internal experts will analyze financial, tax, legal, commercial and technical aspects of the target’s business. The majority of advisors have only the role of coordinators and organizers. As oppose to that, GRUBISIC & Partners take the role of project managers, simultaneously coordinating the work of all team members, while perform independently complete financial due diligence, allowing the client (buyer) to make significant costs savings since there is reduced need for involvment of audit firm.
- The seller would probably give opportunity to interested buyers to speak to company’s management who will present the business, their work and business forecasts for future periods. Buyers and advisors have opportunity to raise questions on open topics. GRUBISIC & Partners will help the buyer with preparation for the meeting with management to enable the most efficient usage of time available on the meeting.
- If the process of disposal is informal (in case the seller accepts indicative offer), GRUBISIC & Partners will send to the seller’s representatives the list of all documentation and data which are to be prepared by the seller and put on the buyer’s disposition as part of the due diligence process. After due diligence, GRUBISIC & Partners will organise meeting with the target’s management.
- The seller or the seller’s legal representatives could prepare and deliver to the buyer draft share purchase agreement after or during due diligence process. This draft contains, inter alias, list of all guarantees and liabilities which the seller is willing to give or take as part of the transaction, as well as risks and events for which the seller is not ready to give guarantees or be held liable. If the seller has performed internal (vendor) due diligence, the results of which have not been included in information memorandum, the report on internal due diligence could be delivered to the buyer.
- Based on the results of due diligence process and other collected information (information memorandum, meetings with the seller’s management) and proposed share purchase agreement clauses, GRUBISIC & Partners will prepare final valuation of the target.
- Based on the above mentioned inputs, legal advisor will prepare draft binding offer. After main components of the offer are agreed upon (price, protection clauses, sources of financing, timetable, additional requests, representations and warranties, etc.), the binding offer will be sent to the seller.
- The seller will enter into final negotiations with the small number of buyers with best offers. As part of the negotiation process, the chosen buyer could get an opportunity (exclusivity) to perform additional due diligence, after which the final terms of the agreement will be determined.
- Legally binding relation between the seller and the buyer starts with signing of share purchase agreement. Signing of share purchase agreement and/or transaction payment could be delayed for the reasons not relating to mutual consent between the parties – e.g. the acquisition needs to be approved by the general assembly of the buyer company or by regulator.
- It is common procedure that part of the agreed transaction price is paid in a special account to allow verification of fulfilment of certain conditions from the contract – e.g. the seller has guaranteed certain level of inventory at the date of transaction’s conclusion which requires checking balance sheet at the date of transaction’s conclusion (preparation of balance sheet reflecting full accounts on transaction closing date can take few weeks).
Payment in cash vs payment with buyer's shares
- Let’s assume that buying company has 50 shares with market value of $36 per share (total $1,800) while the target company has 24 shares with market value of $24 per share (total $576). The buyer has agreed with the shareholders of the target company a purchase price of $27 per share. Two payment options are under consideration:
- Cash payment in the amount of $27 for each share of target company
- Payment in shares of buying company with share exchange ratio of 0.75 shares of buyer company for each share of target company
Additional $3 per share above market price, which the buyer is prepared to pay to the shareholders of the target company in order to motivate the seller to sell, represents the premium.
Value of the company following the acquisition will equal = $1,800 + $576 + $120 - $648 = $1,848
Payment of premium means that out of $120 of estimated synergy effects, $48 goes to shareholders of the buying company, while the remaining $72 will be remain to shareholders of the target company.
Payment in shares of the buying company
The buying company will issue 18 new shares which will be given to shareholders of the target company in order to pay for the acquisition of target company’s shares (0.75 shares of the buyer for each of total 24 shares of target company). In this transaction, there is no cash payment; hence the value of the company after the acquisition is higher than in cash payment transaction. The value of the company following the acquisition = $1,800 + $576 + $120 - $0 = $2,496
The buying company has issued additional 18 shares for the purpose of acquisition, ending with a total of 68 shares subsequent to acquisition. The value of each share of the buying company after the acquisition of the target company amounts to $2,496 / 68 =$36.7. The price paid by the buyer i.e. the value received from the shareholder of the target company = 18 shares x $36.7 = $660.6. Out of the estimated $120 of synergy effects, $84.6 goes to shareholders of the target company and $35.4 to shareholders of the buyer.
In share payment transaction, shareholders of the buying company receive smaller proportion of estimated synergies as opposed to cash transaction (35,4$ vs 48$), but are exposed to smaller risk in case the synergies do not materialize es expected. At the same time, shareholders of the target company benefit from higher synergy effects than in cash payment transaction (84,6$ vs 72$), but are exposed to higher risk in case the synergy effects are not realised (because they have not received cash payment).
Effect of payment models on the split between risk and rewards of transaction
The most important factor which determines the payment method is the level of certainty in estimated synergies. With higher probability of the estimated synergy effects realization, the willingness of the buyer to settle transaction in cash would be higher, while the shareholders of the target company should prefer payment in shares and vice versa.
- The buyer assumes the risk of transaction and in return receives potential benefits from the acquisition through realization of synergy effects.
- Benefits from synergies for the shareholders of the target company are limited to the amount of premium received in cash, but are certain (this is very important in case the synergy effects are not realized or are realized in smaller part than initially planned).
- If synergy effects turn to be higher than expected, the whole benefit is with the shareholders of the buyer; however they also take the risk of non-realization of planned synergies.
- Part of the risks (actual synergies being lower than planned) and potential benefits (actual synergies being higher than planned) are transferred to the shareholders of the target company, since they are also shareholders of the buying company.
- Shareholders of the buying company have higher participation in planned synergies than shareholders of the target company, and in return, they are exposed to lower risk in case the synergy effects are not realized, since they are not paying for acquisition in cash.
MBO - Management Buy Out
- Company’s management has more information about the company’s business than other potential buyers and consequently, the decision process is somewhat different. In MBO transaction, key issue represents finding sources of financing the transaction. The most common characteristic of MBO transactions is high level of indebtedness. Usually, company’s management is not able to finance the whole transaction from its own resources, hence the transaction is often structured in a way that part of the sources is provided by private equity fund, which de facto along with company's management becomes a (co)owner of the company.
- GRUBISIC & Partners can help management to structure, prepare, manage and conclude the transaction. This, inter alias, comprise of the following:
- Structuring transaction
- Valuation of the company
- Creating business plan and financial model in order to acquire financing
- Identification, contact and correspondence with private equity funds (if necessary for the completion of transaction) and evaluation of offers
- Contact and correspondence with credit institutions and evaluation of offers
- Coordination of work of other advisors (lawyers, auditors etc.) and all other parties involved in the process
- Advising in final negotiations
- Coordination in preparation of transaction documents (share purchase agreement, contract between PE funds and management, loan agreement, inter-creditor agreement, etc.)
- Closing of transaction
- If it is estimated that management does not require financial support from other investors such as private equity funds, the focus would be on structuring, valuation and raising capital (please refer to Process of Capital Raising).