# Mergers and Acquisitions

## A Step-by-Step Legal and Practical Guide

## Edwin L. Miller, Lewis N. Segall

# Mergers and Acquisitions

## A Step-by-Step Legal and Practical Guide

## Edwin L. Miller, Lewis N. Segall

## About This Book

The legal, financial, and business primer to the M&A process

Mergers and Acquisitions offers accessible step-by-step guidance through the M&A process to provide the legal and financial background required to navigate these deals successfully. From the initial engagement letter to the final acquisition agreement, this book delves into the mechanics of the process from beginning to end, favoring practical advice and actionable steps over theoretical concepts. Coverage includes deal structure, corporate structuring considerations, tax issues, public companies, leveraged buyouts, troubled businesses and more, with a uniquely solution-oriented approach to the M&A process. This updated second edition features new discussion on cross-border transactions and "pseudo" M&A deals, and the companion websites provides checklists and sample forms to facilitate organization and follow-through.

Mergers and acquisitions are complex, and problems can present themselves at each stage of the process; even if the deal doesn't fall through, you may still come out with less than you bargained for. This book is a multi-disciplinary primer for anyone navigating an M&A, providing the legal, financial, and business advice that helps you swing the deal your way.

- Understand the legal mechanics of an M&A deal
- Navigate the process with step-by-step guidance
- Compare M&A structures, and the rationale behind each
- Solve common issues and avoid transactional missteps

Do you know what action to take when you receive an engagement letter, confidentiality agreement, or letter of intent? Do you know when to get the banker involved, and how? Simply assuming the everything will work out well guarantees that it willâfor the other side. Don't leave your M&A to chance; get the information and tools you need to get it done right. Mergers and Acquisitions guides you through the process step-by-step with expert insight and real-world advice.

## Information

# CHAPTER 1

Structuring Fundamentals

## BASIC CORPORATE FINANCE CONCEPTS

### Valuation Theory

*create shareholder value,*but that is not very precise or helpful. Creating shareholder value simply means making the acquirer's business more valuable. In an academic sense, how is the value of a business or asset theoretically determined?

*Inflows*are roughly equivalent to the operating cash flow component of the company's net income.

*Net income*means the revenues of the business minus the expenses to run it determined on the accrual basis as described in the paragraphs that follow. There are other cash inflows and outflows that are not components of net income (e.g., cash investments in the business that are used to finance it). Also, a business's valuation is partially dependent on its balance sheet, which lists the company's assets and liabilities as of a point in time. In a purely theoretical sense, however, the balance sheet is relevant only for the net cash inflows and outflows that ultimately will result from the assets and liabilities shown. In other words, a balance sheet is a component of future net cash flow in the sense that the assets ultimately will be sold or otherwise realized, and the liabilities will take cash out of the business when they are paid.

*intrinsic value*of the business is, as already stated, the present value of all future net cash flows generated by the business. Because stock market analysts and others in part try to evaluate the ultimate value of the business, they would like to know what cash the business is generating in each accounting period. The reconciliation of the income statement to cash flow is contained in the statement of cash flows, which is one of the financial statements that are required to be presented to comply with generally accepted accounting principles (GAAP).

*multiplied by*the probability of achieving each one, then

*discounted*to present value.

### Comparing Investments

*provided that*the rate of return on those investments meets minimum standards.

*yield*on that investment of $100 in year one is computed algebraically by solving the following equation:

*r*is the rate that discounts the stream of future cash flows to equal the initial outlay of 100 at time 0.

*net present value*method where the cash inflows and outflows are discounted to present value. If you use a riskâfree interest rate as the discount rate, that tells you how much more your dollar of investment is worth, ignoring risk, than putting it in a government bond for the same period of time.

### Element of Risk

*risk*as used by financial analysts is a different concept from the probabilities that are used to produce the expected present value of the business. Risk is essentially the separate set of probabilities that the actual return will deviate from the expected return (i.e., the variability of the investment return).

*risk averse*does not mean that an investor is not willing to take risks. Whether the investor wants to or not, there are risks in everything. The first cut at an investment analysis is to take all of the possible negative and positive outcomes and then sum them, weighting each outcome by its probability. For most investors, that is not sufficient, however. The reason is that investors are

*loss averse,*meaning that the value of a negative outcome of

*x*multiplied by its probability of

*y*is not the exact opposite of a positive outcome of

*x*multiplied by its probability of

*y*. As an example, if you were offered the opportunity to toss a coinâtails you lose your house and heads you are paid the value of your houseâyou would probably not take this bet because your fear of losing your house would outweigh the possible dollar payoutâyou would be loss averse.

### Risk and Portfolio Theory

*diversification*is commonly misunderstood. Using the term with reference to the foregoing discussion, you attempt to reduce the risk of a severely negative outcome by placing more bets that have independent outcomes, or diversifying. You equally reduce the chance of spectacular gains. Taking the example of the coin toss/bet the value of your house, if you were to agree to do 10 bets in a row, betting 10 percent of the value of your house each time, the odds of your losing the entire value of your house are infinitesimal since you would have to lose ten 50/50 bets in a row. On the other hand, the odds of your doubling the value of your house are infinitesimal as well.

*beta*is simply a measure of the extent to which a particular stock's risk profile differs from the market generally. In theory, if you held all available stocks, you would have diversified away all of the risks of each of the stocks in your portfolio other than those that affect all stocks. You cannot completely eliminate them, but in economic terms, the stockâspecific risks with any particular stock should, if the worst happens, have a minuscule effect on the overall portfolio. Put another way, if one of your stocks experiences a loss or gain from its specific risk, it changes the risk profile and return of your portfolio close to nothing because you hold thousands of stocks. The implicit assumption here is that it is unlikely that your portfolio would experience many bad outcomes from individual stockâspecific risks.

### Portfolio Theory as Applied to Acquisitions

*indifference curves*. The curves in Exhibit 1.1 show that for a hypothetical investor (and everyone is different), if that investor were happy with the risk/reward profile for an investment represented by a particular point on the grid (risk on one axis, return on the other), then you could construct a curve of the points on the grid where the investor would be equally happy (i.e., the investor presumably would be happy with an investment that offered greater returns as risk increased). Everyone's curves would be different, but it is thought that the curves would look something like those in Exhibit 1.1. The other thing depicted here is that each higher curve (in the direction of the arrow) represents a better set of investments for the particular individual investor than any curve in the opposite direction, because for any given amount of risk, the higher curve offers more return. That is what the words

*increasing utility*mean in this diagram.

## Table of contents

*Mergers and Acquisitions*(2nd ed.). Wiley. Retrieved from https://www.perlego.com/book/992397/mergers-and-acquisitions-a-stepbystep-legal-and-practical-guide-pdf (Original work published 2017)

*Mergers and Acquisitions*. 2nd ed. Wiley. https://www.perlego.com/book/992397/mergers-and-acquisitions-a-stepbystep-legal-and-practical-guide-pdf.

*Mergers and Acquisitions*. 2nd edn. Wiley. Available at: https://www.perlego.com/book/992397/mergers-and-acquisitions-a-stepbystep-legal-and-practical-guide-pdf (Accessed: 14 October 2022).

*Mergers and Acquisitions*. 2nd ed. Wiley, 2017. Web. 14 Oct. 2022.