Process
Step 6: Preparation of Offering Memorandum
An essential step in the sale process is preparation of the company’s selling brochureoroffering memorandum.This document presents the seller’s strategic plan, including its long-term operating goals and objectives. While the selling brochure should be grounded in real- ity and defendable under intense scrutiny by buyers, it is also in- tended to present the most favorable, realistic picture of the com- pany as an acquisition target.
A properly prepared offering memorandum presents more than details about the target and its industry. It provides insight into the seller’s strategic position and potential, given industry cir- cumstances. It also should indicate management’s ability to design a coherent and effective strategy to maximize the company’s per- formance and value.
A significant goal of the offering memorandum is a clear ex- pression of the strategic advantages of the company as an acquisi- tion candidate as well as what processes, skills, and proprietary sys- tems can be transferred to the buyer. The unstated message in this description should be the justification for why potential buyers cannot afford to pass up this acquisition.
An offering memorandum consists of the following parts.
Executive Summary
Experienced M&A participants would agree that the most critical part of an offering memorandum is the executive summary. In- tended to catch the potential buyers’ attention, it must provide a compelling case for why the company is an attractive acquisition. In just a few pages, this summary should present the company’s history and current market position, major products and services, techno- logical achievements and capabilities, and recent financial perform- ance. The company’s strategic advantages should be emphasized, particularly how these can be exploited by an acquirer. Although de- scriptive, the well-written executive summary is a sales document that effectively promotes the company as an acquisition target.
Description of Company
This section of the selling brochure usually begins with a descrip- tion of the company’s history and extends to a forecast of its pro- jected operations. It usually includes a detailed description of:
• Major product or service lines
• Manufacturing operations, capabilities, and capacities
• Technological capabilities
• Distribution system
• Sales and marketing program
• Management capabilities
• Financial position and historical performance
• Current capitalization and ownership structure Market Analysis
The offering memorandum also should include a market analysis, which is a discussion of the industry or industry segment in which the company operates, including an overview of key industry trends, emerging technologies, and new product or service introductions.
This assessment of the market typically describes the company’s cur- rent position relative to its competition and strategic advantages that will allow it to maintain or improve this position. Key competi- tors are often described with a constant focus on the company’s fu- ture and its strategy to grow and improve its performance.
Forecasted Performance
After this history of the company and strategic analysis, the brochure presents a forecast of future operations, including in- come statement, balance sheet, and statement of cash flows plus the assumptions that support this projection.
Deal Structure and Terms
The offering memorandum should present essential information about deal structure, specifics on any items excluded from the sale, and any restrictions on payment terms. For example, disclo- sure of any specific tangible or intangible assets that the seller in- tends to retain can be identified as well as restrictions on any debt that can be assumed by the buyer or the seller’s willingness to fi- nance any or all of the transaction.
The offering memorandum frequently is preceded by an ini- tial “teaser” letter that may be narrowly or broadly sent to potential buyers. It provides a brief description of the company, which it may or may not specifically identify. The teaser provides only an overview of the company’s finances. Its purpose is to stimulate interest, em- phasizing where the company is, how it got there, and, most impor- tant, where it believes the company can go. It invites potential buy- ers to request additional information—the offering memorandum.
Exhibit 4-5 portrays a “Seller’s Deal Timetable” that involves a 12-week sale process. This should be viewed as a goal—12 weeks
60
Exhibit 4-5Deal Timetable Develop and Implement Bid Evaluation andConduct Negotiations Marketing StrategySolicit Initial BidsDetailed Due Diligenceand Solicit Final Bids •Collect data •Conduct due diligence •Prepare marketing materials •Prepare normalization adjustments and valuation •Select, prioritize candidates •Develop approach strategy •Determine list of potential buyers and gather detailed contact information •Obtain confidentiality agreement from all parties
•Continue calling process •Facilitate information flow between buyers and company to expedite buyers’ evaluation •Select buyers to meet with management •Organize data room •Management meets with interested buyers •Buyers conduct preliminary financial, legal, and accounting due diligence
•Establish price •Establish form of consideration •Establish timing •Establish terms and conditions •Determine ability of buyer to complete transaction •Estimate prospects of combined entity •Select final bidders and conduct on-site due diligence •Distribute draft of definitive agreement and final bid request letter to interested parties
•Establish exclusivity •Prioritize key objectives •Negotiate and execute definitive agreement •Announce transaction •File regulatory documents (if necessary) •Obtain buyer shareholder approval (if necessary)
Four WeeksThree WeeksTwo WeeksThree Weeks Twelve Weeks
61
•Complete working group list •Create nonconfidential company teaser, confidential offering memorandum, and other marketing materials (including company investor presentations) •Commence target blitz with nonconfidential company teaser •Obtain signed confidentiality agreements from interested parties and distribute confidential offering memorandum •Commence calling process
•Prepare for detailed due diligence •Solicit and receive buyers’ nonbinding preliminary indications of interest
•Leverage competitive process to generate increased transaction value •Determine one or two bidders with whom to enter into negotiations
would be very fast. The timetable reflects the many steps in the sale process which emphasizes the importance of planning, prepara- tion, and the benefits of good professional advisors.
For many middle-market shareholders, the sale of their com- pany is the largest financial decision they will ever make. Busi- nesses are complex entities involving people, products, customers, and technologies operating in continually changing industries, economies, and regulatory environments. Their strategic position and value is constantly changing. This value is difficult to measure in the first place, and owners should not only know what their company is presently worth on a stand-alone basis but what it could be worth to strategic buyers when synergistic benefits are considered.
Sale opportunities may be continually available at an attrac- tive price. It is much more likely, however, that a buyer or an ideal population of likely buyers may have to be identified and enticed to consider an acquisition of the company. Anticipating the wants and needs of these prospective buyers, the target may have to be positioned to maximize its attractiveness. This process may require considerable time as well as careful timing to exploit ideal sale conditions in the industry or the economy.
The message here should be clear: Selling at an attractive price requires a lot of luck or, in most cases, careful advance plan- ning. Failure to plan carefully greatly increases the likelihood that the owners will fail to achieve some or all of their financial and per- sonal goals.
ACQUISITION STRATEGY AND PROCESS
The acquisition strategy should fit the company’s overall strategic goal: increase net cash flows and reduce risk. In strategic planning over the long term, to achieve this goal shareholders and man- agement frequently will face the choice of internal development versus merger or acquisition. To drive the company toward its strongest competitive position, resources constantly must be shifted from underperforming activities or those with less poten- tial to those that provide greater benefits. In shifting resources, management can move them among existing operations, into de- velopmental activities or into acquisitions.
The primary reason for acquiring or merging with another business is to produce improved cash flow or reduced risk faster or at a lower cost than achieving the same goal internally. Thus, the goal of any acquisition is to create a strategic advantage by paying a price for the target that is lower than the total resources required for internal development of a similar strategic position.
Forms of Business Combinations
Business combinations can take any of a number of forms. In an acquisition,the stock or assets of a company are purchased by the buyer. A merger, which is primarily a legal distinction, occurs through the combination of two companies, where the first is ab- sorbed by the second or a new entity is formed from the original two. A less drastic form of combination is a joint venture,which typ- ically involves two companies forming and mutually owning a third business , most often to achieve a specific limited purpose.
The lowest form of commitment in a strategic combination would be an alliance,which is a formal cooperative effort between two in- dependent companies to pursue a specific objective, or the licens- ing of a technology, product, or intellectual property to another organization. Thus, in terms of control, investment, and commit- ment, acquisition provides the strongest position, followed by a merger. When less commitment is desired, joint ventures, al- liances, or even licensing arrangements can be adopted.
The planning process should identify the strategy behind combinations as well as the anticipated benefits from them. In as- sessing these benefits, the different types of potential acquisitions usually fall into one of the following categories:
• Horizontal acquisitions.By acquiring another firm in the same industry, the buyer typically aims to achieve economies of scale in marketing, production, or distribution as well as increased market share and an improved product and market position.
• Vertical acquisition.Moving “upstream” or “downstream,” the buyer looks to acquire a supplier, distributor, or customer.
The objective typically is to obtain control over a source of scarce resources or supply for production or quality control
purposes, improved access to a specific customer base, or higher value products or services in the production chain.
• Contiguous acquisitions.Buyers may see opportunities in adjacent industries where they can capitalize on related technologies, production processes, or strategic resources that may serve different markets or customer bases.
The strategic planning process described in Chapter 3 iden- tifies the company’s competitive position and sets objectives to ex- ploit its relative strengths while minimizing the effects of its weak- nesses. The company’s M&A strategy should complement this process, targeting only those industries and companies that can improve the acquirer’s strengths or alleviate its weaknesses. With the acquisition plan focused on this goal, management can reduce the cost and time involved in analyzing and screening investment opportunities that arise. Opportunities that fail to meet these cri- teria can be rejected more quickly as inconsistent with the overall strategic plan. Thus, acquisition should be viewed as only one of several alternative strategies to achieve a basic business objective.
When less investment or commitment is preferred, alliances, joint ventures, or licensing agreements may be a more appropriate form of combination.
Typically, a major advantage of an acquisition over internal development is that it accomplishes the objective much quicker. In addition, the acquisition helps to reduce risk when the acquirer is moving beyond its core business. An established business brings with it one or more of the following:
• Track record
• Management
• Competencies
• Products
• Brands
• Customer base
Internal development may lack all of these benefits. The target also may carry weaknesses, which should diminish its stand-alone value. These attributes should be considered
against the buyer’s competencies to assess their effect on future performance.
Acquisitions also may provide “bounce-back” synergistic ben- efits that the acquirer can leverage by spreading that benefit over its larger base of business. These benefits will be described further in Chapter 5.
Acquisition Planning
The acquisition plan should tie very closely to the company’s over- all strategic plan. Whenever the acquisition plan starts to drift from the strategic plan, whenever its connection to the strategic plan tends to blur or become less well defined, stop! That is a clear warning to return to the company’s basic strategy and goals and investigate whether this acquisition fits. Relentless discipline in this process is rewarded with less time and cost spent studying tar- gets that are not a logical fit.