(1) OurClient's customers wanted software capabilities and features in OurClient's product line which OurClient's tech teams could not readily design and produce within time to meet customers' steadily increasing needs.
(2) Market research showed customers' demand for this software will not only increase, but will also require significant improvements in the software's capabilities, features and benefits over the next three years. Thus, OurClient not only needed software to fill the gap in its product offering, it also needed software that would scale up to meet accelerated performance requirements over the next three years.
(3) One of OurClient's largest competitors had announced a new software product that fit the demands of OurClient's customers.
(4) Wxyz was the only company that produced software that would fill the gap in OurClient's product line. The software was well respected in the marketplace and industry gossip said the privately-held company's owners might be willing to sell the company. The three-year-old privately-held company had annual revenues of approximately $26 million.

Because two of OurClient board members had reservations about acquiring Wxyz, Outlook Analysis was hired to perform information discovery and outlook analysis on Wxyz and the merger, if transacted.

Outlook Analysis's assignment included information discovery and analysis of:
(1) Wxyz's motivations and objectives in selling the company
(2) integrity of finances and revenue
(3) quality of sales and customer relationships
(4) any hidden agendas of the board of directors, senior management or major shareholders
(5) any illegal operations
(6) software products, basic technology, research and development program
(7) investment banking firm hired by Wxyz
(8) individual due diligence on negotiating team
(9) negotiation strategy and tactics
(10) any pressure points affecting Wxyz's negotiation strategy
(11) competing potential acquirers
(12) bottom line price, terms and conditions Wxyz would accept in a final transaction and flexibility in making trade-offs
(13) advice and recommendations on the proposed acquisition and successful negotiation of a transaction.

Because Outlook Analysis analysts had performed several hundred M&A assignments over the last twenty years, they applied their experience using Outlook Analysis proprietary analytical tools to discovering needed information, facts and data. Within five days, they had discovered:

(1) Wxyz's motivations and objectives in selling the company

The motivation to sell the company stems from the philosophy of the chairman and president, who are also the largest shareholders, to sell companies at the top; peak value. Their view is Wxyz is near the peak and now is the best time to realize its value.

The genuine motivation and objective is to sell for reasons concerning Wxyz's technology platform that will be later explained.

(2) Financial integrity that included accounting and revenue

The integrity of Wxyz's finances, accounting and revenue are solid. The reporting systems and numbers are accurate.

(3) Quality of sales and customer relationships

The quality of sales and customer relationships is excellent. Wxyz's brandname and image are respected in its marketplaces.

(4) hidden agendas of the board of directors, senior management or major shareholders

Management has denied our client access to the company's software development teams even though our client has been willing to sign non-disclosure agreements. Every employee in the company has received strict instructions not to discuss anything about the company, even minor details or anecdotes, with anyone not employed the company.

This denial of information raised suspicions among OurClient's board of directors and was an important reason in hiring Outlook Analysis.

(5) Any illegal operations
.
No

(6) software products, basic technology, research and development program

The original software development team wrote the software to meet the marketplace needs they envisioned would exist through next year's needs. While they knew customer needs would significantly expand after next year, they did not want to expend the time, money and resources to allow that additional scalability. As a consequence, the software platform will have to be scrapped and developed almost from scratch to meet the marketplace needs beyond next year. The development team left the company more than a year ago to start a new venture. The team had done this develop-and-sell strategy at least once before.

Since OurClient's main motivation is to acquire technology scalable to the marketplace three years from now, Wxyz does not want to reveal the software's limitations. Their attitude is “take the money and run.”

Our analyst team discovered Wxyz actually knew their software technology's limitations, however, Wxyz's strategy is not to disclose these limitations to OurClient before the transaction closes.

(7) Investment banking firm hired by Wxyz

While management has retained a small investment bank as an adviser, management is actually conducting the M&A negotiations. People who know the management team would say they are highly confident they can negotiate the best transaction possible without heavy investment banker participation.

The investment banking firm is considered competent in handling transactions of $50 million or less. People who know the investment bank would say its ethics and trustworthiness are fairly good. Everything must be in writing.

(8) Individual due diligence on negotiating team

Wxyz's negotiating team is comprised of the chairman of the board, president and chief executive officer, chief financial officer, and vice president of marketing. The chairman and president are the two largest shareholders in the privately-held company. They have full approval from the board of directors to make all decisions related to completing the sale of the company.

Inside and outside the software company, the chairman and president are known to be excellent in bluffing their way in negotiating better than expected agreements and contracts. Management's confidence in its own negotiating abilities is the reason for undertaking the negotiations themselves and relegating the investment bankers to a support role.

The chief financial officer and vice president of marketing serve in a supporting role to the chairman and president in the negotiations. The law and accounting firms participate in a supporting role.

Chairman and President

People who know the chairman and the president say the two men think and act as one person. They are known to finish each other's sentences. It is unusual for them to disagree.

The chairman and the president are confident by nature, forceful in negotiations, and are intimidating when allowed. They will fight rather than compromise. Intimidation best describes their attitude and style.

When they confront solid opposition or find themselves on shaky ground, they usually attempt to obscure the obvious, switch to macro from micro, and obfuscate facts and solid arguments by trying to shift focus to unrelated minutiae.

The Chairman and the President are typically “in-your-face” argumentative. They negotiate to win it all as opposed to friendly negotiations and comprise.
People who have negotiated with them say there is no consideration of compromise or fair value. Exploitation is their focus and goal.

One strategy has been successful in negotiating with them in the past. The strategy is to add qualifications and contingencies with penalties to every point they want. The strategy has led them to comprise key issues.

Chief Financial Officer

The chief financial officer performs well in his job, however, he lacks leadership and negotiating skills. He can best described as an efficient bean counter. His purpose in the M&A negotiation is to support the chairman and president with facts and data.

He is only slightly aware of the software's flaws, but prefers to avoid any knowledge in order to distance himself from any improprieties. He is loyal to whomever pays his salary. He lacks strength of character.

Vice President of Marketing

The vice president of marketing and sales has earned a good track record during his two and a half years with the company and in previous positions with other companies. He knows the company's marketplace and its good at recognizing and exploiting opportunities.

While he is ready to seek another position, the president has convinced him to stay until the company is sold. His decision on whether to stay with the new corporation depends on the same factors he would weigh in accepting another position. People who know him would say he is unaware of the software platform's limitations.

The vice president of marketing has basic integrity. When he makes a commitment, he honors it.

His role in the negotiating team is strictly to support the chairman and president with information, facts and data about the marketplace and the company's accomplishments.

(9) Negotiation strategy and tactics

Wxyz's negotiating team's strategy is to focus on:
a. customers' demand for OurClient's software to include Wyxz's capabilities, features and benefits,
b. Wxyz's software fits into OurClient's product line, and
c. place continued emphasis on the accuracy of Wxyz's financial statements to divert attention away from the undisclosed scalability problems with its software.
The key reason for limiting the time for negotiations is to inhibit OurClient's technology team from fully analyzing the software for reasons stated later in this report. This is why management had delayed contact between OurClient's software developers and engineers interfacing with Wxyz developers and engineers. The delays have been couched under excuses that OurClient could steal the core technology, if allowed to interface with the developers and engineers, even if non-disclosure agreements have been signed.

From industry gossip and previous discussions with OurClient personnel, the Wxyz negotiating team knows OurClient's need for its software technology is considered urgent. OurClient is almost desperate to acquire this technology.

As previously stated, the reasons OurClient chose the strategy of acquisition over internal development are:

a. OurClient's customers want OurClient's software to have the features and benefits of the target company's products,

b. the target software company has respected brand name products OurClient's customers' respect and buy,

c. the software can be fairly easily integrated into OurClient's products, and

d. the costs of creating a comparable software platform would strain OurClient's technical resources in terms of cost, software developer and engineering resources, and

e. OurClient may not be able to develop the comparable sophisticated software in time to meet the forecasted marketplace needs in two and a half years.

(10) Any pressure points affecting Wxyz's negotiation strategy

Complete the transaction before OurClient discovers the truth about the software limitations.

The original software developers of Wxyz's products had only developed the software platform to scale up to the marketplace needs one year out in the future, not the three years OurClient urgently needed. The original developers had foreseen the growth of the marketplace over several years, but did not want to spend the time, money and resources to develop the software beyond it present limitations. People who know the developers would say they were surprised with the marketplace's rapid growth.

The development team had sold the technology and the entire company to the present owners about eighteen months ago. They sold to start a new software company aimed at marketplaces unrelated to Wxyz and OurClient.

Wxyz has studied OurClient's management team, negotiating style and have conducted research on a smaller scale on OurClient's investment banker.

(11) Competing acquirers

Our analysts have not found any other serious acquisition interest in Wxyz, although management has alluded it has had held serious initial talks with one of our clients' competitors.

(12) What are the bottom line price, terms and conditions Wxyz would accept in a final transaction and flexibility in making trade-offs?

Although Wxyz is asking for an all cash deal of $45 million for the sale of the software company, senior management ,who are the company's largest shareholders and board members, have agreed among themselves to accept a minimum of $36 million in cash and stock which includes $5 million to retire debt.

Because OurClient's stock has a history of volatility, Wxyz's strategy is have the acquirer pay a 25% premium for each share of stock used in the transaction instead of cash. Thus, if the acquiring company paid $45 million of the transaction price in stock, the 25% premium would raise the transaction price to $56,250,000. If OurClient agrees to pay half the transaction price in cash and half in equity, management would be willing to reduce the 25% premium to 20%. It is worthwhile noting that securities analysts are bullish on OurClient's stock.

The Wxyz negotiating team definitely wants any stock in the transaction to be without restrictions because they plan to quickly sell it after the close of the merger. The team's obsession can be used by OurClient to reduce or eliminate the premium that will be demanded by Wxyz on any stock included as payment in the transaction.

(13) Advice and recommendations on the proposed acquisition and successfully negotiating a transaction

Outlook Analysis's advice and recommendation is OurClient should not acquire Wxyz because
a. Wxyz management's lack of integrity will eventually negate any gains achieved through the acquisition
b. the minimum price, terms and conditions that Wxyz management will accept to complete a transaction are too excessive to serious consider acquiring Wxyz, its limited technology, and its position in its marketplace.
c. the software platform will not scale to the projected three-year needs
d. OurClient should immediately use an unrelated intermediary to contact the original software platform development team to explore their willingness to re-develop the software to meet the anticipated three-year scalability technological needs.
e. simultaneously, OurClient should immediately use an unrelated intermediary to contact other competent software platform developers concerning contracting them to develop software scalable to the projected three-year needs and which does not violate intellectual property owned by Wxyz.
f. OurClient should refocus negotiations with Wxyz to license the software on a one-year basis or less, depending on the realistically estimated time for the scalable software to be developed and ready for shipment to customers. An alternative is to create a joint venture to bundle the Wxyz software with OurClient's software,

It is also recommended that current negotiations be continued in order to avoid alerting Wxyz management that OurClient is changing strategic directions to solve its scalable software needs.

Since Wxyz rejected OurClient's request to sign a non-disclosure agreement in order to meet Wxyz's technical staff, it is highly recommended OurClient avoid signing any non-disclosure agreement of any kind.

Outlook Analysis can provide additional information discovery and outlook analysis on software developers OurClient considers capable of developing the scalable software as well as all negotiations with Wxyz.

The answers to these questions were taken from several engagements performed over the years. The numbers have been changed to negate recognition of the identities of the subject companies.