SKEMA MSc CFM 2024 Amphi1 Students PDF

SKEMA PARIS 2024 M&A, Restructuring & L.B.O. This document may not be photocopied, reproduced or distributed to third parties without the prior written consent of Hubble Finance Frédéric CWILING / SKEMA PARIS / 2024 Reproduction prohibited, all rights reserved Course Description This course is dedic...

SKEMA PARIS 2024 M&A, Restructuring & L.B.O. This document may not be photocopied, reproduced or distributed to third parties without the prior written consent of Hubble Finance Frédéric CWILING / SKEMA PARIS / 2024 Reproduction prohibited, all rights reserved Course Description This course is dedicated to the valuation, structuring, financing and negotiation of controlling-equity transactions. It provides the students with a background for understanding mergers and acquisitions, corporate restructuring & LBO. It also provides the building blocks to understand the activity of evaluating a business firm. … and make the students think, and be able to do!!! Frédéric CWILING / SKEMA PARIS / 2024 Reproduction prohibited, all rights reserved Rules / Organisation / Assesment Rules - Course material: not - Webcam “on” - Questions: whenever you want! - There is never a “bad” question! Organisation sufficient!!! => You need to: -be present -listen / write -understand -be able to do - Amphi 1 (6h, Frédéric CWILING) - 2 courses in groups (3h each, Farooq AHMAD) - Amphi 2 (6h, Frédéric CWILING) - 2 courses in groups (3h each, Frédéric CWILING) - 1 Course in groups (3h each, Farooq AHMAD) 2 professors = 2 different views of M&A My only e-mail: [email protected] Frédéric CWILING / SKEMA PARIS / 2024 Reproduction prohibited, all rights reserved Rules / Organisation / Assesment Assesment: 2 grades Final test = MCQ (60%) Frédéric CWILING / SKEMA PARIS / 2024 Business case in groups (40%) Reproduction prohibited, all rights reserved Summary I – WHAT / WHY / HOW II - Schedule of a deal III - LBO Frédéric CWILING / SKEMA PARIS / 2024 Reproduction prohibited, all rights reserved Summary WHAT & WHY Frédéric CWILING / SKEMA PARIS / 2024 Reproduction prohibited, all rights reserved Definition Definition ? Dunod : The term Mergers & Acquisitions is used to design the joining of one or several entities in one entity ??? Frédéric CWILING / SKEMA PARIS / 2024 => Acquisition ?? Reproduction prohibited, all rights reserved Definition Foucher :  Merger : an operation in which 2 or more entities are joining together to form just one entity  Acquisition : a company taking control of another company ??? => And what about Joint Venture (for example) !!?? Frédéric CWILING / SKEMA PARIS / 2024 Reproduction prohibited, all rights reserved Definition M&A transactions : “may” involve a purchaser, a seller, and a target. Or not! Target can be : - a company, - or an operating division : assets, employees, etc…! But in some transactions, there may be no clear “purchaser” or “seller”, and no target : merger, JV!!! Frédéric CWILING / SKEMA PARIS / 2024 Reproduction prohibited, all rights reserved Definition Gateway for any M&A / Restructuring deal = Strategy a)What do you consider to be "strategic" operations? b)What common point(s) can there be between them? Frédéric CWILING / SKEMA PARIS / 2024 Reproduction prohibited, all rights reserved Definition Shareholder Strategy Business Strategy Sale (of a subsidiary) Sale (shares of the shareholders) New activity external growth LBO Capital opening (K increase / IPO / , sale) Merger JV Frédéric CWILING / SKEMA PARIS / 2024 Reproduction prohibited, all rights reserved Definition So commonly : “M&A” : transfer of “control” and / or “ownership” of a business ??? “Restructuring” : a “significant” and “unusual” alteration in the organization and / or operations of a business (ex.: merging two divisions ; selling a B.U.). Frédéric CWILING / SKEMA PARIS / 2024 Reproduction prohibited, all rights reserved Definition  LBO (Leveraged Buy-Out) = buying a company (commonly called the « target ») through the creation of another company (commonly called the « holding »), financed both by equity and financial debt. « May » include a PE firm (« Investment Fund ») The debt of the holding company being paid back thanks to cash-flows from the Target served in the form of « dividends » Frédéric CWILING / SKEMA PARIS / 2024 Reproduction prohibited, all rights reserved Definition M&A, Restructuring & L.B.O. : Strategic operations which are not part of an “ongoing business “ Frédéric CWILING / SKEMA PARIS / 2024 Reproduction prohibited, all rights reserved Shareholder 1 Context Shareholder 2 … Power 2 Common points = shares (voting rights) € A company (value creation) Balance sheet Assets P&L Liabilities Operating Fixed assets (investments) Equity Capital Tangible Net Profit Intangible Retained earnings Financial Financial debt Financial Misc Current assets Receivable (clients) Inventory + Frédéric CWILING / SKEMA PARIS / 2024 Current liabilities Cash - Income Tax Payable (suppliers) Social & Tax = Net Profit - Reproduction prohibited, all rights reserved Context : Company life curve At each stage, different objectives and separate means "Love money", "business angels", « P.E. Funds", "family offices", = shareholders ! "industrials", "IPO" Secondary market Pre-IPO / IPO Growth Capital Venture Capital P.E. (LBO & Mezzanine) Sale Growth Start-up Acquisition of companies in difficulties Seed Turnaround capital R&D Birth Take Off Development Frédéric CWILING / SKEMA PARIS / 2024 Maturity Reproduction prohibited, all rights reserved Context: Market conditions in Europe « big LBOs » in Europe. Crisis? Buying price and financing in Europe (to EBITDA) 17 17 Frédéric CWILING / SKEMA PARIS / 2024 Reproduction prohibited, all rights reserved Market conditions: European market The amount of capital to invest in Europe continues to grow (in billions of dollars) 18 18 Frédéric CWILING / SKEMA PARIS / 2024 Reproduction prohibited, all rights reserved Market conditions: European market Amount of capital to invest in non-listed company in the world (in thousands of billions of dollars) Les ECHOS 01/03/2021 Frédéric CWILING / SKEMA PARIS / 2024 Reproduction prohibited, all rights reserved Context: Market conditions in Europe Q3 2023 Frédéric CWILING / SKEMA PARIS / 2024 Reproduction prohibited, all rights reserved Context: Market conditions in Europe Q3 2023 Frédéric CWILING / SKEMA PARIS / 2024 Reproduction prohibited, all rights reserved Context: Market conditions in Europe The reason for the high proportion of extreme multiples is the strong increase transactions at multiples < 7x EBITDA, that account for 30% of analysed transactions, its highest level recorded. Q3 2023 Frédéric CWILING / SKEMA PARIS / 2024 Reproduction prohibited, all rights reserved Context: Market conditions in Europe Q4 2021 Frédéric CWILING / SKEMA PARIS / 2024 Reproduction prohibited, all rights reserved Context: Market conditions Les Echos 29/12/2023 Frédéric CWILING / SKEMA PARIS / 2024 Reproduction prohibited, all rights reserved Market conditions: European market Small & Mid-market companies: DCF is not always the Graal!!! PER / EBITDA / Cash-flows Big deals / Small deals Industrial / Financial Before crisis / After crisis Valuation depends on multiple factors - Intrinsic to the company - External (country, economic environment, interest rates, etc.) - Usage (criteria used) - Contextual (financial or strategic goals) -... We must understand and master these factors, and put the valuation in context But here too, common sense, and a critical mind, must guide the thought! => examples 25 Frédéric CWILING / SKEMA PARIS / 2024 Reproduction prohibited, all rights reserved Context : Understanding strategy Shareholder Strategy Business Strategy Sale (subsidiary) Sale (shares of the shareholders) New activity external growth LBO Capital opening(K increase / IPO / sale) Merger JV Frédéric CWILING / SKEMA PARIS / 2024 Reproduction prohibited, all rights reserved Context: back to strategy General context: what is the « real » motivation of the deal Keypoint: Business Strategy / Strategy Shareholder Strategy Examples : –Age of leaders? (=> decrease in motivation / profitability) –Value for shareholders? (=> cash-out) –Development of the business? (internal / external growth => Private Equity, IPO) –Defensive deal? (Market downturn, social risks …) Same for small or huge deals!!! And so far from « modelisation » !!! Ex: TOTAL vs SME / PUBLICIS - OMNICOM Frédéric CWILING / SKEMA PARIS / 2024 Reproduction prohibited, all rights reserved Context Business Strategy (examples) Offensive Defensive Frédéric CWILING / SKEMA PARIS / 2024 Synergies Reproduction prohibited, all rights reserved Context Business Strategy (examples) Offensive Defensive Synergies New resources Adaptation to tech. developments Costs Market Penetration Reach the « critical size » Growth Production capacities Neutralize competitors Tax Creation of barriers to entry Frédéric CWILING / SKEMA PARIS / 2024 Reproduction prohibited, all rights reserved Preliminary analyzes The questions that any shareholder asks before any strategic operation: Why? How? When? Which partners? Sources of Funding? Which price? Legal & tax frame Parties must integrate these aspects in their analysis, and thus also in the valuation process Shareholder answers must be clear and justified Frédéric CWILING / SKEMA PARIS / 2024 Reproduction prohibited, all rights reserved Target analysis The analysis of the target is a fundamental step prior to any operation and / or valuation The analysis should help to define the risk of the target, that will directly affect the discount rate used in valuation Frédéric CWILING / SKEMA PARIS / 2024 Reproduction prohibited, all rights reserved Target analysis Traps: Solutions : Too fast  Take time Emotion  Moderate discussions Being alone (decisions on target, « due diligences », negociations)  Work experts Frédéric CWILING / SKEMA PARIS / 2024 with reliable Reproduction prohibited, all rights reserved Target shareholder analysis Traps: Solutions: The « fake » (not seller)  Keep a good pace Playing the role of « trial horse »  Ask to speak target advisors to  Work experts reliable Off-market valuation with  Time (a lot!) for nothing  Loss of motivation  Missing other opportunities Frédéric CWILING / SKEMA PARIS / 2024 Reproduction prohibited, all rights reserved the Target analysis Have clients To survive in the long term, a company must: Have profitability Be liquid Factors likely to increase or weaken this balance need to be considered and are potential signs of strategic operations => Tools exist to ease businesses analysis 34 Frédéric CWILING / SKEMA PARIS / 2024 Reproduction prohibited, all rights reserved Target analysis SWOT strengths opportunities Frédéric CWILING / SKEMA PARIS / 2024 weaknesses threats Reproduction prohibited, all rights reserved Target analysis PORTER (4+1 forces) (example) Barriers to entry many competitors Mergers in progress Development of new products with strong added-value STRONG Bargaining power of buyers Diversified customer base Large customers AVERAGE Legal constraints Bargaining power of suppliers intensity of competition STRONG market price technical skill WEAK Threat of substitutes Few new techniques in the activity WEAK Frédéric CWILING / SKEMA PARIS / 2024 Reproduction prohibited, all rights reserved Target analysis PORTER (4+1 forces) (real case study) BUSINESS PLAN Activity Maintenance and installation of protection systems Sales & Installation of video-fire detection solution Frédéric CWILING / SKEMA PARIS / 2024 Reproduction prohibited, all rights reserved Target analysis PORTER (4+1 forces) (real case study) Barriers to entry Barriers to entry on the skills held by manufacturers long skill acquisition time WEAK Bargaining power of buyers Originator = client = supplier only indirect customers STRONG Legal constraints None Bargaining power of suppliers intensity of competition STRONG only one supplier STRONG Threat of substitutes Few new techniques in the activity WEAK Frédéric CWILING / SKEMA PARIS / 2024 Reproduction prohibited, all rights reserved Target analysis PORTER (4+1 forces) (real case study) « Based on our industry analysis, the explosion protection market is a mature and highly concentrated market. Manufacturers of these systems have a strong desire to maintain or even take the market shares of their competitors. It remains very attractive especially because of the multiple barriers to entry. The necessary skills for technicians are acquired only from manufacturers. Our partnership with one of the leaders of the sector guarantees us a security as to the number of maintenance contracts held, but establishes a strong dependence since it is our only direct customer for the maintenance. » 1) What question(s) do you want to ask? 2) Do you think it would be possible to summurize into just 1 question? « SO WHAT!!!» Frédéric CWILING / SKEMA PARIS / 2024 Reproduction prohibited, all rights reserved Model of the 3 circles : Thorough knowledge of the target. The model of the 3 circles. 1 2 Family 3 Management 7 6 4 5 Shareholders Frédéric CWILING / SKEMA PARIS / 2024 1. Non-shareholder family members who do not participate in the management of the business 2. Non-shareholder family members who participate in the management of the business. 3. Non-shareholder external managers. 4. Managers who became shareholders. 5. External shareholders who do not participate in the management. 6. Family ownership who do not participate in the management. 7. Family shareholders who participate in the management. Reproduction prohibited, all rights reserved Model of the 3 circles : Thorough knowledge of the target. ► This model makes it possible to weigh decisions with regard to each of the three dimensions in order to assess the impact of their interdependence on the decision in question ► It also makes it possible to easily describe the governance structures that correspond to each circle and to understand the expectations of the different parties: – Family, for the family circle: Family counseling – Structures of decision for the company: Board of Directors, Supervisory Board … – Shareholders' meeting for shareholder decisions Frédéric CWILING / SKEMA PARIS / 2024 Reproduction prohibited, all rights reserved Summary HOW Frédéric CWILING / SKEMA PARIS / 2024 Reproduction prohibited, all rights reserved Strategic operations Possible growth paths:  launch of new products  increased market share (marketing, advertising, hiring...)  development in new markets (new customer targets, new product applications, new export markets, etc.)  value chain development (verticalization)  acquisition of know-how (purchases of assets / companies) Frédéric CWILING / SKEMA PARIS / 2024 Reproduction prohibited, all rights reserved Strategic operations Main possible Pros and cons of « external growth » Pros Speed of growth Existing know-how Reduce the risk of failure Acquisition of new products Local culture (international) Decrease / replacement of R & D investments Avoid the growth of a competitor Make a competitor disappear … Frédéric CWILING / SKEMA PARIS / 2024 Reproduction prohibited, all rights reserved Strategic operations Main possible Pros andcons of « external growth » Pros Cons Speed of growth Existing know-how Reduce the risk of failure Integrate the target: - corporate culture - Harmonize modes of operation Acquisition of new products Local culture (international) Capital requirements Fast value destruction in case of failure … Decrease / replacement of R & D investments Avoid the growth of a competitor Make a competitor disappear … https://www.8advisory.com/en/2023/11/29/eight-advisory-2023-post-merger-integration-survey/ Frédéric CWILING / SKEMA PARIS / 2024 Reproduction prohibited, all rights reserved Different forms of external growth Horizontal Vertical Conglomeral Frédéric CWILING / SKEMA PARIS / 2024 Reproduction prohibited, all rights reserved Different forms of external growth Horizontal: identical or similar fields of activity -Economies of scale -Disappearance of competitors -Refocusing on the core business -Acquisition of new products / new technologies => the most frequent case / the "less" risky Frédéric CWILING / SKEMA PARIS / 2024 Reproduction prohibited, all rights reserved Different forms of external growth Vertical: activities belonging to different stages of the same sector in order to control an entire economic chain -Purchase of suppliers -Purchase of distribution networks => control the supplies => control the outlets => development of added value => The most risky case: new jobs Frédéric CWILING / SKEMA PARIS / 2024 Reproduction prohibited, all rights reserved Different forms of external growth September 2013: Microsoft announces acquisition of Nokia's mobile phone division for 5.4 billion euros “Nokia's takeover illustrates Microsoft's new strategy to upgrade its software vendor model to a business of terminals and services, similar to Apple” (Les Echos) May 2016: Microsoft signs the end of its "Nokia experience". The US tech giant has announced his intention to delete 1,850 posts most of them in Finland, in his division smartphones, inherited from Nokia. The group added that it would spend a depreciation of 950 million dollars (853 million euros) on this asset Frédéric CWILING / SKEMA PARIS / 2024 Reproduction prohibited, all rights reserved Different forms of external growth January 2014 : "Lenovo buys the Motorola brand”, Two years after having acquired Motorola's cell phone branch for $ 12.5 billion, Google is agreed to give it to Chinese Lenovo (world number one computers ten years after the takeover of the PC branch of IBM), for only $ 2.9 billion. The main explanation for this huge loss is that the owner of Androïd will keep most of the patents on which he wanted to get his hands in 2011, to protect himself from possible legal actions by manufacturers of phones. Frédéric CWILING / SKEMA PARIS / 2024 Reproduction prohibited, all rights reserved Different forms of external growth Conglomeral: diversification -Fashion effects! -Historic constructions: GENERAL ELECTRIC Frédéric CWILING / SKEMA PARIS / 2024 Reproduction prohibited, all rights reserved Different forms of external growth GENERAL ELECTRIC: an American conglomerate founded in 1892 by the merger of part of Thomson-Houston Electric Company and Edison General Electric Company. Up to 6 areas of activity: - financial services (up to about 33% of total turnover) - manufacture of infrastructure equipment (about 33%): aircraft engines, locomotives, gas turbines, oil and gas equipment, turnkey plants, etc. - manufacture of domestic and industrial equipment goods (10%) - manufacture of medical equipment (10%) - broadcast of TV channels (10%); NBC Universal - other (4%) Frédéric CWILING / SKEMA PARIS / 2024 Reproduction prohibited, all rights reserved Different forms of external growth 04/2015 The American industrial conglomerate General Electric announced on Friday a vast plan of refocusing on its industrial activities passing notably by the sale by its financial subsidiary, GE Capital, of 26.5 billion dollars of real estate assets. 04/2015 General Electric gave itself two years to leave the bank and sell its financial activities, totaling $ 200 billion. It only took him two weeks to complete halfway. The group, which had already shed 23 billion real estate assets at the beginning of the month, announced Monday evening the additional sale of $ 74 billion of trade receivables - loans mainly to SMEs. The set is expected to be sold in Wells Fargo, one of America's largest retail banks. Frédéric CWILING / SKEMA PARIS / 2024 Reproduction prohibited, all rights reserved Different forms of external growth 10/2017 General Electric accelerates its downsizing operation The conglomerate will separate $ 20 billion activities. Under the pressure of activists and performance "Unacceptable" Frédéric CWILING / SKEMA PARIS / 2024 Reproduction prohibited, all rights reserved The main forms of business combinations - Acquisition (stocks) Commercial agreement - Merger - Joint Venture (JV) Frédéric CWILING / SKEMA PARIS / 2024 Reproduction prohibited, all rights reserved The main forms of business combinations Acquisition / Merger / JV: differences / questions Previously existing / still here Suppressed Entities: New Shareholders: Previously existing / still shareholders Not shareholders anymore New shareholders Value: An issue or not for the target ? The value of which entity? The value for whom? Frédéric CWILING / SKEMA PARIS / 2024 Reproduction prohibited, all rights reserved Acquisition Before Shareholders A 100% After Shareholders B 100% Shareholders A Shareholders B 100% Company A Company B Company A Activity A Activity B Activity A € 100% Company B Activity B Frédéric CWILING / SKEMA PARIS / 2024 Reproduction prohibited, all rights reserved Acquisition Previously existing: 2 Entities: Suppressed: 0 New: 0 Shareholders A still shareholders Shareholders: Shareholders B not anymore if: 100% sale, in cash Company A now shareholder Value: Valuating company B No point of valuating A if: payment in cash Change in value of A? Frédéric CWILING / SKEMA PARIS / 2024 Reproduction prohibited, all rights reserved Merger Before Shareholders A 100% After Shareholders B 100% Shareholders A x% Shareholders B y% Company A Company B Company A Activity A Activity B Activity A Shares of company A + Activity B €X Frédéric CWILING / SKEMA PARIS / 2024 Reproduction prohibited, all rights reserved Merger Previously existing: 2 Entities: Suppressed: 1 New: 0 Shareholders A still shareholders Shareholders: Shareholders B now shareholders of company A! Value: Valuating company A and / or B? => The real point: A « compared » to B => control of the company: x=? / y=? Change in value of A+B? Frédéric CWILING / SKEMA PARIS / 2024 Reproduction prohibited, all rights reserved JV Before Shareholders A 100% After Shareholders B 100% Shareholders A 100% Shareholders B 100% Company A Company B Company A Company B Activity A + Y Activity B + Z Activity A Activity B y% x% Company C Activity Y + Z Frédéric CWILING / SKEMA PARIS / 2024 Reproduction prohibited, all rights reserved JV Previously existing: 2 Entities: Suppressed: 0 New: 1 Shareholders A & B unchanged Shareholders: Companies A & B now shareholders of company C! Value: Valuating companies: none => The real point: Activity X « compared » to Y => control of the nex company C: x=? / y=? Change in value of A+B? Frédéric CWILING / SKEMA PARIS / 2024 Reproduction prohibited, all rights reserved The main forms of business combinations Acquisition / Merger / JV: which one to choose? => Back to the context: strategy! Goals of M&A: 1 + 1 > 2 ! -Increase in growth rate -Increase in the rate of return -Increase in the valuation multiple And what if … you want to « undo » what you « did » ??? Frédéric CWILING / SKEMA PARIS / 2024 Reproduction prohibited, all rights reserved