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Erschienen in:

2020 | OriginalPaper | Buchkapitel

3. Transaction Management

verfasst von : Thorsten Feix

Erschienen in: End-to-End M&A Process Design

Verlag: Springer Fachmedien Wiesbaden

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Abstract

In the first step of the E2E M&A Process Design, the Embedded M&A Strategy aligned with the overarching corporate and SBU strategies was defined. Based on this framework of the Embedded M&A Strategy a distinguished shortlist of suitable M&A targets with a strong financial, strategic, Business and Culture Design fit have been distilled. The Transaction Management, as the follow-on module of the E2E M&A Process Design, is focused on a specific transaction with a selected target company or merger partner. Core parts of the Transaction Management are the valuation of the target company (Standalone Value) and the potential synergies (Integrated Value), the Due Diligence of the target company which should identify the risks and upsides of the potential transaction, as well as the blending of the Standalone Business and Culture Designs and the Redrafting of the Joint Culture and Business Designs according to the Due Diligence outcomes. Supplementary parts of the Transaction Management as the negotiation of a share or asset purchase agreement, the acquisition financing, and the Purchase Price Allocation (PPA), will be not discussed in detail. (These parts will be incorporated in the second edition).

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Vorheriges Kapitel Embedded M&A Strategy

Nächstes Kapitel Integration Management

As an alternative to the Enterprise DCF method the Discounted Economic Profit model will also be briefly discussed. Discounted Economic Profit models have in comparison to the Enterprise DCF model the advantage to highlight the yearly value creation, the Economic Profit, by comparing the RoIC with the Cost of Capital in any specific year.

The principles of value creation, or at least the basic idea, could be dated back to Alfred Marshall who already addressed in 1890 the trade-off between the return on capital and the cost of capital.

Most PE investors use the Internal Rate of Return (IRR) calculation instead of the DCF model. The investment rule of the IRR to invest in any investment project where the IRR of the project is higher than the risk-adjusted cost of capital—PEs use foremost hurdle rates—will deliver in most instances the same outcome as the DCF models, with its decision rule to invest in any project with a positive NPV, or in the M&A context in any project where the value of the net synergies is higher than the transaction premium paid (Brealey et al. 2020).

Enterprise and Equity Valuation approaches provide—according the “Lücke Theorem”—the same results, if the same underlying assumptions and the corresponding costs of capital are applied. The Enterprise DCF techniques use the WACC to address risk and discount the FCFs, and by adding non-operating items and deducting the value of debt the Equity Value is calculated. The Equity Valuation techniques evaluate the Equity Value directly by discounting cash flows to equity by the levered cost of equity.

Most simulations for corporate valuations are based upon Monte Carlo simulations.

Cash Flow to Equity models will be not in detail discussed in this book as they mix operating performance with non-operating items and capital structure. These valuation models are foremost used, as described, for the valuation of financial institutions, where capital structure is an important ingredient of the company’s Business Design.

The investors might mirror the variety of capital markets, like financial institutions providing loans, bond holders, convertible debt holders, mezzanine holders, preferred and common equity holders.

Therefore, the FCFs as defined for the Enterprise DCF differ significantly from the Cash Flow from operations as defined by the financial statements.

The impact of the company’s financial structure, foremost its interest tax shield (ITS), must be addressed by the valuation. Enterprise addresses this impact in the cost of capital, as the tax shield reduces the WACC and increases DCFs. By moving ITS from FCFs to the WACC, FCFs are computed as if the company is entirely equity financed. Therefore, by benchmarking FCFs, the operating performance across peers without being biased by capital structure and financing side effects, could be evaluated.

According the Modigliani & Miller theory the second order effect of increased leverage would counterbalance this primary ITS value advantage of increasing debt: Increased leverage will increase a company’s financial risk, drop its debt rating and therefore increase its cost of debt & equity.

The traditional APV neglects the second order effect of increasing costs of financial distress driven by a higher debt burden.

E.g. German accounting setter standard IDW S1: If stock market prices of comparable enterprises are available they have to be used as a cross check for the valuation.

Detailed Due Diligence checklists are provided, for example, by Gole and Hilger (2009, p. 108).

Herndon applies a higher granularity of Due Diligence fields to be investigated (Herndon 2014, pp. 59–61).

A more detailed overview of the Financial Due Diligence content is provided by Tseng (2013).

Brealey, R., Myers, S., & Allen, F. (2020). Principles of corporate finance (13th ed., pp. 863–885). New York: McGraw-Hill Education. (Chapter 31: Mergers).

Clark, P. J., & Mills, R. W. (2013). Masterminding the deal – Breakthroughs in M&A strategy & analysis. London: Kogan Page.

Coates, J. C. (2017). The mergers and acquisition process. Core curriculum finance of Harvard University. Cambridge: Harvard Business.

Damodaran, A. (2006). Damodaran on valuation – Security analysis for investment and corporate finance (2nd ed.). New Jersey: Wiley.

DePamphilis, D. M. (2015). Mergers, acquisitions, and other restructuring activities (8th ed.). Oxford: Elsevier.

Fernandes, Nuno. (2012). Note on company valuation by Discounted Cash Flows (DCF). Lausanne: IMD note.

Goedhart, M., Koller, T., Wessels, D. (2016). Valuing high tech companies. McKinsey & Company. Retrieved from: https://www.mckinsey.com/business-functions/strategy-and-corporate-finance/our-insights/valuing-high-tech-companies.

Gole, W. J., & Hilger, P. J. (2009). Due diligence – An M&A value creation approach. Hoboken: Wiley.

Herndon, G. (2014). The complete guide to mergers & acquisitions – Process tools to support M&A integration at every level. San Francisco: Jossey-Bass.

Koller, T., Goedhart, M., & Wessels, D. (2015a). Valuation – Measuring and managing the value of companies (6th ed.). New Jersey: Wiley.

Koller, T., Dobbs, R., & Huyett, B. (2015b). The four cornerstones of corporate finance. New Jersey: Wiley.

Ruback, R. S. (2000). Capital cash flows: A simple approach to valuing risky cash flows. Boston: Harvard University Graduate School of Business Administration.

Schweiger, D. M., & Goulet, P. K. (2000). Integrating mergers and acquisitions: An international research review. In S. Finkelstein & C. Cooper (Eds.), Advances in mergers & acquisitions (pp. 61–91). New York: JAI.

Sirower, M., & Sahni, S. (2006). Avoiding the “Synergy Trap”: Practical guidance on M&A decisions for CEOs and boards. Journal of Applied Corporate Finance,18(3), 83–95.CrossRef

Tseng, A. J. (2013). M&A transactions: Financial due diligence from zero to professional. New Jersey: GreateSpace.

Titel: Transaction Management
verfasst von: Thorsten Feix
Verlag: Springer Fachmedien Wiesbaden
Buch: End-to-End M&A Process Design
Print ISBN: 978-3-658-30288-7

Electronic ISBN: 978-3-658-30289-4

Copyright-Jahr: 2020
DOI: https://doi.org/10.1007/978-3-658-30289-4_3