about the authors A Denzil Rankine Acquisition ‘straightforward, comprehensive and clear – an c PeteR Howson Denzil Rankine is Executive Chairman of excellent guide to this complex topic.’ EssEntiAls q Amr international, which he founded in 1991, Russell taylor, Ceo, ite plc and has over 30 years’ experience of advising second edition u A step-by-step guide to companies on acquisitions and strategic development. He is also author of A Practical i Acquisition smArter deAls Guide To Acquisitions (Wiley), Commercial s Due Diligence (Financial times prentice Very few of the world’s top businesses have got to i Do you really understand the business you Hall), Why Acquisitions Fail (Financial times t EssEntiAls are thinking of buying? prentice Hall) and Due Diligence (Financial where they are without acquisitions, but how should i times prentice Hall). you approach such a risky decision? o what is the right price? How well prepared are you for the Peter Howson is a director of Amr n negotiations? International and has over 30 years’ experience A step-by-step guide to what does all that lawyer speak mean? of M&A and business development both in E industry and as an advisor. step-by-step, this book explains the principles and practices of smArter deAls Have you developed a clear integration plan successful mergers and acquisitions: from identifying the target at the s in advance? start to integrating the acquired business at the end. Helping you to what is the distraction potential for managing s make sounder judgments and sharper decisions, this book will guide you your core business? through the five key phases of an acquisition: E Have you worked out what to do after the acquisition? n • strategic and acquisition planning • acquisition target evaluation t These are challenges faced in every acquisition. • Deal management i Acquisition Essentials is your comprehensive A and crystal-clear companion to getting the right • integration management answer to these questions so you and your l • Corporate development business make the right decisions and deliver s a successful acquisition. guiding you step-by-step through the m&A process, it will help you understand the Acquisition Essentials is here to help you make the important issues and master the important second critical decisions and meet the critical challenges of edition interventions that make the difference between success and failure. M&A with speed and confidence. HR oa wn k s i on ne BUSINESS Visit our website at www.pearson-books.com Visit our website at Cover image © getty images www.pearson-books.com CVR_RANK0633_02_SE_CVR.indd 1 03/12/2013 10:02 Acquisition Essentials A01_RANK0633_01_SE_FM.indd 1 03/10/2013 10:51 At Pearson, we believe in learning – all kinds of learning for all kinds of people. Whether it’s at home, in the classroom or in the workplace, learning is the key to improving our life chances. That’s why we’re working with leading authors to bring you the latest thinking and the best practices, so you can get better at the things that are important to you. You can learn on the page or on the move, and with content that’s always crafted to help you understand quickly and apply what you’ve learned. If you want to upgrade your personal skills or accelerate your inspiration, we can help you make progress in your work and life. Pearson is the world’s leading learning company. Our portfolio includes the Financial Times, Penguin, Dorling Kindersley, and our educational business, Pearson International. To learn more please visit us at: www.pearson.com/uk The Financial Times With a worldwide network of highly respected journalists, The Financial Times provides global business news, insightful With over 500 journalists reporting from 50 countries worldwide, our in-depth coverage of international news is objectively reported and analysed from an independent, global perspective. A01_RANK0633_01_SE_FM.indd 2 03/10/2013 10:51 Acquisition At Pearson, we believe in learning – all kinds of learning for all kinds of people. Whether it’s at home, in the classroom or in the Essentials workplace, learning is the key to improving our life chances. That’s why we’re working with leading authors to bring you the latest thinking and the best practices, so you can get better at the things that are important to you. You can learn on the page or on the move, and with content that’s always crafted to help you understand quickly and apply what you’ve learned. A step-by-step guide to If you want to upgrade your personal skills or accelerate your smarter deals inspiration, we can help you make progress in your work and life. Pearson is the world’s leading learning company. Our portfolio includes the Financial Times, Penguin, Dorling Kindersley, and our educational business, Pearson International. Second edition To learn more please visit us at: www.pearson.com/uk Denzil Rankine and Peter Howson The Financial Times With a worldwide network of highly respected journalists, The Financial Times provides global business news, insightful With over 500 journalists reporting from 50 countries worldwide, our in-depth coverage of international news is objectively reported and analysed from an independent, global perspective. A01_RANK0633_01_SE_FM.indd 3 03/10/2013 10:51 PEARSON EDUCATION LIMITED Edinburgh Gate Harlow CM20 2JE United Kingdom Tel: +44 (0)1279 623623 Web: www.pearson.com/uk First published 2006 (print) Second edition published 2013 (print and electronic) © Pearson Education Limited 2006 (print) © Pearson Education Limited 2013 (print and electronic) The rights of Denzil Rankine and Peter Howson to be identified as authors of this work have been asserted by them in accordance with the Copyright, Designs and Patents Act 1988. Pearson Education is not responsible for the content of third-party internet sites. ISBN: 978-1-292-00063-3 (print) 978-1-292-00064-0 (PDF) 978-1-292-00065-7 (ePub) 978-1-292-00514-0 (eText) British Library Cataloguing-in-Publication Data A catalogue record for the print edition is available from the British Library Library of Congress Cataloging-in-Publication Data Rankine, Denzil. Acquisition essentials : a step-by-step guide to smarter deals / Denzil Rankine and Peter Howson. -- 2nd edition. pages cm Includes index. ISBN 978-1-292-00063-3 (pbk.) 1. Consolidation and merger of corporations--Handbooks, manuals, etc. I. Howson, Peter, 1957- II. Title. HG4028.M4R26 2013 658.1’62--dc23 2013035632 The print publication is protected by copyright. Prior to any prohibited reproduction, storage in a retrieval system, distribution or transmission in any form or by any means, electronic, mechanical, recording or otherwise, permission should be obtained from the publisher or, where applicable, a licence permitting restricted copying in the United Kingdom should be obtained from the Copyright Licensing Agency Ltd, Saffron House, 6–10 Kirby Street, London EC1N 8TS. The ePublication is protected by copyright and must not be copied, reproduced, transferred, distributed, leased, licensed or publicly performed or used in any way except as specifically permitted in writing by the publishers, as allowed under the terms and conditions under which it was purchased, or as strictly permitted by applicable copyright law. Any unauthorised distribution or use of this text may be a direct infringement of the authors’ and the publishers’ rights and those responsible may be liable in law accordingly. 10 9 8 7 6 5 4 3 2 1 17 16 15 14 13 Cover image: Getty Images Print edition typeset in 9.5/13pt Din Pro Regular by 30 Print edition printed and bound in Great Britain by Clays Ltd., Bungay, Suffolk NOTE THAT ANY PAGE CROSS-REFERENCES REFER TO THE PRINT EDITION A01_RANK0633_01_SE_FM.indd 4 03/10/2013 10:51 Contents About the authors viii Foreword ix Publisher’s acknowledgements xiii 1 The foundations 1 Introduction 2 Bad news … most acquisitions fail 2 Planning for success 2 Strategic and acquisition planning 4 Acquisition target evaluation 7 Deal management 10 Integration management 12 Corporate development 13 Getting it right 15 Conclusion 16 2 Finding candidates 17 Introduction 18 Running an acquisition search 19 Strategy 19 Identify the universe of acquisition candidates 22 Screen potential targets 23 Draw up a shortlist 26 Make an approach 30 Conclusion 34 3 Preliminary negotiations 35 Introduction 36 The confidentiality agreement 36 The letter of intent 38 Enforceability of the letter of intent 42 Conclusion 44 v A01_RANK0633_01_SE_FM.indd 5 03/10/2013 10:51 TS 4 Working with advisers 45 N TE Introduction 46 N O Who does what? 46 C Before involving advisers 48 When to involve advisers 48 Selecting advisers 49 The advisory team 49 Briefing advisers 51 Terms of reference 51 Fees 52 Liability caps 53 On appointment 53 Day-to-day management of advisers 54 The final report 55 Conclusion 56 5 The integration plan 57 Introduction 58 The golden rules of acquisition integration 58 The integration plan 75 Post-acquisition review 81 Conclusion 83 6 Investigating the target 85 Introduction 86 What is due diligence about? 86 When should you do it? 86 Be prepared for obstacles 87 Remember: the target will have prepared 88 How do I know what due diligence to do? 93 Who does due diligence? 94 What do I do? 95 Get the right team 96 Other points to watch 97 Commercial due diligence 98 Why carry out both CDD and FDD? 123 Financial investigations 124 Legal investigations 136 Conclusion 140 7 Valuation 143 Introduction 144 vi A01_RANK0633_01_SE_FM.indd 6 03/10/2013 10:51 Valuation is not best left to the experts 144 S T N There is no single number 144 E T The valuation process – a summary 146 N O C Valuation is not just about modelling 148 Calculating synergies 149 Valuation techniques 150 Conclusion 169 8 Negotiation 171 Introduction 172 The basics 172 Preparation 173 Starting discussions 181 Keeping control 184 Dealing with tactical ploys 184 Trading concessions 189 Splitting the difference 191 Dealing with pressure devices 191 Unblocking bottlenecks 192 Body language 194 The green light 195 Learn to recognise and return signals 195 What to do when ‘win-win’ will not work 196 Conclusion 197 9 The sale and purchase agreement 199 Introduction 200 Why is a contract necessary? 200 The agreement 201 Warranties and indemnities 213 Post-deal 220 Alternatives to contractual warranties and indemnities 221 Cross-border issues 221 Conclusion 221 Appendices Appendix A Checklist for a financial due diligence investigation 223 Appendix B Checklist for legal due diligence 229 Index 235 vii A01_RANK0633_01_SE_FM.indd 7 03/10/2013 10:51 About the authors Denzil Rankine is chief executive of AMR International, which he founded in 1991. He has grown the business to become a world leading market and strategic due diligence specialist, based in London, Frankfurt and New York. Denzil has 20 years’ experience of advising companies on acquisi- tions and strategic development. After his early career in the USA he has worked on many hundreds of acquisition programmes with European and American acquirers. Denzil has advised on agreed and hostile acquisitions and private equity transactions with values ranging up to $2 billion. This work has taken him to 33 different countries. Denzil is the author of four M&A related books: A Practical Guide to Acquisitions (Wiley), Commercial Due Diligence – a guide to reduc- ing risk in acquisitions (Financial Times Prentice Hall), Why Acquisitions Fail (Financial Times Prentice Hall) and Due Diligence (Financial Times Prentice Hall). Peter Howson is a director of AMR International, London’s leading com- mercial due diligence specialist. Peter has over 20 years of M&A and business development experience both in industry and as an adviser. Before joining AMR in 1998 Peter worked in corporate finance at Barings where he focused on domestic and cross-border deals in manufactur- ing industries. Prior to that he was part of the small team which, through 75 acquisitions and disposals, transformed TI Group, a UK PLC, from a domestic manufacturer of mainly commodity products into a global engi- neering company focused on specialist niche markets. He has also held senior finance and M&A roles with British Steel and T&N. He is a qualified accountant and has an MBA from Manchester Business School. viii A01_RANK0633_01_SE_FM.indd 8 03/10/2013 10:51 Foreword Acquisition decisions are not like other decisions. In Chapter 1, Denzil and Peter point out that ‘most acquisitions fail’, and these are normally the main words of caution to managers. However, decisions with low success rates are familiar to most managers. Think of new product launches or management appointments or IT investments. Against these compari- sons, success rates of 30–50 per cent seem quite normal. So the special feature of acquisitions is not their low success rate. The special feature is that acquisition decisions involve big stakes and small prizes. In most decisions, such as a new product launch, managers make an investment of a few million and, if the decision succeeds, expect to reap returns five or ten times the investment. Of course, a percentage of the time the investment fails; but the failures are paid for by the successes: one success can usually support three or four failures. With acquisitions the sums are different. In an acquisition the buyer normally pays full value for the target company plus a premium. In other words the buyer pays the discounted value of all future cash flows from the business, plus 10–50 per cent more. The reason why buyers pay premiums is important to understand. They pay premiums because they are normally in competition with other buyers and because they often need to pay a premium to persuade the seller to sell. The prize is the value of the business after it has been improved by and integrated with its new owners less the total amount paid to the seller and spent on the deal and integration process. If the premium is 30 per cent, a number that Denzil and Peter consider normal, and the value of the business after it has been improved and integrated is 150 percent of its value before acquisition, the prize is 20 per cent. In other words, the buyer has spent 130 percent for a prize of 20 per cent: a decision of big stakes and small prizes. In this situation – a stake of 130 and a prize of 20 – the successes are unlikely to pay for the failures. One bad decision can lose the buyer 100 which will only be recouped by five good decisions. The economics of ix A01_RANK0633_01_SE_FM.indd 9 03/10/2013 10:51