~John Donahoe eBay Inc. s President and CEO What Can Go

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Mergers, Acquisitions Divestitures

• How to Expand Your Business in Todays Environment

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Mergers, Acquisitions Divestitures

• PRESENTED BY
• Jim Griffing, Treasurer, Silver Fox Advisor.
• A. Butch Madrazo, Silver Fox Advisor.

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Overview

• INGREDIENTS FOR SUCCESS
• Prepare, Prepare, Prepare
• Good Asset or Service
• Good Attorney, Accountant
• Good Business Advisor
• Preparation, Preparation, Preparation

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Priorities

• FROM SELLERS PERSPECTIVE
• Old Age
• Health, Divorce, Death
• Disenchantment
• Obsolescence
• Life Style
• Ego

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Priorities

• FROM BUYERS PERSPECTIVE
• Desire for Growth
• External Factors
• Fear
• Geographic Position
• Shareholder Demands
• Patents
• Ego

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Process Methodology

• MAJOR ACTIVITIES
• Developing the Hunt
• Negotiating the Transaction
• Integrating the Combined Cos.
• Operating the Combined Cos.

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Elements of Company Profile

• COMPANY REVIEW
• Executive Summary
• Mission Statement
• Product or Service Lines
• Target Markets
• Competition

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Elements of Company Profile

• COMPANY REVIEW
• Stage of Company Growth
• Management
• Financial Statements
• Action Desired
• Support and Verification

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Methods, Structure

• THE PROCESS
• Due Diligence
• Price
• Conflicts
• Tax Consequences

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Methods, Structure

• THE PROCESS
• Art
• Hunt
• Negotiations
• Plans

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Methods, Structure

• THE PLANS
• Acquisition Plan
• Integration Plan
• Operation Plan

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Valuations

• THE VALUATION METHODOLOGY
• Market Based
• Asset Based
• Income Based

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Valuations

• OTHER VALUATION METHODOLOGY
• Comparable Market Value
• Replacement Cost
• Liquidation Value
• Multiple of Earnings or EBITDA
• Discounted Future Earnings
• Formulas Based on Book Values

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Analyses

• THE ANALYSIS
• SWOT Analysis
• Issue Analysis
• PEST Analysis

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Analyses

• ISSUE ANALYSIS
• The issue is_ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _
  _ _ _ _ _ _ _ _ _ _ _ _ _
• Decision Other
  Key Public
• Maker (s) Stakeholders
  Staff Stakeholder
• Buyer X
• Seller X
• Both X X

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Acquisition, Divestiture Audit

• EVALUATION OF TRANSACTION
• What went wrong/right?
• What should have been different?
• Why did it fail/succeed?
• Were there uncontrollable outside forces?
• Was I the stumbling block If so why?

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Failure Factors

• PRINCIPLES FOR ENHANCING SUCCESS
• Due Diligence
• Employee Communication

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Failure Factors

• FROM BUYERS SIDE
• Key Employees Leave
• Productivity Drops
• Poor Communication
• Lack of Direction
• Poor Cultural Fit

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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

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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.

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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.

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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

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How Your Business Could Benefit

• Obtaining Quality Employees and New Skills
• Expanding PPE
• Increasing Sales Through an Increase in Market
  Share
• Generate Cost Efficiencies

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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.

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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
  Offering to Customers?

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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.

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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 Effectively
  before Engaging in Merger Activity.

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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

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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.

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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

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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

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Example of Stock vs. Asset Sale Joes Widget
Factory Balance Sheet
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Example of Stock vs. Asset Sale Joes Widget
Factory
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Due Diligence

• Secrecy is OverratedMay 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

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More about Due Diligence

• Due Diligence is a Methodical Investigation
  Designed to Protect you from skeletons in the
  closetwhich Always Exist!
• First, Check Out the Buyer or Seller
• - Authority to do the deal?
• Verify their funding with bankers or other
  proposed financial participants
• Next, Review ALL Financial Documents
• Then, Verify ALL the Assets, Including
  Intellectual Propertyfor instance, Make Sure
  Patents Are In The Company Name!

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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

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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

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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.

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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
• [phone]
• jgriffing_at_griffing.com

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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.

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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
• [phone]
• www.bmadrazo_at_sliverfox.org

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• Questions?