how to expand your business in today’s environmentdomestic/international experience in...
TRANSCRIPT
Mergers, Acquisitions & Divestitures
How to Expand Your Business in Today’s Environment
Mergers, Acquisitions & Divestitures
PRESENTEDBY:
§ JimGriffing, Treasurer,SilverFoxAdvisor.
§ A.“Butch”Madrazo, SilverFoxAdvisor.
Overview
INGREDIENTSFORSUCCESS
Ø Prepare,Prepare,PrepareØ GoodAssetorServiceØ GoodAttorney,AccountantØ GoodBusinessAdvisorØ Preparation,Preparation,Preparation
Priorities
FROMSELLER’SPERSPECTIVE
Ø OldAgeØ Health,Divorce,DeathØ DisenchantmentØ ObsolescenceØ LifeStyleØ Ego
Priorities
FROMBUYER’SPERSPECTIVE
Ø DesireforGrowthØ ExternalFactorsØ FearØ GeographicPositionØ ShareholderDemandsØ PatentsØ Ego
Process Methodology
MAJORACTIVITIES
Ø Developingthe“Hunt”Ø NegotiatingtheTransactionØ IntegratingtheCombinedCos.Ø OperatingtheCombinedCos.
Elements of Company Profile
COMPANYREVIEW
Ø ExecutiveSummaryØ MissionStatementØ ProductorServiceLinesØ TargetMarketsØ Competition
Elements of Company Profile
COMPANYREVIEW
Ø StageofCompanyGrowthØ ManagementØ FinancialStatementsØ ActionDesiredØ SupportandVerification
Methods, Structure
THEPROCESS
Ø DueDiligenceØ PriceØ ConflictsØ TaxConsequences
Methods, Structure
THEPROCESS
Ø ArtØ HuntØ NegotiationsØ Plans
Methods, Structure
THEPLANS
Ø AcquisitionPlanØ IntegrationPlanØ OperationPlan
Valuations
THEVALUATIONMETHODOLOGY
Ø MarketBasedØ AssetBasedØ IncomeBased
Valuations
OTHERVALUATIONMETHODOLOGY
Ø ComparableMarketValueØ ReplacementCostØ LiquidationValueØ MultipleofEarningsorEBITDAØ DiscountedFutureEarningsØ FormulasBasedonBookValues
Analyses
THEANALYSIS
Ø SWOTAnalysisØ IssueAnalysisØ PESTAnalysis
Analyses
ISSUEANALYSIS
Ø Theissueis:_______________________________
DecisionOtherKey PublicMaker(s) Stakeholders Staff Stakeholder
Ø Buyer:XØ Seller: XØ Both: X X
Acquisition, Divestiture Audit
EVALUATIONOFTRANSACTION
Ø Whatwentwrong/right?Ø Whatshouldhavebeendifferent?Ø Whydiditfail/succeed?Ø Werethereuncontrollableoutsideforces?Ø WasIthestumblingblock:Ifsowhy?
Failure Factors
PRINCIPLESFORENHANCINGSUCCESS
Ø DueDiligenceØ EmployeeCommunication
Failure Factors
FROMBUYER’SSIDE
Ø KeyEmployeesLeaveØ ProductivityDropsØ PoorCommunicationØ LackofDirectionØ PoorCulturalFit
Failure Factors
FROMSELLER’SSIDE
Ø InadequatePlanningØ HowBesttoInvestProceedsØ NoOffice/NoOneAsksQuestionØ TooMuchIdleTimeØ HowtoExplainSaletoFriends
Major Lesson Learned
MERGERS,ACQUISITIONS,DIVESTITURES
Ø CultureMatters,PickPartnersCarefullyØ PlanThoroughly,ActQuicklyØ AddressEmployees’MEIssuesØ AddressWhen,Who,HowLongRetentionØ CommunicateFromTopofOrganizationØ AssureCommunicationsAreReceived,UnderstoodØ NeverUnderestimateHungerforInfo.
Part II: Accounting Aspects of Mergers, Acquisitions and Divestitures
OBJECTIVES
Ø TimesaMergerorAnAcquisitionCouldBeBeneficial.Ø WaystoAssesaTargetBusiness.Ø TheLetterofIntent.Ø AStockSalevs.anAssetSale.Ø DueDiligence.Ø PurchaseandSaleAgreement.
Times a Merger or Acquisition Can Be Beneficial
Ø WhenaFirmWantstoEnteraNewMarketØ WhenaFirmWantstoExpandThroughResearch&Development
Ø WhenaFirmisLookingtoExpandItsPortfolio
How Your Business Could Benefit
Ø ObtainingQualityEmployeesandNewSkillsØ ExpandingPP&EØ IncreasingSalesThroughanIncreaseinMarketShare
Ø GenerateCostEfficiencies
Upon Considering a Merger or Acquisition
Ø Companiesshouldpursueamergeroracquisitionthatwouldfurtheritscorporateorganizationbystrengtheningweaknesses,fillinggaps,anddevelopingnewgrowthopportunities.
Consider the Possible Opportunities to Grow Through a Merger or Acquisition
Ø IstheTargetBusinessUndervalued?Ø IsThereaWeakManagementSystemWithintheCompany?
Ø WilltheTargetBusinessBenefitfromRelocation?
Ø WillCombiningProductsorServicesEnhanceTheirOfferingtoCustomers?
Asses the Target Business
Ø TalktoTheirCustomersandSuppliers.Ø ObtainRecentFinancialStatements.Ø EvaluateTrendsinSalesandProfitMargins.Ø KnowWhotheKeyEmployeesare.
Consider the Culture of Both Companies
Ø Highvs.LowContextCultureØ LookattheValues,Missions,andGoalsofManagement.
Ø AFirmMustManageItsOwnCultureEffectivelybeforeEngaginginMergerActivity.
Synergy Needs To Be Created
Ø Explanation on why the merger between eBay and Skype failed:
"Skype is a great stand-alone business with strong fundamentals and accelerating momentum. But it's clear that Skype has limited synergieswith eBay and PayPal. We believe operating Skype as a stand-alone publicly traded company is the best path for maximizing its potential. This will give Skype the focus and resources required to continue its growth and effectively compete in online voice and video communications. In addition, separating Skype will allow eBay to focus entirely on our two core growth engine - e-commerce and online payments - and deliver long-term values to our stockholders."
~John DonahoeeBay Inc.’s President and CEO
What Can Go Wrong With a Merger or Acquisition?
Ø Therecouldbeotherinterestedpartiesinvolved.Ø Amergercanbecomeexpensiveifcertaintermssuchaswhowillcontinuerunningthebusinesscannotbeagreedon.
Ø Thebusinessmightsimplynotliveuptoitsexpectations.
NOTE:Attempttoseekexpertadvicefromprofessionalssuchaslawyers,accountants,orbusinessadvisorstohelpforecastpotentialdownfallsassociatedwithamergeroracquisition.
The Letter of Intent
DefinesThePlayersandLaysOutGeneralAssumptions:1.LegalEntitiesoftheBuyerandSeller2.DealStructure:Stockvs.Assets3.FormulaforDeterminingPrice4.PaymentTerms5.BailoutClauses6.ListsConditionsandAnticipatesChangesinPlans7.SetsBoundaries
The Letter of Intent, Continued
Forecaststheentireprocedure:– Allocationoffees,
Ø e.g.brokercommissions– MajorWarrantiesandRepresentations– MutualNondisclosureAgreements– PublicAnnouncements– ConductofInterimOperations
Ø Suchasconstraintsonexpansions,borrowingsandemployeematters
Example of Stock vs. Asset Sale: Joe’s Widget Factory – Balance Sheet
ASSETS LIABILITIESCash $100,000 Accounts payable $100,000
Accounts receivable $200,000 Current liabilities $75,000
Inventory $150,000 Long term liabilities $125,000
Furniture & fixtures* $300,000 Total liabilities $300,000 Building* $200,000 EQUITYLand $100,000 Common stock $1,000 Other $50,000 Retained earnings $749,000 Total Assets $1,100,000 Current year earnings $50,000
Total equity $800,000
*net of depreciationTotal Liabilities & Equity $1,100,000
Example of Stock vs. Asset Sale: Joe’s Widget Factory
Asset Sale Stock SaleSales price* $3,200,000 $3,000,000Inside cost basis -$1,000,000 Stock basis -$1,000Inside gain $2,200,000 Gain $2,999,000Corporate income tax @ 34% -$748,000 Capital gain tax @ 15% -$449,850Texas franchise tax @ 1% -$22,400
Cash from asset sale $3,200,000 Total Cash received $3,000,000Cash on hand $100,000Less: liabilities -$300,000Corp. tax paid -$770,400 Total taxes paid -$449,850Liquidating distribution from the corp. $2,229,600 Net cash recived $2,550,150Less: stock basis -$1,000Gain on liquidation $2,228,600Capital gain tax @ 15% -$334,290Net cash received $1,894,310 Advantage, stock sale $655,840
*With stock, purchaser assumes all liabilities
Due Diligence
Ø SecrecyisOverrated—MayKeepYoufromBeingReferredtoTheBestBuyer
Ø TheBestBuyersAsktheMostQuestions
Ø PresenttheFirm’sWeaknessesasSomethingtheBuyerCouldImproveOn
More about Due Diligence
Ø DueDiligenceisaMethodicalInvestigationDesignedtoProtectyoufrom“skeletonsinthecloset”—whichAlwaysExist!
Ø First,CheckOuttheBuyerorSeller:- Authoritytodothedeal?- Verifytheirfundingwithbankersorotherproposedfinancialparticipants
Ø Next,ReviewALLFinancialDocumentsØ Then,VerifyALLtheAssets,IncludingIntellectual
Property—forinstance,MakeSurePatentsAreInTheCompanyName!
Purchase and Sale Agreement
Ø ThePurchaseandSaleAgreementisPreparedAfterTheDueDiligenceisConcluded.
Ø Majoritemsincludedare:- EmploymentContracts- Non-CompeteAgreements- Representations- Warranties
Manage the Risk
Ø ChallengetheEstimatesandLearnWhatTheAssumptionswere
Ø KnowtheTypicalRisksFacedbytheIndustryØ AskEveryParticipantWhereTheySeetheMajorRisks
Ø PlanforHandlingBadOutcomes
About the Presenter
JimGriffing isbothaCPAandCFE.Jim'sexperienceincludesworkwithabroadrangeofclientsintheservice,finance,technologyandmanufacturingsectors.JimreceivedaMasterofScienceinTaxationdegreefromDrexelUniversityandholdsaBSdegreeinAccountingfromWestChesterUniversityofPennsylvania.
About the Presenter
Jimhaspracticedaccountingformorethan30years.AfteryearsofexperienceasaRegionalTaxPartnerwithanotherfirm,hefoundedGriffing&Company,P.C.,afullservicecertifiedpublicaccountingfirmin1987.DuringthesameyearhejoinedtheSilverFoxAdvisorswherehecontinuestobeanofficerandboardmember.
GRIFFING&COMPANY,P.C.OneSugarCreekCenterBlvd.,Suite450
SugarLand,Texas77478(281)491-8866
About the Presenter
Aurelio“Butch”Madrazo isadiversifiedChairmanCEO,President,andEntrepreneurwithdomestic/internationalexperienceinpublic/privatecompanies.HeisskilledinCompanyorganizations,strategies,turnarounds,acquisitions,divestituresandprofileplanning.AsaSilverFoxAdvisor,
“HeguidesandassistsClientsthroughtheminefieldsofpersonallifeandbusiness.”
About the Presenter
ButchreceivedaMasterofScienceinManagementdegreefromtheMITSloanSchoolofManagementwhereheparticipatedintheSloanFellowsProgram.HealsoholdsBSandMSdegreesinPetroleumEngineeringaswellasanHonorisPetroleumEngineerdegreefromMontanaTech.Heisontheboardofseveralcompanies,isamemberofnumerousengineeringassociationsandotherindustrygroups.Hischaritableandprobonoactivitiesincludeworkwithacademicinstitutions,CEORoundtablePrograms,andotherindustryandcivicorganizations.
SILVERFOXADVISORMentor,Advisor,Coach,Consultant
(713)[email protected]
Questions?