www.pwc.com/Transaction Services
Succeeding in today’s M&A environment
April 2014 Strictly private and confidential
Leanne Sardiga 312-298-3183 [email protected]
Bob Forbes 312-298-6506 [email protected]
PwC
Topics for discussion
M&A trends in today’s retail & consumer market
Acquisition considerations
Focus areas for compliance and Internal Audit
Divestitures – Market trends for buyers & sellers
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PwC
M&A trends in today's retail & consumer market
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PwC
Retail and consumer deals market – US
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391 290 316 327 350 272
1,023
685 823 851 885
847
0
20,000
40,000
60,000
80,000
100,000
120,000
140,000
160,000
0
200
400
600
800
1,000
1,200
1,400
1,600
2008 2009 2010 2011 2012 2013
To
tal v
alu
e (
$ i
n M
illio
ns)
Deals
by v
olu
me
Non-disclosed Disclosed Value
In USD million, except
number of deals
2011 2012 2013
# of deals Total deal
value
% value
mix
# of deals Total deal
value
% value
mix
# of deals Total deal
value
% value
mix
$50 to $100M 32 2,260 5% 37 2,669 3% 29 2,120 2%
$100M to $250M 36 5,789 12% 35 5,331 6% 33 5,465 5%
$250M to $500M 21 7,211 15% 20 6,714 8% 23 8,097 7%
$500M to $1B 11 7,773 16% 14 9,908 12% 22 15,426 14%
> $1B 13 21,610 46% 23 56,100 67% 19 75,532 70%
Subtotal >$50M 113 44,644 95% 129 80,722 96% 126 106,640 98%
<$50M 214 2,517 5% 221 3,187 4% 146 2,019 2%
Total (w/disclosed values) 327 47,161 100% 350 83,909 100% 272 108,660 100%
Source: PwC Analysis of Thomson Reuters data
PwC
Rising M&A activity in R&C amidst a challenging environment
• R&C annual deal value exceeded $100 billion for the first time since 2007
• Fundamentals incentivizing M&A are strong - i.e. high demand
- Strengthened corporate balance sheets
- Ongoing access to capital and financing – PE firms are active
- Low growth - but some signs of improvement
• Supply of quality deals is low – very competitive
• Fast changing business environment
• M&A comes into focus…. inorganic tool to drive growth (top line and bottom line)
• Heightened risk for M&A execution
- Overly optimistic/unrealistic forecasts?
- Supportable synergies?
- Identify and assess the risk? Access restrictions?
- Aggressive/sustainable accounting model?
- Deal fever
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Source: PwC Analysis of Thomson Reuters data
PwC
Acquisition considerations
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PwC
Return on acquisition (RoAcq)
Successful acquirers approach acquisitions from an enterprise perspective, not internal organization or process.
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Business levers Description
Commercial • Products
• Customers
• Competitors
• Markets
Operations • Systems
• Costs direct/indirect
• People
• Compliance
People • CEO
• Key executives
• Talent
• HR policies
• Benefits
Stakeholders/
compliance
• Regulatory or market constraints
• Financial reporting alignment
• Policies and procedures
• Tax reporting
• FCPA compliance
• Regulatory approval
Capital structure • Working capital
• Debt and debt like
• Leverage
• Capital spending
• Equity
RoAcq
PwC
Acquisition approach
Leading companies transition ownership and responsibility from Deal evaluation to integration within the first 100 days.
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Deal Evaluation
• Develop deal thesis
• Assess talent, operations, and systems
• Identify risk areas
• Estimate synergies
• Conduct preliminary integration planning
• Define deal structure
• Understand financial reporting
requirements
Go/No-Go
Decision
Integration
• Deploy communication strategy
• Establish transition management
office (TMO) governance &
accountability
• Execute cross functional
integration plans
• Validate and achieve synergies
• Manage integration costs
• Meet regulatory requirements
• Mitigate risks/protect baseline
Price
PwC
Public deals often carry more risk than private deals
Comprehensive Due Diligence is required:
• Time and information limitations/access restrictions
- Public information is not sufficient
• Limited contractual protection - Seller reps & warranties do not survive closing and there is seldom an indemnification escrow
• Control premiums are often paid
- Base value vs. Synergy value in evaluating price and returns
- Risks & confidence level needs proper assessment
• Audited financials are based on GAAP and history,
- Deal value is based on cash flows and the future
- Often can’t assess value drivers from data in a 10K
Challenges to overcome
• Buyers should insist on being informed - push the process to obtain non-public data
- Management reports
- Interim data
- Basis of accounting judgments
• Confidentiality of competitive data can be navigated
- Clean Rooms
- Use of third parties
• Information and access limitations mean buyers must make a risk-based assessments
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PwC
Select questions management and the board may consider asking to evaluate its current deal process
1. To what extent do we have a robust and “best in class” deal process, from developing a deal pipeline to diligence to integrating and monitoring success?
2. What is the acquisition strategy and how is it linked to our corporate strategy?
3. What is the level of deal expertise and readiness within our organization? What are the gaps?
4. What are our standards for due diligence? - functions involved, scope, level of detail, use of external parties?
5. What are our minimum criteria/standards for approving a particular transaction?
i. EPS, ROI, synergy targets, due diligence scope, integration plan, team members?
6. How have past deals performed and how is that monitored?
i. Is there a regular process for monitoring both the base business and synergies, led by someone independent of the business leader?
ii. How does the organization learn from past deals to improve its deal process?
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PwC
Select questions management and the board may consider asking before approving an acquisition
1. For a particular deal, what is the deal strategy and associated value drivers and risks? What is the plan to ensure they are properly evaluated?
2. What diligence was performed and what were the significant limitations, if any?
3. Was the diligence objective? What was the level of access and any restrictions?
4. What has been the communication process throughout the diligence process?
i. To what extent have all members of the deal team (internal and external) been able to voice their opinion?
ii. Do your advisors have the expertise and courage to speak against CEO/management if necessary?
iii. Was the board provided the full report of the provider, and given a chance to ask questions, or just a summary provided by management?
5. How were the diligence findings incorporated into the deal model, deal terms, and integration plan?
i. How did you assess both the baseline and the forecast?
ii. What are the key assumptions behind the synergies in the deal model? How have these been validated? To what extent are the synergies “priced in” to the offer?
iii. Who other than the investment banker was involved in the detailed modelling/review and what is their level of M&A expertise?
iv. How were risks mitigated?
v. What is the impact to year one and ongoing EPS?
vi. What is the integration and communication plan, including key team leads?
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PwC
Focus areas for compliance and Internal Audit
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PwC
Four areas for Internal Audit and compliance initiatives
• Core Compliance
• Commercial
• Financial Systems
• Tax, Legal & HR
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IMO
Core
Compliance
Commercial
Tax, Legal
& HR
Financial
Systems
PwC
Traditional focus areas
• Internal Controls
- Target environment’s risk threshold
- Policies and procedures
- Key controls
- Foreign Corruption Practices Act (FCPA)
• Certification Processes
- Maintaining Buyer’s 404 compliance
- Maintaining cross-company 303 compliance
• Document Retention
- Records management programs
- Nexus Tax concerns
• Training & Tools
- Compliance and other training for new employees
- Tools to manage compliance processes
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Core
Compliance
IMO
Training
& Tools
Document
Retention
Certification
Processes
Internal
Controls
Core
Compliance
PwC
Value added areas for consideration
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• Order to Cash
- Order management
- Fulfillment, billing, collections & returns management
• Procure to Pay
- Conflicts & risk within Target’s contracts
- T&C normalization
- P-card policies & controls
- Delegation of authority
• Supply chain
- Inventory policies & procedures
- Food safety
- Vendor allowances & promotions
- Retail theft
• Synergy Attainment
- Synergy measurement & tracking
Core
Compliance
IMO
Order to
Cash Procure to
Pay
Supply
Chain
Synergy
Attainment
Training
& Tools
Document
Retention
Certification
Processes
Internal
Controls
Core
Compliance
Commercial
PwC
Value added areas for consideration (continued)
• License Assurance
- Licenses purchased support licenses utilized
• System Integrity
- Security procedures in line with policy
- Proper delegation of authority
• System Integration Integrity
- Integration roadmap does not interfere with controls environment
- Reporting integrity
• Third Party Compliance
- Contractual terms in line with policy
- System access relevant to role
- Adequate controls
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Core
Compliance
IMO
Order to
Cash Procure to
Pay
Supply
Chain
Synergy
Attainment
Training
& Tools
Document
Retention
Certification
Processes
Internal
Controls
License
Assurance
System
Integrity
System
integration
integrity Third party
contract
compliance
Core
Compliance
Commercial
Financial
Systems
PwC
Value added areas for consideration (continued)
• Import and Export Compliance
- Potential CTPAT implications associated with the new entity
- Consolidated claims management reporting procedures
• Tax Audit Compliance
- Tax transfer of local licensing issues
- Tax credit positions may be impacted as a result of transaction
• Insurance Coverage Alignment
- Adequacy of current coverage
- Need for incremental insurance policies
• Employee Related
- Adequacy of payroll controls
- Healthcare compliance
- Corporate card controls
- Travel & expense
- Whistle blowing April 2014
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Tax, Legal
& HR Financial
Systems
Core
Compliance
IMO
Order to
Cash Procure to
Pay
Supply
Chain
Synergy
Attainment
Training
& Tools
Document
Retention
Certification
Processes
Internal
Controls
License
Assurance
System
Integrity
System
integration
integrity Third party
contract
compliance
Core
Compliance
Commercial
Financial
Systems
Import
and Export
Compliance
Tax audit
compliance
Insurance
coverage
alignment Employee
policies
Tax, Legal
& HR
PwC
Divestitures – Market trends for buyers and sellers
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PwC
Defining divestiture deal value
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Transaction proceeds/asset
• Divestiture strategy
• Business case, financial model and data
• Divestiture preparation and deal process/auction
• Transaction structure including form of consideration (cash,
debt, equity, earn outs), working capital, net debt and purchase
price adjustments; reps and warranties, escrows and
indemnifications; and tax structure
Transition costs/separation
• Transition services agreements (TSAs) costs – costs to
provide temporary functions needed by the seller
• Separation costs – costs to segregate the business from the
remaining operations
Parent/stand-alone optimization/on-going
• Internal considerations– impact to other seller businesses from
separation of target (customer impacts, etc.)
• Strategic considerations – Post-deal contractual relationships,
competitive and geographical ramifications
• Stranded costs – costs that cannot be conveyed to the buyer
(corporate overhead, excess post deal infrastructure, etc.) which
remain with parent
Key components of value: Workstreams that drive deal value:
Value
Ta
ctica
l e
xe
cu
tio
n
PwC
Key trends – Sellers face a more rigorous divestiture process than in years past, particularly in the PE world
Buyers continue to demand more from Sellers thus increasing the challenges to maximize deal value
• Sellers are expected to highlight value to Buyers
• Buyers demand comprehensive linkage of deal drivers and underlying data
• Buyers require greater depth of detail to support their investment case
• Multiple Buyers as auctions have become more prevalent
• Buyers are increasingly seeking 3rd party perspective
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Past Current
PwC
Divestiture Services, done properly, benefit all parties, and more importantly, adds value to the transaction, however US market practice and consistency still varies
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Why
Divestiture
Services?
Advantages for the business
• Minimizes disruption to the business – only need to discuss things once
• No surprises – early identification of issues allows management to anticipate buyer concerns and develop consistent responses
• All parties talk about numbers management understands
• Allows management early ownership of the process and to be well prepared
• Consistent message/story and supporting analysis to answer buyer’s questions
Advantages for sellers
• Factual accuracy is resolved before issuance of Offering Memorandum
• Reduces value erosion and optimizes negotiating position
• Allows more bidders to remain in auction process longer
• Objective and independent view to balance Offering Memorandum
• More consistent and reliable bids from potential buyers
• Improves speed to market
• Reduce post-close adjustments and liabilities
• Increase odds for smooth transaction closing and post-close transition
• Ability to provide branded deliverables
Advantages for acquirers
• Greater clarity on business drivers and enterprise value
• Confidence in basis for offers – underpins financing
• Saves time, cost and aggravation
• Better use of time in exclusivity phase
• Limits broken deals due to surprises
This content is for general information purposes only, and should not be used as a substitute
for consultation with professional advisors.
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