Printicomm's Proposed Acquisition of Digitech: Negotiating Price and Form of Payment
13 Pages Posted: 21 Oct 2008
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Printicomm's Proposed Acquisition of Digitech: Negotiating Price and Form of Payment
Printicomm's Proposed Acquisition of Digitech: Negotiating Price and Form of Payment
Abstract
This case was developed to serve as a foundation for student discussion of the use of contingent forms of payment in M&A. The protagonist in the case represents the buyer, and must design terms of contingent payment ("earnout") that will protect the buyer if the rosy future does not occur, yet reward the seller if it does. Students are given completed discounted cash flow (DCF) valuations of the target (Digitech) under both the seller's and buyer's forecasts, which reveal a wide gulf in valuation. The protagonist seeks to bridge this gulf through a combination of fixed and contingent payments to the seller. Two different earnout designs are suggested in the case. Students must simulate the value of the earnout to estimate the expected value of this provision from the standpoints of both the buyer and seller.
Excerpt
UVA-F-1264
Rev. Feb. 11, 2014
Printicomm's Proposed Acquisition of Digitech:
Negotiating Price and Form of Payment
In December 1998, Jay Risher sat in his office at Printicomm seeking to structure the price and form of payment for the acquisition of Digitech. Risher was the vice president and controller of Printicomm, a communications company that offered “end-to-end” printing services by combining production capabilities with the ability to create finished copy and distribute the printed materials. He had identified Digitech as an attractive acquisition candidate and negotiated a letter of intent granting Printicomm the exclusive right to negotiate the purchase of Digitech. That exclusivity period would expire in two weeks. Due-diligence research revealed that the value of Digitech depended crucially on the managerial know-how of the two leaders of the firm. Risher had gained the agreement of these two individuals to remain with Printicomm for five years to manage the Digitech operations. With the benefit of their leadership, Risher concluded that the value of Digitech would be no greater than $ 30 million. These individuals believed, however, that Digitech was worth $ 40 million. With the closing of the transaction approaching, Risher needed to decide on the appropriate deal structure to use given the existing disparity in the valuation of Digitech and the importance of retaining key Digitech employees after the acquisition.
Risher was impressed with the recent growth of Digitech and the likely prospects for future growth. Digitech's revenues had grown from $ 7 million, in 1995, to $ 24 million, in 1998 (see Exhibit 1 for historical income statements). This rapid growth was attributable to the addition of several key large corporate accounts, which represented almost 40% of total revenue in 1997. Printicomm's acquisition of Digitech made strategic sense because of the complementarity of the company's products and markets, and offered the prospect of significant growth potential. In addition, Risher thought that significant cost and revenue synergies might be realized after the acquisition.
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Keywords: mergers and acquisitions, Monte Carlo simulation, negotiation
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