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M&AMarch19982BainM&AObjectivesIntroduction•ThepurposeofthismoduleistoallownewACsandConsultantsto:–obtainabackgroundunderstandingofM&A–understandwhatBaindoes/doesn’tdoinanM&Aproject–reviewbasicanalyticaltoolsrequiredindifferentM&AprojectsatBain–develop,throughanexercise,animportantbasicanalyticalskilloftenusedinM&Aprojects3BainM&AAgendaIntroduction•TrendsinM&A•GuidingPrinciplesforSuccessfulM&A•BainApproach•CaseExamples–screening–duediligence–sale•ExerciseonSynergyCalculation•TypicalWatchouts•KeyTakeaways4BainM&AAgendaIntroduction•TrendsinM&A•GuidingPrinciplesforSuccessfulM&A•BainApproach•CaseExamples–screening–duediligence–sale•ExerciseonSynergyCalculation•TypicalWatchouts•KeyTakeaways5TrendsFPECG8030601DriversofM&AActivityBainM&A•Economyboomorrecovery•Over-capacityinanindustry•Cheapmoney•Industryconsolidation•GlobalizationStrategicFinancialOther•Gainshare•Eliminatecompetitivethreat•Captureoperatingopportunities,e.g.,scaleefficiencies•Leverageexistingbusinesssystems–forward/backwardintegration–start-upalternative•Diversify/balanceportfolio•Retireexcessindustrycapacity•Greed•Ego•Improvecapitalmarketsevaluationofacquirer–meetgrowthtargets–reduceportfoliorisk•InvestidlecashMacro-economics6M&AActivity-U.S.vs.Europe$52$91$145$161$163$137$112$133$230$265$361$241$339$343$220$157$136$193$295$434$641$759010020030040050060070080019871988198919901991199219931994199519961997$BEuropeUSCAGR(1992-1997)21%41%EuropeanandUSM&Aactivityisexperiencingsimilarpositivetrends.Note:TransactionValue(includingNetDebtofTarget).Excludessplit-offs.Europeincludes50majorcountriesSource:SDCTrendsBainM&A7M&AActivity•M&Aactivityhasgrownrapidlyinnominaldollarterms,peakingintheU.S.inthelate1980s,andthenmatchingthoselevelslastyear•Theferociousmergeractivityofthelate1980swasdriveninlargepartbythe“easymoney”affordedbythejunkbondmarket.Thisresultedinhuge,oftenunsubstantiated,premiumsbeingpaidforcompanieswithoutregardtothevaluecreationopportunitiespresented(ornotpresented,asthecasemaybe)bytheoperations/underlyingbusinessofthetarget•Growthinmergeractivitysince1992hascoincidedwiththeeconomy’srecoveryfromrecession•RecentM&Aactivitybenefitingfrom:–extendedeconomichealthwithlittlerecessionarypressureonhorizon–aresultingcorporatedemandforgrowth–increaseininternationalM&Aactivityascompaniespursuingglobalstrategies•Sincelate1997,U.S.andEuropeanmarketshaveexperiencedtheresurgenceofjunkbondstofacilitatetheexecutionofdealsgettinglargerandlargerTrendsBainM&A8BainM&AM&AActivitybyCountry1996/97Note:RepresentsannounceddealsSource:SDCUSAUKGermanicCountriesFranceBeneluxScandanaviaItalySpain$687$1,028$152$215$81$170$67$88$38$57$37$42$19$34$14$22$0B$200B$400B$600B$800B$1,000B$1,200BBillionsofDollars19971996USmarketdominatestheglobalM&Aactivity.TrendsPercentchange:50%41%110%31%50%14%79%57%9TrendsUSM&AActivitybySellerIndustry(1992-97)Source:SDC(March98)Valueandvolumeoftransactionsvaryacrossindustries.Forexample,intheUS,computersoftwareandserviceindustriestendtodomanysmalldeals.Telecommunications,broadcastingandleisureandentertainmenthavehightransactionsize.AggregateOfferedValue($BN)(bars)Transactions(line)010020030040050002,0004,0006,0008,000BainM&A10TrendsMultiplesPaidforAcquisitionsEBITMultiplesPaidforAcquisitions7.45.46.577.86.17.28.60123456789101988-891992-9319951996FinancialBuyersStrategicBuyersSources:TheBUYOUTSYearbook,BainAnalysis.Overthelastfiveyears,thepricespaidforacquisitionshavebeenincreasing,andreinforcestheneedforin-depthduediligenceandanalysistoensureafairprice.AverageEBITMultipleBainM&A11TrendsAcquisitionSuccessRates75%67%50%50%0%10%20%30%40%50%60%70%80%HarvardBusinessSchoolSurveyofCFOsLondonBusinessSchoolBain&CompanyStudyPercentofAcquisitionsFailing*inFirstFiveYearsPercentofTotalThemajorityofacquisitionshavebeendeemedfailures.Notes:Failuredefinedasearningslessthancostofcapitaland/orsubsequentlydivested.BainM&A12CommonReasonsforFailure•Poorstrategicfit–combinationdoesnotprovidecompetitiveadvantage–lackofunderstandingofthebusiness•Overpay–imperfectinformation/wrongvaluation–toooptimisticinforecasts/synergies–unforeseenindustrydownturn/emergingtechnology–auctionenvironment;failuretoset/stickto‘walkaway’price–CEO/managementegorevenuegrowthvs.profitabilityemotionvs.analysis•Poorpostacquisitionintegration–inadequateplanning–failuretoexploitrevenue/marginpotential–disruptedrelationswithcustomers,employersandsuppliers–cultureclash;failuretoinvolve‘acquired’peopleStrategic,financialandoperatingcausesTrendsBainM&A13GlossaryTrendsCreditRating•Thelegalcombinationoftwo(ormore)formerlyindependententities•Theacquisitionbyanindependententityofacontrolstakeinanotherentity.Thisisusuallyachievedbyacquiringmorethan50%ofsharesforapubliccompany•Thesaleorclosureofaparticularentity•Leveragedbuy-out:Anacquisitionmadepossiblefinanciallybylargeissuanceofdebt,makingthenewentityhighly“leveraged”or“geared”(i.e.,withahighratioofdebttoequity)•Investmentfirmsmanagingprivatefundsbyrunningbusinessportfolios•Bonds(ordebentures,orcoupondebt)issuedbyanentitywithoutacreditratingorwithentit