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Master plan for Merger Negotiations |
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Havard Business Review |
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Jan - Feb 1970 |
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By Gary E. MacDougal and Fred V. Malek |
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Page 1 2 3 4 5 6 7 8 9 10 11 |
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Prenegotiation homework
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Once the buying company has spotted a promising acquisition candidate, has become acquainted with its principal characteristics, and is preparing for the first approach, the time has come to examine certain key relationships in order to determine what price can be paid—and in what form—without undermining corporate objectives. Management should at this point determine:
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The relationships of various selling company EPS growth rates and new capital requirements to possible purchase prices and discounted cash flow ROI. |
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The impact that various earnings-growth rates of the acquisition candidate and various purchase prices and forms of payment will have on the parent company’s earnings per share and annual ROI. |
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The maximum percentage of control the acquired company would retain at various purchase prices and under alternative forms of payment.
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To determine these relationships, we recommend an analytical approach that has proven effective in practice and is relatively easy to use. A series of graphic guides such as those used in the accompanying simulated case history (see Exhibits I through VII) will quickly demonstrate the financial considerations involved in most acquisitions.
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The graphs make it simpler for negotiating executives to grasp the essentials before talks begin. They provide a sound understanding of the true trade-offs involved and the limitations on purchase price and terms.
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Management can thus proceed into negotiations with greater confidence, since the graphs can be used for a quick assessment of the potential impact of changes in terms or prices. This increased flexibility helps to eliminate unnecessary roadblocks and prevent mistakes.
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Finally, as we shall see, the graphs themselves become persuasive tools for the acquiring company’s negotiating team: when shown to the seller, they help in moving talks on the crucial financial details from an emotional or intuitive level to a more objective plane where the facts convincingly speak for themselves.
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