ucsd english language institute discussion on mergers & acquisitions

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UCSD English Language Institute Discussion on Mergers & Acquisitions Ed Murphy Senior VP, Strategic Transactions (retired) SAIC 8-13-2012

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UCSD English Language Institute Discussion on Mergers & Acquisitions. Ed Murphy Senior VP, Strategic Transactions (retired) SAIC 8-13-2012. My Background. 20 years of M&A experience at SAIC Led team for last several years - PowerPoint PPT Presentation

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Page 1: UCSD English Language Institute Discussion on Mergers & Acquisitions

UCSD English Language InstituteDiscussion on Mergers & Acquisitions

Ed MurphySenior VP, Strategic Transactions (retired)

SAIC8-13-2012

Page 2: UCSD English Language Institute Discussion on Mergers & Acquisitions

My Background• 20 years of M&A experience at SAIC– Led team for last several years– Closed over 100 acquisitions, investments, joint ventures,

and divestitures– Acquired companies with over $2.5 billion in revenue

(SAIC FY12 revenues: $10.6 billion)• 10 years of senior financial line management at SAIC• 3 years at Dyncorp, including 18 months as financial

site manager in Saudi Arabia• Georgetown B.S., Pepperdine MBA

Page 3: UCSD English Language Institute Discussion on Mergers & Acquisitions

How to succeed at M&A• Avoid it – most buyers are not successful• Don’t stray from your competencies• Check your wallet, then your ego• Deals should be material, but not outsized

– Generally, no such thing as a “merger of equals”• Do deals routinely, so they are a competency• Don’t be deluded by success or disappointed by failure; learn

from both

Be a seller, not a buyer!

Page 4: UCSD English Language Institute Discussion on Mergers & Acquisitions

Key Point on M&A • Acquisitions are not a strategy. They should

be an element in the execution of a strategy. Keeping that in mind, and with sufficient resources properly applied and a lot of hard work, you can expect to benefit from the acquisition process.

Page 5: UCSD English Language Institute Discussion on Mergers & Acquisitions

Why Do An Acquisition? Strategic - New business area, new customer,

technology insertion, diversification, defensive

Tactical - Key contract or technology, support of near-term business goals, customer support issue

Opportunistic - Matches existing business at good price, “stress sale”

Page 6: UCSD English Language Institute Discussion on Mergers & Acquisitions

Strategic vs. Financial Buyers

• Strategic generally refers to corporate buyers focused on building a long term business without any thought of selling at the time of acquisition

• Financial generally refers to private equity buyers focused on creating value through growth and/or cost-cutting and eventual sale of the business

Page 7: UCSD English Language Institute Discussion on Mergers & Acquisitions

Strategic vs. Financial Buyers

• Strategic buyers generally have advantages in– Market synergy opportunities– Cost synergies– Lower financing costs using the corporate balance sheet– Deeper understanding of market dynamics and areas of due diligence

Strategic corporate buyers can have competing internal issues that can make the M&A process difficult in not all committed to the same objective and corporate buyers may be more apt to “fall in love” with a deal

• Financial buyers advantages include– Focus almost solely on the financial outcome– Better use of equity to motivate acquired senior management– Experienced in executing multiple transactions– Willingness to use high debt levels to enhance equity returns

Page 8: UCSD English Language Institute Discussion on Mergers & Acquisitions

Process (in context of strategy)

Candidate identification/preliminary discussions Valuation/structure discussion Offer Due diligence and negotiations Closing Integration Operations

Page 9: UCSD English Language Institute Discussion on Mergers & Acquisitions

Pre-Deal Considerations Remain Focused:

Identify value drivers in a transaction

Determine how value drivers will be captured

Ensure negotiated transaction is not inconsistent with value driver capture

Ensure integration and execution plan incorporates achievement of value driver results

Page 10: UCSD English Language Institute Discussion on Mergers & Acquisitions

Pre-Deal Considerations You need to understand an industry or market

before you can understand a company Both strategy and execution are key to successful

acquisitions Low price is not a defense against a poorly-developed

strategy or integration process Execution is probably more important

Direct cost and opportunity cost of an acquisition is significant Make appropriate trade-offs to manage within resources

Page 11: UCSD English Language Institute Discussion on Mergers & Acquisitions

Valuation is the result of financial inputs that model the combined business outlook of buyer and seller; it is much more an overall business process than a financial exercise

Valuation Valuation Inputs

Starting revenue and revenue growth rate Operating profit (EBIT) Net asset base of acquired business Operating capital requirements Tax rate Discount rate

Page 12: UCSD English Language Institute Discussion on Mergers & Acquisitions

Parsing Valuation Inputs (example)

How to calculate revenue growth

• They grew at 10% in the past; together we can use synergy to boost that to 12%

• They grew at 10% in the past; let’s be conservative and use 8%

• What is the economic/market outlook for the combined businesses

• Are there any regulatory concerns that could affect growth

• How will the competition react

• Will the customers fear consolidation of suppliers and spread their business around

• Can we combine sales & marketing, properly train, and provide effective incentives

• Should we assume the integration process will affect near-term sales

• …and so on…

Page 13: UCSD English Language Institute Discussion on Mergers & Acquisitions

Value vs. Price• Value is what it is worth to you; price is what

you pay for it• Price includes the “headline” purchase price,

tax costs/benefits, retention payments, required divestitures; opportunity costs

• Buyer determines value; negotiations determine price

Page 14: UCSD English Language Institute Discussion on Mergers & Acquisitions

Price Considerations• In competitive situations, price is generally set at the margin (high

price wins)• If there are 10 bidders, 9 were not willing to pay the highest price

– who’s right…who won– sometimes “the best deals are the ones you didn’t do”

• Price is rarely the only consideration– Time to close, probability to close are important to most sellers– Best strategic fit and employee considerations are often

addressed, usually in the unspoken context of “if you are the highest price or quickest to close”• Closely held companies can (and have) give these matters more serious

attention

Page 15: UCSD English Language Institute Discussion on Mergers & Acquisitions

Some Reasons Other Companies May Pay More

Greater perceived strategic value More effective use of sales/marketing channels Ability to consolidate / eliminate significant costs Lower required rates of return or financing Ability to utilize tax benefits more effectively Better information Worse information Use of “overpriced” stock; less dilution Desperation Ego

Page 16: UCSD English Language Institute Discussion on Mergers & Acquisitions

Negotiation The Process

Determine what items/issues are “non-negotiable” Understand/codify your alternatives and walk-away

points Commit to your willingness to walk away

If you won’t walk away, the other side has all the power

During the negotiations, maintain a focus on the key issues and the ability to operate the business post-closing

Look at the situation from the seller’s perspective

Page 17: UCSD English Language Institute Discussion on Mergers & Acquisitions

Negotiation• Negotiation often begins with substantive

facts on both sides• As competitive interest grows, or fear of losing

increases, negotiations often turn on fiction masquerading as fact

• Value needs to remain in clear view; don’t allow price to cloud your view of value

Page 18: UCSD English Language Institute Discussion on Mergers & Acquisitions

“Doing the Deal” and “Making the Deal Work”

Orig

ination

Due Dilig

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Signin

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Closin

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Norm

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Reso

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“Doing the Deal” Team

“Making the Deal Work”Integration Team

Page 19: UCSD English Language Institute Discussion on Mergers & Acquisitions

Real World Case #1• Multiple bidders, including Lockheed Martin, SAIC, Home Depot

and Private Equity• Bids had a wide range; we focused on developing strong

relationship with management of selling company and price near high end of value range

• Low margins but very efficient asset utilization provided high return on net assets

• Difficult discussion with board due to low margins• Focused on high ROI

• Integration and retention of key management made the deal very successful

Key manager of acquired business now runs a much larger piece of SAIC business

Page 20: UCSD English Language Institute Discussion on Mergers & Acquisitions

Real World Case #2• Price expectation was set high by seller• Multiple bidders dropped early– 3 “final” bidders• Bidder A had become inactive, still “on-the radar”• Bidder B & C close in price initially• Bidder B raised price by almost 20%• Bidder C considered price increase above “value”, stood

pat due to board concerns, then withdrew bid• Bidder B won with no other bidders, overpriced bid

Page 21: UCSD English Language Institute Discussion on Mergers & Acquisitions

Real World Case #3• Bidder A bids a price much higher than other bidders;

is selected by buyer• fails to get buyer board approval; drops out

• Bidder B has next highest price• inexperienced in getting deals done• cautious board takes too much time

• Bidder C has 3rd highest price; moves toward closing• ignores seller’s insistence for higher price and “immediate” closing• internal discussions: will price increase help or not• completes diligence and insists on closing or walk-away; deal closed

Market turns unfavorable in near-term; was lowest price still too high?

Page 22: UCSD English Language Institute Discussion on Mergers & Acquisitions

Summary• Determine your strategic intent• Summarize your key points & value drivers, get them agreed to before

the “heat of the battle”• Determine your value range and stick to it• Avoid the hype (there will be a lot) and stay close to your value, in

price, process & structure– New information can change your view of value, but remember fiction

masquerading as fact• Allow a margin of error to be successful

– This means you will lose a lot of deals to those who don’t allow a margin of error

– Winning 20% of deals and liking all of them is better than “winning” 80% of deals and liking 20% of them