STRATEGIC MANAGEMENT

CASE STUDY 1
Q1) Explain the term strategic decision making?

Strategic decision making, or strategic planning, describes the process of

creating a company's mission and objectives and deciding upon the courses
of action a company should pursue to achieve those goals.
Strategic decisions are the decisions that are concerned with whole
environment in which the firm operates, the entire resources and the people
who form the company and the interface between the two.
Business leaders use strategic decision-making when they plan the
company's future. Strategic management involves defining long-term goals,
responding to market forces and carrying out the firm's mission.
A company's mission is equivalent to its purpose -- its primary reason for
existing. When making strategic decisions, managers look at the big picture.
They consider the impact potential actions will have on the company, its
competition and its market.
Many managers try to align strategic decisions with the company's overall
vision -- where it would like to be and how it would like to get there.
Strategic decisions have major resource propositions for an organization.
These decisions may be concerned with possessing new resources, organizing
others or reallocating others.
Strategic decisions are different from administrative and operational
decisions. Administrative decisions are routine decisions which help or rather
facilitate strategic decisions or operational decisions. Operational decisions
are technical decisions which help execution of strategic decisions. To reduce
cost is a strategic decision which is achieved through operational decision of
reducing the number of employees and how we carry out these reductions
will be administrative decision.

Q2) Explain the process of decision making?

Step 1:

Identification of the purpose of the decision

In this step, the problem is thoroughly analysed. There are a couple of questions
one should ask when it comes to identifying the purpose of the decision.
What exactly is the problem?
Why the problem should be solved?

Who are the affected parties of the problem?

Does the problem have a deadline or a specific time-line?

Step 2: Information gathering

A problem of an organization will have many stakeholders. In addition, there can be
dozens of factors involved and affected by the problem.
In the process of solving the problem, you will have to gather as much as
information related to the factors and stakeholders involved in the problem. For the
process of information gathering, tools such as 'Check Sheets' can be effectively
used.

Step 3: Principles for judging the alternatives

In this step, the baseline criteria for judging the alternatives should be set up. When
it comes to defining the criteria, organizational goals as well as the corporate
culture should be taken into consideration.
Step 4: Brainstorm and analyse the different choices
For this step, brainstorming to list down all the ideas is the best option. Before the
idea generation step, it is vital to understand the causes of the problem and
prioritization of causes.For this Cause-and-Effect diagrams and Pareto Chart tool can
be used. Then, you can move on generating all possible solutions (alternatives) for
the problem in hand.
Step 5: Evaluation of alternatives
Use your judgement principles and decision-making criteria to evaluate each
alternative. In this step, experience and effectiveness of the judgement principles
come into play. You need to compare each alternative for their positives and
negatives.
Step 6: Select the best alternative
The selection of the best alternative is an informed decision sincea methodology is
followed to derive and select the best alternative.

Step 7: Execute the decision

Convert your decision into a plan or a sequence of activities. Execute your plan by
yourself or with the help of subordinates.

Step 8: Evaluate the results

Evaluate the outcome of the decision. See whether there is anything to be learnt
and then correct in future decision making. This is one of the best practices that will
improve decision-making skills.

Q3)what is the basic thrust of strategic decision making?

The basic thrust of strategic decision making, in the process of strategic

management, is to make a choice regarding the courses of action to adopt. Thus
most aspects of strategy formulation rest on strategic decision making. The
fundamental strategic decision relates to the choice of a mission. With regard to
objective setting the senior management is faced with alternatives regarding the
different yardsticks to measure performance. Finally, at the level of choosing a
strategy, the senior management exercise a choice from among a number of
strategic alternatives in order to adopt one specific course of action which would
make the company achieve its objectives and realize its mission.

Apart from the fundamental decisional choice there are numerous occasions when
the senior management has to make important strategic decisions. Environmental
threats and opportunities are abundant; it is only a few that the senior management
focuses its attention on. With regard to resource allocation, the management faces
a strategic choice from among a number of alternatives that it could allocate
resources to. Thus strategic decision making forms the core of strategic
management.

Q4) Explain in detail the issues in strategic decision making?

Criteria for decision making:- The process of decision making requires

objectivesetting . These objectives serve as yardsticks to measure the
efficiency and effectiveness of the decision making process. Objectives serve
as the criteria for decision making. There are three major viewpoints
regarding setting criteria for decision making.
Concept of maximization
Concept of satisfying
Concept of incrementalism .

Rationality in decision making:- in the context of strategic decision making,

rationality means exercising a choice from among various alternative course
of action in such a way that it may lead to the achievement of the objectives
in the best possible manner.

Creativity in decision making:- A creative strategic decision making process

may considerably affect the search for alternatives where novel and untried
means may be looked for and adopted to achieve objectives in an
exceptional manner.

Variability in decision making:- It is a common observation that given an

identical set of conditions two decision makers may reach totally different
conclusion.

Person related factors in decision making:There are a host of person related

factors that play a role in decision. Some of these are age, education,
intelligence, personal values, risk taking ability, and creativity.

Individual verses group decision making:individuals such as chief executives

or entrepreneurs play the most important role as strategic decision makers.
But as organizations become bigger and more complex, an face increasingly
turbulent environment, individuals come together in groups for the purpose
of strategic decision making.

CASE STUDY 2
Q1) Define vision? And explain the benefits of a vision?
A Vision Statement,

Defines the optimal desired future state - the mental picture - of what an
organization wants to achieve over time;
Provides guidance and inspiration as to what an organization is focused on
achieving in five, ten, or more years;
Functions as the "north star" - it is what all employees understand their work
every day ultimately contributes towards accomplishing over the long term;
and,
Is written succinctly in an inspirational manner that makes it easy for all
employees to repeat it at any given time.
Leaders may change, but a clearly established Vision encourages people to
focus on what's important and better understand organization-wide change
and alignment of resources.

The Benefits of Creating a Vision

1. Visioning is the first step in strategic planning.
2. A vision shared by all the members of your business can help all members
set goals to advance the organization.
3. A vision can also motivate and empower employees.
4. Without a strong vision, strategic plans cannot be properly delineated
since there is no guiding principle or ideal to plan.
5. A vision brings meaning to peoples work, mobilizes them to action, and
helps them decide what to do and what not to do in the course of their work.
6. An effective vision strikes a chord in people, motivates them by tapping
their competitive drive, arouses desire for greatness or interest in doing the
right thing, tantalizes them with personal gain, or appeals to their need to
make a difference in the world.
7. A vision is an idealized picture of the future organization and it expresses
the organization's reason for existence.
8. Visions grab people and then bring them into the fold.

Q2) What do you mean by mission?

The mission statement captures the essence of an organization. It makes a

bold statement to the public and organizational members about the goals
and underlying philosophies of the organization.

The mission statement should explicitly state things related to its business,
such as industry, products or services, employees, culture, customers and
other stakeholders, objectives, adherence to things - like quality and
efficiency, pricing, social responsibility and the community, suppliers,
competitors and the individual niche or competitive advantage.

A mission statement is not evergreen. As a company evolves over time, its

mission and intent may also change. A mission statement will keep your
company on track, but it shouldn't become stale or irrelevant, so revisit it
every few years to fine-tune it if necessary.

A good mission statement answers several key questions about your

business:
o What are the opportunities or needs that the company addresses?
o What is the business of the organization? How are these needs being
addressed?
o What level of service is provided?
o What principles or beliefs guide the organization?

Q3) How are Mission statements formulated and communicated?

In formulating a mission, an organization must base on the four elements :purpose,

strategy, values, and behavioral standards.
In practice, mission statements take on a variety of forms and lengths. But each
mission statement has a personality which is unique and reflective of the individuals
ideals of the corporate directors. Although there are differences in the mission
statements of various companies, there are also many similarities.The kinds of
information contained in mission statement vary somewhat from organization to
organization. Most mission statements cover the following major topics:

o
o
o
o
o
o
o

Company product or service

Market
Technology
Company objective
Company philosophy
Company self-concept
Public image

The mission statement clearly specifies what business the organization is in.
This includes a clear statement about:
o "What" customer or client needs the organization is attempting to
fill, not what products or services are offered;
o "Who" the organization's primary customers or clients are;
o "How" the organization plans to go about its business, that is, what
its primary technologies are; and
o "Why" the organizations exists, that is, the overriding purpose that
the organization is trying to serve and its transcendental goals.

Communicating the mission:

Step 1
List the key points of the new mission of the company. Keep the message concise so
employees can commit much of it to memory. Make a list that includes all points
that must be conveyed.
Step 2
Prepare a visual aid. PowerPoint presentations, slide shows and other methods of
communication should incorporate the items on the list

Step 3
Schedule an employee meeting for corporate headquarters. Reserve a venue large
enough to hold every employee at the local level, if necessary. Set up the
presentation and appoint one person to facilitate the meeting. Members of
management including the company CEO typically unveil a new whether they do it
in person or by video conference.

Step 4
Present the new mission and vision at the meeting, keeping the message positive
and actionable. Point out similarities and differences between the former and
the new mission, if they existed. Leave plenty of time for a question-and-answer
session.

Step 5
Send out a mass e-mail to each employee, including the slide presentation, video
blog or PowerPoint file. Encourage employees to pose questions via e-mail and
assign one person in human resources to provide the responses.

Q4) Explain in detail the characteristics of a Mission statement?

The purpose of a mission statement is to give a concise explanation of the

business's reason for existing and its long-term goals. The exact form of a mission
statement can vary, but effective mission statements typically include nine
elements.
Function
The mission statement needs to include some description of the function of the
business. For example, "to promote industrial excellence," tells customers and
employees nothing. A more effective description would be "To provide management
consulting services."
TargetConsumers
An effective mission statement sets out, in broad terms, the target market. A
manufacturer that makes nuts and bolts might set its target market as retail
hardware stores, machine manufacturers, or both.
Target Region

The business must determine what region it serves best and relay that information
by way of the mission statement. A garage, for example, might limit its target
region to the community while a magazine company might target an entire country.
Values
Mission statements typically include a statement of company values. Values such as
customer service, efficiency and eco-consciousness often appear on lists of
company values. At their best, company values should express principles the
company explicitly tries to affirm in day-to-day operations.
Technology
For businesses that rely heavily on technology, the mission statement should
include a description of the essential technology the company does or plans to
employ. If nothing else, this directs purchasing agents toward the appropriate
vendors for goods and services.
Employees
Every company has a policy regarding its relationship with employees. A mission
statement provides an opportunity to describe that policy in brief so employees
know the essentials of where they stand.
Strategic Positioning
Effective mission statements also include a brief description of the business's
strategic position within the market. For example, the company might excel at
serving residential clients and seek to maximize that strategic advantage.
Financial Objectives
For for-profit ventures, businesses require clear financial objectives. A start-up
company might set one of its financial objectives as making an initial public offering
of common stock within two years. This lets the employees and potential investors
know the company intends to go public, with all of the legal and record keeping
ramifications that entails.
Image
Like people, companies develop public images. Careful companies craft the public
image they want to establish and lay out the major features of it in the mission
statement. This helps managers direct employees that stray from the sanctioned
public image.

CASE STUDY 3
Q1) Explain the concept of Environment?

The term environment in business connotes external forces, factors and

institutions that are beyond the control of the business and they affect the
functioning of a business enterprise. These include customers, competitors,
suppliers, government, and the social, political, legal and technological
factors etc.
While some of these factors or forces may have direct influence over the
business firm, others may operate indirectly. Thus, business environment may
be defined as the total surroundings, which have a direct or indirect bearing
on the functioning of business.
It may also be defined as the set of external factors, such as economic
factors, social factors, political and legal factors, demographic factors,
technical factors etc., which are uncontrollable in nature and affects the
business decisions of a firm.
A business firm is an open system. It gets resources from the environment
and supplies its goods and services to the environment. There are different
levels of environmental forces. Some are close and internal forces whereas
others are external forces.
External forces may be related to national level, regional level or international
level. These environmental forces provide opportunities or threats to the
business community. Every business organization tries to grasp the available
opportunities and face the threats that emerge from the business
environment.
Business organizations cannot change the external environment but they just
react. They change their internal business components (internal environment)
to grasp the external opportunities and face the external environmental
threats. It is, therefore, very important to analyze business environment to
survive and to get success for a business in its industry. It is, therefore, a vital
role of managers to analyze business environment so that they could pursue
effective business strategy.

A business firm gets human resources, capital, technology, information,

energy, and raw materials from society. It follows government rules and
regulations, social norms and cultural values, regional treaty and global
alignment, economic rules and tax policies of the government. Thus, a
business organization is a dynamic entity because it operates in a dynamic
business environment.

Q2) Explain in detail the characteristics of Environment?

Environment is Complex
Business environment principally consists of a number of factors, events conditions.
These are influenced to different departmental source in the organisation. These
conditions are not exited in isolation and create entirely new set of influences which
are interact with each other. If bring comprehensive influence to business
environment.
This is difficult to influence to organisation. All these factors have to be
considered as environment analysis is complex and rigid and totally very difficult to
grasp by the functional manager and top level employees in the organisation
Environment is Dynamic
Business and company environment is constantly changing in different nature. Micro
and macro environment factors are influenced to business. It impact to change on
the
business conditions. Dynamic environment is flexible and dynamic nature in
company.
This is causing due to change, strategic manager can shape strategy and formulate
short term and long term objectives.
Environment is Multifaceted
Strategic observer can shape and observe different character of environment.
Strategic
observer to observe a particular change or latest development in the business . It is
may be viewed different opinion from different observes in the organisation. These
things are frequently seen when the development happens. All are happy to
welcome

it and think as an opportunity for the company even also as threat to company.
Environment has a far reaching impact
Environment impact is essential ingredients for strategist to study changes and take
appropriate decisions at appropriate time. If strategist neglect to take appropriate
decisions at the right time which create impact to organisation. Survival, growth,
profitability and development of organisation which depends critically in terms of
micro and macro factors of the business environment. Environment impact have to
be bring new dimensions to business.

Q3) Explain Internal Environment?

The internal environment of an organization deals with the management of

resources like human resources, physical resources, technology, monetary
resources and others that constitute the organization in order to implement
or execute a strategy.

When competing with other firms, the strategy needs to be in place which
essentially deals with the internal environment. The estimation for the right
amount of internal resources in the internal environment is needed to go
ahead and take up a project or else the project may result in undesired
consequences.

Each business organization has an internal environment, which includes all

the elements within the organization's boundaries. Strictly speaking they are
part of the organization itself. The major components of the internal
environment are :
a. Employees

b. Shareholders and Board of Directors

c. Culture

Internal environment also includes culture and other intangible aspects like
teamwork, coordination, efficiency level of employees, employees salaries
and monitoring costs. The strategy for competition should also be in sync
with the internal resources especially the internal environment.
Internal environmental factors are events that occur within an organization.
Some examples of internal environmental factors are as follows:
o Management changes
o Employee morale
o Culture changes
o Financial changes and/or issues

Q4) Explain External Environment?

External environment can be defined as all elements outside an organization that

are relevant to its operation and they have the potential to significantly affect the
performance of the organization. This environmental context becomes more clear if
the external environment is further divided into two distinct segments:
o
o

general environment
task environment.

(a) General Environment

The general environment consists of interrelated forces that can be categorized into
four elements:
1. Economic Environment
2. Socio-Culture Environment
3. Political Legal Environment
4. Technological Environment

(b) Task Environment

The task environment puts indirect pressures on business management through the
institutional processes of following elements:
Customers
Your customers are among the external elements you can attempt to influence, via
marketing and strategic release of corporate information. But ultimately, your

relationship with your clients is based on finding ways to influence them to purchase
your products. Market research is used to determine the effectiveness of your
marketing messages, and to decide what changes can be made to future marketing
programs to improve sales.
Government
Government regulations in product development, packaging and shipping play a
significant role in the cost of doing business and your ability to expand into new
markets. If the government places new regulations on how you must package your
product for shipment, that can increase your unit costs and affect your profit
margins. International laws create processes that your company must follow to get
your product into foreign markets.
Economy
As with the majority of the elements of your organization's external environment,
your company must be efficient at monitoring the economy and learning how to
react to it, rather than trying to manipulate it. Economic factors affect how you
market products, how much money you can spend on business growth, and the kind
of target markets you will pursue.
Competition
Your competition has a significant effect on how you do business and how you
address your target market. You can choose to find markets that the competition is
not active in, or you can decide to take on the competition directly in the same
target market. The success and failure of your various competitors also determines
a portion of your marketing planning, as well. For example, if a long-time competitor
in a particular market suddenly decides to drop out due to financial losses, then you
will need to adjust your planning to take advantage of the situation.
Public Opinion
Any kind of company scandal can be damaging to your organization's image. The
public perception of your organization can hurt sales it's negative, or it can boost
sales with positive company news. Your firm can influence public opinion by using
public relations professionals to release strategic information, but it is also
important to monitor public opinion to try and defuse potential issues before they
begin to spread.

CASE STUDY 4
Q1) Explain the term mergers and acquisitions?

Mergers and acquisitions are both changes in control of companies that

involve combining the operations of multiple entities into a single company.

In a merger, two companies agree to combine their operations into a single

entity.
In an acquisition, one company purchases another company, and has the
right to sell off operations, merge them into similar groups in the purchasing
company, or close facilities or cancel products altogether.

Companies would choose to merge together for different reasons:

The combined entity would be larger, and have corresponding larger

resources for marketing, product expansion, and obtaining financing. This
could help them better compete in the marketplace.
The combined entity could merge similar operations to reduce costs.
Corporate and administrative functions, such as human resources and
marketing, are often targets for combinations. They might also combine the
production areas if the companies produce similar products and reduce costs
by having fewer plants or facilities in operation.
The combined entity might have less competition in the marketplace. If the
products of the two companies competed for customers, they could combine
their offerings and use resources for improving the product, rather than
marketing against each other.
The combined entity might have synergy in operations. Synergy is when
combined operations show lower costs or higher profits than would be
expected by just adding their financial information together on paper. This
could be due to economies of scale, where costs are lower due to higher
volume of production, or due to vertical integration, where greater control
over the production process is achieved due to owning more steps in the
production process.

Acquisitions are undertaken for strategic reasons. For example:

A company might acquire another company to obtain a specific product. It

can be less expensive to purchase a company offering a product you'd like to
sell than building the product yourself. Software companies often purchase
smaller companies that offer extensions to their product line if they become
popular with customers, so they can add the functionality to their primary
offering.
A company might acquire other companies to increase its size. A larger
company may have more visibility in the marketplace, and also better access
to credit and other resources.
A company might acquire another to obtain control over a critical resource.
For example, a jewelry company might acquire a gold mine, to ensure they
have access to gold without market price fluctuations.

Q2) What are the types of mergers and acquisitions?

There are many types of mergers and acquisitions that redefine the business world
with new strategic alliances and improved corporate philosophies. From the
business structure perspective, some of the most common and significant types of
mergers and acquisitions are listed below:
MERGER TYPES:
Horizontal Merger
This kind of merger exists between two companies who compete in the same
industry segment. The two companies combine their operations and gains strength
in terms of improved performance, increased capital, and enhanced profits. This
kind substantially reduces the number of competitors in the segment and gives a
higher edge over competition.

Vertical Merger
Vertical merger is a kind in which two or more companies in the same industry but
in different fields combine together in business. In this form, the companies in
merger decide to combine all the operations and productions under one shelter. It is
like encompassing all the requirements and products of a single industry segment.

Co-Generic Merger
Co-generic merger is a kind in which two or more companies in association are
some way or the other related to the production processes, business markets, or
basic required technologies. It includes the extension of the product line or
acquiring components that are all the way required in the daily operations. This kind
offers great opportunities to businesses as it opens a hue gateway to diversify
around a common set of resources and strategic requirements.

Conglomerate Merger
Conglomerate merger is a kind of venture in which two or more companies
belonging to different industrial sectors combine their operations. All the merged
companies are no way related to their kind of business and product line rather their
operations overlap that of each other. This is just a unification of businesses from
different verticals under one flagship enterprise or firm.
ACQUISITION TYPES:

Asset Acquisitions
In an asset sale, individually identified assets and liabilities of the seller are sold to
the acquirer. The acquirer can choose ("cherry pick") which specific assets and
liabilities it wants to purchase, avoiding unwanted assets and liabilities for which it

does not want to assume responsibility. The asset purchase agreement between the
buyer and seller will list or describe and assign values to each asset (or liability) to
be acquired, including every asset from office supplies to goodwill. Determining the
fair value of each asset (or liability) acquired can be mechanically complex and
expensive; tedious valuations are costly and title transfer taxes must be paid on
each asset transferred. Also, some assets, such as government contracts, may be
difficult to transfer without the consent of business partners or regulators.
Stock Acquisitions
In a stock purchase, all of the assets and liabilities of the seller are sold upon
transfer of the seller's stock to the acquirer. As such, no tedious valuation of the
seller's individual assets and liabilities is required and the transaction is
mechanically simple. The acquirer does not receive a stepped-up tax basis in the
acquired net assets but, rather, a carryover basis. Any goodwill created in a stock
acquisition is not tax-deductible.

Q3) Explain in detail the reasons for mergers and acquisitions?

Mergers and acquisitions take place for many strategic business reasons, but the
most common reasons for any business combination are economic at their core.
Following are some of the various economic reasons:

Increasing capabilities:
Increased capabilities may come from expanded research and development
opportunities or more robust manufacturing operations (or any range of core
competencies a company wants to increase). Similarly, companies may want to
combine to leverage costly manufacturing operations
Capability may not just be a particular department; the capability may come from
acquiring a unique technology platform rather than trying to build it.

Gaining a competitive advantage or larger market share:

Companies may decide to merge into order to gain a better distribution or
marketing network. A company may want to expand into different markets where a
similar company is already operating rather than start from ground zero, and so the
company may just merge with the other company.This distribution or marketing
network gives both companies a wider customer base practically overnight.

Diversifying products or services:

Another reason for merging companies is to complement a current product or

service. Two firms may be able to combine their products or services to gain a
competitive edge over others in the marketplace. Although combining products and
services or distribution networks is a great way to strategically increase revenue,
this type of merger or acquisition is highly scrutinized by federal regulatory
agencies such as the Federal Trade Commission to make sure a monopoly is not
created. A monopoly is when a company controls an overwhelming share of the
supply of a service or product in any one industry.

Replacing leadership:
In a private company, the company may need to merge or be acquired if the current
owners cant identify someone within the company to succeed them. The owners
may also wish to cash out to invest their money in something else, such as
retirement!

Cutting costs:
When two companies have similar products or services, combining can create a
large opportunity to reduce costs. When companies merge, frequently they have an
opportunity to combine locations or reduce operating costs by integrating and
streamlining support functions.
Surviving:
Its never easy for a company to willingly give up its identity to another company,
but sometimes it is the only option in order for the company to survive. A number of
companies used mergers and acquisitions to grow and survive during the global
financial crisis from 2008 to 2012.During the financial crisis, many banks merged in
order to deleverage failing balance sheets that otherwise may have put them out of
business.

Q4) What are the important issues in mergers and acquisitions?

Deal Structure
Cash versus Equity
Working Capital Adjustments
Escrows and Earn-Outs
Representations and Warranties
Target Indemnification

Joint and Several Liability

Closing Conditions
HSR/Timing Issues
Non-competes & Non-solicits

1. Deal Structure

Three alternatives exist for structuring a transaction: (i) stock purchase, (ii) asset
sale, and (iii) merger. The acquirer and target have competing legal interests and
considerations within each alternative. It is important to recognize and address
material issues when negotiating a specific deal structure. Certain primary
considerations relating to deal structure are: (i) transferability of liability, (ii) third
party contractual consent requirements, (iii) stockholder approval, and (iv) tax
consequences.

2. Cash versus Equity

The method of payment for a transaction may be a decisive factor for both parties.
Deal financing centers on the following:

Cash. Cash is the most liquid and least risky method from the targets perspective
as there is no doubt as to the true market value of the transaction and it removes
contingency payments (excluding the possibility of an earn out) all of which may
effectively pre-empt rival bids better than equity. From the acquirers perspective, it
can be sourced from working capital/excess cash or untapped credit lines but doing
so may decrease the acquirers debt rating and/or affect its capital structure and/or
control going forward.

Equity. This involves the payment of the acquiring company's equity, issued to the
stockholders of the target, at a determined ratio relative to the targets value. The
issuance of equity may improve the acquirers debt rating thereby reducing future
cost of debt financings. There are transaction costs and risks in terms of a
stockholders meeting (potential rejection of the deal), registration (if the acquirer is
public), brokerage fees, etc. That said, the issuance of equity will generally provide
more flexible deal structures.

The ultimate payment method may be determinative of what value the acquirer
places on itself (e.g., acquirers tend to offer equity when they believe their equity is
overvalued and cash when the equity is perceived as undervalued).

3. Working Capital Adjustments

M&A transactions typically include a working capital (W/C) adjustment as a

component of the purchase price. The acquirer wants to insure that it acquires a
target with adequate W/C to meet the requirements of the business post-closing,
including obligations to customers and trade creditors. The target wants to receive
consideration for the asset infrastructure that enabled the business to operate and
generate the profits that triggered the acquirers desire to buy the business in the
first place. An effective W/C adjustment protects the acquirer against the target
initiating (i) accelerated collection of debt, or (ii) delayed purchase of
inventory/selling inventory for cash or payment of creditors. The typical W/C
adjustment includes the delta between the sum of cash, inventory, accounts
receivable, and prepaid items minus accounts payable and accrued expenses. In
terms of measuring the W/C, the definitive agreement will include a mechanism that
compares the actual W/C at the closing against a target level, which target level is
viewed as the normal level for the operation of the business based on a historical
review of the targets operations over a defined period of time. Certain unusual or
atypical factors, one-offs, add-backs, and cyclical items will also be considered as
part of the W/C calculation. The true-up resulting from the post-closing W/C
adjustment will usually occur within a few months of the closing and, to the extent
that disputes between the parties arise concerning the calculation, dispute
procedures are set forth in the definitive agreement.

4. Escrows and Earn-Outs

The letter of intent should clearly indicate any contingency to the payment of the
purchase price in a transaction, including any escrow and any earn-out. The purpose
of an escrow is to provide recourse for an acquirer in the event there are breaches
of the representations and warranties made by the target (or upon the occurrence
of certain other events). Although escrows are standard in M&A transactions, the
terms of an escrow can vary significantly. Typical terms include an escrow dollar
amount in the range of 10% to 20% of the overall consideration with an escrow
period ranging from 12 to 24 months from the date of the closing. Earn-out
provisions are less common and are most often used to bridge the gap on valuation
that may exist between the target and the acquirer. Earn-out provisions are typically
tied to the future performance of the business, with the target and/or its
stockholders only receiving the additional consideration to the extent certain
milestones are met. When drafting earn-out terms, it is important to have the
milestones be as objective as possible. Typical milestones include future revenue
and other financial metrics. From the targets perspective, the concern with earnouts is that post-closing the target loses control over the company and decisions
made by the acquirer post-closing can dramatically impact the ability to achieve the
milestones that were established.

5. Representations and Warranties

The acquirer will expect the definitive agreement to include detailed representations
and warranties by the target with respect to such matters as authority,
capitalization, intellectual property, tax, financial statements, compliance with law,
employment, ERISA and material contracts. It is critical for the target and targets
counsel to review these representations carefully because breaches can quickly
result in indemnification claims from the acquirer. The disclosure schedules (which
describe exceptions to the representations) should be considered the targets
insurance policy and should be as detailed as possible. One of the more debated
representations is the 10b-5 representation, which requires the target to make a
general statement that no rep or warranty contains any untrue statement or omits
to state a material fact necessary to make any of them not misleading. Targets are
typically uncomfortable with such a broad statement, but without such a
representation an acquirer often will question whether the target is withholding
certain information. Acquirers and targets also struggle with the appropriateness of
knowledge qualifiers throughout the representations. The target typically tries to
insert knowledge qualifiers in many of the material representations (for example,
with respect to whether the targets intellectual property has infringed the rights of
any other third party), but the acquirer will want these types of risk to lie with the
target.

6. Target Indemnification

Target indemnification provisions are always highly negotiated in any M&A

transaction. One of the initial issues to be determined is what types of
indemnification claims will be capped at the escrow amount. In some instances all
claims may be capped at the escrow. It is common to have a few exceptions to this
cap any claims resulting from fraud and/or intentional misrepresentation usually
go beyond the escrow and often instead are capped at the overall purchase price. In
addition, breaches of fundamental reps (such as intellectual property or tax) may
go beyond the escrow as well. Another business term related to indemnification to
negotiate relates to whether there will be a basket for indemnification purposes.
In order to avoid the nuisance of disputes over small amounts, there is typically a
minimum claim amount which must be reached before which the acquirer may seek
indemnification which could include a true deductible in which the acquirer is
not permitted to go back to the first dollar once the threshold is achieved.

7. Joint and Several Liability

Related to the concept of indemnification is the issue of joint and several liability. As
most transactions involve multiple target stockholders, one of the primary issues to
consider regarding indemnification, from the acquirers perspective, is to what
extent each of the targets stockholders will participate in any indemnification
obligations post-closing (i.e., whether joint and several, or several but not joint,
liability will be appropriate). Under joint liability each target stockholder is
individually liable to the acquirer for 100% of the future potential damages.
However, if the liability is several, each target stockholder pays only for that target
stockholders relative contribution to the damages. It goes without saying that the
acquirer will almost always desire to make each target stockholder responsible for
the full amount of any future potential claims. However, target stockholders will
generally resist this approach but, even more so, where there are controlling
stockholders and/or financial investors (both of which traditionally resist joint and
several liability in every situation).

8. Closing Conditions

A section of the definitive agreement will include a list of closing conditions which
must be met in order for the parties to be required to close the transaction. These
are often negotiated at the time of the definitive agreement (although sometimes a
detailed list will be included in the letter of intent). These conditions may include
such items as appropriate board approval, the absence of any material adverse
change in the targets business or financial conditions, the absence of litigation, the
delivery of a legal opinion from targets counsel and requisite stockholder approval.
One of the more heavily negotiated closing conditions is the stockholder voting
threshold which must be achieved for approval of the transaction. Although the
targets operative documents and state law may require a lower threshold,
acquirers typically request a very high threshold of approval (90% - 100%) out of
concern that stockholders who have not approved the transaction might exercise
appraisal rights. The target should review its stockholder structure carefully before
committing to such a high threshold (although from a target perspective, the more
stockholders approve the transaction the better, but the target just does not want
the acquirer to have the ability to walk away from the transaction).

9. HSR/Timing Issues

In connection with any transaction, the parties should review long-term lead items
as soon as possible. For example, the parties should complete an analysis to
determine whether a Hart-Scott-Rodino filing will be required to be made and, if so,
at what point such filing will be completed (occasionally it is filed after the letter of
intent is executed but is often filed upon the execution of definitive agreement).
Although the 30-day waiting period can be waived, the necessity of making an HSR

filing can significantly delay the closing of a transaction. A second potential lead
items is determining if any third party notices or consents (as further described
above) will be required and the process by which such notices or consents shall be
made.

10. Non-competes & Non-solicits

Within the context of an M&A transaction, a covenant not to compete or solicit is a

promise by the selling shareholder(s) of the target to not, for a certain post-closing
time frame or after termination of employment with the target/acquirer, (i) engage
in a defined business activity that is competitive with the targets/acquirers, or (ii)
attempt to lure away customers or employees of the target/acquirer. Enforceability
of such restrictions requires that the restrictions be (A) reasonable in time and
scope, and (B) supported by consideration. Because the M&A context involves the
sale of a business and payment to the selling shareholders of typically a material
amount of consideration, courts generally have deemed such consideration
adequate for purposes of enforceability both in terms of scope (i.e., any material
business competitive with that of the target/acquirer) and multiple years of
duration.