Working on an IPO for a client…what would I do?
meet with client and gather info. - financial summaries, competitors, customers, industry overview
—meet with other bankers and lawyers to draft S-1 registration stmt. - describes company’s business and markets it to investors (LEARN WHAT IT IS) - revise doc. With SEC’s direction until acceptable
—go to other institutional investors and present company to them to convince them to invest
—then company begins trading on exchange once you’ve raised capital from investors
What’s in a pitch book?
depends on type of deal bank is pitching for - most common:
- Bank “credentials” (similar deals they’ve done to “prove” their expertise) -how does it work with startup?? Research!!
- Summary of a company’s options (“strategic alternatives” in banker-speak).
- Valuation and appropriate financial models (for example, if you’re pitching for an IPO you might show where the IPO proceeds would go).
- Potential acquisition targets (buy-side M&A deal) or potential buyers (sell-side M&A deal). This is not applicable for equity/debt deals.
- Summary and key recommendations
How do companies select the banks they work with?
banks usually develop relationships with companies years before they need anything - when it comes time for the deal, companies call several banks they have relationships with and tell them to “pitch” for the business - called a “bake-off” and the company selects the winner to do the deal for them
Walk me through the process of a typical SELL-side M&A
sell-side M&A with many potential buyers would look like this:
- Meet with company, create initial marketing materials like the Executive Summary and Offering Memorandum (OM), and decide on potential buyers.
- Send out Executive Summary to potential buyers to gauge interest.
- Send NDAs (Non-Disclosure Agreements) to interested buyers along with more detailed information like the Offering Memorandum, and respond to any follow-up due diligence requests from the buyers.
- Set a “bid deadline” and solicit written Indications of Interest (IOIs) from buyers
- Select which buyers advance to the next round.
- Continue responding to information requests and setting up due diligence meetings between the company and potential buyers.
- Set another bid deadline and pick the “winner.”
- Negotiate terms of the Purchase Agreement with the winner and announce the deal
Walk me through the process of a typical BUY-side M&A
- Spend a lot of time upfront doing research on dozens or hundreds of potential acquisition targets, and go through multiple cycles of selection and filtering with the company you’re representing.
- Narrow down the list based on their feedback and decide which ones to approach.
- Conduct meetings and gauge the receptivity of each potential seller.
- As discussions with the most likely seller become more serious, conduct more in-depth due diligence and figure out your offer price.
- Negotiate the price and key terms of the Purchase Agreement and then announce the transaction.
Why do firms merge or acquire other companies?
- Synergy
- Diversification/ sharpen business focus
- Growth
- Increase supply chain purchasing power
- Eliminate competition
M&A 1. Synergy
The most used word in M&A - idea that by combining business activities, performance will increase and costs will decrease - a business will attempt to merge with another business that has complementary strengths and weaknesses - merge with someone who is strong where you are weak
M&A 2. Diversification/ sharpen bus. Focus
These two conflicting goals have been used to describe thousands of M&A transactions - A company that merges to diversify may acquire another company in a seemingly unrelated industry in order to reduce the impact of a particular industry’s performance on its profitability, reduce firm-specific risk - Companies seeking to sharpen focus often merge with companies that have deeper market penetration in a key area of operations
M&A 3. Growth
Mergers can give the acquiring company an opp. to grow market share w/o having to really earn it by doing the work themselves - instead, buy a competitor’s business for a price. Usually, these are called…
HORIZONTAL MERGERS - Ex. a beer company may choose to buy out a smaller competing brewery, enabling the smaller company to make more beer and sell more to its brand-loyal customers
M&A 4. Inc. supply chain pricing power
By buying out one of its suppliers or distributors, a business can eliminate a level of costs - If company buys out one of its suppliers, it is able to save on the margins that the supplier was previously adding to its costs; this is known as….
a VERTICAL MERGER - If company buys out a distributor, it may be able to ship its products at a lower cost
M&A 5. Eliminate competition
Many M&A deals allow the ACQUIRER to eliminate future competition and gain a larger market share in its product’s market - downside of this is that a large premium is usually req. to convince the target company’s shareholders to accept the offer - not uncommon for the acquiring company’s shareholders to sell their shares and push the price lower in response to the company paying too much for the target company
RESTRUCTURING
Advise distressed companies - businesses going bankrupt
–help them change their capital structure to avoid bankruptcy or assist in sale of company
2 sides:
- -advise DEBTOR (company itself) - advise company to try to sell or get out of mess
- -advise CREDITOR - anyone that has lent the company - advise buyers and lenders to take what they can from company
interesting bc get specialized skillset - more valuable - work is more technical/interesting
–good exposure to both positive side and weak points of companies
restructuring does not change the amount of debt outstanding in and of itself – instead, it changes the terms of the debt, such as interest payments, monthly/quarterly principal repayment requirements, and the covenants.
what options available to distressed company that can’t meet debt obligations?
- Refinance (new D&E)– Advantages: Least disruptive to company and would help revive confidence; Disadvantages: Difficult to attract investors to a company on the verge of going bankrupt.
- Sale – Advantages: Shareholders could get some value and creditors would be less infuriated, knowing that funds are coming; Disadvantages: Unlikely to obtain a good valuation in a distressed sale, so company might sell for a fraction of its true worth
- Restructuring – Advantages: Could resolve problems quickly without 3rd party involvement; Disadvantages: Lenders are often reluctant to increase their exposure to the company and management/lenders usually don’t see eye-to-eye
- Bankruptcy – Advantages: Could be the best way to negotiate with lenders, reduce obligations, and get additional financing; Disadvantages: Significant business disruptions and lack of confidence from customers, and equity investors would likely lose all their money
- In a bankruptcy, what is the order of claims on a company’s assets?
- New debtor-in-possession (DIP) lenders (see explanation above)
- Secured creditors (revolvers and “bank debt”)
- Unsecured creditors (“high-yield” bonds)
- Subordinated debt investors (similar to high-yield bonds)
- Mezzanine investors (convertibles, convertible preferred stock, preferred stock, PIK)
- Shareholders (equity investors)
How would a DCF analysis be different in a distressed scenario?
Even more of the value would come from the terminal value since you normally assume a few years of cash flow-negative turnaround.
–also add a premium to WACC to make it higher and account for operating distress.
also have multiple bidders - no huge negotiating leverage so would want multiple bidders to inc. price for client
The 2 basic ways you can buy a company are through a stock purchase and an asset purchase. What’s the difference, and what would a buyer in a distressed sale prefer? What about the seller?
In a stock purchase, you acquire 100% of a company’s shares as well as all its assets and liabilities (on and off-balance sheet). In an asset purchase, you acquire only certain assets of a company and assume only certain liabilities – so you can pick and choose exactly what you’re getting.
