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The answers to the questions in this case history show the breadth, depth and scope of Outlook Analysis' information discovery and outlook analysis capabilities that clients use in merger and acquisitions. The question format in this case history is typical of the questions that clients want answered before and during negotiations with the target company, its negotiating team and investment bankers. The answers to the questions in this case history were taken from several M&A engagements over the years. The numbers in this case history have been changed to negate recognition of the source engagements. Case History A high growth public company with $160 million
revenue, OurClient is well known in its computer software marketplace.
OurClient had initiated acquisition discussions with Wxyz, a three-year
old privately-held software company with revenue of $26 million,
because: 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. The chief financial officer and vice president of marketing serve in a supporting role to the chairman and president in the negotiations. Wxyz has retained a small investment banker to act purely in an advisory role. The law and accounting firms participate in a supporting role. Because the 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. Our analysts have also found there is no other serious acquisition interest in the company, although management has alluded it has had held serious initial talks with one of our clients' competitors. While Wxyz management has retained a small investment bank as an adviser, management is actually conducting the M&A negotiations.
Wxyz management is basing its $45 million asking price on a management consulting group's valuation of the company, industry analysts' marketplace forecasts for the company's software, and the perception of OurClient's near desperate need for its software capabilities which some industry analysts have said are requisite to improve OurClient's competitive edge in existing and new marketplace segments. Our client's perceived near desperate need for the software is the key component the opposition management's negotiating strategy. In the upcoming negotiating sessions, management plans to also emphasize 1. The technological advancements made by
OurClient's competitors who are almost as large in revenue and market
share as client. 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. Wxyz 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. Wxyz 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. C. What flexibility in negotiating price and terms does the Wxyz negotiating team have in negotiating the transaction? The opposition is very flexible, especially in view of the answer to the next question. As previously answered Wxyz has established the minimum price, terms and conditions based on the valuation provided a consulting firm. Since Wxyz paid for the valuation, it is probably substantially higher than valuation conducted by OurClient or by a neutral financial institution. Naturally, the Wxyz negotiating team's objective is to negotiate a transaction price as close as possible to the asking price. D. What is Wxyz's timeline for concluding a transaction Wxyz has set a three week deadline to reach a merger agreement. If an agreement has not been reached at the end of three week, management will seek another buyer, although management is convinced OurClient will eventually agree to acquire the software company at close to the asking price. 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 though non-disclosure agreements could have been signed. E. What is Wxyz's level of commitment to ensuring the negotiations result in a transaction Total commitment. F. What are the internal reasons, pressures and other motivations behind the commitment to negotiate and complete a transaction? From industry gossip and previous discussions with OurClient personnel, Wxyz knows OurClient's need for its software technology is considered extremely urgent, OurClient is almost desperate to acquire this technology. As previously stated, the reasons OurClient chose the strategy of acquisition over internal development because: (1) OurClient's customers want OurClient's software to have the features and benefits of the target company's products, (2) Wxyz has respected brand name products that OurClient's customers' respect and buy, (3) the software can be fairly easily integrated into OurClient's products, Client's customers want OurClient's product to have the capabilities of Wxyz's software, and (4) the requirements of creating a comparable software platform would strain OurClient's technical resources in terms of cost, software developer and engineering resources, and (5) 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. Wxyz's founders who comprised 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 provide that additional scalability. As a consequence, the software platform will have to scrapped and then developed almost from scratch to meet the marketplace needs beyond next year. The original development team left the company more than a year ago to start a new venture. Since OurClient's main motivation is to acquire technology scalable to marketplace two 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 chairman and president actually knew their software technology's limitations long before they considered selling the company. However, Wxyz's strategy is not to disclose these limitations to OurClient. The chairman and president will do everything possible to keep the limitations a secret, possibly even after the transaction closes. G. How unified are the opposition's board of directors and management in their commitment to complete a transaction? The are unified. It should be noted that Wxyz's board and management know about the technology limitations. Wxyz's board and management are well informed about OurClient's need for its software and are unified in the negotiating strategy and objective as well as the decision to avoid disclosing the software platform's scalability limitations. H. Are any alternatives to the present negotiations under serious consideration? No. I. How does OurClient rank among those companies considered for the transaction? OurClient is the only company seriously interested in acquiring Wxyz. 2. Information about Wxyz 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 wanted. 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. The development team had sold the technology and the entire company to the present owners about a year ago. They had started a new software company aimed at marketplaces unrelated to Wxyz and OurClient. B. Is Wxyz management aware of any undisclosed problems or pending negative developments which could significantly impact the company's corporate reputation, sales, revenue and earnings? Yes. While the scalability problems are not a present problem for Wxyz, the lack of scalability would be a major problem for OurClient if it acquired Wxyz in the belief its software platform would scale to its projected three year need level. C. Is there any potential negative publicity that management knows about but has not disclosed which could significantly impact the company's corporate reputation, sales, revenue and earnings? No. D. Is management aware of any undisclosed pending positive developments that could significantly impact the company's corporate reputation, sales, revenue and earnings? Yes. Wxyz is aware that an industry analyst is ready to publish a very positive report on the software features and benefits. The report contains nothing regarding scalability. Wxyz is also aware a respected industry trade publication plans to publish a favorable article about the company and software within the near future. Wxyz's strategy is to encourage the industry analyst to publish the report within ten days, sooner than planned in order to excite, influence OurClient. While Wxyz has no control over the publication date of the article, the pending publication can be mentioned in the negotiations. E. Is there any disclosed potential positive publicity that management knows about which could significantly impact the company's corporate reputation, sales, revenue and earnings? Yes. Please see answer to previous question. F. Is Wxyz's negotiating team aware of these problems, pending developments, and potential publicity? Yes. G. How loyal are the major customer accounts? Customers are loyal to the brand name. H. How loyal are the major suppliers? Relationships have been established. They are dependent on price, quality and delivery schedules. 3. Information about the opposition's negotiating team A. What are the negotiating team's strategy and tactics for negotiating the merger, acquisition, joint venture, licensing agreement or strategic alliance? Wxyz's negotiating team's strategy is to
focus on: From industry gossip and previous discussions with OurClient personnel, Wxyz the negotiating knows OurClient's need for its software technology is considered urgent, OurClient is almost desperate to acquire this technology. As previously stated, the reasons for OurClient chose the strategy of acquisition over internal development because: (1) OurClient's customers want OurClient's software to have the features and benefits of Wxyz's products, (2) Wxyz has respected brand name products OurClient's customers' respect and buy, (3) the software can be fairly easily integrated into OurClient's products, Client's customers want OurClient's product to have the capabilities of Wxyz's software, and (4) the costs of creating a comparable software platform would strain OurClient's technical resources in terms of cost, software developer and engineering resources, and (5) 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. Wxyz negotiating team's primary objective is cash or cash and unrestricted stock. Wxyz management will accept a price payable in cash or cash and unrestricted stock that is lower than payment in restricted stock or little cash and restricted stock. B. How much flexibility and what trade-offs does the negotiating team have in changing the price and terms during the negotiations to produce a transaction? Total flexibility C. Does the negotiating team have a hidden agenda, and if so, what is it? Complete the transaction before OurClient discovers the facts about the software limitations. D. What are the internal pressures on the opposition and its negotiating team in completing a transaction? 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 though non-disclosure agreements have been signed. E. Does the negotiating team have a timeline, benchmarks or deadline for completing a transaction and how flexible are they? As stated in the answer to question #1.D., if an agreement has not been reached at the end of three week, management will seek another buyer, although management is convinced OurClient will eventually agree to acquire the software company at close to the asking price. 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 though non-disclosure agreements could have been signed. F. What does the negotiating team know about your negotiating strategies, tactics, and flexibility in negotiating price and terms? They have studied OurClient's management team, used their network to learn about OurClient's negotiating style, and have conducted research on a smaller scale on OurClient's investment banker. G. What is the level of accuracy of the information that the negotiating team has provided OurClient? No financial or technical information has been exchanged yet by either Wxyz or OurClient. Wxyz is prepared to show its financial statements, but nothing about its technology. The excuse for no disclosure related to its technology is fear OurClient will learn enough to pirate it. H. How much genuine authority does the negotiation team have in making binding decisions? Total authority I. Which members of the opposition negotiating team have the most authority and influence over the other members of the team The chairman and the president J. Does the negotiating team have a source of confidential information inside your company? No K. Are there any conflicts, dissension or other problems among the negotiators? None L. Does the negotiating team know of any undisclosed problems or opportunities with Wxyz's products, finances, manufacturing, technology, new product developments, sales contracts and agreements, strategic alliances, operations or other areas? Yes. The software's inability to scale is a major problem. Scalability is the only major undisclosed problem. 4. Information about Wxyz's finances A. What are the levels of Wxyz's management's confidence in the accuracy and validity of Wxyz's most recent financial statements? Very high levels. The statements are accurate. B. What are the levels of Wxyz's management's confidence in the accuracy and efficiency of Wxyz's financial reporting methods and procedures? Excellent C. What are the levels of confidence that Wxyz's board of directors and senior management have in the company's revenue and earnings projections and proforma statements? Highly confident. The statements are accurate. D. What is the level of confidence of Wxyz's board of directors and senior management in the company's compliance with Sarbanes-Oxley Act requirements? Since Wxyz is a privately-held company with few shareholders, compliance with Sarbanes-Oxley Act requirements is a non-issue. Wxyz has no public debt. 5. Individual executives involved in the negotiations A. What does in-depth research reveal about the key members of the negotiating team reveal? Wxyz's negotiating team is comprised of the chairman, president, chief financial officer and vice president of marketing. The investment banking, accounting, and law firms serve only as advisers; not as active participants. 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. 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. In the past,this 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. The chief financial officer is only slightly aware of the software's flaws, but prefers to avoid any knowledge in order to distance himself from any proprieties. 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 maximizing opportunities. While he is ready to seek another another position, the president has convinced him to stay until the company is sold. His decision on whether to stay with the new merged corporation depends on the same factors he would weigh in accepting another position. 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. Chief Technology Officer The technology manager has the title of chief technology officer, but is really technology manager. In reality, he is unqualified for the CTO position. For these reasons and the possibility he might reveal the software limitations in a discussion, he has been excluded from the negotiations. It ought to be noted that a skilled negotiator could probably entice him to reveal proprietary information without realizing he was disclosing it. B. What are the key negotiator's individual strengths and weaknesses? Please see previous answer. C. What are each key negotiator's hot buttons? The Chairman's and the President's emotional hot buttons are being caught in a lie, having their facts and data shown to be incorrect, and having a bluff called.
They want to complete the transaction before OurClient discovers the software platform has scalability limitations. This is why they want an all cash transaction. E. What are the negotiation style and characteristics of each key negotiator? Please see answers to previous questions. F. How well prepared is each key team member for the negotiations? They are well prepared. They have thoroughly researched and analyzed OurClient company, products, and its marketplace using company's published data, industry and security analysts' reports. They have interviewed industry analysts and gleaned information from their industry network. They are confident in their evaluation of OurClient and its need for Wxyz's software. G. What are the confidence levels of the key negotiators in the team's position, objectives, and the strategy and tactics for achieving the objectives? Highly confident H. What is each individual negotiator's position on different objectives or specific points in the negotiation and what are the reasons for that individual's position? Their strategy is to entirely focus on a quick transaction payable in cash or cash and securities without restrictions. I. What are observable habits and characteristics which reveal the attitudes and emotions of each key negotiating team member? The chairman and the president both have the characteristic of continuously leaning forward in negotiations rather than sitting straight or leaning back in their chairs. They will continue aggressively leaning forward even when they know they have won a major point. This is also their characteristic when standing in a negotiation. However, they will sit back when caught off guard or been caught in a bluff or presenting invalid facts and data. While they could lean back as a deceptive tactic, this would not be their style. When the chairman finds himself in a weak position, a small tick or twitch can appear on the left side of his face, near his mouth. In a very weak position, he has been known to burp. When the president finds himself in a weak position, he often raises his voice and uses explicatives to bolster his position. 6. Price and terms A. What is the negotiating team's maximum or minimum price and are there any trade-offs? As stated in the answer to question 1.A., 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. The chairman and president own 45% of the company's stock, other executives and employees own 23%, angel investors own 30%, and vendors who accepted stock in lieu of payment in the early days of the company own 2%. 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. The chairman and the president have total authority and flexibility to complete the transaction. C. Which terms are considered negotiable, which are not, and why? The primary objective is cash or cash and unrestricted stock. Wxyz management will accept a price payable in cash or cash and unrestricted stock that is lower than payment in restricted stock or little cash and restricted stock. (Please see answer to question 5.A.) D. What concessions does the opposition negotiating team expect from your team and what concessions are they willing to make? Because Wxyz team considers OurClient to be near desperate to acquire Wxyz and its software, they expect OurClient to capitulate on all key points, including the ratio of cash to restricted stock. Wxyz negotiating team can be expected to relentlessly drive to exploit this perceived OurClient weakness. E. What does the team expect to happen in these discussions or negotiations? They will win all key points. F. Has the opposition negotiating team set any benchmarks, timelines or scheduled a deadline for the negotiations? While the goal of three weeks may be unrealistic, they will use this goal to pressure OurClient into rapid paced negotiations that enable them to win their key points. G. What is the preferred method of payment and are there any acceptable alternatives? 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 the acquiring company'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. H. How close is the opposition negotiators' offer or counteroffer to the actual price and terms which the opposition negotiating team will now accept? Huge difference. As stated in the answer to question 1.A., 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. I. What are the team's strategy and tactics for negotiating changes in price and terms Please see answers to previous questions. No Questions that would have been answered had Wxyz been engaged in discussions or negotiations with a competitor. A. What is the present status of the discussions or negotiations between the opposition and your competitors? B. What are the price and terms which your competitor has offered or plans to offer? C. How much flexibility and what trade-offs does the competitor's negotiating team have in changing the price and terms during the negotiations in order to produce a transaction? D. What are the pressures that the competitor's negotiating team is under to produce a transaction? E. What information does the competitor's negotiating team have about your negotiating strategy and tactics? F. What is the opposition's evaluation of completing a transaction with your competitor; what are the pivotal issues, concerns, roadblocks, advantages, disadvantages, opportunities, and preferences? G. How does this evaluation of your competitor
compare with the opposition's evaluation of completing a transaction
with your company? Since serious negotiations have not yet commenced,
this question is presently irrelevant. This question would be answered
once acquisition negotiations commence. No. 10. Are there any hidden assets or unrecognized opportunities that have not already been noted? No. 11. Based on the foregoing analysis, what is the advice and recommendation for continuing the negotiations for acquiring Wxyz? Outlook Analysis's advice and recommendation
is OurClient should not acquire Wxyz because: 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. * * * |
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