What
is the Price?
The situation depicted above (taken from an actual
deal in the chemical industry) shows that a simple question
like – What is the price? – is not always easily answered.
In the illustration that is shown here, the statements of the
seller and the buyer are both true. But the seller and buyer
have different perspectives and each is casting the same deal
in a different light. The seller would like to show that it
got a high price and the buyer has the opposite motive. In a
sense, the seller is describing apples and the buyer is describing
oranges.
In the article that follows, we describe some of the main elements
that make up price in the context of a transaction in the chemical
industry. We also describe a case in point which further illustrates
this issue.
What is the Price?
When a business is sold, after all the dust settles, how
much did the seller get? In order to answer this, 2 main questions
need to be asked:
- what is being sold?; and
- what is the seller getting?
Asset Deals
Since a sale of assets typically does not include the sale
of every asset a company has, the amount a seller gets will
include both the amount it gets selling the business as well
as the amount it gets by retaining or subsequently selling
the assets not included in the deal.
1. Liquid Assets – Assets like cash and securities
are typically retained by a seller in an asset deal, so the
amount a seller realized in total on a divestiture includes
both the amount it gets from the buyer as well as the amount
of these liquid assets it keeps.
2. Working Capital – Is the buyer taking all inventory
and receivables? If not, the seller will dispose of these
assets subsequent to a divestiture and add this to the amount
it gets on closing to determine its total proceeds (the situation
depicted on the cover of this newsletter is an example of
this – seller retained $10 million in accounts receivable).
3. Property, Plant & Equipment – As with other
assets, if a plant or certain equipment is not sold to the
buyer in a divestiture, the proceeds from a subsequent sale
by the seller will add to the total amount realized.
4. Operating Liabilities – Trade payables and other
normal operating accruals are commonly assumed by the buyer
in an asset deal, but not always. The assumption of a liability
has the same effect as getting cash – it increases the amount
the seller has at the end of the day. If the buyer does not
take trade payables for example, the seller will have to pay
these off after closing which then reduces the amount it nets
on the sale.
5. Debt – Liability for borrowed money may or may not
be assumed in an asset deal. The significance here is the
same as with operating liabilities.
Stock Deals or Mergers
When a seller sells the stock of a company or merges it into
the buyer, the entire balance sheet goes to the buyer. This
would include cash, bank debt and everything else, including
contingent liabilities for things such as warranty claims,
litigation and environmental matters. All other things being
equal, the price here (on its face) will be lower because
of this than in an asset deal, even though the seller may
end up with the same amount after it is all over.
What is the seller getting?
When a seller gets cash, the stock of the buyer (if publicly
traded) or the assumption of some of its liabilities, this
is usually easy to quantify. In addition, there may be other
parts of a deal that may or may not be easy to quantify, such
as:
- earnouts or contingent payments
- assumption of a contingent liability
- an employment or consulting agreement
- payments for an agreement not to compete
The case in point on the back page describes an unusual arrangement
used by a seller to induce a buyer to pay a higher up front
cash price.
Determining the price or value of a transaction is not
always as simple as looking at the amount of the wire transfer
at the closing. Many variables come into play which can be
significant in relation to the whole deal. Comparing one deal
to another may be an apples and oranges comparison. Prices
seen in newspapers and magazines (and in this newsletter)
must be taken with a grain of salt and any judgments made
on this type of limited information must be made with caution.
Case In Point
President says, "I Got My Price" .................
Did he?
A client recently made what we thought was a fair offer to
buy a division from a public company. The offer was well below
the seller's "asking price", which we thought was not justified
under the circumstances. Seller's President however stuck
with his "asking price" throughout the ensuing two months
and then told us that he sold to someone else, saying "I got
my price."
Curious to find out if this was true, we waited to see seller's
SEC filing for the deal. The President indeed got his price
(in cash on the closing) but gave the buyer warrants for the
company's stock (at the then current market price) as well.
What was the price for this deal?
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