Mergers, Acquisitions &

Divestitures

How to Expand Your Business in

Todays Environment

Mergers, Acquisitions &

Divestitures
PRESENTED BY:

Jim Griffing, Treasurer, Silver Fox Advisor.

A. Butch Madrazo, Silver Fox Advisor.

Overview
INGREDIENTS FOR SUCCESS

Prepare, Prepare, Prepare

Good Asset or Service
Good Attorney, Accountant
Good Business Advisor
Preparation, Preparation, Preparation

Priorities
FROM SELLERS PERSPECTIVE

Old Age
Health, Divorce, Death
Disenchantment
Obsolescence
Life Style
Ego

Priorities
FROM BUYERS PERSPECTIVE

Desire for Growth

External Factors
Fear
Geographic Position
Shareholder Demands
Patents
Ego

Process Methodology
MAJOR ACTIVITIES

Developing the Hunt

Negotiating the Transaction
Integrating the Combined Cos.
Operating the Combined Cos.

Elements of Company Profile

COMPANY REVIEW

Executive Summary
Mission Statement
Product or Service Lines
Target Markets
Competition

Elements of Company Profile

COMPANY REVIEW

Stage of Company Growth

Management
Financial Statements
Action Desired
Support and Verification

Methods, Structure
THE PROCESS

Due Diligence
Price
Conflicts
Tax Consequences

Methods, Structure
THE PROCESS

Art
Hunt
Negotiations
Plans

Methods, Structure
THE PLANS

Acquisition Plan
Integration Plan
Operation Plan

Valuations
THE VALUATION METHODOLOGY

Market Based
Asset Based
Income Based

Valuations
OTHER VALUATION METHODOLOGY

Comparable Market Value

Replacement Cost
Liquidation Value
Multiple of Earnings or EBITDA
Discounted Future Earnings
Formulas Based on Book Values

Analyses
THE ANALYSIS

SWOT Analysis
Issue Analysis
PEST Analysis

Analyses
ISSUE ANALYSIS

The issue is:_ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _

Decision
Other
Key
Maker (s)
Stakeholders
Staf
Stakeholder

Buyer:
Seller:
Both:

X
X
X

Public

Acquisition, Divestiture Audit

EVALUATION OF TRANSACTION

What went wrong/right?

What should have been diferent?
Why did it fail/succeed?
Were there uncontrollable outside forces?
Was I the stumbling block: If so why?

Failure Factors
PRINCIPLES FOR ENHANCING SUCCESS

Due Diligence
Employee Communication

Failure Factors
FROM BUYERS SIDE

Key Employees Leave

Productivity Drops
Poor Communication
Lack of Direction
Poor Cultural Fit

Failure Factors
FROM SELLERS SIDE

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

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

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

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

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

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

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 Ofering to Customers?

Asses the Target Business

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

High vs. Low Context Culture

Look at the Values, Missions, and Goals
of Management.
A Firm Must Manage Its Own Culture
Efectively before Engaging in Merger
Activity.

Synergy Needs To Be Created

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?

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:

Joes Widget Factory Balance Sheet

Example of Stock vs. Asset Sale:

Joes Widget Factory

Due Diligence

Secrecy is Overrated
May Keep You from Being
Referred to The Best Buyer
The Best Buyers
Ask the Most Questions
Present the Firms
Weaknesses
as Something the Buyer
Could Improve On

More about Due Diligence

Due Dil igence is a Methodi ca l Inv estiga tio n D esigned to Pro tect y ou fro m skeleto ns i n the clo setwhi ch
Al wa ys Ex ist!
First, Check Out the
Buy er o r Sell er:
- Autho ri ty to do the dea l?
- Verify their funding wi th ba nkers o r o ther pro po sed fi na nci al pa rticipa nts
Nex t, Revi ew ALL Fina ncia l Do cuments
Then, Verify ALL the Assets, Incl udi ng Intel lectua l Pro perty for i nstance, Ma ke Sure Pa tents Are In T he Co mpany Na me!

Purchase and Sale Agreement

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

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?