Mergers, Acquisitions & Divestitures

1. Mergers, Acquisitions & Divestitures How to Expand Your Business in Today’s Environment

2. Mergers, Acquisitions & Divestitures PRESENTED BY: • Jim Griffing,Treasurer, Silver Fox Advisor. • A. “Butch” Madrazo,Silver Fox Advisor.

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

4. Priorities FROM SELLER’S PERSPECTIVE • Old Age • Health, Divorce, Death • Disenchantment • Obsolescence • Life Style • Ego

5. Priorities FROM BUYER’S PERSPECTIVE • Desire for Growth • External Factors • Fear • Geographic Position • Shareholder Demands • Patents • Ego

6. Process Methodology MAJOR ACTIVITIES • Developing the “Hunt” • Negotiating the Transaction • Integrating the Combined Cos. • Operating the Combined Cos.

7. Elements of Company Profile COMPANY REVIEW • Executive Summary • Mission Statement • Product or Service Lines • Target Markets • Competition

8. Elements of Company Profile COMPANY REVIEW • Stage of Company Growth • Management • Financial Statements • Action Desired • Support and Verification

9. Methods, Structure THE PROCESS • Due Diligence • Price • Conflicts • Tax Consequences

10. Methods, Structure THE PROCESS • Art • Hunt • Negotiations • Plans

11. Methods, Structure THE PLANS • Acquisition Plan • Integration Plan • Operation Plan

12. Valuations THE VALUATION METHODOLOGY • Market Based • Asset Based • Income Based

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

14. Analyses THE ANALYSIS • SWOT Analysis • Issue Analysis • PEST Analysis

15. Analyses ISSUE ANALYSIS • The issue is:_ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ Decision Other Key Public Maker (s)StakeholdersStaffStakeholder • Buyer: X • Seller: X • Both: X X

16. 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?

17. Failure Factors PRINCIPLES FOR ENHANCING SUCCESS • Due Diligence • Employee Communication

18. Failure Factors FROM BUYER’S SIDE • Key Employees Leave • Productivity Drops • Poor Communication • Lack of Direction • Poor Cultural Fit

19. Failure Factors FROM SELLER’S SIDE • Inadequate Planning • How Best to Invest Proceeds • No Office/ No One Asks Question • Too Much Idle Time • How to Explain Sale to Friends

20. 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.

21. 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.

22. 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

23. How Your Business Could Benefit Obtaining Quality Employees and New Skills Expanding PP&E Increasing Sales Through an Increase in Market Share Generate Cost Efficiencies

24. 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.

25. 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?

26. 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.

27. 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.

28. 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

29. 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.

30. 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

31. 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

32. Example of Stock vs. Asset Sale: Joe’s Widget Factory – Balance Sheet

33. Example of Stock vs. Asset Sale: Joe’s Widget Factory

34. Due Diligence Secrecy is Overrated—May Keep You from Being Referred to The Best Buyer The Best Buyers Ask the Most Questions Present the Firm’s Weaknesses as Something the Buyer Could Improve On

35. More about Due Diligence Due Diligence is a Methodical Investigation Designed to Protect you from “skeletons in the closet”—which 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 Property—for instance, Make Sure Patents Are In The Company Name!

36. 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

37. 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

38. 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.

39. 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 (281) 491-8866 jgriffing@griffing.com

40. 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.”

41. 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 (713) 850-0585 www.bmadrazo@sliverfox.org

42. Questions?