PRECISE. PROVEN. PERFORMANCE.

© 2011 Moore Stephens LLP

Acquisition process in EuropeDuncan Gregory

StructuringKathy Gillen 23 September 2011

www.moorestephens.co.uk

Agenda

• Introduction to Moore Stephens

• Acquisition process in Europe– Duncan Gregory

• Structuring– Kathy Gillen

Introduction to Moore Stephens

• Established in London in 1907 (Jersey: 1968)

• Strong financial and operational resources: one of the world’s largest accounting networks

• Focus on long-term relationships and adding value

• Wide range of skills and sector disciplines

• Committed to using the right people on every assignment

• Substantial international experience

• Proven track record

• Dedicated India desk in London

Locations

World UK

Countries

Offices

Principals and staff

Turnover

98

630

20,864

$2.1bn

1

37

1,551

£138.8m

India

1

21

n/a

n/a

Overview of our services

• Audit and accountancy

• Business Support and Outsourcing

• Corporate Finance (Duncan Gregory)

• IT Consultancy

• Taxation

• Trust and Corporate Services and International Planning (Kathy Gillen)

• Wealth Management

• Other services including Corporate Recovery, Forensic Accounting and Governance, Risk and Assurance

© 2011 Moore Stephens LLP

Acquisition process in EuropeDuncan Gregory

www.moorestephens.co.uk

Moore Stephens Corporate Finance

• Specialist division based in London

• International remit and active in India

• Comprehensive range of lead advisory and transaction support services:

– Mergers and acquisitions, MBOs/MBIs and disposals

– Capital markets related (AIM, LSE and other regulated markets)

– Due diligence

– Valuations

– Business planning, financial modelling and strategic review

– Fund raising

• Privately owned and listed businesses

• Typical equity value of £1 million to £200 million

Indian acquisitions in the UK

• UK is a leading destination for offshore acquisitions by Indian companies

– Cox & Kings £300m acquisition of Holidaybreak

– Essar Energy £775m acquisition of Stanflow Refinery

– Sahara India Pariwar £500m acquisition of Grosvenor House Hotel

– CORE Projects & Technologies £15m acquisition of ITN Mark Education

• Moore Stephens actively working on acquisitions in certain sectors:

– Leisure

– Pharmaceuticals and distribution

– Motor

– Infrastructure

– IT

Success and failure in acquisitions

• Largest survey of value creation by Moeller, Schlingemann and Shultz

– 12,000 transactions

– Net losses to acquiring firms: $25.2 billion

• Key causes of failure

– Overpaying

– Poor strategy

– Financial instability

– Inadequate due diligence

– Failure to integrate cultures

– Failure to integrate operations

Why make acquisitions?

• Effective acquisition strategy driven by overall growth strategy

• Acquisitions used to meet objectives that:

– Cannot be achieved through organic growth and development

– Can be achieved more quickly and cost effectively with less risk by buying established performer instead of developing from scratch

• Strategies fall into 4 broad categories

– Consolidation

– New markets

– New technologies

– Industry convergence

Key stages of the acquisition process

• Strategic

– Corporate strategy

– Acquisition strategy

• Acquisition process

– Acquisition criteria

– Target search

– Appraisal

– Value/negotiations

– Finance

– Due diligence

– Legals/completion

• Post acquisition integration

Developing an acquisition strategy

• Integration with overall corporate strategy?

– Shareholder value creation?

• Are acquisitions the most effective way of achieving objectives?

• Feasible strategy?

– Are suitable targets likely to exist?

– Can they be identified?

– Likely to be for sale?

• Be careful about:

– Pursuing growth for growth’s sake

– Deflecting attention from weaknesses in the core business

Acquisition criteria?

• Sector/industry

• Competitive position within the industry/product mix

• Revenue/size

• Valuation

• Location of operations

• Likely synergies and integration success

• A clear acquisition criteria will form the basis of an acquisition search

Target search

• Understanding the target sector is critical

• Access to information

– Overall sector information (press, trade conferences, databases)

– M&A activity reviews (specialist data available)

– Information about targets (websites, broker reports, filed information)

• Report on shortlisted targets

– Target name, location and business description

– Summary financial information

– Ownership structure

– Consider why a match with acquisition criteria

– Prioritise targets

Planning the approach

• Why is the current owner a possible vendor?

• Non-financial reasons for sale?

• Synergistic benefits?

• Integration plan?

• Critical members of the target management team?

• Reaction to new management?

• What critical issues need addressing during early discussions?

• Maximum likely valuation and to what extent will synergies be shared?

• Cash, deferred consideration, own shares or a mixture?

• Does finance need to be raised?

Making the approach

• Initial approach

– Write directly to the majority, dominant or controlling shareholder

– Confidentiality letters

– Vendor quickly asks for indication on valuation range

– First proposal will be rejected

– However, a process to ensure maximum price achieved may commence

• While price will be the biggest factor (usually), consider

– Certainty of completion

– Speed of completion

– Minimisation of hurdles, barriers and deal breakers

Understand the sale process

• Vendor’s key weapon is information flow

– Can be managed for tactical purposes

• Vendor may:

– Disclose positive information to encourage bidders to commit high prices

– Limit site visits

– Disclose more information to preferred bidders

– Present information in a positive light

– Resist requests for detailed analysis

– Limit access to second line management

– Limit or delay disclosure of prejudicial information

Understand the sale process

• Acquirer should:

– Access as much information as possible

– Understand vendor’s key issues

– Know the vendor’s decision making process

– Assess the attitude of target’s management team

– Consider different approach for owner-managed target

• UK law requires directors to take into account factors other than price

– ‘act in good faith’

• Project management

– Achieve an agreement in principle and draft HOA (with exclusivity period)

– After completion of due diligence, negotiate sale and purchase agreement

Getting to heads of agreement

• Consider valuation, including to purchaser

• Information gathering

– Information Memorandum, due diligence, data room

– Consider how business will fit post-completion

• Seeing through the figures

– Vendors will try to make the business as attractive as possible

• Identifying key issues, including dealbreakers

• Modelling is a key tool

• Preparing the offer

• Draft heads of agreement, including exclusivity ‘lock-out’

Types of due diligence

• Financial due diligence

– Data room

• Vendor due diligence

• Commercial due diligence

• Management due diligence

• Legal and regulatory due diligence

• IT due diligence

• Technology due diligence

• Environmental due diligence

Getting to completion

• Steps to completion

– Detailed due diligence

– Post completion operating and integration plan

– Negotiation of final contracts (including SPA)

– Tax planning and off-shore structuring

– Finalisation of arrangements for external financing

• Advisors can help to ensure that:

– Specialist advisors are properly briefed

– Reporting deadlines are met

– Reports are integrated into the decision making and planning process

– Issues, conflicts and disagreements constructively addressed

Integration

• Post acquisition implementation plan is crucial BEFORE completion

• Areas to address include:

– Structure

– How to capture merger benefits

– Payroll

– Administration

– Sales tactics and product integration

– Accounting systems

– Many others!

• Set milestones and allocate responsibilities

Common issues for Indian acquirers

• Acquisition process

– Sourcing appropriate targets in Europe

– European approach different to Indian

– Time zone impact

• Post acquisition

– When value is not created, poor integration is to blame in 70% cases

– Talent retention and understanding the people issues

– Communication

– Synergies not delivered

Summary

• Acquisition process in Europe is well established

• Complex and emotive issues can arise

• Deadlines and certainty are important

• Development of relationships critical

• Commitment to the process and planning is essential

• Due diligence and good negotiation can improve transaction terms

• Local advisors with international experience important to help ensure success

© 2011 Moore Stephens LLP

StructuringKathy Gillen

www.moorestephens.co.uk

Types of Indian Clients using Jersey

• Corporate – Investment

o Capital Markets/Corporate Structuring using Jersey (Public) Holding Companies and Cell Companies

o Private equity, real estate, hedge and infrastructure investment opportunities using a range of Jersey Funds

• Owners of businesses (families): – General asset protection, estate succession and tax planning

• Structures are simple or complex depending on clients’ requirements

Why Jersey is attractive to Indian clients

• Wide range of solutions

• Political and Financial Stability

• Effective, comprehensive, world class, internationally recognised Regulatory Standards

• Robust, modern and sophisticated legislation

• Privacy/confidentiality, not secrecy

• Tax Neutrality – as investors are outside Jersey there are no domestic taxes

• Self-governing UK Crown dependency

• In Europe but not in UK or EU

• Proven track record in European listings

Why Jersey is attractive to Indian clients (cont’d)

• Depth and breadth of more than 13,000 finance professionals

• One of the first jurisdictions to regulate Trust Company Business

• Clarity and quality of products and services offering

• Convenient location – 35 minutes by air from London

• Time Zone (same as the UK)- able to transact business with Jersey practitioners in the same working day

• Excellent Communications

• A UK visa is sufficient to travel to Jersey

It is common for companies in jurisdictions with double taxation arrangements with India, e.g. Mauritius, to form part of a Jersey structure

Some examples of the accolades that Jersey has received in recent times

• Financial Action Task Force: “close to complete adherence”, Jersey is considered a co-operative jurisdiction

• Financial Stability Forum - Jersey is considered to be a group one jurisdiction

• International Monetary Fund – ranked number 1 in 2009 – “Jersey has a robust supervisory framework”

• The G20 considers that Jersey has a tax regime that meets the highest standards of transparency and regulation. The Island is ranked in the top tier alongside the UK, US, Germany and France

• Jersey was named as the top offshore finance centre in the world in recent official rankings by the City of London.

Jersey Tax Regime

• Standard 0% corporate tax on worldwide income and bank deposit interest paid in Jersey

• No stamp duty on share transfers

• No withholding tax on dividends paid or received

• No capital gains tax

• No inheritance or wealth tax

• UK VAT is not levied in the Island

Example of a (complex) Corporate Structure

 *Source Mourants

Why Jersey Holding Companies?

• Reputation

• Quality of service providers

• Tax Environment

• A Jersey (Public) Holding Company is comparable to a UK Company (PLC )

• Speed of incorporation

• If Listed - – Three CREST enabled share registrars.

– Ability to trade shares directly through CREST (the UK share settlement system)

Facts!

• 91 Jersey holding companies listed on worldwide stock exchanges from London to New York

• Combined market capitalisation of over £157 billion

Jersey is now one of the leading international finance centre jurisdictions to be used for

incorporating listing vehicles

 

Most Common Structures used by Owners of Businesses

• Trusts

• Foundations

• (Underlying company/ies e.g. owning UK real estate)

Trusts v Foundations: Features

Trust Foundation

General Not a separate legal entity - an ‘arrangement’

A corporate body, registered with Jersey Registrar

Assets held in Trustees name Assets held in Foundations name

Contract/ sue/ be sued in Trustees name

Contract/ sue/ be sued in own name

Must hold property to be valid Does not have to have property including initial endowment

Fiduciary responsibilities No fiduciary responsibilities

Requirement to provide beneficiaries with information

No requirement to provide beneficiaries with any information

Trusts v Foundations

Trust Foundation

Key parties Settlor Founder

Protector/ enforcer (if any)

Guardian

Trustees Council

Beneficiaries Beneficiaries (if any)

Key documents Charter (lodged with JFSC – public document)

Trust Deed (not public)

Regulations (not public)

Letter of Wishes (not public)

Letter of Wishes (not public)

Trusts v Foundations: Benefits and Uses

• SIMILAR FOR BOTH!

• Key additional benefits of Foundations:

– Holding real estate directly

– Where there is a single family ‘wasting’ asset

Other Vehicles

• Limited Partnerships - for families

• Private Trust Companies

• Family Offices

Conclusions

• Jersey structures can provide a number of solutions for Indian corporate and private clients

• Jersey is a well respected and renowned jurisdiction which is attractive to Indian clients

Moore Stephens….. in India, London, Jersey and….. Internationally …….. has a wealth of experience in assisting

Indian clients with Mergers and Acquisitions…… and the necessary structuring

• Duncan Gregory• Partner

• Moore Stephens Corporate Finance

• London

• T + 44 (0) 20 7651 1531

• F + 44 (0) 20 7651 1954

• M + 44 (0) 7904 392 121

• E duncan.gregory@moorestephens.com

• Duncan specialises in flotations, financial due diligence and valuations covering a wide variety of sectors on transactions involving UK and overseas companies

• He qualified with a Group A firm where he commenced his corporate finance career before joining MSCF. He was awarded the ICAEW’s Advanced Diploma in Corporate Finance in 2006

• He has worked with a broad range of corporate clients and is also experienced in dealing with flotations, transaction support, valuations and raising finance

• Kathy is a Partner of the Moore Stephens’ Offshore Group (Jersey, Guernsey, Isle of Man and Gibraltar) and Director of our in-house corporate trust and fund companies

• She advises international clients, both individuals and corporate bodies, on the establishment and implementation of trusts, foundations and company structures

• She is a member of the Institute of Directors and in 2004 was awarded the Institute of Directors’ Chartered Director Status, the first person to have achieved this distinction in the finance sector in Jersey

• She is responsible for Indian clients

• Kathy Gillen• Partner

• Moore Stephens’ Offshore Group

• Jersey

• T +44 (0) 1534 880088

• F +44 (0) 1534 880099

• M +44 (0) 7797 828755

• E kathy.gillen@moorestephens-jersey.com

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