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

2. 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
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3. 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
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4. 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.
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5. 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)
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6. 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
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7. 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)
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8. Many Keys to a Successful Divestiture
Have and use business plan!
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9. 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
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10. 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
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11. 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: % reliable power
Results: “Same old, same old” (read: flat stock price)
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12. 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 hours
Our banks, hotels, phone companies
& airlines minutes
Results: Chapter 11 bankruptcies / falling stock prices
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13. 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!
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14. 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.
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15. What’s the problem with these cases?
No Business Plan!
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16. 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
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17. 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
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18. Case 5: “What was our problem?”
Investment Banker’s Plan, Not Ours!
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19. 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.
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20. 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!!!!
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21. 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?
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22. 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
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24. 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!
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25. 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
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26. 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:
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27. 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.
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28. 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%.
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29. 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
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30. 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

31. 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
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32. 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?
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33. 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.
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34. Large Cash Outflows: Think Big
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35. 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:

36. 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.
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37. 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 USA
Mobile phone:
Office:
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