M&A,March1998,2,Bain M&A,Objectives,Introduction,The purpose of this module is to allow new ACs and Consultants to: obtain a background understanding of M&A understand what Bain does/doesnt do in an M&A project review basic analytical tools required in different M&A projects at Bain develop, through an exercise, an important basic analytical skill often used in M&A projects,3,Bain M&A,Agenda,Introduction,Trends in M&A Guiding Principles for Successful M&A Bain Approach Case Examples screening due diligence sale Exercise on Synergy Calculation Typical Watchouts Key Takeaways,4,Bain M&A,Agenda,Introduction,Trends in M&A Guiding Principles for Successful M&A Bain Approach Case Examples screening due diligence sale Exercise on Synergy Calculation Typical Watchouts Key Takeaways,5,Trends,F PEC G 80306 01,Drivers of M&A Activity,Bain M&A,Economy boom or recovery Over-capacity in an industry Cheap money Industry consolidation Globalization,Strategic,Financial,Other,Gain share Eliminate competitive threat Capture operating opportunities, e.g., scale efficiencies Leverage existing business systems forward/backward integration start-up alternative Diversify/balance portfolio Retire excess industry capacity,Greed Ego,Improve capital markets evaluation of acquirer meet growth targets reduce portfolio risk Invest idle cash,Macro-economics,6,M&A Activity - U.S. vs. Europe,$B,Europe,US,CAGR (1992-1997),21%,41%,European and US M&A activity is experiencing similar positive trends.,Note: Transaction Value (including Net Debt of Target). Excludes split-offs. Europe includes 50 major countries,Source: SDC,Trends,Bain M&A,7,M&A Activity,M&A activity has grown rapidly in nominal dollar terms, peaking in the U.S. in the late 1980s, and then matching those levels last year The ferocious merger activity of the late 1980s was driven in large part by the “easy money” afforded by the junk bond market. This resulted in huge, often unsubstantiated, premiums being paid for companies without regard to the value creation opportunities presented (or not presented, as the case may be) by the operations/underlying business of the target Growth in merger activity since 1992 has coincided with the economys recovery from recession Recent M&A activity benefiting from: extended economic health with little recessionary pressure on horizon a resulting corporate demand for growth increase in international M&A activity as companies pursuing global strategies Since late 1997, U.S. and European markets have experienced the resurgence of junk bonds to facilitate the execution of deals getting larger and larger,Trends,Bain M & A,8,Bain M&A,M&A Activity by Country 1996/97,Note: Represents announced deals Source: SDC,US market dominates the global M&A activity.,Trends,Percent change:,50%,41%,110%,31%,50%,14%,79%,57%,9,Trends,US M&A Activity by Seller Industry (1992-97),Source: SDC ( March 98),Value and volume of transactions vary across industries. For example, in the US, computer software and service industries tend to do many small deals. Telecommunications, broadcasting and leisure and entertainment have high transaction size.,Bain M&A,10,Trends,Multiples Paid for Acquisitions,Over the last five years, the prices paid for acquisitions have been increasing, and reinforces the need for in-depth due diligence and analysis to ensure a fair price.,Average EBIT Multiple,Bain M&A,11,Trends,Acquisition Success Rates,Harvard Business School,Survey of CFOs,London Business School,Bain & Company Study,Percent of Acquisitions Failing* in First Five Years,Percent of Total,The majority of acquisitions have been deemed failures.,Bain M&A,12,Common Reasons for Failure,Poor strategic fit combination does not provide competitive advantage lack of understanding of the business Overpay imperfect information/wrong valuation too optimistic in forecasts/synergies unforeseen industry downturn/emerging technology auction environment; failure to set/stick to walk away price CEO/management ego revenue growth vs. profitability emotion vs. analysis Poor post acquisition integration inadequate planning failure to exploit revenue/margin potential disrupted relations with customers, employers and suppliers culture clash; failure to involve acquired people,Strategic, financial and operating causes,Trends,Bain M&A,13,Glossary,Trends,Credit Rating,The legal combination of two (or more) formerly independent entities The acquisition by an independent entity of a control stake in another entity. This is usually achieved by acquiring more than 50% of shares for a public company The sale or closure of a particular entity Leveraged buy-out: An acquisition made possible financially by large issuance of debt, making the new entity highly “leveraged” or “geared” (i.e., with a high ratio of debt to equity) Investment firms managing private funds by running business portfolios Bonds (or debentures, or coupon debt) issued by an entity without a credit rating or with entities with “non-