The letter of intent (LOI) is a paper that is key during the M&A Process, it is formed by the main points of the first agreement made by the Buyer and the Seller. It will be the base of the Sale and Purchase Agreement (SPA).
It is significant that all important aspects of the agreement are written down since thereafter, the Buyer will invest in auditors and legal advisors. In the case in which the most important and relevant points were not addressed in the LOI, then it could be possible that the process can fall apart and everyone involved wasted their time and, in the purchaser case, a lot of money.
Furthermore, the LOI is what the buyer will have to expose to the banks so that they can start financing what was agreed.
Abstract: This is the introduction with the fundamental aims of the LOI.
Transactions: Simple description of the Transaction.
Timeframe for the transaction process: This point can include deadlines to keep process moving along, according to the arrangement.
Assumptions: It includes any representations made before the Closing of the Transaction which have been discussed between the Buyer and the Seller.
Conditions precedent: Detailed description of conditions for the closing.
Due Diligence: It is wise to describe in detail the areas of the company that will undergo the process.
Financing: In this part you should incorporate the type of financing that the Buyer will use to fund it.
Confidentiality: it is important to include a confidentiality clause due to the possibility that your document contains new sensitive information.
Exclusivity period: This point should be as detailed as possible.
Disclaimer of Liabilities: A brief pulled apart should be made to limit the liabilities of the Parties in the event that negotiations fall through after LOI.
Termination of LOI & Break up Fees.
In collaboration with the Legal Department we have made two E-Books in which you can find the key points that should be included in the LOI (Letter Of Intent) and in the SPA (Sale and Purchase Agreement). If You want to know more, you can download our E-Book that provides detailed information about this document:
If you are looking to optimize the value of your investment within an operation, I encourage you to evaluate ONEtoONE Corporate Finance: a firm dedicated to provide the highest value services to their clients through transparency and professionalism. For more information click the button below.
The M&A boom of 2019 has turned uncertain in 2020. But, there are islands of strong investment activity. M&A investments will be more centered on emerging technologies that enable corporate transformations or entry into new market formations. Strategic investment decisions will be made with an eye beyond growth in revenue, margin, or market share. The COVID-19 pandemic and economic recession have served to accelerate structural business changes that have been evolving across the global market. Supply chain resilience, distributed workforce optimization, skillset realignment, AI-infused business processes, and corporate end-to-end sustainability are a few of the areas where corporations are revamping operations and portfolio to meet the 21st century economy. Companies’ fundamental realignment of investment focus will likely remain through 2025.
Aggregate 2020 deal volume for the middle, large, and mega markets will be down 45% from 2019 levels. There will be nearly 70% fewer megadeals, but M&A within the North American middle-market sector will drop only about 30% from 2019’s highs. Other sectors of M&A activity through 2021 will be in distressed funding and accelerated industry roll-ups. Our takeaways for the 2020-2021 North American M&A market:
1) Heightened Demand for Disruptive Technology to take advantage of entirely new markets and to stay ahead of competitive market entrants.
2)Transformational change needed for entire portfolios in order to increase market penetration in fast-growing sectors, such as BioTech, medical/health services, IT infrastructure, sustainability, ClimateTech, natural resources, Telecommunications, FinTech, and core technology disruptors (AI, IoT, Cloud, Blockchain).
3) Cross-border M&A remains strong, aided by new foreign direct investment legislation in key markets, such as in UAE and China, will give impetus to North America looking outside of its borders for transformative assets. At the same time, North America will remain attractive investment geography because of its advanced technology and healthy consumer markets.
4) PEs and VCs turn from small deals to branded companies, while corporations look for value deals, market consolidation, and recapitalization. It is expected these activities will stay near the rubric of portfolio or capability transformation.
5) Buyers will heavily weigh Environmental and Social Sustainability (ESG) and corporate data security integrity, particularly as it relates to GDPR compliance. A company’s ESG and data privacy capabilities will be major determinants of its value and fit for future business platforms or add-ons.
6) Historical levels of cash available for M&A, with PE firms holding $2.4 trillion, US corporations’ access to $2.2 trillion, and non-financial institutions/groups raising $6 trillion in debt & equity. Even if the economy continues its GDP losses, these levels of capital are unlikely to tighten to the extent seen during the 2007-2009 Great Recession.
If you are looking to optimize the value of your investment within an operation, we encourage you to evaluate ONEtoONE Corporate Finance: a firm dedicated to provided the highest value services to their clients through transparency and professionalism. For more information click the button below.
The big question is how to manage change? Well, it is not a matter of time; it’s a matter of commitment.
If you want to provoke change, create a proper culture. Instead of taking control, give it away. For you to create an appropriate culture, you must reduce control systems. Control is achieved when people control themselves.
Don’t give orders, but ask questions like: What would you do? What do you suggest? It’s not an easy task, but you must control your tendency towards giving orders or transmitting messages that undermine the dignity and responsibility of your subordinates.
Don’t just preach and hope a proper culture will develop itself; you must cultivate it and implement schemes that bestow authority and allow each employee to feel entitled. You must be very clear on whose responsible for avoiding the employee’s tendency towards delegating decisions to upper levels. Give the authority to decide to those who receive information, instead of moving data towards the authority, move the authority towards the information.
How to manage change formula
There’s a natural resistance to change that makes many strategies fail. To create change in your organization, you must apply the following formula:
Amount of change = Dissatisfaction + Vision + Process – Cost of change
Dissatisfaction: to create the change, you must produce an atmosphere of dissatisfaction with the current situation and generate feelings of need for change. On occasion, setting a sense of urgency works.
Vision: a compelling vision is an excellent ally for change. An ambitious challenge bonds the team together and stimulates it to reach the goal.
Don’t try to convince others on the need for change with numbers and statistics; do it with visual evidence as visuals are compelling. Make the team personally experience the pain that the current way of operating makes the client feel.
Process: Involve your employees in the decision. The change will be seen as the enemy when you suggest it to your team but will be embraced as an opportunity if your team proposes it. They’re the ones who must set their own goals, so they’ll commit themselves, and you can demand their completion on the dates set for each challenge.
Don’t try to change everything all at once. Break down your ultimate goal into smaller, specific, and achievable objectives. You can’t eat an elephant all at once, but you can do it piece by piece. Start with a leg. Use metrics and short-term milestones to gauge progress.
Cost of change: to create the change, you must first understand the points of resistance: What do people lose with this change? It’s natural for there to be resistance because you’re taking them out of their comfort zone. People are comfortable with what’s familiar, and anything new makes them anxious.
When you have everybody on board, you must create small victories, point them out, and celebrate them. Small goals lead to small victories, which in turn trigger a virtuous circle of behavior. Above all, you must over-communicate.
One piece of the puzzle
Managing your work crew and employees is one of the essential pillars of the strategy of your company. Nevertheless, it is necessary to acknowledge that it doesn’t end here. As the world is continuously changing, managers have to know how to manage change.
There are many other aspects to take into consideration when building up your strategy for a valuable company. We invite you to download for free the bestseller book written by our Chairman, Enrique Quemada, which will guide you through the most critical points of a solid strategy.
How to build a more profitable company through the FIT strategy and may other elements.
Discover the eight elements of the business puzzle, and all they contain, to build a valuable company.
Learn how to execute your strategy and maximize the price of your company as never before.
Download for free the bestselling book: "FIT: STRATEGY, VALUE, AND PRICE"
Please fill out the form and enjoy the book written by our Chairman, Enrique Quemada.
Having a clear profitability model is very important. It explains how a company makes money while creating value for the client at the same time. The business model should not only help you to serve your client distinctively, but it must also pursue that the company gains a high return for shareholders.
The DuPont formula helps you to make decisions on strategy and the business model because it combines the three components for creating value: margin, efficiency (asset rotation), and indebtedness (balance structure).
You must understand which of these three elements is your true engine for creating value, and know-how you must compete. You must identify your profitability model and be coherent with it. Some companies compete through their high sales margins (Google). Others, through asset rotation (Walmart) or leverage, by using little capital and substantial debt (Banks).
Margin(Profit / Sales): tells how much money I make as profit for each dollar I earn. It’s the result of income minus expenses. Anything that lowers costs and increases income improves the margin.
Efficiency (Asset rotation): allows you to know how much money you make for each dollar in your balance. Some companies make money by rotating merchandise several times a year. If you have a low margin for each product unit you sell but sell it many times, you end up making a lot of money. This is what happens in supermarkets.
Balance structure (Assets/Equity): allows you to make money with a smaller investment since the cost of debt is lower to the cost of capital.
Return on equity (ROE) is the result of the income model (how much it charges and how it charges it), the cost structure, the margin per customer, and the speed of use of resources.
Does it end with having a clear model?
Having a solid business model is just one of the eight blocks of the success puzzle, according to the book FIT: Strategy, Value, and Prize written by our Chairman, Enrique Quemada.
If you want to know how to build an excellent strategy for successfully managing your company, be sure to get into the following topics:
Having a solid mission, vision, and set of values.
How to design a leadership strategy for your company.
Create the right working culture in your business.
How to execute your strategy.
These topics and more are all available in the downloadable e-book below.
Download for free the bestselling book: "FIT: STRATEGY, VALUE, AND PRICE"
Please fill out the form and enjoy the book written by our Chairman, Enrique Quemada
How to build a more profitable company through the FIT strategy and may other elements.
Discover the eight elements of the business puzzle, and all they contain, to build a valuable company.
Learn how to execute your strategy and maximize the price of your company as never before.
Technology is advancing at high speed. Remember how space looked from the flight deck of Star Trek’s Enterprise, just before the ship reached warp speed? The speeding onrush of celestial bodies and the blurring of peripheral view might have made you feel the slightest sense of disorientation, anxiety, imbalance. The barrage of new technological innovations disrupting established industries can be equally disorienting, especially if you’re trying to lead a business. This is basically how the high-tech industry can also be described.
Today, innovation in key information technologies is fueling change across thousands of products and services. IT is restructuring business models of thousands of companies, driving a trend for a rising number of smaller individual startups and challenging the survival of more consolidated players in the field. Research shows that an increasing number of companies are buying innovative technologies to ensure a smooth adaptation to new processes, products, services, and markets that are created as a consequence of tech innovation. When outsourcing, for example hiring scarce technical expertise compliant with organic growth strategies becomes obsolete, acquiring other companies for that expertise may become a matter of survival.
Leading technologies like the Internet of Things (IoT), Artificial Intelligence (AI), and Blockchain are enabling innovation across a multitude of industries – especially in finance, transportation, agriculture, energy, supply chain, entertainment, healthcare, and bio-engineering. These three technologies eliminate barriers between traditional industry verticals. The result is hybrid companies that can efficiently produce, fulfill, scale, and support successful offerings across multiple verticals – a phenomenon called “Amazoning”. New advanced technologies will also continue to fuel related M&A activity.
When outsourcing, for example hiring scarce technical expertise compliant with organic growth strategies becomes obsolete, acquiring other companies for that expertise may become a matter of survival.
Let’s take a closer look at the mentioned technologies
The internet of things (IoT) – Billions of devices – from home thermostats, to heart pacemakers, to farm machinery, to police surveillance systems – are connected to the Internet and constantly communicating data. Businesses are taking advantage of IoT capabilities to scale for competitive advantage, and at a faster pace than they did cloud-based computing and storage.
The IoT ecosystem enables business intelligence (BI) efforts to apply machine learning on raw customer data pulled from devices and networks scattered around the world. Full use of IoT assets allows companies to measure and manage their global supply chains and operational performance instantly. For instance, retailers are able to real-time track individual product purchases – by customers, time of day, location, and dozens of other parameters.
Blockchain – The benefits of Blockchain technology will totally disrupt how we all live and work. Blockchain is a more specialized, function-specific, and structured application of the IoT schema. It is a highly distributed network of processing nodes (e.g., computers, databases, servers), where every node holds a mapping of the entire blockchain structure (addresses, node identifiers). As these nodes, or “ledgers”, complete a transaction for an “owner”, each transaction is time-stamped and encrypted. As these discrete transactions accumulate, they are grouped together, assigned an identifier, and labeled as a “block”. Strong encryption and multiple copies of each transaction block ensure no transaction record can be altered.
Blockchains have no central authority. They distribute work, according to pre-established order of work, across chain nodes for processing. All transactions are verified in the blockchain process and periodically revalidated to ensure there is no variance between nodes’ copies of each specific transaction. Many industries are taking advantage of blockchain’s processing, documentation, transparency, and securitization features.
Artificial Intelligence (AI) – In the 1950s, ‘60s, and ‘70s, AI was primarily an effort to apply sets of statistical models to discern data trends and perform non-complex problem-solving. Early AI was an attempt to replicate basic human reasoning as it applies to data mining and analysis. Today’s AI has advanced beyond data mining and machine learning – to “deep learning” where the computer can identify, recognize, analyze, and describe data patterns in human terms – to apply and enhance its own models and methods in order to more thoroughly understand data’s meaning. Advances in machine and deep learning now fuel other technologies, such as virtual reality, augmented reality, mixed reality, and natural language processing. In addition, it is very likely that AI will increasingly be used in a wide variety of M&A tasks.
Even as new information technologies are created (such as 5G, quantum, and neuromorphic computing), IoT, AI, and Blockchain will remain as major drivers of related M&A activity. In the attempt to have an overview of the M&A activity in this disruptive environment, we have used in our study a sample of over 5,000 companies and deals from Pitchbook.com advanced search for the high-tech industry for the period 2015-2018. Thus, this research of “disruptive information technology” includes IoT, IA & Machine Learning, Cryptocurrency/Blockchain, Cybersecurity, Fin Tech, Bigdata, Robotics & Drones and Cloud and 3D Printing.
Overall, the data show that there is a surge in the number of large value M&A deals from 2015-2018. VC firms are targeting larger tech players in the innovative information tech sector. The distribution of capital invested demonstrates that the predominant mid-market industry sector receiving investment was advanced IT, accounting for 70% of transactions throughout the period.
Even as new information technologies are created (such as 5G, quantum, and neuromorphic computing), IoT, AI, and Blockchain will remain as major drivers of related M&A activity.
Which industries receive the most capital investments for innovative IT?
Regarding the industries that receive the largest amount of capital investments for innovative IT, the data reveal a fragmented picture of technology application, with some predominant use groups being software (58.88% of all transactions), Other Financial Services applications (7.61%), Commercial services (5.64%) and IT services (4.02%) respectively.
A more thorough analysis can be found in the full report that can be downloaded at the end of this article. The High-Tech Industry Outlook 2019includes data of capital invested and deal count according to the volume of transactions, the primary country sector, the deal type, and world region.
To sum up, innovation across the IT industry is accelerating at dizzying speeds. Huge technology disruption – in the form of AI, IoT, and blockchain – is fueling other industries’ in-house innovation, and dramatically expanding companies’ capabilities across global markets. Companies are buying innovative IT to ensure their own ability to deliver new technologies, products, and services at accelerating speeds to quickly-evolving global markets. With regards to today’s M&A landscape, these disruptive technologies had the following impact:
US advanced tech M&A remains strong, but Europe IT M&A is growing
During a time of falling global Capital Investment activity, rising investment in the IT sector is a bright spot
Buyers are placing greater emphasis on integrating acquired IT innovation
Advanced IT remains the hot M&A target.
Download the full report “HIGH-TECH INDUSTRY OUTLOOK 2019” to have a deeper understanding of today´s M&A landscape within the disruptive environment.
Will the next member of your M&A team be a robot? One of the world’s most potentially disruptive technologies is Artificial Intelligence (AI). Given AI developments in the areas of big data and pattern recognition, it is very likely that AI will increasingly be used in connection with a wide variety of M&A tasks. This will have a major impact on how mergers and acquisitions deals are done.
Overview of Artificial Intelligence (AI)
The term Artificial Intelligence (AI) is a broad concept that refers to technology that allows machines to carry out tasks that are ordinarily performed by humans. In order to perform these tasks, AI requires the development of software that allows machines to replicate different elements of the complicated human thinking process.
There are two general types of AI, Narrow AI and General AI.
Narrow AI refers to the ability of a machine to apply a limited artificial cognitive function to carry out a narrowly defined task. An example of Narrow AI is the virtual assistant Siri, which is capable of speech recognition and searching for information on the Internet in response to queries. Other examples of Narrow AI are machines that play chess or Go, which select optimal game decisions from a wide set of mathematically calculated move possibilities.
General AI refers to the ability of machines to carry out more sophisticated reasoning processes and draw conclusions about courses of action which are different from possibilities that have been programmed into their database. In other words, General AI allows machines to not only perform pre-determined responses to a defined set of response triggers but rather to engage in higher-order thinking that involves creativity, innovation and improvisation.
To provide an example of the difference between Narrow AI and General AI, with Narrow AI, an autonomous car with a driving scenario database that contains examples of cars stopping at stop signs would stop the next time a stop sign was encountered. With General AI, an autonomous car would be able to reason that it should not stop at a stop sign if conditions made stopping particularly hazardous. Machines are still far away from exhibiting General AI.
AI and Mergers & Acquisitions
AI will very likely soon have a significant impact on M&A. To begin with, the preliminary application of AI will likely be to assist companies and financial analysts with gathering and processing information that can be used to make different types of M&A-related decisions. While humans can, of course, execute these tasks, AI-supported machines will be able to carry out these activities continuously, much faster and have far better recollections of search results.
Focusing on specific areas of the M&A process, AI can transform the activity as follows:
1. Market and Sector Data Extraction. To provide one type of example, machines could extract economic or sector data in real time which would allow firms to have a much more detailed and nuanced view of the business realities within a country or sector. This will be advantageous because companies often make investment decisions based on market perceptions or biases that do not reflect actual market realities which causes them to miss opportunities or assume unwanted risks.
Armed with this knowledge a company could develop stronger M&A strategies and more sensible transaction timetables. In addition to obtaining information regarding one country, machines could gather information about multiple markets and sectors and compare them to identify acquisition opportunities that likely offer the best ROI or risk-adjusted returns.
“ AI could gather information about multiple markets and sectors and compare them to identify acquisition opportunities that likely offer the best ROI.
2. Company Selection. Once a general M&A strategy has been developed, AI could be used to identify potential M&A targets and track information about them or information that affects their business models. For example, for an acquirer that was targeting the acquisition of a real estate company, AI could be used to gather several types of data which would allow the attractiveness of the acquisition opportunity to be analyzed, such as macroeconomic data, interest rates, property prices and company information. This would allow for a more sophisticated, multi-dimensional view of targets and how they react to surrounding business and economic conditions.
3. Due Diligence. The evaluation of M&A opportunities is often accompanied by extensive due diligence regarding the business environment in which a company operates in, the company and its competitors. AI will allow acquirers to develop increasingly sophisticated models of due diligence where the work of advisors such as bankers, lawyers and accountants is accompanied by various types of AI-assisted search queries. Machines will also likely be able to detect discrepancies between target narratives of either past of probable future event and past or likely future realities which can become the basis for further due diligence questions and analysis.
4. Business Valuation. Another way in which AI could be used to support the M&A activity is in the area of valuation. With the market method of valuation, different types of multiples, such as an EBITDA multiple, are extracted from the market and then applied to the financial performance of the target company to arrive at a company valuation.
In connection with the market valuation method, AI could be used, first of all, to extract in real time EBITDA and public share price data to create a live database of EBITDA multiples. In addition to this baseline EBITDA multiple information, AI could also be used to create individualized valuation adjustment formulas that were based on certain criteria, such as the size of the company or larger company sector trends to arrive at better valuation calculations.
A second valuation approach is DCF analysis, in which the future free cash flows of a company are calculated and then discounted by a discount factor which in theory reflects the risks that are related to those cash flows. AI could assist with this type of analysis by gathering information on discount factors and risks to a company’s cash flows.
5. Add-On Transactions and Exit Strategies. Most M&A strategies involve the contemplation of helping targets to grow or planning for an investment exit. Because of its ability to monitor and calibrate company performance, competitor performance and larger market conditions, AI will be able to help companies better plan post-acquisition steps. The application of General AI to M&A is much farther off, but if machines are able to learn higher forms of human reasoning they likely will be able to play a major role in developing M&A strategy, forming due diligence queries based on factual analysis and even in the psychological analysis of management teams.
Advances in AI will allow machines to access and analyze exponentially increasing data about economies, markets, companies and companies’ consumers. This ability will assist companies and financial analysts with gathering and processing information that can be used to make different types of M&A related decisions, making core business processes faster, more efficient and accurate. Some of the most impactful foreseen areas of improvement will be in market and sector data extraction, company selection, due diligence, business valuation, add-on transactions and exit strategies. As the depth and complexity of AI grow, so does the range of its application use in vital business processes.
The photo for this article was taken by Franck V on Unsplash.
Generally, we find the articles about private equity funds in which it is discussed what these companies are looking for or what type of company they invest in. In this article we wanted to change the direction and perform the analysis from the entrepreneur’s point of view, as our main goal is to understand how a private equity firm can contribute to your company.
Furthermore, we usually have the perception that private equity funds or their societies only invest in big companies. This is due to the amount of news about it, however, this conception is far from reality, since most venture capital operations are carried out in family businesses. These are operations that go unnoticed in the press, but that play a very important role to boost our business network.
Private equity entities are investment vehicles. Its mission is to invest in companies, create value over a period of approximately four or five years and sell its stake with the greatest possible surplus value. Private equity funds are the type of investment that generally invest in non-listed companies that find themselves consolidated, therefore, they have a history, growth and cash flows. Private equity invests money in companies in the medium term, usually with entry into the capital of private companies to help them grow and succeed. The counterpart for the risk assumed usually occurs, in case of success, in the form of capital gains.
In growing companies, private equity investors specialize in development capital and family offices, which are offices created for the integral management of a family’s assets. When the company enters a stage of maturity in which the growth stops being so accused and the profits become stable, the potential buyers or capital funds that come into play are the so-called buy-outs, which are capital funds, specialized risk in purchase with debt.
The following table reflects the types of investment according to the stage of the company:
“ If your company is growing and looking to expand, if you want to sell it or pass it on to managers, private equity can help you.
If you already know what private equity is, you might be asking who actually forms it. Or even, who invests in private equity? Within the world of investors in private equity we can distinguish different classes, among which we could highlight the following:
Individuals: normally wealthy families.
Big organisations: in private equity they mostly look for the possibility to have access to new technology to make the product line better or to carry out an adequate diversification policy.
Financial institutions: along with the pursuit of profitability, they also seek to have a quarry of companies linked to the bank or cashier, but without facing the risks of a direct and permanent participation.
Institutional investments: insurance companies and pension funds, taking advantage of long-term investment horizons.
Organizations and institutions of the public sector: The objective is to promote a financial activity with undoubted positive effects on the business fabric of a country, with the consequent impact on employment, investment, exports and collections for various taxes.
Foreign investors: some seek to develop an international network of private equity entities by providing their name and experience. Others look for investment opportunities that the country can offer.
In the area of financial investors, there is a lot of public information about private equity entities and their investment preferences. The family offices, however, will find it more difficult to locate and contact.
Private equity contributions
If your company is growing and looking to expand, if you want to sell it or pass it on to managers, private equity can help you. Apart from being a source of additional or alternative financing, private equity offers a series of “collateral” contributions that in many cases become the true elements of value for the entrepreneur. Below, we indicated a series of private equity benefits that can support your compan
Inject capital into the company to face the future with greater warranties.
Support the definition of the company’s medium and long-term strategy.
Advise managers on a wide range of business areas.
Can introduce you to many contacts from various sectors and businesses.
Can provide you with cross-business from other investments.
Optimize your company’s financial structure, as they are able to offer additional support to projects financed by subordinated debt, etc.
Help your company’s professional image improve in the eyes of other financial investors, suppliers, clients, employees, etc.
Manage relationships between partners in a professional manner.
Demand high levels of professionalization in management.
Require a level of professional and sufficient reporting to adequately monitor the activity.
Allow professionalizing the dialogue of the Boards of Directors and focus the decisions towards the creation of value for the shareholder.
Support the selection and hiring processes of the executive managers.
Bring some experience in business internationalization projects.
Allow preparing the company for a sale at approximately 4-7 years with greater guarantees for maximizing the sale price at the exit.
Design attractive compensation packages for managers, motivating and retaining the main managers to remain aligned with the project
Leave the entrepreneur or the manager autonomy in the daily management of the business.
They can contribute simultaneously in mixed operations resources for the shareholder (cash out) and resources for the company (cash in).
They can substitute any shareholders who are not aligned with the business project.
Allow professionalizing the management of the company with an eye on the employer’s retirement when he does not have a clear succession project.
How to get the financing
Obtaining the financing of private equity funds for your company is difficult, but at the same time it can represent a turnaround during the life of your company. Private equity entities receive a large number of projects, but select one in a hundred. Therefore, when considering the search for private equity for your company, to provide resources and with whom you can stay a few years growing your company, it is essential to prepare the proper documentation so that your company exceeds the filters of private equity entities.
“ Private equity funds will be your partners and you should trust them when they entered the company, but until then, they are your adversaries in the negotiation and you must be careful to protect your own interests.
This documentation must demonstrate the following elements:
An ambitious business plan. This plan must be realistic as well as ambitious to obtain financing for private equity. It seeks significant returns and therefore must demonstrate that its market has the capacity to grow, especially through acquisitions. In fact, private equity wishes to carry out consolidation processes in the sector and, therefore, growth via acquisitions is a fundamental requirement for them.
Design the exit plan. Private equity, before deciding to enter a company, wants to understand and plan how it will leave that company. Entrepreneurs can also stay in another round of financing with a private equity fund of the next level or, alternatively, they can go out with private equity obtaining a much higher price through the sale to a strategic group.
Keys to negotiating with private equity firms
Another crucial aspect to obtain private equity funds is a good negotiation with investors. If you negotiate with private equity, they will take your free cash flow forecasts and apply a 20% or 25% discount rate. The price that comes out (and if they have found reasonable forecasts), is what they will be willing to pay.
Another way they can lower the discount rate with is debt: the less money they can put and the more they lend them the banks, the greater the profitability that will come out for the money they put in and therefore, the more they can pay for the company. That is why, when negotiating with private equity, it is so important to help your indebtedness with banks. If the banks see that the numbers are solid, clear and well explained and documented, they will be more confident in the future flows presented to them and as a result they will lend more money for investment in the company. The more you help in this, the higher the price the company can sell.
Although there is no magic recipe for negotiating with investors, there are a number of factors that certainly contribute to making the negotiation a success. If you are considering entering a private equity firm and wish to prepare a good negotiation plan, the ONEtoONE advisory team is at your disposal.
One consequence of the world’s increasing computing power, expanding computer use and the ability of computers to capture and share different types of information is the generation of big data. It is data that because of its core properties is difficult to analyze with traditional data analysis techniques and software.
Despite the analytical processing challenges it poses, new techniques are being developed which make it possible to analyze this kind of data more effectively and allow it be used by individuals, companies and governments in many different business and scientific fields. This will likely have an important impact on many areas of M&A, such as in the definition of M&A strategy, business model validation and valuation.
This article will provide an overview on the matter by looking at a few types of analytical techniques and consider the potential impact of this kind of data analysis on M&A.
Overview and Big Data Analysis
While it can have many different qualities, its key attributes are:
Volume. it is characterized by large volumes. According to one general estimate that was published in October 2017 – the distant past in terms of global data growth – there were 2.7 zettabytes of data in the digital universe. This unimaginably large number is the equivalent of 1 trillion gigabytes.
Velocity. it is characterized by the extremely rapid pace at which it is generated. According to one report, 2.5 billion gigabytes of data were generated every day in 2012. With more than 3 billion people on line, millions of Google searches are now generated and hundreds of hours of videos are uploaded every minute.
Variety. it is also characterized by its great variety. In addition to text, this big amounts of data are also comprised of audio, video and changing combinations of data transmission methods.
Data with these properties are often very difficult to process with traditional data analysis techniques. This means that a great deal of the potential ability to use this data is lost.
Due to the challenges of processing data, various techniques are being developed to process big data. One example of this is the Apache Hadoop system, a set of open source programs which includes a component called MapReduce which reads large amounts of data, reduces it in a form that makes it suitable for analysis and then runs mathematical functions on the data.
Apache Spark is another open source data framework for data analysis. Apache Spark can perform some data analysis techniques 100 times faster than MapReduce.
A program used in statistics is R. R is very useful for data mining and for data visualization.
Big Data and M&A
It will very likely it will soon have a large impact on M&A. The following are some key ways it may change how M&A deals are identified and executed.
Strategy development. There are numerous potential M&A strategies, ranging from realizing operational synergies, creating long-term value, turnarounds of poorly performing companies and risk arbitrage. While strategy selection is defined by the particular goals of the company executing an M&A strategy and the skill sets of the M&A team members, it is also heavily influenced by numerous market factors that determine if a strategy should be launched, when it should be launched and how likely it is that it will be successful if it is launched. These factors will increasingly be able to be reduced to data points that companies can use to make strategic choices.
Acquisition targets. Finding targets to carry out an M&A strategy is often a very time consuming process which fails to identify suitable targets and closed deals. Low M&A execution rates are due to various factors, including limited search parameters, search biases, due diligence challenges and buyer/seller price expectation mismatches. With big data it will be possible to drastically improve M&A target searches and pre-screen targets more effectively, which should improve successful deal close percentages.
Business model validation. A significant challenge in analyzing a potential acquisition target is validating a company’s core business model. Particularly for acquirers who are not located in the same market as the target company, it can be very difficult to obtain real time market information and predict what that means for a company’s business prospects. With big quantities of data data, it will be possible to obtain far more detailed analyses of factors such as how fast a target company’s market is growing or shrinking, how cyclical market patterns compare with historical patterns, the amount of customers that are in a market or positioned to enter a market and their preferences and how the market is reacting to the target’s or competitor’s products.
Valuation. Often a major roadblock to executing M&A deals is valuation. Even setting side common biases for buyers to discount firm and asset values and sellers to inflate them, valuation is very challenging due to the fact that it often involves trying to forecast the future. Using big data in connection with market-based valuation techniques, such as EBITDA multiples, it will be possible not only to extract multiples from much wider market data bases, but more quickly and reliably perform comparisons between a target company and the company’s valuation reference set to make appropriate EBITDA adjustments. For valuation models that are based on discounted cash flow analyses, it will become easier to prepare cash flows, identify risks to those cash flows based on existing market information and prepare stronger assumptions about how those risks will affect those cash flows.
Shareholder activism. The existence of data in real time about a company, the execution of company’s business model and a company’s competitors will likely significantly change the relationship between a company’s founders, executives and outside investors. Rather than shareholder activism that is driven by periodic financial reporting, it is likely that increasingly available information will significant shorten the intervals between market events, company actions and shareholder attempts to influence what steps in the market a company is taking or plans to take.
As the amount of data in the world grows, technology will attempt to store the data, break it into intelligible pieces and use the data for different purposes. It is likely that the aforementioned data analytical techniques will have a large impact on M&A given that it is heavily impacted by data points that can be extracted from the market. In light of this, companies as well as investors should try to stay informed about data analysis developments so they can incorporate them into their M&A strategies and increase the likelihood that M&A deals will create lasting shareholder value.
The often volatile process of M&A is a time that requires steadfast leadership, which is able to create a sense of stability whilst everything around the company is changing. In fact, it has been reported that aside from financial results themselves, senior leadership team effectiveness is considered the most important element in determining overall company success. One of the biggest factors to consider as a leader during any M&A process is that the mentality of your employees will not be 100% focussed on their individual tasks, and perhaps will be feeling a certain element of insecurity. In unpacking this notion a little further, a leader must consider that an M&A process can place added pressure on workers, with uncertainties over the likes of job security, salary, roles and overall worth to the firm (amongst others) being common occurring questions appearing in their minds. As we all know, mental distractions can genuinely be detrimental to one’s own productivity and overall standard of work. Thus, the importance of a leader re-establishing a stable workplace during and post an M&A process truly goes without saying.
What It All Comes Down To
As we have wrote about in previous articles, understanding the human factor in M&A, let alone in business overall, is absolutely essential to the overall success of the operation; especially from a leadership perspective. It is vital to know your employees, build relationships with them, and understand how they are feeling about their place in the firm. In turn, one of the most effective practices that a leader can adopt is when they are willing to level themselves with their employees. It could be something as simple as having a non-work related conversation with them regarding a shared interest, to something more extensive as the leader organising an office-wide initiative like a team-bonding event that includes company management. The idea behind it all is to remind leadership and employees alike, that everyone in the company is human after all, and that the best foundation for future success is a strong sense of company harmony and morale.
Within this frame of knowing your employee, it is essential to understand their individual strengths. As it were, it is commonly understood that if someone is working with their passions, strengths and interests, that they will almost certainly be more effective and efficient with their work. In turn, if a leader is able to harness and ultimately leverage the individual strengths of their workers, they will go a long way in ascertaining a strong sense of company pride, belonging and arguably most important, an all-encompassing sentiment of stability; a hugely coveted concept during what are inherently unstable times of M&A transitions. But there is more to it than just stability. With their interests being promoted, employees will naturally feel more motivated to work for their leader. This is a special setup to maintain, a symbiotic working format in which leadership is happy to back in their employees, and employees are secure in the knowledge that their boss is fully in support of their endeavours. All in all, it leads to a healthy workplace, whereby little time or attention is lost on anything other than the work at hand.
Leading the Company Further Ahead
This being said, there is more to do than to just ensure stability within the company. At the end of the day, you have not gone through all of this effort to complete an M&A process not to reap your deserved rewards from it. Resultantly, it is also very important to keep growth at the forefront of the company’s mentality. Importantly however, the pursuit of growth and improvement as a firm can often be used as a galvanizing tool in which employees can become even further dedicated to the cause. As a leader, if you can effectively portray the vision, goals and overall pathway ahead for the firm, then one might just find that their employees are even more committed to achieving beyond their previous performances than ever. What’s more, the employees will know that if they show their willingness and shared passion for the new company vision, that they will have more job security within the firm. In turn, by clearly voicing the future strategy and direction of the company, you will be signposting exactly what the employees can expect and should be aiming for going forward.
The snowball effect then transitions toward that hallowed achievement, synergy. After all, this is the target of any merger or acquisition; but of course, they do not just appear. To truly unlock the full potential of your merger via synergies, company leadership must conduct the necessary groundwork that has largely been covered in this article. As such, this can be a drawn-out process, and it might take years until the company is recording the financial returns desired as a result of their corporate transaction. However, M&A is a long-run game and when successful, the unfolding synergies are able to drive the company to newfound heights and capacities. Thus, it is up to leadership to incorporate strategies that seek to enhance the propensities for the various synergies to come to fruition inside their business. This starts at the most individual of levels and reaches right up until the most central of corporate strategy as a whole. Overall, an M&A operation is an almost unrivalled opportunity for companies to increase their capabilities, strength and focus on new areas. In turn, it is essential for company leadership to be diligent in their actions, ensuring that no stone is left unturned so to uncover every available synergy from their merger or acquisition.
One business trend that will likely gain significant strength in the coming years is technology-driven M&A. These are acquisitions or joint ventures whose fundamental purpose is to create or protect firm value through the acquisition of technology. While the search for technology has always been an M&A strategy, its importance has grown as the pace of technological development has accelerated, the use of technology in our lives has increased and technological disruption of industries has become more common.
Technology-driven M&A transactions have, as with all M&A strategies, potential advantages and disadvantages. On the one hand, they can help companies jump often lengthy innovation curves, rapidly expand into new business areas and maximize the sales potential of products and services. On the other hand, acquiring technology can be very expensive, implementing technology can be challenging and there can be significant uncertainties as to the impact of technology on a business and whether the acquired technology will remain relevant and competitive in the face of other technological developments and market changes.
This article briefly discusses the increasing pace of technological development, provides an overview of three models of technology-driven M&A and looks at some advantages and disadvantages of tech-driven M&A strategies.
The Accelerating Pace of Technological Development
While technological development is by no means a new phenomenon, arguably we are witnessing the greatest acceleration of technological progress and impact of technology on human lives in history. There are four related reasons for this which have combined to create a virtuous cycle of technological progress.
● Increased Dissemination of Technological Knowledge. Information about technology and technological development is being disseminated at increasingly rapid rates. Due primarily to the Internet and the explosion of knowledge-sharing economies, it is possible to learn about technological developments, discover how to replicate them and work on ways to improve them faster than ever before. The Internet has gone a long way to convert the world into an open technological laboratory.
● Improving Technological Development Finance and Economics. Investment in technology has rapidly increased due to growing global wealth, deeper and more efficient capital markets and the increasing interface between investment capital and technology development. This has been combined with the falling cost of many key building blocks of technological development, such as human labor, access to information, computer-driven research and the cost of technology development-enabling devices such as computers.
● Increased Use of Technology. The use of technology in our daily lives has increased. Due to increased Internet penetration rates, the Internet of Things and trends such as technology convergence, our lives are increasingly intertwined with devices, such as cell phones, which rapidly evolve. This has increased technology absorption rates.
● Economic Conversion of Technology. Due to increased knowledge about technology demand and immediate access to large amounts of technology users through the Internet, the chances of converting technological development into short-term financial gain have improved. This has created the rise of companies such as Google, who channel large amounts of resources into technology research and technology ventures. The shrinking loop of technology development and economic conversion creates strong incentives for the constant push for new technological applications.
Three Types of Technology-Driven M&A Strategies
The rapid pace of technological development has had a major impact on businesses and how businesses view the path to value creation. As an M&A strategy, the acquisition of the right technology can allow a business to grow at rates that can be significantly in excess of growth strategies that rely on other growth drivers.
There are three key types of technology-driven M&A transactions.
● The first type of technology-driven M&A strategy is used by businesses who are looking to acquire innovation to defend their current business model, strengthen elements of their business or transition into new business areas. One example of this strategy is where a petroleum company seeks to acquire a company with renewable energy technology.
● The second type of technology-driven M&A strategy is utilized by technology companies who have technology at different stages of development but who not have the necessary resources to complete the technological development or who do not have a platform to monetize the technology. This strategy can allow technology companies to shorten product launch cycles, significantly expand their access to potential customers and greatly accelerate their ability to deliver their products and services to those customers.
● The third type of technology-driven M&A strategy is used by financially-driven investors who attempt to use technology to create financial value consistent with their overall investment strategy. Technology can be used with every type of financial M&A strategy, ranging from turnaround strategies to long-term value growth to risk arbitrage.
Advantages and Disadvantages of Technology-Driven M&A Strategies
Technology-driven M&A strategies have advantages and disadvantages. At the company level, the key advantage is the right technology can significantly improve business performance. This, is and of itself, can create a series of positive developments, including increased productivity, profitability and investment.
A second key advantage of technology-driven M&A strategies is that they externalize different parts of the technology development and commercialization phases, which can create overall economic efficiencies. For an industrial group, it can be economically efficient for a large portion of technology development to be carried out by third parties. Similarly, for a technology firm, it can be economically efficient for other parties to develop and maintain the channels necessary to market technology.
On the other hand, technology-driven M&A strategies can pose several challenges. To begin with, acquired technology may not fit precisely with a company’s business model or may be difficult to implement, which can create operational inefficiencies as well as efficiencies.
Second, even if technology fits precisely with a company’s business model and can be readily implemented, technology may become obsolete or markets may shift toward different technological applications, eliminating the benefits of the technology acquired.
Thirdly, because of the uncertainties involved with the integration, implementation and durability of technology, it is extremely challenging to value. Unlike investment funds who might hedge the risks of technological investment by investing in many technology ventures, for a single company a major technological investment may constitute a significant bet of its available business development capital. Furthermore, given the uncertainties of technology investments, financing parties may only underwrite investment in technology at significantly higher costs than more secure CAPEX or other investments, which can put firms under financial pressure, particularly if it will take a long time for technology-driven benefits to be realized.
As the pace of technological development and the integration of technology in our daily lives continues to accelerate, technology-driven M&A will become an increasingly relevant M&A strategy. While this strategy has advantages and disadvantages, it should be carefully considered by companies looking to maximize the potential of their business model and drive overall firm growth.
This article was written by Darin Bifani.
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