Texas A&M - M&A Deal Makers
Accounting 647
October 11, 2013
Instructor: Jeff L. Hull
Managing Partner – Highlander Partners, LP

Lesson Objective:

With respect to your Target Company, determine:
Investment Merits (why would you support this transaction to your investment committee?)
Enterprise Value (how much you pay determines your returns!!!)
Deal Structure (there are a million ways to structure a deal, what’s right for you?)
Risks Assessed in Diligence (every deal has risks, leverage increases those risks!!!)
Post-Closing Opportunities (it doesn’t stop at closing, now you own it what are you going to do?)
Selective Purchase and Sale Agreement Mechanics (the negotiation is critical!!!)

Item 1:
Review your assigned Confidential Information Memorandum (CIM).
Identify 5 key characteristics that are appealing to you as a buyer of this Target Company.
The position in the market that this company finds itself in as a result of the increased regulation and increased energy prices is unique and represent an exciting opportunity. The situation embodies a chance to capitalize on existing strengths (strong and diverse product line, high DP ratings, and technological aptitude) and grow the sales of products that contribute the highest margin.
The strong relationships that the company has with its suppliers speak well to the company’s ability to continue to produce their product profitably and without interruption through transitions. This ability was demonstrated in 2006, when these customer relationships weathered a significant management changeover and change in product focus.
The sales figures that the company has produced with only five salesmen are quite impressive. With additions to the sales force, we believe the company can better market and sell their products beyond merely letting the product “sell itself,” which management has indicated has often been the case thus far.
The barriers to entry that the environmental and hurricane regulations represent are definite advantages for this company and would seem to be significant enough to prevent any additional competition from entering the marketplace for the conceivable future.
The firm would be an excellent addition to the portfolio, especially a portfolio of companies located in the same region. Their business is such that if a hurricane or natural disaster struck the area, their revenue would spike, as opposed to dipping like the rest of the surrounding business community. In other words, this company would diversify the portfolio and lower its overall risk.

Item 2:
Develop an enterprise value for the Target.
Develop what you believe is the correct EBITDA to use. Consider adjustments to purchase price provided by the investment banker and the diligence report identified in Item 4.
Use a multiple of EBITDA to develop your enterprise value.
Develop a basic financial model to determine your target returns (IRRs) as a PE investor in determining the appropriate level of enterprise value.
Consider macro risks in the projections you develop for your model.
Be prepared to discuss the exit multiple you use in your model and explain your macro level assumptions.

Item 3:
Develop the financing structure that you believe is appropriate for the Target.
Include a Sources and Uses Table, and a Capitalization Table (include percents in your Cap Table)
Within your capital structure, consider types of debt and appropriate levels of each.
Provide your best guess of the interest rate on any debt used.
Be prepared to discuss whether you would use common equity or other equity types (preferred, convertible, etc. and whether you would offer some type of equity incentives or earn outs to management (how would that effect your returns)).

Item 4:
Review the financial diligence report provided and evaluate your comfort level in the quality of earnings.
Identify the specific EBITDA you will use to determine your enterprise value.
5006 from the