Mergers Acquisitions from the Small Company Perspective Doug

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Mergers & Acquisitions from the Small Company Perspective Doug Adams SOLX, Inc.

Mergers & Acquisitions from the Small Company Perspective Doug Adams SOLX, Inc.

Preparation is the Key • • Getting your house in order (business model) Legal/Financial/Governance

Preparation is the Key • • Getting your house in order (business model) Legal/Financial/Governance Due diligence needs and concerns Dealing with the “pimples” The needs of a public buyer (Sarbox) Re-forecasting Understanding the buyer’s value drivers

The Seller’s Process • • • Assembling the Advisory Team Usage and role of

The Seller’s Process • • • Assembling the Advisory Team Usage and role of Intermediaries Valuation and Objectives Before the “Letter of Intent” Reaching Targeted Buyers Managing the Due Diligence Process

M&A Phases Typical Emphasis Pre-M/A Negotiation FINANCIAL • Worth of firm • What price

M&A Phases Typical Emphasis Pre-M/A Negotiation FINANCIAL • Worth of firm • What price to accept • Structuring financial aspects of deal POLITICAL • Price & payout method • Legal structure • Levels of autonomy • Positions for key managers Successful Emphasis STRATEGIC • Strategic Fit • Business Potential • Organizational Compatibility INTEGRATION PLANNING • Integrative mechanisms • Joint interaction • Focus on achieving synergies & desired benefits of the combination

Doing the Deal: Decision Points & Challenges • The Deal: Deal Structure (Financial/Economic) vs.

Doing the Deal: Decision Points & Challenges • The Deal: Deal Structure (Financial/Economic) vs. Deal Dynamics (Friendliness/Hostility, Integration Strategy) • Post-Combination Management: Takeover vs. Merger • CEO Mindset: “Deal” Mentality vs. Integration Perspective • Cultural Alignment: Collisions vs. Collaboration • Orientation to Individuals: Collateral Units vs. Organizational Resources • Information Frenzy: Staying Ahead of the Media vs. Confidentiality in the Information Age

Selection of “Right” Partner: Due Diligence Hard Data ____ Financial statements: Do they reflect

Selection of “Right” Partner: Due Diligence Hard Data ____ Financial statements: Do they reflect a capacity to uphold financial commitments? Relations with vendors/customers: Do bills get paid on time? Court filings: Is the company continually involved in legal hassles? Governance: Does the board of directors support the decision to form an alliance? Will this support or undermine the CEO? ____ Agreements with other companies: What licenses, alliances are currently relevant? Soft Data ____ Industry reputation: What is the company known for? Does it have a reputation for quality & excellence? ____ Quality & longevity of top managers: Do they have a good track record? Is there high turnover? ____ Critical strategic decisions in the past: Does the company have a record of excellent judgment? ____ Core organizational values: company integrity, teamwork, loyalty, etc. ____ Company Values Statement: Does the firm have one? Does it stick?

Preconditions for Success Company Conditions: Our company. . . ____ has something very valuable

Preconditions for Success Company Conditions: Our company. . . ____ has something very valuable to offer a prospective partner. has something very valuable to gain from a prospective partner. has a cooperative corporate culture. has insufficient resources or our company has prominent but not debilitating strategic weaknesses. ____ desires a leadership position in the marketplace. ____ company knows that pursuit of a strategic objective is too risky to undertake independently. ____ is doubtful of its ability to succeed without the support or name recognition of a partner. Style of Operations: ____ The prospective partners have similar or complementary goals, rewards, methods of operations, and cultures. ____ Both companies have a similar or complementary style of decision making. Support: ____ The CEOs of both partners are in full support of the transaction. ____ There is no threat of an unfriendly takeover which could jeopardize trust and a cooperative working relationship.

Preconditions for Success (cont’d) Industry Conditions: ____ High capital costs result in the need

Preconditions for Success (cont’d) Industry Conditions: ____ High capital costs result in the need to share financial risks. ____ Rapid changes in technology, customer traits, and the need for product differentiation. ____ Decline or maturity of an industry requires consolidation to protect market share. ____ High entry costs or entry risks make risk sharing advisable. ____ High levels of uncertainty exist in the marketplace. ____ There is a need for rapid market entry and acceptance. ____ The market is expected to respond positively to the “best product, ” which can only be produced by a team capable of combining resources and producing excellence. Time Orientation: ____ Both prospective partners take a long-term view. Financial Goals: ____ The goals of the transaction are not driven primarily by quarterly or short-term earnings.

Early Warning Systems ____ Back Burner: Partner doesn’t give priority to getting the job

Early Warning Systems ____ Back Burner: Partner doesn’t give priority to getting the job done; lack of “vested interest” motivation in one of the partners or in a key individual(s) ____ Missed Deadlines: Be alert to spiraling progression of problems that may be throwing the alliance off course. Missed deadlines often signal poor planning, poor management, inadequate resources, and/or lack of commitment. ____ Role Confusion & Conflict: If the team doesn’t fully understand its assignments, the job will not get done. The alliance champion or manager must clarify roles & expectations immediately. ____ Winners & Losers: If one party perceives it is getting the “short end of the stick, ” the alliance is likely to fail because there is insufficient “vested interest” motivation; realign for parity. ____ Cost Overruns: Early-stage cost overruns may signal problems in risk analysis & planning. Left unattended, the alliance may be bled dry of financial resources, creating friction between the partners. The alliance champion or manager must get on top of this problem as quickly as possible. ____ Missed Goals or Milestones: An effective monitoring should determine how well goals and milestones are being met. Any early deviations will be amplified over the long term. The alliance champion or manager should address early deviations immediately.

Partners to Avoid • Deceitful Reputation Win-at-all Costs Orientation Questionable Orientation to Ethics •

Partners to Avoid • Deceitful Reputation Win-at-all Costs Orientation Questionable Orientation to Ethics • Companies not into Partnering Poor Partnership History Control-Oriented Culture • Dependent Companies that Need You to Survive Declining & Struggling Companies Caution: Small, Emerging Companies can be an exception • Over-dominant Egos Controlling CEOs

Summary • • Build the pedigree Start with the end in mind Solve an

Summary • • Build the pedigree Start with the end in mind Solve an important problem You can’t make bad deals with good companies