In this post we walk through an M&A process from start to finish.
M&A Process Summary
- Teaser/Executive Summary
- Non-Disclosure Agreement (NDA)/Confidentiality Agreement (CA)
- Confidential Information Memorandum (CIM)/Offering Memorandum
- Indication of Interest/Expression of Interest
- Bid Process Letters Round 1
- First Round Bids/Letter of Intent
- Bidder Selection
- Bid Process Letters Round 2
- Definitive Agreements
- Merger Closing
Sell Side Process Preparation
When the ink is dried on the engagement letter with the seller, the investment bank juniors will start putting together materials for a kickoff call with the company. They will put together immediate questions for the company, map out key work streams to lay out the process and put together a working group list (WGL) that has all the key contacts of the main participants (the investment banking deal team, the law firm contacts, the company contacts).
Once an investment bank is hired to help sell a company or asset, they begin compiling a list of buyers that make sense. Depending on the banker’s relationships with potential firms, there may be sound offs to gauge interest.
The investment bank will collect data required to market the company and start putting presentations and a working Excel model together. Unless the company has a dedicated corporate development (internal M&A) team (companies with an enterprise value of over $25 billion), their internal model is unlikely to be useable and must be reconstructed by the investment banker. Generally, the 2nd or 3rd year analyst will build the model and the associate will check it.
The investment bank will send out Teasers to possible buyers. Teasers are low in information and are glossy marketing files that will highlight major line items in an attractive light (revenues, growth, asset portfolio) with selective visuals in the form of photos.
If potential buyers are interested in gathering more information, they will sign a Confidentiality Agreement (CA) or Non-Disclosure Agreement (NDA) where the potential buyer agrees to keep data received and the sale process confidential.
Confidential Information Memorandum
The Confidential Information Memorandum (CIM) or Offering Memorandum (OM) is distributed once CA’s are signed. The CIM is a much more detailed document detailing the company’s operations, extensive financials with management forecasts that give the potential buyer a framework for valuation.
Meanwhile, the investment bank will prepare company management for presentations and putting up the data room – previously a room full of confidential data for potential buyers to conduct due diligence, but now usually a virtual, password protected website hosted by Intralinks or a similar website.
Indication of Interest (IOI)
Interested buyers will submit a non-binding Indication of Interest (IOI) or Expression of Interest (EOI), which is an offer with an indicative valuation range. The IOI will also include commentary on potential synergies from the buyer’s perspective, timing and ideas around structuring that give an indication to the investment banker and seller of whether this may be a viable bid.
The investment bank and the company cut the list of potential buyers to decide which bidders get to proceed to the next phase in the process.
First Round Bids and the Letter of Intent (LOI)
Once bidders are short-listed, their due diligence process begins.
The remaining firms will have access to the data room and attend management presentations where they can figure out how the company would fit in their portfolio or as part of their corporate. Operational site visits will also be conducted at this point (counting trucks, visiting restaurants).
A bid process letter is disseminated to selected purchaser candidates that outlines what information to include in their proposals – the rationale for the deal, potential synergies they see, how they could finance the transaction etc.
Interested buyers will now have to put together a Letter of Intent or Term Sheet to continue the process. This is a more formal document than the EOI and will be granular in detail pertaining to timing, structuring and price that will be checked and guided by the buyer’s financial advisor and corporate lawyers. However, this document is generally non-binding (with the caveat that it should include a disclaimer that it is non-binding, otherwise it may legally constitute a valid offer) and subject to negotiation. At times, should the buyer be logical and the consideration be attractive, the buyer and seller may become exclusive.
Second Round Bids and the Definitive Agreements
After the list of buyers is pruned down to one or a few remaining candidates, another bid process letter is sent out to solicit definitive agreements.
Final bids are binding and finalists are brought in to negotiate their proposals. From there, a winning bidder is selected by the company guided by the investment bank and a Purchase and Sale Agreement is drafted – a definitive agreement that outlines the terms of the acquisition.