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.Click here for terms of use.202APPENDIX Adiligence should ensure an adequate understanding of the target’s operations and the risks involved in the purchase.With this understanding, management can better evaluate whether the premium needed to purchase the company is reasonable.With the Seller’s Investment BankersInvestment bankers will be used as gatekeepers to the seller’s operations.Don’t let a seller’s investment banker impede your ability to assess the target’s management or its operations.2.BEWARE OF “TROUBLED COMPANIES”Many companies are put up for sale because their operating results have not met their parent’s expectations.This raises questions about how achievable the company’s projected financial results will be.A hedge that is commonly employed involves holding back a portion of the purchase price and putting it in escrow to reflect these risks (a “contingent payment” or “earn-out”).If the uncertainties at closing are ultimately resolved favorably, the seller can draw on the escrow for the incremental purchase price.If the risks do materialize and result in losses, the acquirer keeps the escrowed funds to cover these losses.This strategy is particularly helpful when target management is selling a portion of its equity interests, as it helps to align the interests of management with those of the buyer to grow the revenues and income to their mutual benefit postacquisition.3.INVOLVE TOP MANAGEMENT EARLYSenior management should be an integral part of the due diligence process to assess the target’s management and determine whether the target’s industry focus is truly synergistic with the buyer’s existing operations.Particularly in industry-related acquisitions, senior management can bring its experience to bear to provide a higher-order assessment of the strength and quality of the target’s management and its ability to execute in the new environment.Finally, the stress of working on due diligence teams may result in members losing their objectivity.The fresh and unbiased perspective of senior management ensures that the deal team doesn’t get enamored, but remains objective.Ten Steps for Better Acquisitions2034.INVOLVE THE INTEGRATION TEAM EARLYGiven the high premiums required to get deals done in today’s market, it is critical that a sound business integration plan be in place before closing.Integration professionals should play a key role in the due diligence process.They can assist in evaluating the target’s operating systems and procedures, get a head start on a plan to integrate the target into the buyer’s existing operations, and also evaluate the reasonableness of the operating synergies and cost takeouts being factored into the pro forma projections.In some companies, no acquisition is approved until an integration plan has been developed and approved by senior management.This allows the new management team to hit the ground running the day after the acquisition is closed.5.CRITICALLY EVALUATE DUE DILIGENCE REVIEWSDue diligence findings and the resulting pro forma projections should be critically reviewed by management independent of the due diligence team.The assumptions underlying these forecasts need to be discussed thoroughly and reviewed for reasonableness.Downside scenarios should be developed that provide the results of the acquisition if key assumptions are not met as a result of macroeconomic changes beyond the acquirer’s control.For instance, what would happen to the pro forma projections if interest rates moved up 50basis points in the next 12 months, thereby increasing the target’s cost of capital? In short, senior management needs to be comfortable with these sensitivity projections so that doing the deal makes sense across all probable scenarios.6.CAREFULLY CULTIVATE INVESTMENTBANKING RELATIONSHIPSInvestment bankers play a critical role in providing buyers with“market intelligence” about the status of a blind auction and the premium that is likely to be needed to win the deal.For less sophisticated buyers, these bankers also run pro forma projections to project the target’s operations under a variety of scenarios.However, because bankers are compensated for closing deals, listening to their counsel with a fair amount of discretion is imperative.By providing the opportunity for repeat business, acquirers can persuade investment bankers to represent their interests more aggressively.204APPENDIX A7.DEVELOP A FORMAL POLICYFOR POSTCLOSING AUDITSAcquirers should implement a policy of requiring independent audits at the time of closing and each year thereafter.These audits need to be completed by someone outside of the immediate deal team, possibly the firm’s internal audit function.The audit should encompass the following areas:At the time of closing:I Review of the goodwill amounts recordedI Review of purchase accounting adjustments that are offset against goodwillI Review of the integration plan, the team members assigned, and milestone dates for integration targetsI Establishment of operating targets for the acquired company that are consistent with the projections used for investment approvalI Annual audits thereafterI Analysis of all accounting adjustments during the one-year purchase accounting window and afterwardsI Review of the status of the integration plan relative to its targetsI Detailed analysis of company performance relative to the goals that were established and approved by senior management [ Pobierz całość w formacie PDF ]
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.Click here for terms of use.202APPENDIX Adiligence should ensure an adequate understanding of the target’s operations and the risks involved in the purchase.With this understanding, management can better evaluate whether the premium needed to purchase the company is reasonable.With the Seller’s Investment BankersInvestment bankers will be used as gatekeepers to the seller’s operations.Don’t let a seller’s investment banker impede your ability to assess the target’s management or its operations.2.BEWARE OF “TROUBLED COMPANIES”Many companies are put up for sale because their operating results have not met their parent’s expectations.This raises questions about how achievable the company’s projected financial results will be.A hedge that is commonly employed involves holding back a portion of the purchase price and putting it in escrow to reflect these risks (a “contingent payment” or “earn-out”).If the uncertainties at closing are ultimately resolved favorably, the seller can draw on the escrow for the incremental purchase price.If the risks do materialize and result in losses, the acquirer keeps the escrowed funds to cover these losses.This strategy is particularly helpful when target management is selling a portion of its equity interests, as it helps to align the interests of management with those of the buyer to grow the revenues and income to their mutual benefit postacquisition.3.INVOLVE TOP MANAGEMENT EARLYSenior management should be an integral part of the due diligence process to assess the target’s management and determine whether the target’s industry focus is truly synergistic with the buyer’s existing operations.Particularly in industry-related acquisitions, senior management can bring its experience to bear to provide a higher-order assessment of the strength and quality of the target’s management and its ability to execute in the new environment.Finally, the stress of working on due diligence teams may result in members losing their objectivity.The fresh and unbiased perspective of senior management ensures that the deal team doesn’t get enamored, but remains objective.Ten Steps for Better Acquisitions2034.INVOLVE THE INTEGRATION TEAM EARLYGiven the high premiums required to get deals done in today’s market, it is critical that a sound business integration plan be in place before closing.Integration professionals should play a key role in the due diligence process.They can assist in evaluating the target’s operating systems and procedures, get a head start on a plan to integrate the target into the buyer’s existing operations, and also evaluate the reasonableness of the operating synergies and cost takeouts being factored into the pro forma projections.In some companies, no acquisition is approved until an integration plan has been developed and approved by senior management.This allows the new management team to hit the ground running the day after the acquisition is closed.5.CRITICALLY EVALUATE DUE DILIGENCE REVIEWSDue diligence findings and the resulting pro forma projections should be critically reviewed by management independent of the due diligence team.The assumptions underlying these forecasts need to be discussed thoroughly and reviewed for reasonableness.Downside scenarios should be developed that provide the results of the acquisition if key assumptions are not met as a result of macroeconomic changes beyond the acquirer’s control.For instance, what would happen to the pro forma projections if interest rates moved up 50basis points in the next 12 months, thereby increasing the target’s cost of capital? In short, senior management needs to be comfortable with these sensitivity projections so that doing the deal makes sense across all probable scenarios.6.CAREFULLY CULTIVATE INVESTMENTBANKING RELATIONSHIPSInvestment bankers play a critical role in providing buyers with“market intelligence” about the status of a blind auction and the premium that is likely to be needed to win the deal.For less sophisticated buyers, these bankers also run pro forma projections to project the target’s operations under a variety of scenarios.However, because bankers are compensated for closing deals, listening to their counsel with a fair amount of discretion is imperative.By providing the opportunity for repeat business, acquirers can persuade investment bankers to represent their interests more aggressively.204APPENDIX A7.DEVELOP A FORMAL POLICYFOR POSTCLOSING AUDITSAcquirers should implement a policy of requiring independent audits at the time of closing and each year thereafter.These audits need to be completed by someone outside of the immediate deal team, possibly the firm’s internal audit function.The audit should encompass the following areas:At the time of closing:I Review of the goodwill amounts recordedI Review of purchase accounting adjustments that are offset against goodwillI Review of the integration plan, the team members assigned, and milestone dates for integration targetsI Establishment of operating targets for the acquired company that are consistent with the projections used for investment approvalI Annual audits thereafterI Analysis of all accounting adjustments during the one-year purchase accounting window and afterwardsI Review of the status of the integration plan relative to its targetsI Detailed analysis of company performance relative to the goals that were established and approved by senior management [ Pobierz całość w formacie PDF ]