Mergers, Acquisitions &
Divestitures
How to Expand Your Business in
Today’s Environment
Mergers, Acquisitions &
Divestitures
PRESENTED BY:

Jim Griffing, Treasurer, Silver Fox Advisor.

A. “Butch” Madrazo, Silver Fox Advisor.
Overview
INGREDIENTS FOR SUCCESS
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Prepare, Prepare, Prepare
Good Asset or Service
Good Attorney, Accountant
Good Business Advisor
Preparation, Preparation, Preparation
Priorities
FROM SELLER’S PERSPECTIVE
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Old Age
Health, Divorce, Death
Disenchantment
Obsolescence
Life Style
Ego
Priorities
FROM BUYER’S PERSPECTIVE
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Desire for Growth
External Factors
Fear
Geographic Position
Shareholder Demands
Patents
Ego
Process Methodology
MAJOR ACTIVITIES
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Developing the “Hunt”
Negotiating the Transaction
Integrating the Combined Cos.
Operating the Combined Cos.
Elements of Company Profile
COMPANY REVIEW
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Executive Summary
Mission Statement
Product or Service Lines
Target Markets
Competition
Elements of Company Profile
COMPANY REVIEW
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Stage of Company Growth
Management
Financial Statements
Action Desired
Support and Verification
Methods, Structure
THE PROCESS
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Due Diligence
Price
Conflicts
Tax Consequences
Methods, Structure
THE PROCESS
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Art
Hunt
Negotiations
Plans
Methods, Structure
THE PLANS
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Acquisition Plan
Integration Plan
Operation Plan
Valuations
THE VALUATION METHODOLOGY
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Market Based
Asset Based
Income Based
Valuations
OTHER VALUATION METHODOLOGY
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Comparable Market Value
Replacement Cost
Liquidation Value
Multiple of Earnings or EBITDA
Discounted Future Earnings
Formulas Based on Book Values
Analyses
THE ANALYSIS
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SWOT Analysis
Issue Analysis
PEST Analysis
Analyses
ISSUE ANALYSIS
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The issue is:_ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _
Decision
Maker (s)
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Buyer:
Seller:
Both:
Other
Stakeholders
Key
Staff
Public
Stakeholder
X
X
X
X
Acquisition, Divestiture Audit
EVALUATION OF TRANSACTION
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What went wrong/right?
What should have been different?
Why did it fail/succeed?
Were there uncontrollable outside forces?
Was I the stumbling block: If so why?
Failure Factors
PRINCIPLES FOR ENHANCING SUCCESS
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Due Diligence
Employee Communication
Failure Factors
FROM BUYER’S SIDE
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Key Employees Leave
Productivity Drops
Poor Communication
Lack of Direction
Poor Cultural Fit
Failure Factors
FROM SELLER’S SIDE
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Inadequate Planning
How Best to Invest Proceeds
No Office/ No One Asks Question
Too Much Idle Time
How to Explain Sale to Friends
Major Lesson Learned
MERGERS, ACQUISITIONS, DIVESTITURES
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Culture Matters, Pick Partners Carefully
Plan Thoroughly, Act Quickly
Address Employees’ ME Issues
Address When, Who, How Long Retention
Communicate From Top of Organization
Assure Communications Are Received, Understood
Never Underestimate Hunger for Info.
Part II: Accounting Aspects of
Mergers, Acquisitions and Divestitures
OBJECTIVES
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Times a Merger or An Acquisition Could Be Beneficial.
Ways to Asses a Target Business.
The Letter of Intent.
A Stock Sale vs. an Asset Sale.
Due Diligence.
Purchase and Sale Agreement.
Times a Merger or Acquisition Can Be
Beneficial
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When a Firm Wants to Enter a New Market
When a Firm Wants to Expand Through
Research & Development
When a Firm is Looking to Expand Its Portfolio
How Your Business Could Benefit
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Obtaining Quality Employees and New Skills
Expanding PP&E
Increasing Sales Through an Increase in
Market Share
Generate Cost Efficiencies
Upon Considering a Merger or
Acquisition
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Companies should pursue a merger or
acquisition that would further its corporate
organization by strengthening weaknesses,
filling gaps, and developing new growth
opportunities.
Consider the Possible Opportunities to
Grow Through a Merger or Acquisition
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Is the Target Business Undervalued?
Is There a Weak Management System Within
the Company?
Will the Target Business Benefit from
Relocation?
Will Combining Products or Services Enhance
Their Offering to Customers?
Asses the Target Business
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Talk to Their Customers and Suppliers.
Obtain Recent Financial Statements.
Evaluate Trends in Sales and Profit Margins.
Know Who the Key Employees are.
Consider the Culture of Both
Companies
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High vs. Low Context Culture
Look at the Values, Missions, and Goals of
Management.
A Firm Must Manage Its Own Culture
Effectively before Engaging in Merger Activity.
Synergy Needs To Be Created
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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 synergies
with 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 Donahoe
eBay Inc.’s President and CEO
What Can Go Wrong With a Merger or
Acquisition?
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There could be other interested parties involved.
A merger can become expensive if certain terms such
as who will continue running the business cannot be
agreed on.
The business might simply not live up to its
expectations.
NOTE:
Attempt to seek expert advice from professionals such as
lawyers, accountants, or business advisors to help forecast
potential downfalls associated with a merger or
acquisition.
The Letter of Intent
Defines The Players and Lays Out General Assumptions:
1. Legal Entities of the Buyer and Seller
2. Deal Structure: Stock vs. Assets
3. Formula for Determining Price
4. Payment Terms
5. Bailout Clauses
6. Lists Conditions and Anticipates Changes in Plans
7. Sets Boundaries
The Letter of Intent, Continued
Forecasts the entire procedure:
– Allocation of fees,
 e.g. broker commissions
– Major Warranties and Representations
– Mutual Nondisclosure Agreements
– Public Announcements
– Conduct of Interim Operations
 Such as constraints on expansions,
borrowings and employee matters
Example of Stock vs. Asset Sale:
Joe’s Widget Factory – Balance Sheet
LIABILITIES
ASSETS
Cash
$100,000 Accounts payable
Accounts receivable
$200,000 Current liabilities
Inventory
$150,000 Long term liabilities
Furniture & fixtures*
Building*
Land
Other
Total Assets
*net of depreciation
$300,000
$200,000
$100,000
$50,000
$1,100,000
Total liabilities
EQUITY
Common stock
Retained earnings
Current year earnings
Total equity
Total Liabilities &
Equity
$100,000
$75,000
$125,000
$300,000
$1,000
$749,000
$50,000
$800,000
$1,100,000
Example of Stock vs. Asset Sale:
Joe’s Widget Factory
Asset Sale
Sales price*
Inside cost basis
Inside gain
Corporate income tax @ 34%
Texas franchise tax @ 1%
Cash from asset sale
Cash on hand
Less: liabilities
Corp. tax paid
Liquidating distribution from the
corp.
Less: stock basis
Gain on liquidation
Capital gain tax @ 15%
Net cash received
Stock Sale
$3,200,000
-$1,000,000
$2,200,000
-$748,000
-$22,400
Stock basis
Gain
Capital gain tax @ 15%
$3,000,000
-$1,000
$2,999,000
-$449,850
$3,200,000
$100,000
-$300,000
-$770,400
Total Cash received
$3,000,000
Total taxes paid
-$449,850
$2,229,600
-$1,000
$2,228,600
-$334,290
$1,894,310
Net cash recived
$2,550,150
*With stock, purchaser assumes all
liabilities
Advantage, stock sale
$655,840
Due Diligence
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Secrecy is Overrated—
May Keep You from Being
Referred to The Best Buyer
The Best Buyers
Ask the Most Questions
Present the Firm’s Weaknesses
as Something the Buyer
Could Improve On
More about Due Diligence
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Due Diligence is a Methodical Investigation Designed to
Protect you from “skeletons in the closet”—which
Always Exist!
First, Check Out the
Buyer or Seller:
- Authority to do the deal?
- Verify their funding with bankers or other proposed
financial participants
Next, Review ALL Financial Documents
Then, Verify ALL the Assets, Including Intellectual
Property—for instance, Make Sure Patents Are In The
Company Name!
Purchase and Sale Agreement
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The Purchase and Sale Agreement is Prepared
After The Due Diligence is Concluded.
Major items included are:
- Employment Contracts
- Non-Compete Agreements
- Representations
- Warranties
Manage the Risk
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Challenge the Estimates and
Learn What The Assumptions were
Know the Typical Risks Faced by the Industry
Ask Every Participant Where They See
the Major Risks
Plan for Handling Bad Outcomes
About the Presenter
Jim Griffing is both a CPA and CFE. Jim's experience
includes work with a broad range of clients in the
service, finance, technology and manufacturing
sectors. Jim received a Master of Science in Taxation
degree from Drexel University and holds a BS degree
in Accounting from West Chester University of
Pennsylvania.
About the Presenter
Jim has practiced accounting for more than 30 years. After
years of experience as a Regional Tax Partner with another firm,
he founded Griffing & Company, P.C., a full service certified public
accounting firm in 1987. During the same year he joined the Silver
Fox Advisors where he continues to be an officer and board
member.
GRIFFING & COMPANY, P.C.
One Sugar Creek Center Blvd., Suite 450
Sugar Land, Texas 77478
(281) 491-8866
jgriffing@griffing.com
About the Presenter
Aurelio “Butch” Madrazo is a diversified Chairman
CEO, President, and Entrepreneur with
domestic/international experience in public/private
companies. He is skilled in Company organizations,
strategies, turnarounds, acquisitions, divestitures and
profile planning. As a Silver Fox Advisor,
“He guides and assists Clients through the minefields of
personal life and business.”
About the Presenter
Butch received a Master of Science in Management degree from the
MIT Sloan School of Management where he participated in the Sloan
Fellows Program. He also holds BS and MS degrees in Petroleum
Engineering as well as an Honoris Petroleum Engineer degree from
Montana Tech. He is on the board of several companies, is a member of
numerous engineering associations and other industry groups. His
charitable and pro bono activities include work with academic
institutions, CEO Roundtable Programs, and other industry and civic
organizations.
SILVER FOX ADVISOR
Mentor, Advisor, Coach, Consultant
(713) 850-0585
www.bmadrazo@sliverfox.org
Questions?