Deal Structuring – Case Analysis

Summary
The case study you provided outlines a fictional scenario involving potential mergers and
acquisitions (M&A) between two leading consulting firms, East Coast Strategy Consultants
Inc. (EAST) and West Coast Strategic Management Advisory Corp. (WEST), and two
accounting and advisory services firms, Ocean & Whistle Accounting (OW) and LeDosh
(LD). Each acquirer is looking to acquire one of the two target companies, but not both. The
acquirers hope to capture revenue and cost synergies through these acquisitions.
Analysis

1. Antitrust Limitation: The antitrust authorities have indicated that each of the
acquirers can acquire only one of the proposed targets, not both. This limitation
requires strategic decision-making to determine which target to pursue and negotiate
with.
2. Financial Performance: The financial performance of the acquirers and targets plays
a crucial role in deal structuring. EAST and WEST have different financial metrics,
including revenue, net income, debt levels, and stock prices. These financials impact
their capacity to finance the acquisition and the terms of the deal.
3. Synergy Considerations: Both acquirers are interested in capturing revenue
synergies and cost synergies through the acquisitions. The present value of these
synergies, along with uncertainties associated with their realization, is an important
factor in determining the acquisition price.
4. Recent Developments: The case highlights recent events in the targets' histories,
such as OW's data breach and potential legal liabilities and LD's accounting scandal.
These events have financial and reputational implications that need to be factored into
the deal structure.
5. Method of Payment: The method of payment for the acquisition, whether in cash,
stock, or a mix, needs to be negotiated and agreed upon.
6. Contingent Payments: Contingent payments may be necessary based on specific
milestones or outcomes, such as the realization of synergy benefits.
7. Sequential Approach: The case mentions the possibility of a sequential approach,
which involves initial minority investment with the option to acquire the target
company fully later on. This approach requires negotiation and agreement.
8. Closing Conditions: The parties need to agree on the conditions that must be met for
the deal to close successfully. These could include regulatory approvals, due diligence
outcomes, and other factors.
9. Post-Closing Management and Governance: If applicable, the composition of the
target company's board and management after the acquisition must be determined.
10. Exclusivity Agreement: There is an option for an exclusivity agreement, where the
seller grants exclusive rights to the buyer to investigate the acquisition. However,
there are compensation clauses in case the deal doesn't proceed.

About the Potential Acquisition Targets:

1. Ocean & Whistle Accounting (OW):

o Founded in 1935 and headquartered in Little Rock.
o Employs 15,000 accountants worldwide.
 oPrivate company, 100% owned by the founders' daughter, Pacifica Ocean.
oRecently involved in a data breach with potential legal liabilities.
2. LeDosh (LD):
o Chicago-based global accounting firm founded in 1990.
o Employs 16,500 accountants globally.
o Private company, 100% owned by Susan LeDosh.
o Recently involved in an accounting scandal with potential legal liabilities.

Structuring the M&A Deals:

 Antitrust authorities allow each acquirer to acquire only one of the proposed targets,
not both.
 The acquirers aim to maximize the value and minimize risk in the acquisitions.
 Key elements to negotiate include acquisition price, method of payment, contingent
payments, sequential approach, closing conditions, post-closing board and
management composition, and estimated timing.

Appendices:

1. Financial information and additional details about EAST and WEST.

2. Financial information and additional details about OW and LD.
3. Term sheet template for the deal.
4. Exclusivity agreement template if exclusivity is desired.

Challenges and Considerations:

 Acquirers need to carefully evaluate each target's strategic fit, financial performance,
synergy potential, and risk profile.
 Recent events, such as data breaches and accounting scandals, impact the targets'
financials and legal liabilities.
 Acquirers must assess their financial capacity and negotiate the method of payment
and contingent payments.
 The choice between a sequential approach or direct acquisition must be made.
 Closing conditions and post-acquisition management and governance need to be
defined.

Objectives:

 Acquirers aim to secure a target at an appropriate price and share as much risk as
possible with the seller.
 Sellers aim to maximize the acquisition price and minimize risk.

Decision-Making Process:

 Negotiations occur in three stages: two with different acquirers and a final decision on
which deal to pursue.
 A term sheet and potentially an exclusivity agreement need to be agreed upon.
Key Strategic Choices:

 Which target to pursue based on strategic fit, financial capacity, synergy potential,
and risk assessment.
 How to structure the deal, including acquisition price, payment method, and
contingent payments.
 Whether to proceed with a sequential approach or direct acquisition.
 Determining closing conditions and post-acquisition governance.

Certainly, here are sample answers for the stages of the discussion on deal structuring, with
one group representing the acquirer companies (EAST and WEST) and the other group
representing the acquiree companies (OW and LD):

Stage 1: Initial Strategy Formulation

Acquirer Group (EAST and WEST):

 EAST: Our primary objective is to expand into the accounting and advisory services
sector. We have a strong position in the financial services industry (EAST) and the
technology sector (WEST), and we believe that acquiring an established accounting
firm will enable us to cross-sell services and capture synergies. We need to consider
our stock price, which is currently at $115. To maximize value for our shareholders,
we propose a mix of stock and cash payment, along with contingent payments based
on the achievement of revenue and cost synergies.
 WEST: Our primary goal is to further strengthen our position in the technology
sector, and LD aligns well with our client base and reputation. Our stock price is
currently at $101, which has risen significantly in the last year. We propose paying in
stock to align the interests of both parties. Contingent payments will be tied to the
realization of synergies, and we are open to including a legal clause regarding the data
breach issue at OW.

Seller/Target Group (OW and LD):

 OW: Given the recent data breach incident, we are keen to sell our firm and address
potential legal liabilities. Our primary aim is to maximize the selling price to
compensate for the potential future liability. We propose a substantial cash payment
and contingent payments linked to any revenue synergies realized by the acquirer.
 LD: The accounting scandal has had a negative impact on our reputation, and we are
eager to sell our firm and avoid potential legal action. Our primary objective is to
maximize the selling price while ensuring our ESG commitment is upheld. We
suggest a mix of stock and cash payment with contingent payments based on revenue
and cost synergies.

Stage 2: Negotiation with One Party

Acquirer Group (EAST and WEST):

  EAST: In negotiations with OW, we considered the data breach issue, and as a
compromise, we agreed to a higher cash payment upfront and contingent payments
for revenue synergies. We believe this mitigates our risk. We value OW's client base
and are prepared to move forward with this deal.
 WEST: In negotiations with LD, we emphasized the potential for revenue synergies
and the positive ESG aspects. We offered a mix of stock and cash payment, with a
lower initial price but a significant contingent payment based on the realization of
synergies. We believe this deal is beneficial for both parties.

Seller/Target Group (OW and LD):

 OW: We agreed to EAST's offer, given the concerns over the data breach. The higher
cash payment upfront provides some assurance to our company regarding potential
liabilities. The contingent payments align with our interests in achieving synergies.
 LD: We accepted WEST's proposal, as we value their emphasis on ESG and their
commitment to maximizing revenue synergies. The mix of stock and cash payment
allows us to share in the potential future value of the combined entity.

Stage 3: Decision on Finalizing Negotiations

 Acquirer Group (EAST and WEST): EAST decided to proceed with the acquisition of
OW, recognizing the importance of mitigating the data breach risk and capturing
revenue synergies. WEST chose to finalize the deal with LD, aligning with their ESG
commitment and potential for revenue synergies.
 Seller/Target Group (OW and LD): OW agreed to the deal with EAST, focusing on
the cash payment and risk mitigation. LD finalized the deal with WEST, emphasizing
the value of ESG and revenue synergies.

Post-Negotiation Debrief (Whole Class Discussion)

The whole class discussion can involve a reflection on the negotiations, the reasons behind
each group's decisions, and the key takeaways from the exercise. This debrief helps students
gain a comprehensive understanding of the complexities and strategic considerations
involved in M&A deal structuring.