Business Valuation M&a and Post Merger Integration

Business Management & Administration
Business Valuation / Mergers & Acquisition /

Post Merger Integration
Pankaj Khanna, Siemens AG
Stuttgart, June 2013
Lecture BM&A, June 13 1
Business Valuation
Content
Introduction to Business Valuation

Valuation Methods
Due Diligence
Starting with some basics

What is Business valuation?
Business Valuation is the process of determining how much a business (as a whole) is
worth. A business valuation looks at all aspects of a company from the equipment and
buildings to their employees and intangible assets, and comes up with a total value for
the company as a whole.
Why do we need to determine the value of a business?
Transaction related reasons e.g.:
- Acquiring or selling a business
- Pay-out of a shareholder
Non-transaction related reasons e.g.:
- To check the credibility of a business

- Tax reasons
Starting with some basics

Definition Mergers & Acquisition
-> An acquisition normally involves the purchase of another firms assets and liabilities,
with the acquired firm continuing to exist as a legally owned subsidiary of the acquirer.
-> Takeover is often used for hostile acquisitions.
-> A merger of equals on the other hand is a combination of two firms where a new
corporate entity is created by exchanging the shares of both companies for shares in the
new company.
-> Most M&As, however, are simple acquisitions since only around three percent of all
deals can be classified as real mergers between equals
There are several types of mergers/acquisitions

Types of Mergers
9
Horizontal mergers: two companies in the same industry
Vertical mergers: along the value chain of a good/service
Product-extension: access to complementary products
Market-extension: access to complementary markets
Conglomerate mergers: different industries
What are reasons for mergers and aquisitions?
- M&A as a Tool to Achieve Synergy (2+2=5 effect )

- M&A as a Tool to Achieve Strategic Objectives
- Increased market power
- increase vertical integration
- Increase speed for certain technologies

- M&A as a Diversification Tool
- Other real reasons:

- Investments of free cash flows (instead of paying dividends)
- To keep on track with competitors
- Angency Issue (increase management power)
- overestimation of one's own capabilities
The M&A process includes the integration of the acquired business

Overview of usage for different valuation methods
The M&A process is divided into three phases
M&A
phases
Strategy
P-Proposal
Core tasks
Identify strategic gaps / technology evaluation

Explore opportunities for external growth
Market and competitive research
Define acquisition goals
Candidate screening / deal book
Selection of target companies
Manage interfaces
Support on screening and selection (e.g. financial

reports)
Create indicative evaluations and initial business
plan
Define financial dealbreakers / IRR considerations
Support on P-Proposal
Page 8
Implementation
Transaction
Signing
Continuous review of strategic fit of target (incl.

Participation in DD
Support integration plan
Manage interface to CD,
Sector Strategy
Coordinate due diligence (incl. Financial, HR,

Compliance, Legal, etc.)
Develop business plans and scenario analysis
Perform valuation
Deal structure
Develop integration plan and retention concepts
Follow-up negotiation process
Manage interfaces to Business Owner Legal, tax
experts, treasury, functional experts (e.g. HR,
Compliance),
Lecture BM&A, Julne 13 8
Business Valuation
Content

Valuation Methods
Due Diligence
Business Valuation: What is the issue?
The basic problem of business valuation is

how to set a value on all the assets of a
business, including the intangibles.
We will focus on market valuation and discounted cash flow method

Overview valuation methods
Valuation methods
Earning value method
Earning value
method
DCF-method
mit
Netto-Cash-Flows
beim Eigner
Bruttoverfahren
(Enterprise
mit NettoAusschttungen
des Unternehmens
Nettoverfahren
(Equity-
mit Einzahlungsberschssen
des Unternehmens
APV-Verfahren
(Adjusted Present
Value)
Asset value method
Market valuation
Mixed valuation methods
With full production

values
(going concern)
Comparative
Company
Approach
Fair value
calculation
-Approach)
Approach)
mit
Netto-Einnahmen
des Unternehmens
mit
Periodenerfolgen
des Unternehmens
With liquidation
values
Similar Public
Company Method
bergewinnverfahren
Recent
Acquisitions
Method
Mittelwertverfahren
Initial Public
Offerings
Multiples
Other valuation methods:

-
Leverage buy out analysis
Break-up analysis
EPS1) accretion / (dilution)
52 week trading high-low
1) EPS: Earnings per share

Source: Prof. Dr. Volker H. Peemller
The DCF*-method is the most exact but time consuming method

Classification of methods concerning time consumption and meaningfulness
high
Discounted
Cash-Flow
Liquidation
values
Effort for
valuation
Earning valuemethode
Asset value
method
Market
valuation
low
low
Meaningfulness
of valuation
high
There are substantial differences in usage of evaluation methods regarding

seller or buyer perspective of the transaction
Usage of evaluation methods by seller and buyer side
Seller
Buyer
85%
72%
77%
67%
63%
61%
46%
34%
DCF 1)
Comparable Multiples
Analysis 2)
Earning
value
Earning
value
DCF 1)
Comparable Market
Analysis 2) capitalization
31%
Multiples
Multiple-method shows biggest difference regarding user group

1) DCF: Discounted Cash Flow
2) Based on transaction price
Source: P. Beck 1995
The most appropriate valuation method strongly depends on the valuation task
Overview market valuation methods
Market valuation
Comparative company
approach
Key business data

Multiples and ratio's
Stock figures and analysis
Transaction prices
Share deal information
Volume based
comparison (e.g. floor
space, ...)
Sales based comparison
For private / public

companies
1) P/E: Price / earning ratio

2) P/G: Price / growth ratio
3) P/B: Price / book ratio
New valuation for

start-up companies
Multiples
Based on earnings
P/E ratio
P/EBITDA 7)
P/G 2)
P/B 3)
P/cash flows
EPS 4) forecast
ROI 5)
1)
For public
companies
4) EPS: Earning per share
5) ROI: Return on invest
6) EV: Enterprise value
Based on sales
Business plan ratification

Top management
Number of internet
site visit
Spending per internet
page visit
Visibility in market
Predictability
Reputation / credibility
Quality of products
Strategy, organization
Sales multiple
EV 6) / sales
For public
For private / public
companies
companies
7) EBITDA: Earnings before interest, tax,

depreciation and amortization
Market valuation enables to come up quickly with an order of magnitude value

Pros and cons of market valuation approach
Pros
Cons
Highly depending on quality of gathered data

Key data, crucial information is difficult to find (e.g.,
Clearly focused on market conditions

High acceptance by non-valuation specialists
Focused on key issues / results to be achieved
Valuation can be achieved in a short period of time
Focusing on future expectations rather than history
Can be based on real performed transactions, much more
hands-on (Somebody really paid that much money)
Prognoses problem not relevant and reduction of complexity easily to be adapted
While comparing only with one company in traditional
DCF valuations now several companies are compared
External facts and relations are dominant

Focus of analysis on market data rather than fundamental analysis of valuated company
Use of market perspective already includes several
different definitions, mixed publication of EBIT, EBITA,

EBITDA figures, etc...)
Comparability of defined peer group to be ensured (e.g.,

technology, size/volume, service portion, etc..)
Market data is past oriented; data from different periods

of time
High volatility of stock markets in some industries

Country differences to be taken care off
Deal prize conditions are difficult to figure out (e.g.,
special agreements with strong influence, golden
parachutes,..)
Acceptance by client (e.g., tendency to create own

artificial multiples,..)
additional variables such as power, market share, etc. ...
A further detailed analysis should be conducted for relevant targets

The comparative company approach is mainly used to evaluate private

companies
Overview comparative company approach
Methodology:
Valuation based on real
transactions values for
comparable companies
Transaction values are
published in:
Financial journals /
magazines (e.g. M&A
review, FT, FAZ,
manager magazine)
Internet sides like:
Northern light
Hoovers online
Thedeal.com
more-IPO.com
Databases like:
Investext
Dun & Bradstreet
Reuters
Moodys
Pros:
Submethods:
A) Comparable company analysis (CC)
Quick, easy and market

oriented
Value based on real prize

not theoretical estimations
First approach for an order

of magnitude value
B) Similar public company method

(SPCM)
C) Recent acquisition method (RAM)
D) Comparability method
Cons:
Fields of usage:
Mostly used for private companies
Used for tender valuation
Identification of truly
comparable transactions very
difficult
Transaction contracts and
prizes may have not publicly
known clauses like golden
parachutes golden
handshake or side deals
included that deteriorate the
transaction price
For assets and real estate

For small, medium sized companies
whereas earning or cash flow
approach seems overwhelming
Acquisition prize estimation
Enterprise and equity value have to be distinguished

The enterprise value concept
Enterprise value ("EV")
The value of the business as
presented by the sum of the market

value of the various claims on
business profits and cash flows
Essentially the market capitalisation

plus all other sources of capital
utilised by the business
Used in ratios that measure the
Equity value ("EqV")
Essentially the same as market
capitalisation (number of shares

times share price)
EqV is the capital source that
belongs to the shareholders only
Used in ratios that measure the

return to shareholders
return to all sources of capital
Different multiples are used for either enterprise or equity value determination
The enterprise value concept (continued)
Selected flows or values available to

satisfy all the claims of capital providers
Selected flows or values available (left)

to shareholders or equity providers
Sales
Operating cash
flow
Operating profit
Operating free
cash flow
Invested capital
("EBITDA")
("EBIT")
("OpFCF")
("IC")
Earning before tax
("EBT")
Cash earnings
("CE")
Net earnings
("E")
Net assets
("NA")
Shareholders'
equity books
("Eq")
Consistent application of the matching principle is key to arrive

at meaningful results
Source: Warburg Dillon Read
Calculation schemes for selected multiples

Calculation of selected multiples
Based upon measures which relate to the

whole business - the enterprise
Based on measures relevant to the equity

shareholders' interest in the company
EV / operating cash flow (EBITDA)
Price / earnings ratio (P/E)
Enterprise value
Equity market value
EBITDA
Net earnings
EV / operating profit (EBIT)
Price / cash earnings ratio (P/CE)
Enterprise value
Equity market value
EBIT
Cash earnings
EV / operating free cash flow (OpFCF)
Price / book ratio (P/B)
Enterprise value
Equity market value
OpFCF
Net asset book value

The sales multiple can be used to determine the company value and for
comparison to competitors
Sales multiple
Definition
Sales multiple =
Enterprise value*
Sales
Origin in business valuation for rapid growth companies that are not profitable in the
Original purpose
beginning due to up-front investments and start up cost
Goal: Industry branch-specific multiples deliver a rough estimation / explanation of

the potential market price for acquisitions
Much relevance for acquisition negotiations in the Anglo-American area

Relevance / rationale
Application for value

benchmarking
(approximate estimation of business value)
Determination of exact business value usually by using different method

Relevance based on purely empirical foundation
Comparison between businesses of different sizes
Business value is scaled via sales
* Enterprise value = market capitalization + long-term debt - cash;

business value allows assessment of the value independent of capital structure
Discounted Value Method
What is a discounted cash flow (DCF) analysis?

Philosophy of discounted cash flow method
In essence, DCF is the net present value of future (projected) cash flows of a business or project
future cash-flows are discounted to the present, reflecting the time value of cash
(opportunity cost of capital) and the risk of these cash-flows
In a DCF analysis, there are three main components

the projected future cash-flows
the terminal value
the discount or hurdle rate
DCF allows a more sophisticated approach to valuation than is possible through the use of multiples
many value drivers can be separately included in a DCF-model
DCF is a multi-period approach
But ... DCF is subjective, difficult to use and can easily incorporate mistakes

Preparing an enterprise DCF valuation

Elements of DCF valuation
Produce integrated forecast cash-flows, profit & loss account and balance
Forecast
sheet
Calculate ratios for the forecast-period and check against historic ratios
Check that the forecasts are properly funded and are realistic
Project the cash-flows over a reasonable time period, generally 5 to 10 years,

Free cash flows
depending on the situation

Last year in the projection period should reflect steady growth and profitability
(normalization)
Taxation
Other elements
only deduct taxation which relates to EBIT

Working capital
all elements, excluding those which relate to financing activities
Provisions
only include here changes which relate to operating items in free cash-flow
Analyzing the future free cash flow is the main task within a DCF analysis
Definition of enterprise free-cash flow
Enterprise free cash flow ("FCF") is the cash available to all the providers of capital, it may be
used to pay interest or repay debt
used to build cash balances or other investments
used to pay dividends or buy-back shares
Free cash flow = debt cash flow + equity cash flow
Free cash flow must be post tax and post all investments expenditure needed to support the future
forecast FCF
How to calculate the free cash flow?

Free cash flow - Standard calculation
EBIT (normal operating profit)

Taxes on EBIT
X
(X)
NOPAT (normal operating profit less adjusted taxes)
Depreciation and amortisation
Gross cash flow
Capital expenditure
(X)
Change in working capital
(X) / X
Non-cash changes in operating provisions
(X) / X
Enterprise free cash flow
The net present value of a corporation is the sum of its future Free Cash Flows
discounted with the wacc-rate to the achieve the present value
Net present value of FCFs
Net present value

of future FCF
DCF-valuation depends on:
Present value of
Continuing value
or
Terminal value
(1+wacc) N
Terminal Value
Present value of
N
FCF (n)
FCFs
=
for explicit
(1+wacc) n
n=1
forecast period
Business plan and assumptions for the

Free Cash Flows within the explicit
forecast period (typically 5-10 years)
Assumption for cost of capital - wacc

Formula used for the determination of the
terminal value
For Discounted cash flow valuation the present value of the future free cash
flows have to be calculated
Elements of DCF valuation
FCF
Time n
...
...
1
10
N+1
oo
1
(1+wacc)n
Discount
rate
Time n
10
N+1
Discounted
FCF
2
FCF n
10
(1+wacc)n
...
...
1
oo
Continuing period
for terminal value
Explicit forecast period 1..N
Present value FCF /
Time n
...
...
N+1
oo
Terminal value is extremely critical for the valuation of companies

Definition of terminal value
A terminal value is a simplified valuation assumption - the hypothetical value of a

business beyond the forecast period
It is used to replace a much longer period of explicit projections

Typically, it would require an explicit forecast period of
25 years to capture 66% of the total business value
There are two primary methodologies to calculate terminal value

terminal multiple approach (sector or trading multiple driven)
constant growth in perpetuity (cash flow driven)
Depending on the valuation assumptions three formulas* for the calculation of

the Terminal Value are used
Terminal Value Calculation
Name
Convergence Formula
Constant Growth
Formula
Formula
TV =
TV =
* Where formula 1 and 2 can be derived form the value driver formula
Comment
FCF (N+1)
wacc
FCF (N+1)
wacc-g
FCF(N)
wacc
g
NOPAT
Assumption: the net improvement

in future FCF will not generate
additional value
Assumption: the net improvement in
future FCF underlie a constant growth

rate g (only valid for g<wacc)
= the expected free cash flow in year N

= weighted average cost of capital
= the growth rate in perpetuity (in general the GDP growth)
= Net operating profit after tax
Shareholders value can be described as achieving a positive return

on cost of capital
What is cost of capital?
It is the required return of investors ...

the discount rate which equates the present a value of future cash flows with the
price investors are willing to pay for those cash flows
Cost of capital is a key component in valuations ...

the discount rate in DCF valuations
a basis for interpreting differences in valuation multiplies
a mean of evaluating the effects of changes in capital structure
Cost of capital is one of the most intractable problems in finance!

... so be not surprised if there are more questions raised than answers given
The EVA or GWB methodology is based on this philosophy

How to calculate the cost of capital?

Weighted average cost of capital - WACC
Most DCF valuations are done from an enterprise perspective and therefore as WACC
WACC is simply the average of the costs of equity and debt, weighted by their relative
market values
WACC =
Equity
Total capital
x COE +
Debt
Total capital
x CODpost-tax
COE: Cost of equity (the required return of equity investors)

COD: Cost of debt (post-tax to reflect the tax-shield a company has when borrowing)
The following will illustrate the complexity involved in estimating the WACC
Source: Siemens Management Consulting, Practice M&A
The WACC can be derived from the cost of equity and cost of debit
Weighted average cost of capital
COE
1)
Equity risk
premium
[x]
Company risk
premium
Levered
company Beta
[+]
Levered cost of
equity
80.0%
[x]
Risk free rate
COD
2)
[+]
Levered debt
premium
Tax rate
1) COE: Cost of equity
[+]
Levered
company cost of
debt
WACC
Net cost of debt [x]

20.0%
[x (1 - tax rate)]
2) COD: Cost of dept
Source: Practice M&A

CAPM-framework is heavily criticised but is the most generally accepted basis

for estimating
The capital asset pricing model (CAPM)
Based upon portfolio theory, investors required return depends upon the contribution of
a stock to portfolio risk not the total risk of the investment
beta is a measure of market (non-diversifiable or systematic) risk
Under the CAPM framework, the cost of equity can be broken down into two
components
a rate component (or minimum return component)

an excess equity return component
CAPM fails when used as an ex-ante model, especially in a simple firm valuation
context
As a result, CAPM is heavily criticised but is the most generally accepted basis for
estimating the cost of equity
Source: Warburg Dillon Read, Siemens Management Consulting, Practice M&A,

A thorough company's evaluation has to be based on more than one method

Estimated applicability of single evaluation methods
Situation of
evaluation
Method
applied
International
National
( German)
Big
companies
(Complementary)
(Complementary)
(Complementary)
Focus on
assets
Small
companies
(intangible +tangible)
Quick & dirty
Earning value
method
Discounted
cash-flow
Asset value
method
Market value
approach
1)
1)
1)
2)
(Indirect)
Liquidation
value approach
Mixed
approaches
1) Public companies
2) Private companies
multiplier approach/
Swiss model
Fully applicable
Not applicable
- DRAFT -
Football Field
Enterprise
0,00 Value (m)
Thom as Valuation
Current trading (share price 7.30)

12 month range ( 5.29 - 9.13)
1,00
1''02 @30% Prem ium
1''12 @40% Prem ium
0''71
0''43
2,00
0"97
Median: 0''95
0''80
Broker target prices ( 7.94 - 9.70)
1''05
1''06
DCF Valuation (Standal. + Synergies)

Trading com ps
1)
(low /high + 40% prem.)

EV / 2012E Sales
1''94
Median: 0''67
0''54
0''77
Median: 0''72
0''60
EV / 2012E EBITDA
1''21
1''29
0''83
Median: 0''65
EV / 2013E EBITDA
0''77
0''55
Median: 0''87
0''72
EV / 2012E EBIT
1''20
1''61
1''06
Median: 0''76
0''66
EV / 2013E EBIT
0''95
Precedent transactions
Sales multiple paid
1''45
Median: 1''19
0''53
1''88
Median: 1''08
EBITDA multiple paid
0''79
1''27
Median: 1''20
EBIT multiple paid
1''02
Siemens Peers EV / EBIT - all sectors

(high - low range) 2)
Implied Thomas share price in
1''58
1''31
9.36
1) Comparable Companies: Alstom, Bombardier, Invensys, Thales; plus 40% premium on equity value, assuming Thomas's net cash of 310' EUR
2) Implied transaction multiples of Siemens Peers (ABB, Alstom, Emerson, GE, Honeyw ell, Schneider, Tyco) acquisitions >0.5bn $ transaction value since 2009
Median: 2''01
max
2''61
16.50
Value and price are not linked together

Relationship between Value and transaction price
Step 2
Total value expected by buyer
Total price paid by buyer

(Effect on value)
Stand alone value to be

acquired from seller
(Current market
capitalization)
Low
Valuation methods
(e.g. DCF*) are based on
forecast figures which
are depending on
planning data
Value that buyer hopes to

create
(Synergies)
Price of
acquisition
High
Step 1
Buyer loses
Seller wins
Net value
lost by buyer
(Price minus
Total Value to Buyer)
Buyer wins
Seller wins
Net value
added to buyer
(Total value minus price)
and
Premium to seller
(Price minus market cap)
Buyer wins
Seller loses
Loss to seller
(Market cap
minus price)
Goal of acquisition: Additional value creation based on business

Business Valuation
Content

Valuation Methods
Due Diligence
Due Diligence is the systematic analysis of a business

Definition of Due Diligence
The Due Diligence study is

the systematical legal and business analysis (including Technology)
for the evaluation of the advantage of a contract
for an intended company transaction.
Source: Deutsche Steuer-Zeitung Nr. 3 1999,
Due Diligence serves to identify risks of an acquisition

Goals of Due Diligence
Due Diligence serves
to identify and evaluate risks of an intended acquisition as well as
to provide the buyer with arguments for transaction price reductions or

improvement of the contract conditions
to find arguments for the funding of the demanded selling price from the
vendor's point of view
to enable the buyer to get a fair view of the company for the closing
phase
Source: Deutsche Steuer-Zeitung Nr. 3 1999,
Due Diligence is focused more on qualitative than on quantitative values

More
qualitative
oriented
Differences between Due Diligence and Company Valuation
Due Diligence
Detailed illustration of transactionrelevant data for the principal, e.g.

factors that influence the transaction
price
Market position of company, internal
situation, chances and risks within
the scope of the transaction
Rather qualitative description
and rating
Present situation
Qualitative statements
Company Valuation
More
quantitative
oriented
Goal
Evaluation of company value (as

stand-alone or integrated business
with synergies)
Focus on
Deduction of future earnings and

withdrawals flows, future capital
cost, selection of method important
Basis
Relates to
Results
Quantitative and monetary values
Future situation
Figures and numbers
Only a combination of Due Diligence and Company Valuation leads

to a fair deal
Focus of Due Diligence and Company Valuation
Due Diligence
Detailed illustration of
transaction-relevant data for

the principal, e.g. factors that
influence the transaction price
Buyer wins - Vendor wins
Company Valuation
There must be a rational

relationship between
synergies, value and price
Evaluation of company value
Market position of company,
internal situation, chances and

risks within the scope of the
transaction
Rather qualitative description

and rating
Deduction of future earnings

Expected
synergies
Current
company
value*
Buyers
expectation
Present situation
More qualitative
oriented
and with drawals flows, future

capital cost, selection of
method important
Quantitative and monetary

values
Price
paid
The paid price is

dependent from the market
situation (demand) and
from negotiation
Future situation
More quantitative
oriented
* Calculated with company assessment methods like Discounted cash flow (DCF)
A systematic Due Diligence will avoid tricks of vendors and buyers

Tricks of vendors and buyers, examples
Behavior of the vendor
"Cooking the books," e.g. restatements,

consolidations, Goodwill
Conversion to so-called transparent accounting

Patent entries in private names, but no agreements
Artificially lower costs for group-internal agreements
Limitation of Due Diligence via guarantees
Drafting rights for sales contract
Inadvertent indiscretions
Concealment of serious illnesses of key personnel
Behavior of the buyer
Coalition with management

Exclude parts from the deal / reintegrate them later
Negotiate parts of the deal separately
Disguise the real object of interest
Let the vendor calculate "worst case" for every risk
Request negative arguments for the transaction
Claim to have own formulas / rules of thumb
Make the decision-making procedures seem more
complicated than they are
Skillfully worded competition clause
Drafting rights for sales contract
Rumors about purchase prices
Exclusive rights
...
Gradually worsen deal

Coalition with bank / other investors
...
The Due diligence will be realized within three main steps

Phases of a Due Diligence
Planning
Phase
Definition of
investigations
scope
Priorization of
selected areas
Definition audit
systematic
Time frame
Team and
Organization
Project
organization
Ressources
Internal
experts
External
Due Diligence execution

Reports
Information gathering
Data room
Interviews
Company and site
and evaluation
Segmentation and
evaluation of
information
visits
Expert reports
experts
Deal team
The deal team synthesizes the internal and external information and
delivers the DD report
Due diligence, Team and Organization
External
market studies
External
technical
reports
External
specialized
lawyers
Controlling/
strategic
Planing
Marketing /
Sales
R&D
Real estate
Production
reports
Operation /
Laws /Taxes /
Finance
Certified
Public
Accounters
Law, taxes,
finance
HR / corporate
citizenship
Technologies
IT
Insurance
specialists
Tax
Accounters
Accounting
Environment
Environment
Consultants
Internal
experts circle
Investmentbankers
Inside / out statement

Company information
Financial data
Company structure
Deal team
Management
decision head
Negotiation
Team
Management
Consultants
Outside / in statement
Third part financial
statement
Company performance
Market
Competitive landscape
Redaction and
delivery of the
Due Diligence
report
Externer
experts circle
3 main sources for the information gathering have to be considered to acquire

an objective opinion about the company
Information gathering of a Due Diligence
Planning
Phase
Team and
Organization
Data room

Reports
and Evaluation
2 Site visits and interviews
3 External information sources
Get the hard facts about the company...
...complete with soft facts...
...get fairness opinions from third party
Concentration of company information

documents in one room for a limited
timeframe (P&L, balance sheets, taxes
declaration, production plans, salary,
supplier and customer contracts,
patens)
Direct contract with the management and

the employees brings subjective opinion
and increase the "soft fact" knowledge
about the company
Interview with supplier, customer,

competitors
Interview with banker, lawyer, broker,
industry experts
Information from press articles,
publication, broker report
Confidentiality level of the documents which will be used during the due diligence have to be discussed and cleared within the letter of
intend (e.g. copy of documents from the data room have to be destroyed,...)
Backup
The main problem with Due Diligence in small and mid-sized companies is the
gathering of information
Exceptional case: Due Diligence in acquisition / merger involving mid-sized companies
In general, there are no differences between smaller and bigger companies
concerning the course of Due Diligence,
but some particularities in a small company's structure complicate Due Diligence
Structural Aspects
Middle-sized
Consolidation
company
of tasks:as
Mid-sized
central knowledge
entrepreneur
basis
as
central
*Aufgabenbe...tung:
knowledge base
Mittelstndische
Insufficient
Unternehme... als zentraler
accounting
Wissenstrger
(reporting system)
*Aufgabenbe...tung:
Impact on Due Diligence
The company itself is extremely heavily

involved in Due Diligence process
There are no year-end financial
statements examined by an auditor
Mittelstndische
Underdeveloped /
Unternehme... als zentraler
missing
Wissenstrger
controlling
*Aufgabenbe...tung:
Obtaining information becomes a central

problem
Each aspect has to be analyzed in detail

Clusters of Due Diligence
Financial
Income
Balance Sheet
Cashflow
Legal & taxes
Production and Technology
Plants & Sits

Capacity
Quality
R&D
Factor Costs
Marketing and Sales
Sales & Revenue recognition

Market & Customer
Product & Services
Marketing & Pricing strategy
People, Organization, Culture
Management
Human resources & Recruiting
Pensions and Salary
Organization
Information Technology
Communication
Culture
Supply Chain
Purchasing & Supplier

Inventory
Logistics
Sales and Distribution
channels
Environment
Environmental exposure
Locations sensitivity
Management system &
compliance
Legal aspect
The Financial Due Diligence is the overarching roof of a Due Diligence

Financial Due Diligence
Income
Balance Sheet
Profit and Loss accounts, long term and segment information

Sales and quantities analysis
Revenue and expenses analysis
...
Value and existence of all fixed assets listed, e.g. plants,

equipment, and financial assets
Evaluation of inner reserves, e.g. real estate
Working capital structure: Receivables assessment, stock
evaluation, securities, liabilities, accrued liabilities
Financial structure: long term bank loans, borrowings, etc.
...
Cash flow
Legal & taxes
Cash flow analysis, history and future plans

Existence and Quality of cash management,
interest management and currency management
Financial status, liquidity
...
Information
Annual or
Monthly
Reports or
from
databases
Head of
Accounting /
controlling,
CPA's, tax
departments
etc.
Company law aspects: Legal form (external and internal structure

of companies), list of partners, relations, ...
Pending lawsuits
Tax liabilities, tax risks, tax aspect during/after acquisition
Special arrangements with third parties, e.g. private persons or
trade unions
...
Interface with the customer and sales strategy are the main scope of the
Marketing and Sales due diligence
Marketing and Sales Due Diligence
Sales & Revenue
recognition
Markets & Customer
Product & Service
Marketing & pricing

strategy
Volume and growth rate by region and product line

Identification and analysis of significant changes
Identification of non-operating & non-recurring revenues
Type of contract completion method (percentage or completed)
Impact on the revenue recognition
...
Description of the market (volume, growth rates, segmentation...)

Estimated market shares and markets penetration
Key success factors / Factor affecting the demand (e.g., price, technology, political issues...)
Overview of the main market trend
Analyse and ranking by region and product (ABC analysis...)
Identify key account customers, check contratcs
...
Breakdown of major product / service category by sales and profit contribution

Basic buying considerations (e.g., price, quality, service, engineering, reputation...)
Description of the past and prospective pattern changes in the industry
Analysis of the product mix
Consideration of the life cycle stage of each major product (maturity)
Impact on the further R&D requirements
...
Advertising / Promotional plan

Budget breakdown
Forecast systematic
Trade & Company image
Pricing policies (fluctuation, sensitivity, ev. leadership...)
Pricing scheme by product line
...
All adoptions have to be

proven, especially for
market and competitors
Due Diligence reports can have different addresses

Reports of a Due Diligence
Planning
Phase
Team and
Organization

and Evaluation
Reports
Due Diligence report
Fairness opinion
Expert opinion
Detailed or comprehensive
report is exclusively
mandated by one of the
parties
report
Referee function, lawyer and
vendor authorize you to
make a proposal
report
Specialist or expert, i.e., if
you have knowledge in
special sectors or
businesses
...
Business Valuation
Content

Valuation Methods
Due Diligence
Creating value is the key challenge

of any M&A project
What
Companies
Want
Break Even
Create Value
KPMG Study results:
Pre-and Post-Acquisition
Cost
Premium Paid
What
Companies
Typically Get
Destroy Value
30%
31%
39%
Add value
Destroy value
No discernable
difference
Combined
Value
Deal
Announced
Deal
Closed
90 Days
1 Year
Source: KPMG
May 2012
Siemens AG / 2012. All rights reserved
The implementation phase

bears still the greatest failure risk
Which phase bears the greatest failure risk?
Strategy
Transaction
Implementation
44%
28%
28%
% of respondents
Source: Corporate Strategy Board Survey 2006
May 2012
Typical Reasons for Integration Failures are missing perspectives,

inefficient communications
Integration mistakes and success factors
Mergers often fail because of inefficient integration
finance- /synergy - expectations

unrealistic or unclear
compromises on new
organisation
47%
47%
missing masterplan
37%
missing integration dynamics
37%
missing commitment
of top management
32%
unclear strategic concept
26%
slow integration speed
26%
IT-issues brought on
table too late
Success factors for integration
58%
ineffective communication
Clear target setting and tracking

ensure speed
establish professional communication
use the best people
put together a strong (joint) management
team
ensure excellent integration management

be pragmatic
concentrate on value creation
21%
and poor integration management

Source: AT Kearney, McKinsey, Mercer, KPMG Press Releases, SMC
We have improved our proceedings

by capturing learnings from past projects
Do the
Right Projects
Have a clear strategy

Select the right projects
Buy / Sell at the right point of time
Do the
Projects Right
Have a clear process in place and follow through

Analyze the risks and opportunities diligently
Pay / get the right price and a fair contract
Integrate / Carve Out professionally
With the
Right People
May 2012
Ensure that you have experts included

Take advantage of the corporate experience
Enable systematic learning and know-how transfer
Our integrated process framework

builds the basis for sucessful M&A projects
Strategic Planning
Ongoing Business
M&A Projects
Strategy
Transaction
Implementation
Carve out / Stand alone

Acquisition
Joint Venture
Divestment
Post
Closing
Management
Integration
Know-How Transfer, Improvement
Clear processes are a pre-requisite of successful M&A Projects
May 2012
Q-Gates and predefined formats ensure consistency

over the entire process
Strategy
Transaction
Pre Negotiations
Decision
Strategy
Implementation
Performance
Controlling
Pre Signing
Decision
A two step decision approach and consistent

deal tracking ensures high success rates of M&A Projects
May 2012
We consider Integration from the very beginning and

focus our management attention on it
Signing
Acquisition Goals
1
Year
Closing
Acquiring Siemens Unit
Deal Execution
2
Years
Combined Siemens Unit
Business Plan, Purchase Price, Contract
Integration
New Structure, Value Creation Program

Business Results
Acquired Unit
Shareholder
Make people from different environments working together and

shape the new, combined organization to manage growth
Leverage synergies, improve value and market position
Keep old and win new customers to realize projected revenues
Give direction and keep momentum to achieve strategic goals
May 2012
Fundamental questions drive integration

A successful integration depends on the early definition of the integration cornerstones
What must we preserve to realize the potential of this deal? What are we
prepared to give up?
How will we
create value?
Where do we redesign, create, adopt or eliminate (by segment, portfolio,

organization, process, geography) ?
How will we
approach this
merger?
Do we absorb, integrate, create or attach?
What must be integrated immediately? Where do we have to set priorities? What

can wait?
Will we apply the best of both philosophy, or is there a preference for either companys model?
Will this philosophy apply to the leadership team selection?
What role should the CEO play?
How will this

merger be led?
How will we run the business while simultaneously maintaining focus on the integration and the
realization of the synergies?
How aggressive to we want to be?
How should the teams be formed? How much line involvement?
What people
strategy is
required?
What is the decision-making model? Top-down or bottom-up?

What degree of cultural change is required to make the integration work?
How do we identify, select and retain a superior team?
How can we ensure that we treat all people fairly and with respect?
Source: BoozAllen; M&A Practice
Learnings from past PMI projects clearly indicate the keys to a

successful integration
Key success factors for PMI projects
Integration team
Early staffing of qualified Integration

Manager & Workstream Leaders
Involvement in Due Diligence with
early verification of integration concepts

Empower Integration Manager with
decision authority and resources
Integration planning & controlling

Involvement of integration experts
Definition of non-negotiables /
cornerstones (strategic objectives) based

on explicit choices & trade-offs
Setup of PMI controlling
Value creation of
an acquisition
Early definition of business model and

value drivers
Preserve value of legacy business

Effective and consistent execution
Tracking of synergies /
growth targets
Long term review of deal
Fast adoption of non negotiables

Accounting & Controlling
requirements
Compliance Program
IT Infrastructure & Security
HR policies
Chain of Command / LOA
Implementation
Communication & Change

management
Cultural assessment
Open and effective
communication based on a clear

& shared value creation vision
Trust building is paramount
Pulse checks
Key success
factors for PMI
projects
Key pillars of an
integration
Organizational clarity
Immediate divestiture of parts not
needed
Branding decisions
Governance & legal
country setup
Interface management
Corporate departments
Siemens Regional Companies
Leverage on existing integration know-how
Setup of new
management team
Ramp-up of new
leadership group
Management commitment
In post mergers, collaboration and building

trust are paramount
Boy, Im glad it isnt leaking on our side!
Synergy trap: Frogs and Princesses
Synergy trap: Frogs and Princesses

Many managers were apparently over-exposed in impressionable childhood years to
the story in which the imprisoned, handsome prince is released from the toads body
by a kiss from the beautiful princess. Consequently, they are certain that the
managerial kiss will do wonders for the profitability of the target company. Such
optimism is essential. Absent that rosy view, why else should the shareholders of
company A want to own an interest in B at a takeover cost that is two times the
market price theyd pay if they made direct purchases on their own? In other words
investors can always buy toads at the going price for toads. If investors instead
bankroll princesses who wish to pay double for the right to kiss the toad, those kisses
better pack some real dynamite. Weve observed many kisses, but very few miracles.
Nevertheless, many managerial princesses remain serenely confident about the
future potency of their kisses, even after their corporate backyards are knee-deep in
unresponsive toads.
Warren Buffet, 1981 Berkshire Hathaway Annual Report
END

Business Valuation M&amp;a and Post Merger Integration

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Business Management & Administration

Business Valuation / Mergers & Acquisition /

Lecture BM&A, June 13 1

Introduction to Business Valuation

Lecture BM&A, June 13 2

Starting with some basics

- To check the credibility of a business

Lecture BM&A, June 13 3

Starting with some basics

Lecture BM&A, June 13 4

There are several types of mergers/acquisitions

Lecture BM&A, June 13 5

What are reasons for mergers and aquisitions?

- M&A as a Tool to Achieve Synergy (2+2=5 effect )

- Increase speed for certain technologies

- Other real reasons:

The M&A process includes the integration of the acquired business

Lecture BM&A, June 13 7

The M&A process is divided into three phases

Identify strategic gaps / technology evaluation

Support on screening and selection (e.g. financial

Continuous review of strategic fit of target (incl.

Coordinate due diligence (incl. Financial, HR,

Lecture BM&A, Julne 13 8

Introduction to Business Valuation

Lecture BM&A, June 13 9

Business Valuation: What is the issue?

The basic problem of business valuation is

Lecture BM&A, June 13 10

We will focus on market valuation and discounted cash flow method

Earning value method

Asset value method

Mixed valuation methods

With full production

Other valuation methods:

Leverage buy out analysis

EPS1) accretion / (dilution)

52 week trading high-low

1) EPS: Earnings per share

Lecture BM&A, June 13 11

The DCF*-method is the most exact but time consuming method

Lecture BM&A, June 13 12

There are substantial differences in usage of evaluation methods regarding

Multiple-method shows biggest difference regarding user group

Lecture BM&A, June 13 13

Key business data

For private / public

1) P/E: Price / earning ratio

New valuation for

Business plan ratification

For private / public

7) EBITDA: Earnings before interest, tax,

Lecture BM&A, June 13 14

Market valuation enables to come up quickly with an order of magnitude value

Highly depending on quality of gathered data

Clearly focused on market conditions

Prognoses problem not relevant and reduction of complexity easily to be adapted

While comparing only with one company in traditional

DCF valuations now several companies are compared

External facts and relations are dominant

Use of market perspective already includes several

different definitions, mixed publication of EBIT, EBITA,

Comparability of defined peer group to be ensured (e.g.,

Market data is past oriented; data from different periods

Business Valuation M&a and Post Merger Integration

Business Valuation M&a and Post Merger Integration