Beruflich Dokumente
Kultur Dokumente
October 6
2013
Submitted by
1. Sayanti Sardar(M115/12) 2. Gaurav Kumar(M078/12) 3. Sarvasidhi Phaneendra Kumar(M033/12)
Favourable factors: Increasing U.S population Higher level of education attainment Increasing personal income Growing economy (2% inflation adjusted profit) Growing demand
Unfavourable factor: Growing cost of raw materials (papers, paints etc.) Evolving technology: Equipment becoming obsolete.
Acquisition -Strategic sense: Complementary of the companys product and market Potential of significant growth Risher thought that significant cost and revenue synergy can be realised after acquisition. Will help Printicomm realise the total digital pathway solution and be a one stop shop with latest service offerings. Acquisition will enhance capability by providing latest electronic marketing solution (Marketelegence).
Acquisition: Frank Greene, founder and owner of Digitech, hoped to sell Digitech and retire within the next few years while its value was attractive. Greene perspective on valuation of Digitech: Greene compared the sale of Digitech to many other recently sold firms that went for 10-12 times EBITDA. He believed firm to be of worth of above $40 million.
Risher perspective on valuation of Digitech: Risher was only willing to pay a maximum of $30 million for Digitech and remained firm on this price after his valuation calculation through a discounted-cash-flow analysis. Dead lock: Bidding negotiations continued and the Rishers final offering was $28 million for Digitech and a firm holding price by Greene was of of $40 million for the company. Alternatives: Risher was concerned he would lose the Digitech deal and other competitors would quickly acquire them. As a result of this, he proposed an earnout for the transaction. Two different earnout structures were proposed.
Problem Identification:
Printicomms strategy was to grow through acquisitions. Jay Risher, Vice President and Controller of Printicomm believed the acquisition of Digitech would have a significant and positive impact on the performance of their Journal Services and Point of Purchase divisions. Risher had to decide from several alternatives: 1. Develop Digitechs technology in-house if a purchase price could not be reached. 2. Printicomm may try to find another company to purchase. 3. Secure a fixed price (easiest alternative) - This only required a standard purchase and sale agreement; however, the two companies remained far apart on the fair valuation for Digitech. If Printicomm paid a premium price, then the management of Digitech may not stay to grow the business. It was essential to have the business knowledge passed from Digitech to Printicomm. 4. Pursue an earnout - this was an acquisition payment mechanism whereby some portion of the purchase price of the acquired company (Digitech) would be paid by the acquisition company (Printicomm) only if the agreed upon goals were reached. Alternatives for earnouts (negotiation on the lines of): 1. There were three elements for a successful earnout: the earnout should be based on achievable performance goals for Digitech after closing: Digitechs management should receive adequate compensation; Digitechs management should receive adequate resources and freedom to achieve these goals. 2. The second plan would only offer contingent payments over the next three years. The amounts would be lower as there was less uncertainty Concerns: Balance between operating ratio , Earout ratio and Capital expenditures is necessary for the deal to be profitable.
on their respective notions of a fair valuation for Digitechs business. Risher was also concerned that if Printicomm paid a premium price for Digitech that Digitech management would have little incentive to stay on at Digitech and continue to grow the business. Risher thought that the retention of Greene and Buckingham was critical to integrating the companies and transferring business knowledge between the two companies. 4. Earnout- Given his concerns about valuation and management retention, Risher had begun to consider the idea of using an earnout to move this potential transaction forward. Risher recalled that an earnout was an acquisition payment mechanism where some portion of the purchase price of the acquired company (Digitech) would only be paid by the acquiring company (Printicomm) if Digitech attained certain agreed-upon performance goals after the closing Risher knew that there were three key elements in creating a successful earnout. First, the earnout should be based on achievable performance goals that increase the value of Digitech in the hands of Printicomm after the closing. Second, Digitechs management should receive adequate compensation for creating that value. Third, the earnout should provide Digitechs management with the resources and operating freedom necessary to achieve its performance goals. Risher knew that an earnout made a lot of sense from an economic perspective, and if designed appropriately, could be viewed as a win-win situation for both parties. He also knew that the two key drivers that could be negotiated in designing an earnout were the time period and the earnout targets. As a result, Risher decided to develop two different earnout structures to present to Greene at their next meeting. The two proposals would offer alternatives that were on either side of the spectrum with regard to time period and earnout targets. The first earnout structure would extend payments to Greene and Buckingham over the next five years based on Digitech achieving certain operating income targets. Since this five year plan left Printicomm exposed for a long time Risher wanted to incorporate high earnout targets into this structure .Risher decided to set the targets as follows: 1999 $2.5 million; 2000$3.0 million; 2001$3.0 million 2002$3.5 million; 2003$3.5 million. These targets were purposely set close to Printicomms projected operating income numbers for Digitech so that Printicomm would only pay additional monies for performance above the expected level. Risher also believed that the dollars paid out at closing could be set at a relatively low value of $20 million because of the potential future value offered to Digitech with a 5 year earnout period. The second earnout structure would only provide for contingent payments over the following three years. Risher felt that the earnout targets should be lower for this structure since there was less uncertainty about the future in this shorter time frame. Risher decided to set the targets as follows: 1999$2.0 million; 2000$2.5 million; 2001$2.5 million. These relatively low targets provided Digitech with a good opportunity to earn additional monies in the earnout, but were still not expected to cost Printicomm much over the shorter time horizon. Since the shortened earnout provided Digitech with less time to capture value from the earnout, Risher believed that the dollars at closing would need to approximate the $28 million fixed price offer that was already on the table.
1. Scenario-1:-We have taken growth of 10% (average growth rate) as per Printicomms perspective and calculated the present value of earn-out for 5 years
1998 Sales(in thousand) 23450 Net Profit(thousand) Target Earning Earn-Out Present value discount factors PV of Earn-outs Sum of PV (in million) 0.155
0.909091 72.27273
0.826446 -134.339
0.751315 91.0556
0.683013 -45.5471
0.620921 171.7754
*(discount rate=10%) 2. Scenario-2:-We have taken growth of 10% (average growth rate) as per Printicomms perspective and calculated the present value of earn-out for 3 years
1998 Sales(in thousand) 23450 Net Profit(thousand) Target Earning Earn-Out Present value discount factors PV of Earn-outs Sum of PV (in million) 1.272
*(discount rate=10%) 3. Scenario 2:- We have taken growth of 10% (average growth rate) as per Digitechs perspective and calculated the present value of earn-out for 5 years
*(discount rate=10%) 4. Scenario 2:- We have taken growth of 10% (average growth rate) as per Digitechs perspective and calculated the present value of earn-out for 3 years
1998 Sales(in thousand) Net Profit(thousand) Target Earning Earn-Out Present value discount factors PV of Earn-outs Sum of PV (in million) 23450 1999 28140 5628 2000 3628 0.909091 3298.182 11.024 2000 33768 6753.6 2500 4253.6 0.826446 3515.372 2001 40521.6 8104.32 2500 5604.32 0.751315 4210.609
*(discount rate=10%) From here we take scenario 3 as the right alternative for Printicomm