Title: Implementation: Search Through Closing --Phases 3-10
1Implementation Search Through Closing --Phases
3-10
2A man that is very good at making excuses is
probably good at nothing else.
Ben Franklin
3(No Transcript)
4Current Learning Objectives
- To Provide Students with an understanding of
- how to conduct an acquisition search, to screen
potential candidates, and to make initial contact
with potential targets - the four concurrent activities within the
negotiation phase and how they interact to
determine purchase price, and - the importance of pre-closing planning and
post-closing execution
5The Acquisition Process
- Phase 1 Business Plan
- Phase 2 Acquisition Plan
- Phase 3 Search
- Phase 4 Screen
- Phase 5 First Contact
- Phase 6 Negotiation
- Phase 7 Integration Plan
- Phase 8 Closing
- Phase 9 Integration
- Phase 10 Evaluation
6Phase 3 Initiating the Search
- Two step procedure
- Establish primary selection criteria (e.g.,
industry and maximum size of transaction) - Develop search strategy to identify potential
targets using computerized databases directory
services legal, banking, and accounting firms
and the Internet. - Brokers and finders
- A broker has a fiduciary responsibility to either
the seller or buyer. - A finder introduces both parties without
representing either party. - Fee structures are normally negotiated and may
include a basic fee, a closing fee, and an
extraordinary fee (i.e., fees paid if closing
delayed due to obtaining antitrust approval, a
hostile takeover, etc.) - Put everything in writing
7Phase 4 The Screening Process
- As a refinement of the search process, screening
involves increasing the number of selection
criteria to reduce the list of potential
candidates. - In addition to the industry and maximum size of
transaction used in the search process,
additional criteria could include - Market segment
- Product line
- Profitability
- Degree of leverage
- Market share
- Cultural compatibility (e.g., AOL/Time Warner)
8Phase 5 First Contact
- The appropriate approach strategy depends on
- Size of target
- Whether target is publicly or privately held
- Acquirers timeframe for completing transaction
- Trust and relationship building when time is not
critical - Discussing value
- Preliminary legal documents
- Confidentiality agreements
- Term sheets (price range/formula, form of
acquisition, extent of due diligence, no-shop
provision)) - Letter of intent (price range/formula, form of
acquisition, form of payment, non-competes,
employee contracts, no-shop provision)
9Phase 6 Viewing Negotiation as a Process
If No, Walk Away1
Perform Due Diligence
Profiling Target Market Firm
First Contact
Structuring the Deal Form of
Acquisition Form of Payment Tax
Considerations Accounting Considerations Acquisiti
on Vehicle Post-Closing Organization Legal Form
of Selling Entity
Develop Financing Plan/ Structure
Decision Proceed to Closing or Walk Away
If Yes, Initiate Negotiations
Refine Initial Valuation
Negotiation
Process
1Alternatively, the potential buyer could adopt a
more hostile approach such as initiating a tender
offer to achieve a majority stake in the target
firm.
10Phase 6 Negotiation
- Negotiating strategy
- Initially determine areas of agreement and
disagreement - Solve the easiest areas of disagreement first
- Establish and maintain trust throughout the
process - Concurrent activities
- Refining valuation
- Deal structuring
- Conducting due diligence (buyer, seller, and
lender) - Developing the financing plan
11Key Deal Structuring Considerations
- Form of Acquisition
- Form of Payment
- Tax Considerations
- Accounting Considerations
- Acquisition Vehicle
- Post-Closing Organization
- Legal Form of Selling Entity
12Phase 6 Buyer Due Diligence During Negotiation
- Objectives
- Validate preliminary valuation assumptions (e.g.,
growth, cost, productivity, etc.) - Identify additional sources/destroyers of value
(i.e., those providing upside potential fatal
flaws) - Activities
- Detailed legal (e.g., contracts) and financial
record reviews - Management interviews (consistency in questions
asked) - Site visits (e.g., inspect equipment, inventory,
etc.) - Customer and supplier interviews
13Determining the Purchase Price
- Total consideration (TC)
- PVTC C PVS PVND
- Where C, PVS and PVND represent Cash, PV of
acquirer stock, and PV of acquirer debt issued to
seller, respectively. - Composition of offer price
- Total purchase price (TPP) or enterprise value
(EV) - PVTPP
PVTC PVAD - Where PVTPP, PVTC, and PVAD PV of total
purchase price, PV of total consideration, and PV
of assumed debt, respectively. - Offer price plus long-term
assumed liabilities - Net purchase price (NPP)
- PVNPP PVTPP PVOAL- PVDA
- (C PVS PVND PVAD) PVOAL- PVDA
- Where PVOAL and PVDA represent PV of oethr
assumed liabilities and PV of discretionary
assets, respectively. - Actual cash cost of
acquisition
14Due Diligence and Negotiation
- Reliable Appliances, a leading manufacturer
of washing machines and dryers, acquired the
stock of competitor, Quality-Built, which had
been losing money during the last several years
for 100 million in cash. Reliable also assumed
20 million (present value 18 million) of
Quality-Builts outstanding long-term debt. To
help minimize losses, Quality-Built reduced its
quality-control expenditures and began to
purchase cheaper parts. Quality-Built knew that
this would hurt business in the long run, but it
was more focused on improving its current
financial performance in the months prior to
being sold. Reliable Appliances saw the
acquisition as a way of obtaining market share
quickly at a time when Quality-Builts market
value was the lowest in 3 years. - Quality-Built had been selling its
appliances with a standard industry 3-year
warranty. Claims for the types of appliances sold
tended to increase gradually as the appliance
aged. Quality-Builts warranty claims history
was in line with the industry experience and did
not appear to be a cause for alarm. Not
surprisingly, in view of Quality-Builts cutback
in quality-control practices and downgrading of
purchased parts, warranty claims began to
escalate sharply within 12 months of Reliable
Appliances acquisition of Quality-Built. Over
the next several years, Reliable Appliances paid
out 15 million in warranty claims (PV 12
million). The intangible damage may have been
much higher because Reliable Appliances
reputation had been damaged in the marketplace.
At the end of the second year, Reliable sold
certain non-strategic Quality-Built assets for 2
million, equivalent to a PV of 1.5 million. - 1. What was the total consideration, total
purchase price, and net purchase price ultimately
- paid for Quality-Built?
- 2. Why was it important to Quality-Built to
improve its current financial performance? - 3. How should Reliable Appliances have been able
to anticipate this warranty problem from its due
diligence of Quality-Built? - 4. How could Reliable have protected itself from
the outstanding warranty claims in the
definitive agreement of purchase and sale? - 5. In what sense had Reliables reputation been
damaged?
15Discussion Questions
- Identify several criteria that might be used to
select a manufacturing firm as a potential
acquisition target? A financial services firm? A
hi-tech firm? - Describe how the various activities that occur
concurrently during the negotiation process
affect the determination of the final purchase
price for the target. Be specific.
16Phase 7 Developing the Integration Plan
- Use due diligence to determine post-closing
sequencing of events necessary to realize
potential savings and revenue enhancements - Resolve contract-related transition issues in
purchase agreement - Employee payroll and benefit claims processing
- Seller reimbursement for products shipped before
closing for which payment not received - Buyer reimbursement for vendor supplies/services
received before closing for which payment had not
yet been made - Ensure contract closing conditions include those
necessary to facilitate integration (e.g.,
employee contracts, agreements not to compete) - Develop post-merger integration organization
consisting of both target and acquirer managers
to - Build a master schedule of what should be done,
by whom and by what date - Establish work teams to determine how each
function and business unit will be combined - Establish post-closing communication strategy for
all stakeholders
17Phase 8 Closing
- Obtain all necessary consents
- Shareholder
- Regulatory (e.g., state and federal)
- Third party (e.g., customer, lender, and vendor)
- Complete definitive agreement
- Purchase price
- Allocation of purchase price
- Assumption of liabilities
- Representations and warranties
- Covenants
- Closing conditions
- Indemnification
- Loan documents
- Etc.
-
18Phase 9 Implementing Post-Closing Integration
- Communication plans (e.g., consistent and
continuous) - Employee retention (e.g., retention bonuses)
- Satisfying cash flow requirements (e.g., deferred
maintenance expenditures) - Employing best practices (e.g., competitor or
similar business) - Cultural issues (e.g. joint work teams,
co-location of acquirer and target employees)
19Oracle Integrates Sun Microsystems
- Following closing its acquisition of Sun in early
2010, Oracle must rationalize and consolidate
Suns manufacturing operations and substantially
reduce the number of products the firm offers.
Fewer products will mean less administrative and
support overhead. Furthermore, Oracle has
introduced a build to order mentality rather
than a build to inventory marketing approach.
With a focus on build to order, hardware is
manufactured only when orders are received rather
than for inventory in anticipation of future
orders. By aligning production with actual
orders, Oracle expects to reduce substantially
the cost of carrying inventory however, it does
run the risk of lost sales from customers who
need their orders satisfied immediately. Oracle
also intends to pare the number of suppliers in
order to realize savings from volume purchase
discounts. Historically, Oracle has been a more
bottom line and less bureaucratic firm than
Sun. - Discussion Questions
- 1. What specific challenges do you believe
Oracle will face in its efforts to integrate Sun
Microsystems? - 2. What do you believe Oracle should do to
overcome each of these challenges? Be specific.
20Phase 10 Conducting Post-Closing Evaluation
- Dont change performance benchmarks
- Ask the difficult questions
- Learn from mistakes
21Discussion Questions
- What is the purpose of the buyer and the seller
performing due diligence? What other parties
might want to perform due diligence on the target
firm? - Describe the financing plan. In what sense is it
a reality check? - Of the various activities conducted during
post-closing integration, which do you believe is
the most important and why?
22Things to remember...
- The search phase involves using relatively few
criteria to identify potential targets, while
screening involves narrowing the list by
employing more criteria - How first contact is initiated depends on target
size, availability of intermediaries with
contacts in target, and time criticality - Actual purchase price determined during the
negotiation phase - Integration planning must be done before closing
when buyer has greatest leverage with the seller - Closing involves completion of final
documentation, obtaining necessary approvals, and
resolving remaining transition issues - Post-closing integration focuses on effective
communication to all stakeholders, employee
retention, and identifying and resolving
immediate cash flow needs - Post-closing evaluation provides opportunity to
learn what worked and what didnt