Strategic Due Diligence and Synergies Identification in M&A DD.pdf · Who we are: BCG, global leader in strategic consulting Over 50 years of experience Topic leader in strategy,

NOVEMBER 12TH 2018

Strategic Due Diligenceand Synergies Identificationin M&A

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Target identification and strategic due diligence

Recent trends in M&A market

Who is BCG and our offering in M&A

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Who we are: BCG, global leader in strategic consulting

Over 50 years of experience

Topic leader in strategy, corporate development, innovation,

implementation and change management

• e.g. BCG Matrix portfolio, …

~11 000 people in the world

• of which ~7 000 consultants

• 80+ offices in 40+ countries

Focus on industry leader clients

• Fortune 500

• Top 500 in Europe and Asia

Committed to concrete strategy implementations

• Mixed group of work BCG-Clients

• Continued interactions with top-management

2nd place in Fortune Magazine Survey “100 Best US

Companies to Work For”

BCG in the World BCG in ItalyEstablished some 25 years ago

Currently with ~400 people employed (of which ~300 in the Consulting

Team) between Milan and Rome

• Yearly double digit growth in the last 5 years

Diversified client portfolio

• By industrial sector

• By client type: multinational companies, large enterprises, SMEs, PE

funds, cathegory associations, etc.

Large alumni network

• ~500 alumni in Italy

Relevant social commitment through pro bono cases

• World Food Program

• Palazzo Strozzi Foundation

• Save the children

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Corporate development: One of our worldwide practice areasBCG is organized along functional capabilities and industry practice areas

People and organization

Operations

Transformation/large scale change

Corporate development

Technology advantage

Global advantage

Strategy

Marketing, sales, and pricing

Fin

ancia

l institu

tions a

nd in

sura

nce

Energ

y

Health

care

Technolo

gy, m

edia

and Te

lco

Consu

mer

Industria

l Goods (in

clu

din

g A

gChem

)

Prin

cip

al in

vesto

rs & p

rivate

equity

Public

secto

r

Socia

l impact

Functional capabilities Industry practice areas

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BCG’s corporate development practice—our topic map

?

Shareholder

valueTransactions

Corporate

strategy

Restructuring

& RecoveryCFO excellence

Driving value through strategy

Corporategovernance

Corporate strategy process

Capitalallocation

Parentingstrategy

Growthstrategy

Portfoliostrategy

Industrylandscaping

Corporate missionand vision

Value patterns

Ownership culture

Financial strategy

Shareholder activism

Equity story

Investor strategy

TSR strategy

Takeover andactivist defense

Corporateventure capital

Pre-MI andClean teams

Organizingfor M&A

Due diligence

M&A execution

Target search

JVand alliances

Initialpublic offering

Spin-offs

Carve-out

Vendordue diligence

Divestitures

Finance technologyand process

Risk management

Performance management

Planning andforecasting

Value-basedmanagement

Financeorganization

Financetransformation

(Pre-)insolvencysupport

Restructuringexecution

Liquiditymanagement

Going concernprognosis

Restructuringconcept

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BCG’s thought leadership in corporate development

Selected CD PA thought leadership publications and articles

Source: BCG

BCG’s value

creator series (1999–2016)

BCG reports on specific

corporate finance topics

BCG’s perspectives

and working papers

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Global M&A activity remained strong in 2016

M&A activity remains near all-time highs

Deal value of completed deals in

2016 is on par with 2015

1,500

1,000

7,500

2,500

0

500

5,000

0

10,000

Deal value (B$) 1 Number of deals

1996 2012199419921990 2016201420042002 20102008200620001998

2,4762,481

1,882

1,4871,582

20152012

Deal value (B$) 1

20162013 2014

Deal value (B$)Deal volume (#)

1. Enterprise values include the net debt of targets

Note: The total of 555,131 M&A transactions comprises completed and unconditional deals announced between 1990 and 2016, with no transaction-size threshold. Self-tenders,

recapitalizations, exchange offers, repurchases, acquisitions of remaining interest, minority stake purchases, privatizations, and spinoffs were excluded.

Source: Thomson ONE Banker; BCG analysis

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Above-average valuation levels persist

1. The acquisition premium is the amount by which the target’s offer price exceeds its closing stock price one week before the original announcement date; the top 2.5% of deals were

excluded to reduce distortion by outliers

Note: The total of 18,493 M&A transactions comprises completed, unconditional, and pending deals announced between 1990 and 2016, with transactions of at least $25M and at least a 75%

share transfer. Self-tenders, recapitalizations, exchange offers, repurchases, acquisitions of remaining interest, minority stake purchases, privatizations, and spinoffs were excluded. Only

deals with a disclosed deal value were considered

Source: Thomson ONE Banker; BCG analysis

40

30

20

10

0

50

Average one-week deal premium (%) 1

Ø 33

200520001990 20161995 2010

12.5

7.5

10.0

5.0

15.0

Ø 12.0

1990 2005 20102000 2016

Median EV/EBITDA acquisition multiple (x)

1995

Valuation levels are comparable

with previous years …

… while deal premiums are slightly below the

long-term average

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Global M&A activity in 2017 healthy but slowing down

Recent M&A activity continues on (less) elevated levels

Slow-down of announced

deal value since two years

0

2,500

0

12,500

10,000

7,500

5,000

1,500

1,000

500

19981996 2012 20142004 2008 20101992 2002 20061990 201620001994

Deal value (B$) 1 Number of deals

Ø 1,965

2013

2,346

1,475

2017

2,249

201620152014

1,718

2,037

Q1-Q3 deal value (B$) 1

Deal value (B$)Deal volume (#)

1. Enterprise values include the net debt of targets.

Note: The total of 764,146 M&A transactions comprises all announced deals (completed, unconditional, pending and withdrawn) published between Q1-1990 and Q3-2017, with no

transaction-size threshold. Self-tenders, recapitalizations, exchange offers, and repurchases were excluded

Source: Thomson ONE Banker; BCG analysis.

2017

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Private equity is posting continued high spending and fundraising

Source: Prequin; BCG analysis

Dry powder is growing faster than the deployed capital

Number of PE companies Fundraising at historical highs

CAGR

'10-'16# PE companies

+3%

2016

4,719

2015

4,0053,919

2011

4,443 4,558

2014

4,2704,093

2010 2012 2013 2016

963

1,523

2015

2,387

755

+6.3%2,486

1,632

AuM (B$)

1,360

590 580

1,203

2012

1,721

610

1,111

2010

2,184 2,239

680

20142011

1,504

1,793

1,546

693

2013

1,940

Dry powder (B$)Invested AuM (B$)

5.4%

7.9%

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M&A scan to be completed over three phases

Phase 1: Target identification Phase 2: Target prioritization Phase 3: Target assessment

Conduct DD on priority opportunities by

refining and quantifying view of

• Need state

– Demand space, evolution and users

• Right to win

– Ability to capture market share

• Financial potential

– Standalone revenue and profitability

• Intangible benefits

– Data, channel access and capabilities

• Fit with acquirer

– Capability, culture and product fit

– Acceleration potential

Assess target value through financial,

intangible and fit lenses

• Initial internal evaluation of

attractiveness to divide ideas between

priority targets (~10) and non-priority

targets (~20)

Prioritise short-list in client workshop

• Prepare one-pagers on shortlisted targets

• 3-5 targets prioritized by client based

on value and fit

Define opportunity space for search

• E.g., business and/or value chain

segments, services and products,

geographies, other limiting factors

Generate long list of potential targets

• E.g., press/web search, market reports,

expert interviews, bloomberg, capital IQ

Refine targets to create short-list

• Group and prioritize into

themes/segments

• Apply K.O. criteria

• Assess at high level via desktop research

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• Phase 1 and 2: Target identification and prioritization

• Phase 3: Target assessment


Who is BCG

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Approach: BCG and client should agree on parameters for target search

BCG to lead kick-off discussion with

client to agree on

• Business and/or value chain

segments acquirer should play in

• Services and products acquirer

should target

• Geographies acquirer should

focus on

• Other limiting factors

BCG led kick-off discussion Illustrative output: Definition of opportunity space

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Approach: Value of each of target to be assessed through three lenses

Fit for Acquirer

Acquirer’s ability to accelerate

the enterprise or use

enterprises capabilities

Intangible value

Intangible benefits (data,

relationship, capabilities)

Financial value

Financial value of an enterprise

in its own right

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Approach: Five key dimensions to assess financial & intangible value and fit of digital companies to corporate acquirer

Key questions (example for Digital target)

Financial

value

Intangible

value

Fit for

Acquirer

Addressable population: How large is the addressable population?

Friction/need: How significant is the current consumer friction?

Product Strength: How technically advantaged is the product?

Competition: How defensible is the position/new entry risk?

Current users: How large is the current user base?

Value per user: What is the current financial value of each user?

Data granularity: How granular is the data gathered by each user?

Relationship: How strong are relationships with each user?

Capabilities: Can acquirer leverage assets capabilities?

Synergies: Does the target offer any synergies to acquirer's existing portfolio?

Ability to accelerate: Can acquirer accelerate the growth of the target?

Need

state

Right to win

Financial

potential

Intangible

benefit

Fit

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• Phase 1 and 2: Target identification

• Phase 3: Target assessment and due diligence


Who is BCG

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Due diligence can be seen as an iterative process of raising and then addressing critical questions

Issue identification

Information gathering

Negotiation

Re-assessment

“Occasionally, the buyer’s final due diligence effort uncovers a golden nugget of value, but in my

experience, the opposite generally occurs. Final, intensive due diligence inevitably reveals negative items

that diminish the seller’s value by a considerable amount”1

Due

Diligence

1. Jeffrey C. Hooke; M&A guidebook

Source: BCG experience

Price range

Assets

Terms, conditions

Financial

Data-related

Cultural

Attractiveness

Valuation

Integration plan

Memorandum

Data room

Q&A

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Strategic due diligence evaluates target attractivenessTypically four or more teams running in parallel

Note: Other advisors may be involved for a tax or pension due diligence

Source: BCG experience

Strategic due diligence Financial due diligence Legal due diligence

Technological/environ-

mental due diligence

• Assessment of

technological risks

• Assessment of

environmental risks

• Assessment of growth and

profitability potential for

financial valuation

• Determination of

offer price

• Deal structure

• Certification of accounts

• Draft of

investment agreement

• Legal go-ahead for deal

Objectives

• Delivery of technological

expert opinion

• Delivery of environmental

expert opinion

• Evaluation of

market dynamics

– Sustainable growth

– Customer needs

– Segmentation

– Competition

• Sources of

competitive advantage

• Internal operations

turnaround potential

• Mgmt. plan assessment

• Financial analysis

• Various valuation models

• In-depth review of

accounting information

• Scrutiny of

contractual risks

• Assessment of

regulatory risks

• Formulation of

investment agreement

Tasks

• Specialized

consultants, scholars

• Strategy consultants

• “Gray haired gentlemen”

• Accountants

• I-banks

• (Strategy consultants)

• LawyersResponsible

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Overview of a typical strategic due diligence process

Teaser

Initial analysis

Info provided by target company/I-Bank

Info-memo Data room Q&A

Financial due diligence (provided by accountant)

Legal due diligence (provided by lawyer)

Pre-qualification Strategic due diligence

1. Occasionally done in large transactions based on desktop research and interviews

Source: BCG corporate finance task force

Non-binding bid

Strategic/commercial due diligence

Pre-due diligence1

Decision

Final bid

Documentation of

“equity case”

Presentation of

“banking case”

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Pre—(qualification) due diligence can determine “back-of-the-envelope”target attractiveness

Typically 10–20 page memo

Describing business

Key financials

Non confidential

Fit with investor strategy

Market attractiveness

Competitive position

Value creation potential

Exit options

Range of potential

bid (indicative)

Post acquisition strategy

• Value

creation possibility

• Break up?

• Merger with

portfolio company

Done by target company

with external advisors

Based on

• Price offered

• Strategy

• Reputation of bidder

Typical admission of

3–8 bidders

Source: Source: BCG corporate finance task force

Is the target attractive

for the buyer?

Buyer usually also has to

provide information on

future strategy (in addition

to indicative bid)

Teaser Pre-qualification Non-binding bidShort-listing of

bidders in process

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Typical chapters of a strategic due diligence document

The target

at a glance

Industry

overview

Competitive

position

Target

historical

performance

Business Plan

assessment—

scenario

analysis

Market sizing

and growth

projections

Other—

Assessment

and key risks

Business overview

summary/limited research

needed

Bulk of project research and analysis focused here

Introduction

24

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guaranteed by BCG. BCG has used public and/or confidential data and assumptions provided to BCG by the Client.

BCG has not independently verified the data and assumptions used in these analyses. Changes in the underlying data or

operating assumptions will clearly impact the analyses and conclusions.

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Strategic Due Diligence and Synergies Identification in M&A DD.pdf · Who we are: BCG, global leader in strategic consulting Over 50 years of experience Topic leader in strategy,

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