What an M&A Deal Process Looks Like (good, bad, ugly)

Email agenda:

Estimated read time: 4 minutes 15 seconds

1. What an M&A Deal Process Looks Like (good, bad, ugly)

2. Chamath unwind

3. Markets

Good morning and happy Monday - let's get smarter

What an M&A Deal Process Looks Like

Twitter makes buying and selling businesses or M&A sound glamorous

After working on M&A deals since college, I can assure you of 2 things:

1. They are life-changing liquidity events / wealth generators

   1. When you put together a “funds flow” at the close of a deal, you see how much money everyone is getting wired: sellers, bankers, lawyers, etc. It’s rather eye-opening

2. It’s a royal pain in the ass

The saying in M&A is every deal dies at least twice during the process. I firmly stand behind this

Side note - A very cool video showing the final days of Profitwell being acquired by Paddle for $200m: We Sign Tomorrow? Inside a Tech Acquisition | A Paddle Documentary

So I wanted to give you a high level overview of an M&A process from a buyer’s perspective and sellers perspective

As you can see from below, this is a rough timeline we shared with a client below

Type of process

Competitive M&A process - This means that you are talking to multiple parties and having them all march together. The goal is to have multiple people competing against each other to drive bids higher.

Sometimes we will go “preemptive” with a buyer. This means that rather than talking to as many as 150 buyers, you will show 1 potential buyer the opportunity before it goes to market and let them get an early look at it. If you do this, you typically expect them to pay a higher multiple than the current market valuation multiples, in order to prevent you from talking to other potential buyers

Process Launch

1. Compile materials - Before launching your M&A process, you put together sales material (teaser, CIM) and other documents that provide buyers with qualitative and quantitative information about your company

1. A teaser can be a 2 page overview of the company highlighting the company's line of business, major products, industry, key customers, financials. Typically, this document does not share the company’s name, it will use a name like “Project Hydro”

2. Initial outreach - Assuming its a competitive M&A process the investment bankers will reach out to potential buyers and provide them with the teaser and an email overview of the company they are taking to market

3. NDA + CIM - If a potential buyer reviews a teaser and is interested, they will be asked to sign an NDA to receive more detailed materials on the company, including who it is. The CIM or confidential information memorandum is typically a 30-50 page slide deck overviewing all of the key aspects of the company.

4. Bids - After sharing the CIM and other materials on the company, the investment bankers will typically set a bid deadline. The bankers sometimes are asking for indications of interest (IOI’s) which are non-exclusive bids (will explain). Other times, bankers are asking for letters of intent (LOI’s), which have exclusivity included

Exclusivity simply means that if the seller signs the LOI, there is a certain time period (30-45 days) where the seller can ONLY talk to that one potential buyer and that one potential buyer only. If the seller signs indications of interest or IOIs, this means they are planning to talk to a few different parties and then later will ask for LOIs

LOIs - sign with 1 party

IOIs - sign with 1 or more parties and then pick 1 to sign an LOI with to try and get a deal done

5. Due Diligence - This is the absolute meat of an M&A process. During due diligence, the seller will be providing just about every file to ever exist of their business into a dataroom. The buyer will bring on consultants, lawyers, advisors, to review all of the information to check for potential issues that could cause them to kill the deal, or lower their price (never increase), or put certain protections into the legal agreements

1. Accounting due diligence (accounting firm consulting for buyer)

2. Tax due diligence (accounting firm consulting for buyer)

3. Legal due diligence (law firm consulting for buyer)

4. Regulatory or compliance due diligence (law firm consulting for buyer)

5. Business diligence (employees of buyer reviewing materials)

Due diligence can take anywhere from 3-9 months and is expensive for both buyers and sellers

6. Agreements - Once due diligence is completed, the lawyers will go and forth on the purchase agreement. Making sure their respective client is protected is their job, so this can be a painful process.

Funds Flow - Once the deal is signed and closed, a flow of funds will be distributed to the buyer giving them wire instructions for everyone and the amounts owed.

All in all, this can be a 2 month of 12 month process depending on the size, industry, etc of the deal

Bye Bye Chamath SPACs

I have made my feelings about the pump and dumper formally named Chamath before in this newsletter

So I surprisingly did not shed a tear when I saw the news that had to unwind 2 of his SPACs

The way a SPAC works (at a very high level) is you raise capital from investors to make an acquisition like we discussed above

You have a certain amount of time and money that needs to be spent on acquisitions or the money goes back to the investors and the SPAC is no more

“Now, in a kind of bookend for the era, Palihapitiya — who has raised money for 10 SPACs altogether — announced in a blog post today that he will wind down two SPACs that raised $460 million and $1.15 billion, respectively, after failing to find a suitable merger candidate for either.”

How sad - he won’t be able to pump up 2 more dogshit acquisitions to the average joe and then sell it at its peak while the actual terrible company he bought collapses

Market's

We continue to beat the drum on raising cash, buying $UUP (bullish US Dollar) and shedding stock (equities) and crypto exposure

As highlighted in a previous newsletter, the Federal Reserve has only begun their quantitative tightening (QT), which will have massive ramifications

If you combine this with corporate profits decelerating and GDP decelerating you have a technical term: shit storm

Just as we have been beating the drum on the above, when the time comes to start adding on risk asset exposure such as stocks and crypto, we will be loud and clear

Nothing wrong with holding cash and not losing money, it’s just as damn good as winning

- Dev

DISCLAIMER: None of this is financial advice. This newsletter is strictly educational and is not investment advice or a solicitation to buy or sell any assets or to make any financial decisions. Please be careful and do your own research.