transaction structure
An overview
Abhijit Sen
OCTOBER 2014
Contents
1. Understanding Transaction Lifecycle
2. Enterprise value and purchase price formulae
3. What is due diligence
4. Types of due diligence
5. Tools for transferring business
Strategic
Analysis
Identify Deals
Opportunity
Analysis
Opportunity
Analysis
Transaction
Development
Negotiation
advice &
Execution
Transaction
Effectiveness
Indicative/
Evaluating the deal Making the deal
Conditional bid
Executing the deal successful
Evaluating the deal Completion & post Exit the deal
( Private Equity)
completion
Strategic
Analysis
Identify Deals
Opportunity
Analysis
Opportunity
Analysis
Transaction
Development
Negotiation
advice &
Execution
Indicative/
Evaluating the
Conditional bid
deal
Evaluating the deal Executing the deal
Completion & post
completion
Buyer activity
Confirm strategy
Identify potential targets
Preliminary desktop evaluation
(public info)
Industry assessment (key for
private equity
4
Transaction
Effectiveness
Strategic
Analysis
Opportunity
Analysis
Opportunity
Analysis
Identify Deals
Transaction
Development
Indicative/
Conditional bid
Evaluating the deal
Buyer activity
Review teaser
Confirm strategic fit or
purchase rationale
Preliminary internal
discussions
Preliminary valuation
Preliminary bid or expression
of intent
5
Negotiation
advice &
Execution
Transaction
Effectiveness
Strategic
Analysis
Identify Deals
Opportunity
Analysis
Transaction
Development
Indicative/
Conditional bid
Evaluating the deal
Opportunity
Analysis
Negotiation
advice &
Execution
Transaction
Effectiveness
Evaluating the
Making the deal
deal
successful
Executing the deal Exiting the deal
Completion & post ( Private Equity)
completion
Buyer activity
Short-listed
Agree on confidentiality
agreement
Review IM
Re-confirm strategic fit
First valuation
possible
Management presentation
Access to target
management
Conduct comprehensive
due diligence
Submit offer (form of letter
and marked-up SPA)
Strategic
Analysis
Identify Deals
Opportunity
Analysis
Transaction
Development
Negotiation
advice &
Execution
Transaction
Effectiveness
Opportunity
Analysis
Buyer activity
Modelling)
Due Diligence (Market,
Financial, Tax, Human
Resource, Real Estate,
Technology, Operations)
SPA Advice
7
Strategic
Analysis
Identify Deals
Opportunity
Analysis
Opportunity
Analysis
Transaction
Development
Negotiation
advice &
Execution
Transaction
Effectiveness
Indicative/
Evaluating the deal Making the deal
Conditional bid
Executing the deal successful
Evaluating the deal Completion & post Exiting the deal
completion
( Private Equity
Buyer activity
Preparation of financial
Strategic
Analysis
Identify Deals
Opportunity
Analysis
Opportunity
Analysis
Transaction
Development
Negotiation
advice &
Execution
Transaction
Effectiveness
Indicative/
Evaluating the deal Making the deal
Conditional bid
Executing the deal successful
Evaluating the deal Completion & post Exiting the deal
completion
Buyer activity
Integration
Restructuring
Consideration of exit options
Sale of business
IPO
MBO
9
10
Strategic
Analysis
Strategic Analysis
Opportunity
Analysis
Opportunity
Analysis
Transaction
Development
Disposal
preparation
Marketing
11
Negotiation
advice &
Execution
Transaction
Effectiveness
Completion
Post completion
Contents
1. Understanding Transaction Lifecycle
2. Enterprise value and purchase price formulae
3. What is due diligence
4. Types of due diligence
5. Tools for transferring business
12
Enterprise Value
13
Enterprise Value
The following methods are typically used to assess the enterprise value of a
business to be purchased:
DCF-entity approach
Projected free cash flows are discounted to the date of valuation
Free cash flows are a gross figure, not accounting for financing structure (equity vs. financial
debt)
Discount rate applied accounts for risk premiums and cost of capital
Multiples on EBITDA/ EBIT figures
An approximation for DCF methods
Applied to normalized EBITDA/ EBIT for either the current year (forecast) or next budget year
Considers multiples paid for comparable transactions
Magnitude of the multiple depends on buyers desire to complete the transaction
Both valuation methods are interrelated and result in a value for the business
The result is a business value, which is a gross value, independent of the
financing structure of the business
14
These adjustments reflect the difference between enterprise value and the
consideration paid to equity shareholders at the date when the economic
ownership is transferred from the seller to the buyer (closing date).
15
Purchase Price
Consideration Formula
16
17
Cash/ Debt
Working Capital
Capex
Non-operating assets
and liabilities
Appropriately classified?
Are any overstated/ understated?
Any unrecorded significant commitments or
contingencies?
18
19
Closing date
Closing date is the date when the economic and legal power over the business
assets and liabilities is transferred from the seller to the buyer.
Closing date is different from the date when the sale and purchase agreement
(SPA) is signed as a result of several factors. Some of them are preconditions:
Conditions to the legal effectiveness of the transaction; for example, payment of the purchase
price
Conclusion of supportive contracts/ agreements
Allowance from anti-trust agreements/Competition Commission of India
Approval of FIPB
Other business related condition precedents
The balances used to determine net debt and working capital adjustments are
typically measured as of the transaction closing date based on the closing
balance sheet or completion accounts.
20
Summary
21
Summary
Enterprise value is typically a gross value, independent of the financing structure of the
business.
Purchase price consideration paid to equity shareholders is based on enterprise value after any
necessary adjustments.
Signing date is the date when the agreement is signed by both parties.
Closing date is the date when the economic and legal power over the business's assets and
liabilities are transferred from the seller to the buyer.
22
Questions?
23
Contents
1. Understanding Transaction Lifecycle
2. Enterprise value and purchase price formulae
3. What is due diligence
4. Types of due diligence
5. Tools for transferring business
24
?
A measure of
prudence or
assiduity, as is
properly to be
expected from,
and ordinarily
exercised by, a
reasonable and
prudent man
under the
particular
circumstance.
a target company
its business; and
the environment in which a target company operates.
Blacks law
dictionary
25
Reciting them
Its about:
Evaluation
Interpretation
Communication
26
strategies
closes
assessing the financial statement
agreements
negotiating financial covenants in credit
agreements
determining future financing strategies
27
Contents
1. Understanding Transaction Lifecycle
2. Enterprise value and purchase price formulae
3. What is due diligence
4. Types of due diligence
5. Tools for transferring business
28
Information technology
Human resources / employee benefits
Commercial
Insurance/ risk management
Legal
Environmental
Regulatory
29
Focus areas
Quality of
earnings,
gross margin
& cash flows
Quality of
assets &
working
capital
Separation/
structuring/
integration Issues
Potential
liabilities &
commitments
Net debt
Other matters
Focus areas
Deal fundamentals
Business environment - markets, competition, regulations
Public listed company
31
Key benefits
Inputs for making Go/No go decision, valuation, risk mitigation in
transaction documents and matters to be addressed post acquisition.
Those issues which would impede
the consummation of the
proposed transaction
Deal Breakers
Commercial override
32
Questions?
33
Contents
1. Understanding Transaction Lifecycle
2. Enterprise value and purchase price formulae
3. What is due diligence
4. Types of due diligence
5. Tools for transferring business
34
35
Merger
Demerger
Acquisition
Asset Purchase
Slump Sale
Asset sale
Share Acquisition
36
1. Merger
Meaning
Pre-merger scenario
Shareholders A Co
Shareholders B Co
A Co
B Co
Post-merger scenario
Shareholders A Co
Shareholders B Co
Company A+B
37
2. Demerger
Transaction
Meaning
Shareholders of A Co
Consideration in the form of
shares of buyer company
100%
A Co
Business
X
Demerger of
Business Y
B Co
Business
Y
Shareholders
100%
X%
A Co
B Co
Business X
Business Y
38
3. Slump sale
Meaning
Shareholders of A Co
Consideration in form of
cash/ shares
Business X
Business Y
Slump sale of
Business Y
B Co
A Co
Resultant structure
Shareholders of A Co
A Co
B Co
Business X
Business Y
in buyers books
4. Asset sale
Certain key considerations
Shareholders of A Co
Consideration in form of
cash/ shares
B Co
A Co
Business X
Sale of certain
assets of
Business X
Resultant structure
Shareholders of A Co
A Co
B Co
Business X
Certain assets
of Business X
40
5. Share acquisition
Certain key considerations
Pre-acquisition scenario
Flow of Consideration
Shareholders (A
Co)
Buyer (B Co)
X
Target Co
Post-acquisition scenario
A Co
Shareholders (B
Co)
Target Co
41
THANK YOU