Mergers and Acquisitions For Dummies (17 page)

Step 5: Send or review the confidential information memorandum

If the confidentiality issue in the preceding section is socked away and settled, Seller provides Buyer with a boatload of information, usually in the form of a book known as an
offering document,
deal book,
or some similar title. The offering document provides a huge amount of informational about Seller: financials, customer info, employee info, products, marketing, operations, legal, real estate and fixed assets, and more. The offering document should provide sufficient information for Buyer to make an initial offer. I cover offering documents further in Chapter 8.

Step 6: Solicit or submit an indication of interest

If the Buyer reviews the offering document (see the preceding section) and is interested in pursuing a deal, Buyer indicates that interest in the aptly named
indication of interest
(IOI). An IOI provides a valuation range (not a specific price) Buyer would consider paying for the company, as well as some other basic info (estimated closing date, source of funds, basic composition of the purchase price, and so on). An IOI is nonbinding, which means it can't be enforced in a court of law. See Chapter 9 for more.

Step 7: Conduct management meetings

When the Indication of Interest covered in the preceding section is acceptable to Seller, the next step is for Buyer to meet with Seller's management team. Seller conducts the meeting, which provides a financial update as well as updates to any other issues that may be pertinent for Buyer, such as new customers, lost customers, new hires, new product launches, litigation, and so on. The meeting also allows Buyer and Seller to interact and engage in question and answer sessions — and to gauge whether both sides can play well together. Chapter 10 gives you the lowdown on these meetings.

Step 8: Write or review the letter of intent

If Buyer's management has met Seller's management as noted in the preceding section and is interested in making a firm offer, the next step is the vaunted
letter of intent
(LOI). The LOI is a nonbinding document that forms the basis of the final deal. It contains a specific purchase price (rather than a range) and provides the steps needed to close the deal. The LOI usually includes an
exclusivity clause,
which means Seller can no longer negotiate with other Buyers. Flip to Chapter 13 for details on making and receiving offers.

Exclusivity is an enormous issue! Grant it carefully.

Step 9: Perform due diligence

When Seller accepts Buyer's LOI (see the preceding section), the process moves to
due diligence,
where Seller discloses all its contracts, financials, customer info, employee info, and much more to Buyer. These days, the due diligence info is usually provided in a secure, online data room. Seller's investment banker manages this process, which I cover more thoroughly in Chapter 14.

Step 10: Draft the purchase agreement

If due diligence (see the preceding section) is progressing reasonably well, the parties draft a purchase agreement. The
purchase agreement
is the final document, which means it's the binding document (at long last!). The lawyers for Buyer and Seller work out the details of the purchase agreement; see Chapter 15 for more.

When drafting the purchase agreement, make sure the lawyers hammer out the legal details and
only
the legal details. All of the business particulars should be handled by the investment bankers. Lawyers should never, ever, upon pain of death, negotiate a single business term! It's not their job. Lawyers aren't the deal-makers; they're the people who make sure the deal-makers don't agree to something illegal or unenforceable in a court of law. Business and legal issues are two separate worlds and each should be handled by the appropriate party.

Step 11: Show up for closing

When the parties are ready to wrap up the deal, both sides meet (usually in a lawyer's office) to close the deal. It's mainly a sign-this, sign-that kind of a day, much like the closing for buying a house. After all the documents are signed, the money is wired to the appropriate parties, and the deal is done! Chapter 16 provides more info on closing.

Step 12: Deal with post-closing adjustments and integration

After the deal actually closes, the real work begins: tying up the loose ends of the deal in the post-closing adjustments and integrating the acquired company into Buyer's company. See Chapters 17 and 18 for more on how to do just that.

For those of you who successfully complete the M&A process, there's a special Step 13, a hidden track on the M&A CD, if you will: enjoying your success. One of the benefits of successful deal-making is the money, the wealth creation, and the self-actualization that comes from success. Before you think that's merely a joyful ode to money making . . . well, okay, it is. But more than that, successfully doing deals means creating wealth and opportunities for others. A consummate deal-maker expands the economy as she improves her personal balance sheet. The best deals, where both sides make money, come from the value creation of hard work and ingenuity and the hardnosed ability to negotiate mutually beneficial deals. If you don't believe that — if you can't sleep well at night because engaging in M&A activities bogs you down with some sort of guilt — you may want to find a new line of work.

Exploring Two Types of M&A Processes: Auction versus Negotiation

The world of M&A breaks down into two large camps: negotiated sales and auctions. Although they're similar (they both follow the same steps outlined in “Take Note! The M&A Process in a Nutshell” earlier in the chapter), auctions and negotiated sales have a few key differences.

An
auction
is a business sale process where a group of Buyers makes their final and best bids and the company goes to the best bid. So what does best bid mean? In most cases, the
best bid
is the highest price, although Sellers do examine other factors, including Buyer's ability to close a deal, how much of the sale price is in cash, and when Seller will receive that cash.

For example, say Seller is examining two bids. One bid has a total deal value of $10 million, with $1 million in cash at closing and $9 million in the form of a
note
(a promise to pay later). The other offer is for $5 million, all cash at closing. Which is the better deal? Perhaps the first bid ($10 million total value) makes the most sense; after all, it's more money. But depending on the situation, the second bid, although lower, may make more sense; perhaps Seller is willing to forgo a higher potential price for the certainty of more cash today.

A
negotiated sale
occurs when Seller (or Seller's advisor) talks with each Buyer and perhaps tailors the pitch to highlight those benefits that will be most appealing to each individual Buyer. A negotiated sale still has elements of an auction (numerous participants making bids), but a negotiated sale involves a lot more hand-holding of the Seller.

Which process is better depends on the situation. An auction usually works best for larger, well-known companies. In these cases, Buyer may be willing to pay a premium for a famous company.

A negotiated sale works best for smaller companies or companies with losses or thin profits.

Some Buyers shy away from auctions. Although an auction can be a great way to sell a company, the auction may result in an unintended consequence: no bids!

Who Has It Easier, Buyer or Seller?

Anyone who has worked a sales job has probably dreamed about being on the other side: the buyer, the person who seemingly has all the power. Buyers, after all, are the ones who pick and choose. They get to interview numerous possible vendors and pick the one that delivers the best combination of price, quality, and, often, the intangibles of an interpersonal connection.

But in mergers and acquisitions, that scenario gets flipped on its head. Buying companies is actually more difficult than selling companies because the M&A Buyer plays the role of vendor; Buyer has to market its deal to Seller the way a traditional salesperson would sell his or her product. The following sections look at each of these positions.

Selling is easy if you know what you're doing

M&A is a strange industry because it's one of the few that I can think of where the selling functions are in many ways easier than the buying functions.

Simply put, quality companies with critical mass are in demand. (For more on what that means, see the nearby sidebar.) Suffice it to say that after a company gets above a certain revenue level and especially a certain profit level, Buyers of all shapes and sizes start chasing it. When an owner decides she wants to put her company up for sale, she stands a good chance of being in the driver's seat. Assuming she follows the proper M&A process (as I outline in the earlier section “Take Note! The M&A Process in a Nutshell”), she'll likely have multiple offers, thus putting her in a position of control.