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Home , Corporate finance

Advanced Corporate

Lorenzo Parrini

May 2017

1 Introduction Course structure

Course structure 3 – 24 h – 6 lessons

1. Corporate finance

2. Corporate

3. M&A deals

4. M&A private

5. IPOs

6. Case discussions

2 Lesson 3 M&A Deals

3 Lesson 3 Summary

1 M&A Overview Introduction M&A scenario Global M&A scenario in Italy

2 M&A Process

3 Negotiation

4 Closing

5 Post merger integration

4 M&A Overview Introduction

An M&A transaction is usually a pooling of economic , often achieved by combining two companies It’s a complex and iterative process involving multiple skills set:

Finance

Multi languages/multi cultural/multi time Tax and Legal zones

Execution/ M&A Strategy Process

Tactics

Stock

5 M&A Overview Introduction

To correctly define extraordinary operations it’s necessary first of all to analyze three aspects which can variously combine

Promoter of the operation Financier (external/internal) (financial/strategic)

Nature of the financial tool (/equity/hybrid)

The term M&A is usually improperly used referring to all corporate finance operations. However it would be suitable to narrow down the term to:

o Acquisitions/divestitures o Contributions o Mergers/joint ventures that involve third parties o Corporate reorganizations (mergers/spin off between group companies) o Privatizations

6 M&A Overview Introduction

Features of an M&A operation can be significantly influenced by the promoter of the operation

Industrial Investment Public operators company Strategic Financial investor perspective perspective Funds Merchant

Strategic investor Financial investor

 Usually a competitor or a company which operates in  Usually PE funds, investment company or financial the same or commercial network holdings

 Prevalence of motivations relative to strategies  Prevalence of motivations related to growth in the period (3-5 years) Market share/ Market leadership Financial source injection to finance the business development/ Economies of scale Optimization of the financial structure Horizontal/ Buy & Build Commercial synergies (channel, sales mix, etc.)

Productive synergies or synergies related to generation complementary use of the resources Structure efficiency Exit opportunities

7 M&A Overview Introduction

Financial sources used for financing company’s activity can be classified by:  financing tool nature;  financier nature Nature of the Financier External Internal bank side market side

Traditional bank Shareholders loan debt Mini bond Debt • short term • medium- term Structured finance Project Financing

Mezzanine Convertible B.L. Participation financial HybridHybrid B.L with tools Participating financial tools

Ownership Equity Self financing ( / Venture (’ s Capital/ IPO/ new strategic Shares Equity capital increase) investors)

Warrant Warrant Nature of of Financing Naturethe tool

8 M&A Overview M&A scenario Global

Global M&A - Prices and Volumes (2011 - 2016) 7.000.000 120.000 6.500.000 110.000 6.000.000 100.000 5.500.000 5.000.000 90.000 4.500.000 80.000 4.000.000 70.000 3.500.000 60.000 3.000.000 50.000 2.500.000 40.000 2.000.000 1.500.000 30.000 1.000.000 20.000 500.000 10.000 0 0 2011 2012 2013 2014 2015 2016

Deal value ($mln) #deals

M&A Western Europe - Prices and Volumes (2011 - 2016) 1.800.000 30.000 1.600.000 25.000 1.400.000 1.200.000 20.000 1.000.000 15.000 800.000 600.000 10.000 400.000 5.000 200.000 0 0 2011 2012 2013 2014 2015 2016

Deal value ($mln) #deals 9 Source: Zephyr (Bureau van Dijk) "Global, FY 2016" M&A Overview M&A scenario in Italy (1/3)

M&A in Italy - Prices and Volumes (2007 - 2015) 700 140 583 543 600 120 495 459 500 100 381 340 400 80 329 279 300 60 197 40 200 20 100 148 56 34 20 28 26 31 50 56 0 0 2007 2008 2009 2010 2011 2012 2013 2014 2015

Deal value (€mld) #deals Domestic M&A - Prices and Volumes (2007 - 2015) 60 400 350 50 285 300 256 256 252 40 186 205 250 30 200 149 158 117 150 20 100 10 50 60 24 13 7 7 17 14 10 14 0 0 2007 2008 2009 2010 2011 2012 2013 2014 2015 10 Deal value (€mld) #deals M&A Overview M&A scenario in Italy (2/3)

M&A Cross border - Foreign countries on Italy (2007 - 2015) 30 250 202 201 25 200 20 150 116 15 109 106 91 82 83 100 10 38 5 50 28 12 7 10 18 7 13 27 32 0 0 2007 2008 2009 2010 2011 2012 2013 2014 2015

Deal value (€mld) #deals M&A Cross border - Italy on Foreign Countries (2007 - 2015) 123 60 121 130

50 97 110 89 90 40 63 70 62 70 30 47 42 50 20 30 10 10 60 20 13 2 3 2 4 13 10 0 -10 2007 2008 2009 2010 2011 2012 2013 2014 2015 11 Deal value (€mld) #deals M&A Overview M&A scenario in Italy (3/3)

M&A breakdown by sector of the Bidder (€ mln)

41 33 87 76 105 103 99 114 29 33 70 54 82 81 52 27 17 22 #deals

13,9 12,0 11,3 11,3 10,7

7,0 7,3 5,5 5,0 4,5 3,5 3,9 3,4 2,8 2,0 2015 1,0 1,1 0,0 2014

Energy & Utilities Consumer Markets Industrial Markets Market Technology Media Private Equity Support Services & Private Investors & Telecomm Infrastructure

M&A breakdown by sector of the Target (€ mln)

52 49 70 54 163 174 134 174 - - 93 81 - - 70 38 - - #deals

20,4

14,1 12,4 11,8 10,0 6,8 7,5 5,5 6,2 5,0 5,1 2015 1,5 ------2014

Energy & Utilities Financial Services Consumer Markets Industrial Markets Technology Media Private Equity Support Services & Private Investors & Telecomm Infrastructure

12 Lesson 3 Summary

1 M&A Overview

2 M&A Process Phases of an M&A Deal M&A deals: - M&A documents Configuration of the sell process

3 Negotiation

4 Closing

5 Post merger integration

13 M&A Process Phases of an M&A deal M&A process checkpoint:

Targeting  Blind profile (teaser) Preliminary contacts  Non disclosure agreement  Information memorandum  Preparatory activities  Valuation (range of value) Non Binding Offer

Short list of potential counterparts

Competitive Auction/ Process Private negotiation* limited checkpoint (one-to-one)

Vendor due diligence Letter of intent

Binding offers (SPA can be attached) Due diligence

Counterpart selection

Signing of Acquisition agreement

Closing

Notes: It’s more frequent in case of industrial investors, in particular in the circumstance that the seller (buyer) has since the beginning of the process a clear idea of the selected counterpart for specific strategic or personal reasons. 14 M&A Process M&A deals: Buy side - Sell side

Buy side

Pre-Deal Deal Execution Post Deal

• Strategic Direction • Speed of execution • Integration • Deal Origination • Competing against other bidders • Customer retention • Buying from Private Equity • Governance and cost • Measuring value • Auction process • Identifying and evaluating and • Optimizing value • Managing Price rewards • Key Learning • Ownership structure • Synergy benefits • External environment • Competition clearance • Financing • structure • Managing the SPA process

Sell side

Pre-Deal Deal Execution Post Deal

• Deal origination • Price maximisation • Clean break • Strategic positioning • Speed of execution • Customer retention • Auction process • Process control • Measuring value • Carve out • Minimising business disruption • Key Learnings • Confidentiality • Governance and costs • Transitional Service level Agreement • • Early issues identification • Rewarding management on exit • Building a business case • Managing the SPA process 15 M&A Process M&A documents After the Targeting activities the Company’s Advisor draws up some documents to start the first contacts with potential investors

Blind profile (Teaser) Non disclosure Agreement Information Memorandum

A teaser is a blind profile of When a counterpart wants to Information memorandum the target company that is proceed on the contact it’s contains more complete and sent to players that seem to necessary to draw up a legal specific information about the be interested in the operation through which the target Company, as well as (or supposed to be on the parties agree not to disclose personal data. It’s useful to basis of facts and confidential information give: information available) covered by the agreement

 Reference market  Confidentiality of given  Detailed Company  Activity information Profile  Main financial data  Ban of using  Company’s market information in someone personal  Company’s economic  Ban of submitting job and financial situation proposal to  Company’s potentialities management

16 M&A Process M&A documents

Teaser

At the beginning of an M&A process the target Company’s Advisor draws up a short anonymous description of its business to test the market interest in the operation

The blind Profile (Teaser) is sent to companies that could potentially be interested in the operation to test the opportunity of carrying on the operation

Typical contents of a teaser are:

 Company headquarter (“Made in Italy”)  Ownership structure (anonymous)  Products short overview  Company activity  Main financial highlights

17 M&A Process M&A documents

Non Disclosure Agreement (Confidentiality Agreement )

In the common praxis the seller is likely to be required to provide some information about the business to prospective buyers/target companies before the beginning of detailed negotiations.

Unless and until a binding sale and purchase agreement has been entered into, a seller will almost certainly want to keep confidential the fact that the business is “for sale” and the fact that discussions/negotiations are taking place with one or more interested buyers. : • It may unsettle its employees • It can impact on relationships with customers • It can impact on relationships with suppliers . Confidentiality Agreement can be: Confidentiality Agreement Contents:

Unilateral: when only one part undertakes the non- disclosure duty. • Parties of the agreement • Definition of what is confidential Mutual: when the parties undertake the non-disclosure duty • Items excluded from what must be one to another and vice versa kept confidential • Term of the confidentiality • Term the agreement is binding

18 M&A Process M&A documents

Information Memorandum When a formal auction process is undertaken, the seller needs to make sure that the same information is given to all prospective buyers

Information Memorandum Normally prepared by seller’s lead advisor on the basis of information provided by the seller

Typical sections of an Info memo are:

 Investment Opportunities  Company profile and Milestones  Company structure   Market overview and competitive strategy  Plants and logistics  Products and commercial network  Details about main relevant data ( breakdown by sector/product/area, ABC clients and suppliers, etc.)  and personnel  Financial highlights (historical trend and forecast)

19 M&A Process Configuration of the sell process

Range of values of the Tratt operation

Competitive Auction

Opportunities & threats Selective Auction  High level of control on information and data  The potential buyer has to show a strong

Process complexity Process will of closing the operation in a quite short period and at an adequate value  The seller is in a weaker negotiating position

Opportunities & threats  Opportunity to keep a competitive pressure on buyers through the preparation of a Vendor Due Diligence  Good control on information and operation timetable  Quite flexible process Private  Maximization of the sale price (seller) Negotiation  Pretty short time

Confidentiality level

20 Lesson 3 Summary

1 M&A Overview

2 M&A Process

3 Negotiation

Letter of Intent Due Diligence

4 Closing

5 Post merger integration

21 Negotiation Letter of Intent It’s a fundamental step of the M&A process, when the parties write down the terms of the transaction. It’s a moral, more than legal, commitment for the parts to respect the agreement.

 Innominate contract, not specifically regulated Obligation of confidential treatment of information (commitment sanctioned even by by the civil code confidentiality agreement)  Pre-contractual document that usually doesn’t bind parties, except for: Contingent exclusive (Seller obligation to not carry on other negotiations for an established stretch of time, defined in the same letter)

Contingent stand still clauses (Seller obligation to not conduct any operation that go beyond company’s ordinary activities)

Letter of Intent’s contents are not peremptorily defined. Its aim, indeed, is to define the main aspects of the negotiation that will be refined with the Sell and Purchase agreement (SPA)

Contracting parties

Object of negotiation

Valuation methods for price determination

Purchase price (related to Due diligence outcome)

Way of payment (with other contingent kinds of reward)

Essential elements for the closing of the operation  Seller’s guarantees about company status  Post- acquisition governance 22 Negotiation Due Diligence

Verifying the presence of elements that don’t allow to realize the investment Aim or (more likely) that require reviews and revisions of one or more contractual conditions (price, guarantees, etc.)

It’s the first phase of due diligence process. The investor directly collects information about the target “Light” Due diligence company, through site visits, meetings with entrepreneur, management and experts

It’s a subsequent phase, conducted by external advisors, which realize careful inspections on behalf “Heavy” Due diligence of the investor, testing different aspects of the target Company

23 Negotiation Due Diligence

“Heavy” Due diligence

Accuracy and extension of “Heavy” Due Diligence depend on

Company dimension

Specific Business factors complexity

Heavy DD Investor experience Investment in target sector features (PE) Investment relevance

24 Negotiation Due Diligence

Commercial DD (Market- Product Analysis )

Financial DD Legal DD (Analysis of (Analysis of legal financial aspects) aspects )

Target Company Operational DD Tax DD (Operative (Analysis of fiscal analysis) aspects )

Environmental DD (Analysis of environmental aspects)

Due Diligence main objective is to verify historical results and to analyze the consistency and reliability of Business Plan development forecasts.

Business DD Integrated DD 25 Negotiation Due Diligence

Commercial, Operational e Financial Due Diligence are very integrated activities necessary for M&A transactions

Check validity of historical/actual data FINANCIAL DUE OPERATIONAL Analysis of cost DILIGENCE DUE DILIGENCE of sold (FDD) (ODD)

Analysis of historical trend

Analysis of strategic COMMERCIAL programs Analysis of fixed DUE DILIGENCE costs

Competitors (CDD) benchmarking

Individuation of Business non-core performance activities review

 Commercial DD: External performance Analysis [Market] and control of the consistency of BP commercial assumption;  Operational DD: Internal performance Analysis [Company] and control of the consistency of BP operative assumption;  Financial DD: Historical performance Analysis and control of reported data.

26 Negotiation Due Diligence

Area Typical Questions Aims and benefits

. Is the strategy sustainable ? . Is the market in a growth phase? . What is competitors’ behavior? Historical and forward analysis . Is the business well positioned in reference markets? . Check of the consistency between CDD . Which threats could emerge? expected results and market context; . What’s the reference regulatory context? . Check of business plan sustainability . Do new markets exist? and reliability. . Are margins sustainable? . Is the Business Plan sustainable?

. What has been company’s historical operative performance? . What’s the cost structure related to this performance? Historical and forward analysis . Are the assumptions at the base of BP correct? . How do improvement plans react to ? . Identification of operative performance; ODD . Is there consistency between the timing of BP results and the . Valuation of performance improvement assumptions? plans . Have been some areas liable to improve efficiency ignored? . Identification of additional . Are there other opportunities to improve company improvement opportunities performance? . Which are current economic and financial business performances? Historical analysis . Is accounts’ classification consistent with reference accounting . Qualitative and quantitative analysis of standards? FDD , liabilities and incomes, for the . Are there non recurring items or normalized items? purpose of verifying economic and . Are funds adequate? financial results and potential liabilities . Are there overestimation elements of Equity?

27 Negotiation Due Diligence

Legal, Tax and Environmental Due Diligence are ancillary activities that refine Due Diligence process to valuate every single aspect of M&A transactions

LEGAL DUE TAX DUE DILIGENCE DILIGENCE analysis (LDD) (TDD)

Identification of potential liabilities ENVIROMENTAL DUE DILIGENCE (EDD) Definition of main Rep & Warranties

28 Negotiation Due Diligence

Area Typical Questions Aims and benefits

. Have tax returns been correctly presented? Historical analysis . Have been taxable incomes correctly determined? . Check of company fiscal aspects, in TDD . Is the company up to date with payments? particular it focuses on tax litigations, . Is the company in relationships with “black list” Countries? tax liabilities and contingent tax . Are there current/potential tax litigations with financial benefits (definition of rep and authorities? warranties).

. Are there current/potential litigation risks? Historical and forward analysis . Does the Company respect current regulations? . Does the Company respect intellectual property rights? . Check of any possible legal matter, LDD . Has the Company correctly edited/updated account books? that could impact on company’s value and/or on the draft of the purchase . Are company’s relationships with employees/agents correctly agreement (definition rep and regulated ? warranties) . Has the Company lent financial guarantees?

. Do factories and plants operate in accordance with current regulations? . Does the Company respect regulation about health and work Historical and forward analysis safety? EDD . Do environmental liabilities and/or related risks exist? . Check of company’s compliance with . Do dangerous materials and substances exist? current regulations and environmental . Does the Company respect current regulation concerning impacts of company’s activity. waste management, water resources management, ground safeguard and air pollution?

29 Negotiation Due Diligence

Data Room

Data Rooms are part of the Due diligence procedure. It represents the place where physically/virtually the due diligence documents are. Its aim is to consent the proposed bidders to analyse the confidential documentation related to target Company.

Virtual Traditional data room data room

 Virtual data rooms are web-sites reserved to the players of the specific transaction, which through a password or an access key can display the documents.  Traditional data rooms are a physically secure room, continually monitored, normally in the vendor’s offices (or those of his lawyers), which the bidders and their advisers will visit in order to inspect and report on the various documents and other data made available.

30 Lesson 3 Summary

1 M&A Overview

2 M&A Process

3 Negotiation

4 Closing

From value to price SPA Closing Different kinds of M&A deals

5 Post merger integration

31 Closing From value to price

Restated net Analogical value Intrinsic value worth

Stand Alone Operating value Cost Synergies

Key risk Price/Exchange Synergies net of Financial mapping and Ratio proposed implementation quantification costs by buyer to seller

Revenue Technical (tax, Synergies legal, Transaction environment..) background

Buyer’s Negotiation Regulatory objectives environment environment

Contrasting objectives of buyers and sellers

32 Closing SPA

M&A transaction ends with a Sale and Purchase Agreement (SPA) regulated by art 2556 and following of Italian Civil Code On the basis of art. 2556 C.C., the Sale and Purchase Agreement:  must be proven in writing and draft in the form of public deed or private deed certified by a notary  the notary must register the contract in the term of 30 days in the company registration list, and he must refer the agreed price and company’s details to the commissioner contractor’s personal data,

Even if it doesn’t have a specific form, SPA usually contains following data:

Contractor’s personal data Conditions related to contract’s suspension/ resolution

Deal structure Regulation of put&call options

Price settlement (conditions, timetable, earn out clauses) Ancillary and specific clauses and payment methods

Assets and liabilities transferred Declarations and guarantees

Seller obligation to not realize relevant changes at the Shareholder’s agreements (attached to contract) transferred company before the closing

Ancillary (properties rent, subordinate Seller’s competition ban (art. 2557 CC) employment , etc.)

33 Closing Closing

Term sheet /Letter of Intent

SPA Signing

Suspending conditions

SPA Closing (contingent N° of purchased shares addendum)

Contract that regulates all Guarantees aspects of the deal, as:

Shareholder’s agreements

Way-out regulation regulation

34 Closing Closing

Despite the SPA is drawn up after due diligence it’s essential to protect the buyer from the risk of economic losses resulting from past management and occurred before the closing.

The seller includes in the agreement some declarations and guarantees

In general in the agreement it’s provided an indemnification obligation for the purchaser, related to company’s previous liabilities and contingent liabilities that should occur, with regard to to the situation of the company resulting from declarations and documents attached to the agreement.

Nature of contingent liabilities can be:

Social Work legislation Fiscal Financial related

Legal Environmental Civil Resp.

Guarantees (usually time and amount limited – allowance and ceiling)  Real: guarantee (usually at first request)  Escrow account (part of the price paid is related to determined conditions)

Even the seller usually asks for guarantees for the amount yet to be collected (also contractual guarantees)

35 Closing Closing

An important feature of SPA are pre-closing covenants, or promises to do/not do something during the period between the signing of the SPA and the closing

Two types of covenants

Positive Negative

Positive covenants obligate the seller or Negative covenants restrict the seller the buyer to take certain actions prior to from taking certain actions prior to the the closing. closing without the buyer’s prior consent.

They can include: They can include:  allowing the buyer full access to the  not changing accounting methods or seller’s books, records, and other practices properties;  not entering into transactions or incurring  obtaining the necessary board and liabilities outside the ordinary course of stockholder approvals; business or in excess of certain amounts;  obtaining the necessary third party  not paying or making other consents; and distributions to stockholders;  making the required governmental filings  not amending or terminating contracts; and obtaining the required governmental  not making capital expenditures; approvals  not transferring assets;

M&A deals usually contain also several conditions to closing: certain obligations that must be fulfilled in order to legally require the other party to close the transaction, such as corporate approvals, governmental filings.

36 Closing Closing - Partnership discipline

Governance Regime of shares outstanding

• Corporate Governance composition: Lock-up clause - Management Designation - Designation Drag along clause - Board of Statutory Auditors Designation • Veto right and BoD exclusive topics regulation

• Decision deadlock regulation Tag along clause • Bad leaver clause • Non Competition agreement Sell (Minority shareholders)

Stock option plan First bid right

37 Closing Different types of M&A deals

Type of transaction

Asset purchase Stock purchase

Acquisition (sale) Acquisition (sale) Cash of assets of shares

Payment Contribution of shares or Stock Contribution of assets merger

38 Lesson 3 Summary

1 M&A Overview

2 M&A Process

3 Negotiation

4 Closing

5 Post merger integration

Types of integration Problems of integration

39 Post merger integration Types of integration M&A deals can configure different kind of integration: Horizontal Vertical

Has same Has different Is a supplier products/services products/services

Has same margin of Has different Is a distributor Target business customers

Is a customer

Protection of the Sector knowledge Spread risk supply chain

Rationale Margins that would be lost

Often deals are called horizontal even if they are not (same clients) Conglomerates suffer the Notes “diversification discount” 10-15% on average More anti-trust issues

40 Post merger integration Types of integration

All synergies in a deal can be classified as

Financial Operative Commercial

Commercial More financial Cost Synergies Synergies sources network

«The Magnificent There may be Revenue . Bigger companies . Geographical seven»: Synergies in a deal, such have more expansion . Central administrative as: possibilities to obtain . New products overheads . Increased sales financial sources than . Sales mix . Manufacturing/produc . Increased prices smaller ones tion capacity . Increased number of . Purchasing Power units sold at higher . Research and prices development . Advertising . Distribution . Selling and marketing

Consequences: for same value different buyers may have different synergies, hence different prices

41 Post merger integration Types of integration

In general through M&A operations companies hope to benefit from the following aspects:

• Mergers usually mean reduction of staff members from accounting, marketing and other departments. “Staff reductions” • Job cuts will also include the former CEO, who typically leaves with a compensation package.

• Bigger company placing the orders can save more costs. • Mergers also translate into improved purchasing power “Economies of scale” • Placing larger orders, companies have a greater ability to negotiate prices with their suppliers.

• By buying an innovative smaller company with unique technologies, a large “New Know-how” company can maintain or develop a competitive edge.

• Mergers allow companies to reach new markets and higher revenues “New Market” • Mergers may expand companies distribution offering new sales opportunities. • Mergers can also improve a company's ability to raise capital than smaller ones

42 Post merger integration Problems of integration

Problems with synergies

Prediction Achievement Costs

. Human nature and buyers’ . Target management often . Synergies have a cost that nature leaves is often . Increase of predicted . Buyers often see the underestimated/ignored: synergies as «deal crisis» acquisition as the end of - Redundancy approach the transaction rather than - Property - Sunk costs the beginning - Environmental - Sunk management time . Five of the seven operative . Costs come before savings - Buyer’s ego costs synergies require job . There is often the possibility . Lack of reliable information cuts, so there may be of negative synergies political, social and regulatory difficulties

43