Executing Merger and Acquisition Transactions

Generating revenue growth for companies is often more challenging to accomplish than a cost cutting exercise through a restructuring process. To achieve more rapid growth, senior management often opt for acquisitions if they perceive this will meet their growth objectives. Over the past 3 years there has been an M&A boom fuelled by low cost debt and accommodating equity markets which has extended from the public to the private sector.
Many companies have been able to acquire successfully, to integrate diverse businesses and to generate value for all their stakeholders. However, shareholders of both private and public companies are becoming more vociferous if their expectations are not met. Private equity firms have the ability to finance the acquisition of even the largest businesses. Therefore, management teams must have a realistic plan to achieve the acquisition benefits.

We will review the key aspects required for successful transactions. Senior management needs to take a holistic approach to the entire acquisition selection, financing and integration process.

Implementing a successful acquisition strategy

A clear strategic rationale is the first step to ensure a successful acquisition. The chances are significantly enhanced when the following are taken into consideration:

  • Business synergies, where an acquiring company’s core competences are accentuated;
  • Increased revenues, particularly through access to additional markets for existing and new products;
  • Consolidating the business sector with a focus on the potential for cost savings;
  • Enhanced barriers to entry against new entrants; and
  • Effective leadership, especially with a new CEO running the business and needing to motivate the management to deliver the new strategy.

There have been countless examples of destruction of shareholder value by companies through diversification into unrelated business areas. An example relates to Hewlett Packard and their many difficulties with post acquisition integration from Compaq to autonomy.  The company required several changes of leadership over the past 15 years.

The initial approach

Once an acquisition strategy has been agreed by the company, a small team should be assembled including specialist business development, financial and operational personnel. Financial advisers should be appointed as early as possible to work with the team in researching and approaching potential targets, or merger partners, with the initial intention of selecting a short list of one to three candidates for more advanced discussion and negotiation. It is vital at that stage to separate the operating management of the existing business from the M&A team in order to ensure the continuing focus on the existing business.

The due diligence process

Once interest has been ascertained in the business and ideally a period of exclusivity has been agreed, the due diligence process can commence. If a price needs to be disclosed at this stage then this should be as flexible as possible. Due diligence is the most time consuming and least creative part of the M&A process, but can have a direct influence on the final price achieved. It is also crucial to incorporate due diligence into the integration planning and to keep the same team involved throughout the transaction.
Due diligence can be separated into a number of areas depending on the complexity of the business. The main areas of focus are: accounting, legal, commercial, systems and human resources including the impact of pensions. The review will also provide the opportunity to evaluate the quality of the operating managers in the business.
A significant amount of time must be spent on commercial due diligence. Discussions with key customers and suppliers, joint venture partners and competitors provide invaluable information on the prospects for the business.

Pricing and final negotiations

There are several valuation methods assist the negotiation process. These include discounted cash flow, earnings and operating profit multiples as well as analysing comparable transactions.
The intrinsic value of the business is the net present value of expected future cash flows independent of any acquisition. This is the stand alone value and the basis for negotiations. Any price paid above the intrinsic value represents a premium to be shared between the target company and the acquirer’s shareholders. This premium includes a market premium and the potential synergy value. These synergies comprise of revenue enhancements, cost savings including financial engineering and tax benefits as well as process improvements.
However detailed the financial analysis has been, the final price will depend on a negotiation between the buyer and the seller. It is essential to have a disciplined approach to the valuation of the business and for the buyer or for the seller to be able to walk away from a transaction at the appropriate time.

Financing alternatives

With the large variety of new financial instruments developed, there are a variety of financing methods available:

  1. All cash deal. This is often the preferential route for selling shareholders. The purchaser can use internal resources or can raise funds from the banking, insurance or hedge fund sectors. A mixture of senior and subordinated debt can be raised. Alternatively, the bond or equity markets can be employed. Lenders are often willing to provide substantial sums, up to 5-7 times EBITDA for strongly cash generative businesses with assets to provide as collateral.
  2. Share transaction. Companies can use existing or new shares and use these as payment to the selling shareholders. If the prospects of the combined business are strong and there is potential liquidity in the shares, then this could be an attractive option for the selling shareholders.
  3. Hybrid options. A combination of cash, increased debt and shares could be used. For a larger transaction, bonds convertible into equity can be also considered.

Achieving closure

Once terms have been agreed, the financing arranged and the final agreement signed, there is typically a one to three month period before all the documentation is completed and the approvals received. A surprising number of deals fall apart at this stage and whilst there may be legitimate reasons such as a material adverse change in the business, it is also vital for the acquirers to sell the deal to the company’s stakeholders and to maintain the momentum to ensure there is rapid closure.

Post acquisition integration

Effective acquirers, such as GE, have perfected their ability to integrate companies rapidly into their organisation. The key elements in a successful integration are as follows:

  • Begin the integration process before the deal is signed with a combined due diligence and business integration team;
  • Dedicate a full time individual with decision making powers to manage the entire process;
  • Ensure constant communication to minimise the loss of morale. Reaching to the second tier of management as fast as possible and clarifying their positions reduces the possibility of significant defections;
  • Focus on a rapid integration process. There needs to be clear decision making authority from day one. A 100 day plan is required and tough decisions, particularly on personnel issues, have to be taken at the outset. Paralysis in decision making must be avoided.
  • Integrate not only the business operations but also the corporate culture. This is particularly important in cross border mergers.
    Poor integration planning and execution is one of the major reasons for value destruction in mergers and acquisitions.


Successfully acquiring and integrating businesses only occurs through a disciplined process and experience. A clear strategic rationale is required at the outset with identifiable synergies in combining the businesses.

A combined acquisition and integration team is required, which is supplemented by the necessary multi disciplined advisory team. Thorough due diligence must be undertaken which is critical both to the final negotiations and to the integration process.

Reviewing the alternative financing options at the outset can provide attractive alternatives.

Finally, it is important to note that in the excitement of the deal more value can often be generated for shareholders by walking away from a transaction than by pursuing a merger or acquisition of limited strategic benefit.
The views expressed in this newsletter are those of DC Dwek Corporate Finance Limited and are provided for information purposes only.

Raising Finance in a Challenging Environment

Financing Alternatives

Bank Finance

Financing is available from a variety of sources including new challenger banks

The key points in dealing with banks in the current environment are as follows:

  1. Commence negotiations early as the approval process is taking significantly longer to complete;
  2. Ensure compliance with all current loan documentation, information and covenant requirements;
  3. Broaden banking relationships, both domestically and if appropriate internationally; and
  4. Improve chances of successful financing by considering other options. These include financing based on assets, invoice discounting for working capital facilities, the provision of enhanced loan security and/or additional equity.

Equity & Bond Markets

The stock and bond markets are available for large and medium sized companies.

Bond markets have provided large amounts of debt for public companies allowing refinancing often at lower interest rates.

The following are the key points for a company considering an IPO:

  1. Solid Track Record. The Company needs to demonstrate that it has made both financial and operational capability for a public company.
  2. Sufficient Management Depth. Running a public company from the regulatory perspective and reporting to the investors requires an experienced management team to execute the business plan. Companies also need to strengthen their board of directors to ensure the necessary support and governance.
  3. Business Plan. The goal of investors is to realise a growth in shareholder value through capital gains and dividends. The relative performance of a company within its sector will be closely followed. A clearly executed plan based on either organic and/or acquisition growth will be monitored by investors.
  4. Managing Investors. Consistent investor relations are crucial in order to maintain interest in a company following a flotation and to manage expectations

Venture Capital & Private Equity

There is continuing availability of equity funding from both venture capital and from private equity.

Large technology companies  have been providing venture funding or purchasing purchasing smaller technology businesses

Bridging the GAP

In spite of the improving sentiment, there remain many situations where bank or equity/debt funding from the capital markets or from private equity/venture capital is not available. In such situations creative financing solutions need to be considered. These include:

  1. Joint Ventures. A joint venture with a client or a competitor is an alternative to an M&A transaction where financing may be an obstacle. This can provide opportunities to access new markets or sectors particularly internationally and where both parties add value to the venture. However, joint ventures can be difficult to manage and it is therefore imperative that clear responsibilities and the sharing of risk and return are agreed at the outset to avoid paralysis in decision making and potential poor performance. Whilst successful, JVs can continue operating for many years. There are cases where one party will purchase the shares of its partner at the appropriate time.
  2. Supplier Financing. With working capital constraints and limited bank funding, businesses may have to resort to a variety of methods to ensure business continuity. A supplier will be keen to ensure that his products can continue to be sold. Therefore the availability of extended credit lines, medium to long term loans and even equity injections have been provided recently by suppliers. Commencing early discussions is important and the company may benefit from the financing terms and the speed of response.
  3. Client financing. Similarly, a number of businesses have resorted to asking their clients for funding. With knowledge of the product and of the business, a client or a syndicate of clients can provide a more rapid bridging solution for short to medium term funding.
  4. Club Deals. For M&A transactions or for the purchase of assets, several equity investors can join together with the view of concluding a transaction and refinancing at a later stage when debt or private/public equity is available. This has been a common practice in the property market during 2009.

Activities of DC Dwek Corporate Finance

DC Dwek Corporate Finance prides itself in developing creative financing and transaction solutions for its clients and partners. During 2009, this has included successful financing, joint ventures and execution of complex Government contracts in the international mobile water desalination sector. This has provided hands-on experience of financing and growing an international business through a joint venture in a challenging market. Similarly, our advice to private and publicly listed clients on balance sheet restructuring has provided assistance with commercially appropriate solutions. Whether it is building businesses internally, via acquisitions, joint ventures, raising finance through banks or in the public markets, DC Dwek Corporate Finance has the international experience to assist clients.



The views expressed in this newsletter are for information purposes and are intended for eligible counterparties and professional clients only.
DC Dwek Corporate Finance Limited is authorised and regulated by the Financial Conduct Authority.

Improving Boardroom effectiveness

Much has been written recently on the subject of boardroom effectiveness following the massive destruction in shareholder value both before and after the financial crisis, we provide a summary of the key points and examine creative ways to improve the effectiveness of company boards.

Improving effectiveness

Over the past 12-18 months, regulators across the world have been conducting reviews and passing additional legislation to reduce the potential for accounting manipulation and fraudulent behaviour by companies. Whilst certain penalties will reduce unacceptable behaviour, the nature of business is in taking calculated risks. Therefore it is essential that good practice takes precedence over a culture of over-regulation and mere box-ticking. As we observed with the downfall of Enron, companies can find ingenious methods to circumvent rigid rules to their advantage.
Good practice therefore implies a set of prescribed principles to which companies adhere. The quality and intensity of debate at board meetings must be enhanced and this is where independent directors must be more prominent. They should not rely exclusively on the information provided by the company and its advisors, but must look to independent advice to enhance the quality of questioning of the executive team, particularly during a major strategic or financing event.
We no longer require a board full of “Yes men”, but a board of individuals that will take a unified decision following intense discussion and debate. Saying “No” occasionally will be healthy and may also lead to improved decision making.

What makes a non-executive director effective?

There are three key functions of a non-executive director. Firstly, to provide guidance and strategic input to the management team using their experience and network, secondly to ensure that there are the systems in place to monitor the performance of the team and thirdly to strengthen the executive team in a timely manner.
In order to add value to the companies with which they are associated, non-executive directors must above all uphold the highest ethical standards of integrity and promote the best standards of corporate governance. They must support the executive directors in the execution of the agreed strategy of the business whilst monitoring their performance and remuneration on behalf of the outside shareholders. This is a critical role and a fine balance is required in order to maintain an open relationship between executive and non-executive directors.
Non-executive directors are typically appointed for their commercial experience in a given sector. Their main role must be to question intelligently and therefore to add substance to the boardroom debate. However, whilst being sensitive to the views of the other board members, they must challenge rigorously.
Finally, the non-executive director must gain the trust of fellow board members in order to be viewed as a key team player.
The debate on the Higgs Report in the UK

The report by the Higgs Committee in the UK on the effectiveness of non-executive directors was published in January 2003 following a six month period of consultation and analysis. The proposals are likely to be amended prior to inclusion into a revised Corporate Governance Code.
In order to avoid a rigid one-fits all system, Higgs proposed a “comply or explain” approach to governance. For such a system to be widely accepted in the business community, there has to be general compliance with the principles of the Corporate Governance Code and limited deviations. In particular, smaller companies with more limited resources have voiced concerns on the potential rigidity of the new proposals such as the limits on the years a non-executive director can serve one company. A box-ticking approach to corporate governance needs to be avoided, or else methods will be devised to circumvent the rules and regulations.
The appointment of a senior non-executive director with access to institutional investors is viewed by a large number of Company Chairmen as potentially devisive as they believe it will reduce their role and effectiveness. Many large UK companies already have a Deputy Chairman who can play the role of senior non-executive director. Providing shareholders with an additional channel of communication, especially when there are contentious issues, is a healthy development.
The non-executive or independent directors should constitute the majority of directors. The main issue relates to the cost and time involved in appointing the appropriate non-executives, particularly for the smaller companies. Clearly increasing the pool of quality non-executive directors with the necessary experience and training for their role is key and this should be supplemented by independent advice, particularly at times of major strategic change.
Higgs has made a recommendation that the Chairman of the Board should not chair the nominations committee. This is a direct attempt to reduce the power of the Chairman and has met with strong resistance and is unlikely to be included in the Corporate Governance Code.
The Higgs report has been generally welcomed as a way of improving the high standards of corporate governance in the UK. As discussed above, certain modifications will need to be made to obtain broader business approval.
Is Sarbanes-Oxley a role model?

Following the Enron and WorldCom scandals in 2001-2002, the US rapidly passed the Sarbanes-Oxley Act in July 2002. It remains unclear as to the exact ramifications particularly for international companies that are listed on US Exchanges.
The main focus on the Act is to strengthen the role of the audit committee, particularly through the appointment of experienced non-executive directors and the provision of truly independent advice. Auditors are no longer permitted to provide a range of financial advisory services for the Board and for the committees.
Chief Executive Officers and Chief Financial Officers are required to certify to the accuracy of the financial statements and all off balance sheet activities will need to be explained in the accounts.
With securities analysts playing an important role in reviewing and analysing the financial statements of companies, a clear separation is required between the analysts and the investment banking services that can be provided by their colleagues.
In contrast to the wider ranging Higgs Review, the Sarbanes-Oxley Act has been viewed as a rapid response to the major accounting issues associated with recent destruction in shareholder value in the US. It does not however address some of the more fundamental issues in US corporate governance including the potentially excessive powers vested in the combined Chairman and Chief Executive Officer and the overly prescriptive nature of the regulations which has led to a culture of complying with the letter rather to the spirit of corporate governance.

Clearly the vast majority of companies are well managed and comply with the high standards required of the governing bodies and regulations across both sides of the Atlantic. However, with the recent scandals and significant reductions in valuations of companies around the world in the last 2-3 years, improvement is required.
Non-executive directors must play a more influential role. They need to enhance the level of discussion and debate in the boardroom and on the board committees to pose the appropriate questions. They need to be supported by the company, but also by appropriate training and independent advice. Once this more rigorous debate has been completed, then a unified board can follow the agreed strategy. We no longer need “Yes men”, but non-executives that will be willing in certain circumstances to say “No”.
The views expressed in this newsletter are those of DC Dwek Corporate Finance Limited and are provided for information purposes only.


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