Mergers & Acquisitions . . . How to get the maximum value for your business. ~ www.phystone.net ~ Maximum value to Seller . . . Value Enhancers Tax Benefits • Diminished tax liability • Advantageous structure of sale Payment: cash or kind Value Strategic Benefit Future Value Intangible Value • Immediate liquidity for business • Ability to invest entire proceeds into interest bearing investments • Realization of marginal revenue and / or cost saving opportunities through combination • Future earnings potential of business • Growth of market share • Value of goodwill, customer base, technology, management • Economic value of business Book Value • Book value of equity created Mergers & Acquisitions – Phystone Consulting WLL 2 Step 1: Financial Recasting . . . Profit Mechanics of Value • Asset book value vs asset market value M & A Recast • Owner’s compensation • Professional manager Value • Perks P & L Recast Tax Returns Future Past 5 years Mergers & Acquisitions – Phystone Consulting WLL 3 Step 2: Market Positioning . . . Drivers of Premium Valuation Increasing Customer Base Value Drivers Redefining Target Market Realistic market research and analysis Improving Client Relationships Globalization Pro forma financials Understanding the latest M&A trends Product Innovation Value Mergers & Acquisitions – Phystone Consulting WLL 4 Step 3: Pro Forma Financials . . . Profit Mechanics of Value Realistic market research and analysis M & A Recast Value P & L Recast Tax Returns Future Past 5 years New organizations with significant financial and organizational resources will be able to sustain projected growth Mergers & Acquisitions – Phystone Consulting WLL 5 Step 4: Company Valuation . . . • Quantitative Analysis Financial Analysis Precedent M&A Transaction Developing a Comprehensive Valuation Model Accretion / Dilution Analysis Discounted Cash Flow Analysis (DCF) Publicly Traded Comparables Leveraged Buyout Analysis • Quantitative Analysis Value Enhancers Analysis Competitor Analysis Operational Financial External Market Trends Analysis Growth Opportunities Analysis Risk Factors Analysis Mergers & Acquisitions – Phystone Consulting WLL 6 Step 5: Buyer Identification . . . Buyer Universe Sources for Identification Past Acquisition experience Private Companies Public Companies Employees Databases M & A Publications Buyer Recent IPOs Investment Groups Competitors Industry Associations and Trade Shows Suppliers Customers Trade Publications Mergers & Acquisitions – Phystone Consulting WLL 7 Step 6: Marketing Collaterals . . . Teasers Initial offering document outlining business created to generate interest in potential buyers Name, price and confidential information about company is not disclosed until confidentiality agreement is signed Offering Memorandum Document containing investment highlights, detailed business description, industry and competitive analysis, and detailed financial information Distribution should be closely tracked and confidentiality strongly guarded Management Presentation Presented upon buyer showing interest Detailed business overview given in conjunction with management discussions Mergers & Acquisitions – Phystone Consulting WLL 8 Step 7: Planning . . . Event Time Sending the Teaser 2 to 3 weeks Buyer shows Interest 1 to 2 weeks Discussion with prospective buyers 2 to 3 weeks Signing the Confidentiality Agreement 1 to 2 weeks Sending the Offering Memorandum 1 to 2 weeks Non-Binding Indication of Interest 2 to 3 weeks Meeting with Management / Tour of Seller's Premises 1 to 2 weeks Due Diligence 1 to 2 weeks Drafting the Sale Agreement 1 to 2 weeks Negotiate Transaction with the Buyer 1 to 2 weeks Close the transaction 1 to 2 weeks Total: 14 to 24 weeks Mergers & Acquisitions – Phystone Consulting WLL 9 Step 8: Due Diligence . . . Legal Financial Business Complete disclosure of all Recast the pro forma financials Complete overview of assets, probable lawsuits and other with sound and realistic technologies, employees, and possible liabilities assumptions processes § Risk § Risk § Risk Legal issues not fully-disclosed incomprehensible and non- A lack of an easy to understand that arise in later stages can be defensible financials can lead to overview of operations can reduce used as a tool to drive down erosion of value during the value of business valuation negotiations Mergers & Acquisitions – Phystone Consulting WLL 10 Step 9: Negotiation. . . Key Deal value enhancers Earn-outs: Additional consideration paid upon seller achieving particular milestones Employment Compensation: Guaranteed employment contracts subject to buyer’s perception of necessary ongoing relationship Debt Extinguishment: Agreement to assume and/or extinguish company / owner-related debt Dollars, Puts, Options: Establishes “locked-in” value of buyer stock paid to seller •Risks Becoming Personally Involved: A seller becoming personally involved hampers the seller’s ability to achieve maximum value Neglecting Customers, Suppliers, and Employees: Too much personal focus on deal can hurt strength of ongoing business Agreeing on Details Too Quickly: Agreeing on details too quickly prevents seller’s ability to negotiate Mergers & Acquisitions – Phystone Consulting WLL 11 Step 10: Deal Structure. . . Asset Deal Stock Deal Generally preferred by buyers Generally preferred by sellers Risk considerations Risk considerations Seller retains liabilities and contracts not Seller not responsible for company liabilities specifically assumed Tax considerations Tax considerations Immediate tax hit to buyer Long term capital gain rates for seller Affords buyer ability to write up assets (tax basis), Elimination of double taxation for buyer increase deductions and after-tax cash flow Mergers & Acquisitions – Phystone Consulting WLL 12 Phystone Consulting WLL, Al Moayyad Tower, 21st Floor, Office 2113, PO Box 18259, Manama, Kingdon of Bahrain Tel: +973 17 567 980 / 82 Fax: +973 17 567 901 Mergers & Acquisitions – Phystone Consulting WLL 13