Risk Minimizing Strategies for Corporate Mergers, Acquisitions and Divestitures Richard A. Michelfelder, Ph.D. Clinical Associate Professor of Finance July 21, 2014

Today’s Discussion Overall Introduction to Today’s Discussion What is a Merger versus an Acquisition? Large Firms: A Successful Divestiture The Business Plan Divestiture & Acquisition– buy or sell portions of a firm Strategic Alliances Size of the deal Advance Contracting 6/11/2018

Today’s Discussion New Ventures / Venture Capital: Additional Considerations for New Ventures: Minimum Size Venture Capital Firms’ Challenge Have Large Cash Outflows Use the “S” Curve to Predict New Product Sales & Revenues Do Not be Afraid to Acquire Larger or Earlier 6/11/2018

What are Mergers & Acquisitions? There is no difference! Both involve buying a firm’s assets with either stock, cash or both. With a deal one has to be buyer and seller. Acquiring all or part of a firms assets, tangible or intangible, is done for the purpose of creating new equity value. An acquisition strategy is meant to create equity value growth for the acquirer by purchasing target firms that have something the acquirer does not. 6/11/2018

What are Mergers & Acquisitions? Key purpose is to buy equity value growth by purchasing assets that have strategic value to your firm. Alternative is to grow internally at a slower pace; possibly face a competitive threat. Here’s an example: Pepsico buys Pepsi Bottling 8/2009 (too much cash) Coca Cola buys Coca Bottling 2/2010 (strategic threat) 6/11/2018

Keys for a Successful Divestiture Many businesses do not have a business plan Some Fortune 500 firms, closely-held, publicly-traded, large, small Euphemisms for business plans Financial plan Marketing plan Sales Plan Strategic Plan Operating Plan Exit Strategy 6/11/2018

A Successful Divestiture Understanding and Using the Keys to a Successful Divestiture is the Best Guide to Managing Your Business. Successful Divestiture: Get Highest Possible Price! Always Manage Your Business as if it’s Always Actively for Sale. When You Raise Capital for an Acquisition, Pay the Lowest Cost of Capital (get high stock prices and low interest rates) 6/11/2018

Many Keys to a Successful Divestiture Have and use business plan! 6/11/2018

quoted from “The Bottom Line on Startup Failures” "We studied firms that had developed a business plan at the outset, and found that 85% were still in business after three years. I think that fact speaks for itself," says Jonathan Goldhill, a small-business consultant and former director of an economic development center in California's San Fernando Valley. quoted from “The Bottom Line on Startup Failures” Karen E. Klein, Business Week, March 4, 2002 6/11/2018

The Question Is: “What Is A Business Plan?” Let start by stating what it’s not. It’s not any one of these: Vision Mission Strategies Marketing Plan Sales Plan Operational Plan Financial Projections / Plan Exit Plan Report developed by investment bankers, consultants, the “planning department,” or the lawyers Offer Memorandum 6/11/2018

Case 1: The Straight and Narrow “Business Plan” Publicly-Traded Electric Utility (many US electric utilities) Vision: “provide cheap, reliable electric power and a attractive return to shareholders” Mission: “generate, transmit, and deliver electricity Long-term plan horizon: 25 years Operational plan horizon: 15 years Operational objective: 99.999% reliable power Results: “Same old, same old” (read: flat stock price) 6/11/2018

Case 2:“Lets buy earnings growth & diversify & stock price will grow” Diversification of US electric companies: Banking, hotels, telecommunications, airplanes, etc. Typical Board / Management Meeting Agenda: Electric / Gas financials 2 hours Electric / Gas operating statistics 1 hour Electric / Gas investment plan 1.5 hours Our banks, hotels, phone companies & airlines 20 minutes Results: Chapter 11 bankruptcies / falling stock prices 6/11/2018

Case 3: “Lets stick to our core business and compete for others’ customers” Question: Do we have marketing skills to work with customers? Sure. We have 2 million “ratepayers” right now. The result: In California, tripling of electric prices, 2 of 3 utilities in Chapter 11 In New Jersey and Pennsylvania, nothing! 6/11/2018

Case 4: “Lets grow by consolidation: after all, bigger is better” 110 publicly-traded electric utilities in late 80’s down to 60 and dropping The result: Stock price growth of acquired utility firm nil at 1 to 4% Typical acquisition premium of target firm stock: 20-40% Investors did not see the value creation from the “big will win in competitive markets” so why acquisitions. 6/11/2018

What’s the problem with these cases? No Business Plan! 6/11/2018

Case 5: The High Tech Start-Up with the Offer Memorandum New York City investment banker wrote the plan to raise equity $ Six months to write 18 months and 30 investor presentations: The results: No venture capital firm investors Angel investor getting anxious Start-up management very anxious Cash “burn rate” rising and cash running low 6/11/2018

Case 5: “We need to plan, so we know where we are going” Developed by management for management in two sleepless days after finally repudiating the banker’s offer memo The Results: Revenues from $1 million to over $20 million in one year and two years after start-up, cash flow and profits attractive to investors Multiple syndicated private equity investments Initial Public Offering in 2006 6/11/2018

Case 5: “What was our problem?” Investment Banker’s Plan, Not Ours! 6/11/2018

Case 6: Steady as she goes Successful 20 year old boutique consulting firm “Problem”: Revenues, profits, cash flow strong every year but flat Review of business plan shows they had none but called it one Developed a plan with everyone engaged; revenues, profits, cash flow more than doubled in one year Real problem? You know the answer by now. 6/11/2018

So then, what is a business plan? Includes ALL of these: Vision: What does success look like? Mission: What are we doing now? Strategies: Paths for getting there Marketing Plan: Compelling offer sold to whom? Sales Plan: Implementing the marketing plan Operational Plan: Resource needs and deployment Financial Projections / Plan: Value of success, cash and capital needs Exit Plan: If new venture, how do you extract some of the financial value EXECUTE: Lets call it business planning and doing!!!! 6/11/2018

That’s the recipe, now just add the ingredients? The plan must be yours – those who execute the business Live by your plan. Its not primarily a tool to raise money or to sell your business. It answers the following questions for everyone in the business: What you are doing? What does success look like? Not in money What business are you in? Example: McDonald’s Why are you doing it? Hopefully not for money Why will you succeed? What is the shareholder value created if you succeed? Goals – Are you getting there or not? 6/11/2018

PriceWaterHouseCoopers Keys for Successful Divestiture: Links to Bus PriceWaterHouseCoopers Keys for Successful Divestiture: Links to Bus. Plan PWC Step No. PWC 10 Steps Michelfelder’s Business Plan Components 1 Align Org. Objectives Vision / Mission 2 Develop a Divestiture Plan Exit Strategy 3 Assemble Team of Trusted Advisors & Deal Specialists Operational Plan / Exit Strategy 4 Get “Financial House” in Order Financial Projections / Plan 5 Develop Credible Financial Projections – A Compelling Story Financial Projections / Plan & entire business plan 6 Understanding Subjective Value – Seeing Your Business through the Eyes of the Buyer 7 Initiate Buyer Identification / Assessment Process 8 Evaluate Potential Structuring Alternatives 9 Re-Visit Specific Transition Objectives and Priorities Deal Process – not part of business plan 10 Determine Specific Sales Timeline and Execute 6/11/2018

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Personal Note As an academic researcher, consultant, and entrepreneur, my message is that a primary key to business and divestiture success is having and executing a business plan with a trusted team of outside advisors US Dept. of Commerce survey recently showed that out of 10 start-ups in a specific year, only 2 will exist in 5 years I have started or took the helm of 7 businesses, some in large corporations, partnerships, solely-owned LLC’s, consulting, high-tech, energy, real estate, commercial construction; they are all thriving today – I believe, to a large degree, due to business planning and execution, and having outside advisors who kept us in check! 6/11/2018

Divestitures & Acquisition: Sell & Buy Only What You Want If you want a division of a firm, go after only that division, no need to buy the whole firm – save your precious capital. Example: Lucent Technologies Automated Metering Division; Scientific Atlanta Controls Systems Division 6/11/2018

Divestitures & Acquisition: Do Not Pay for Value that You Will Create The average acquisition premium for US publicly traded firms is 40%. Value is not what someone is willing to pay; there is an objective fundamental financial value based on cash flow and risk. Example: 6/11/2018

Strategic Alliances If you want access to the assets of another firm, but don’t want to use capital, develop a strategic alliance – save your precious capital. They are easy to create: a discussion and a one-page agreement. Easy to terminate: Written notification. Assess what your firm has that potential alliances may benefit from. 6/11/2018

Size of the Deal If you plan to have an initial public offering (IPO) of your stock, be sure that the value of your firm is large enough. Approximately $500 million or larger in firm value will be required to interest investment bankers in an IPO. Investment banking fees are 3% to 5%. 6/11/2018

Advanced Contracting For project financing, securing a contract in advance for the sale of the majority of product output is critical for financing. Examples: Electric Power Plant Construction Office Building Purchase or Construction 6/11/2018

Discussed So Far: What is a Merger versus an Acquisition? Large Firms: A Successful Divestiture The Business Plan Divestiture & Acquisition– buy or sell portions of a firm Strategic Alliances Size of the deal Advance Contracting 6/11/2018

Now We Discuss: New Ventures / Venture Capital: Additional Considerations for New Ventures: Minimum Size Venture Capital Firms’ Challenge Have Large Cash Outflows Use the “S” Curve to Predict New Product Sales & Revenues Do Not be Afraid to Acquire Larger or Earlier 6/11/2018

Minimum Size Early stage VC Investment generally have to be at least $3 to $5 million. If your plan cannot justify investment at that level, you will not get VC attention. Why? 6/11/2018

Venture Capital Firm’s Challenge Most VC firms are small, maybe 10 or less people. Principals have to invest at least $100 million to cover costs with 2% management fees. Principals can manage about 5 investments. With 4 principals managing 5 deals each, investments have to average $5 million each to invest $100 million. 6/11/2018

Large Cash Outflows: Think Big 6/11/2018

New Product Life Cycle Curve: Bass Model or the “S” Curve The marketing research literature has concluded that new product life cycle curves typically follow an S pattern:

Acquire Larger & Earlier If Needed There is no reason or business logic for an acquiring firm to be larger than the target acquisition or more mature in stage of business. All that you need is the money. If deal is compelling with a good business plan it can be financed by “OPM” or, Other People’s Money. 6/11/2018

Thank you for the invitation to speak to this distinguished group! Richard A. Michelfelder, Ph.D. Clinical Associate Professor of Finance Rutgers University School of Business – Camden 225 Penn Street Camden, New Jersey 08203 USA E-Mail: richmich@rutgers.edu Mobile phone: 001-609-214-0986 Office: 001-856-225-6919 6/11/2018