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

jgriffing@griffing.com

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)850-0585www.bmadrazo@sliverfox.org

Questions?