7/23/2019 PRintcomm's Proposed Structure

http://slidepdf.com/reader/full/printcomms-proposed-structure 1/6

Home

Our Papers

Our Mission

Resources

Contact

Financial Management: Printicomm's

Proposed Acquisition of Digitech: NegotiatingPrice and Form of Payment

Printicomm was a company that handled electronic and paper submissions ofprint copy throughout the world. In December 1998, Jay Risher, VP ofPrinticomm, proposed an acquisition of Dig itech. Risher negotiated a letter ofintent for the exclusive rights to purchase Digitech; however, this would expirein two weeks. A discrepancy came when Risher believed the value of Digitechwas no greater than $30 million and the two leaders of Digitech valued theirfirm at $40 million. It was crucial for Risher to decide on the correct dealstructure as Risher hoped to maintain Digitech employees after the acquisition.Both companies would complement each other after the acquisition and offeredconsiderable growth potential...

The Case Papers

INTRODUCTION:

Printicomm was a company that handled electronic and paper submissions of

print copy throughout the world. In December 1998, Jay Risher, VP of

Printicomm, proposed an acquisition of Digitech. Risher negotiated a letter of

intent for the exclusive rights to purchase Digitech; however, this would

expire in two weeks. A discrepancy came when Risher believed the value of

Digitech was no greater than $30 million and the two leaders of Digitech

valued their firm at $40 million. It was crucial for Risher to decide on the

correct deal structure as Risher hoped to maintain Digitech employees after

the acquisition. Both companies would complement each other after the

acquisition and offered considerable growth potential.

Frank Greene, founder and owner of Digitech, hoped to sell Digitech and retire

within the next few years while its value was attractive. Greene compared the

sale of Digitech to many other recently sold firms that went for 10-12 times

EBITDA. The value of Digitech was said to be a function of Greene’s

involvement, which would soon cause another incongruity in the sale price.

Risher was only willing to pay a maximum of $30 million for Digitech and

remained firm on this price after his valuation calculation through a

discounted-cash-flow analysis. Bidding wars continued and the final offering

was $28 million for Digitech and a firm holding price by Greene of $40 million

for the company.

Risher was concerned he would lose the Digitech deal and other competitors

would quickly acquire them. As a result of this, he proposed an earnout for

the transaction. Two different earnout structures were proposed; one

extending payments to Greene and CEO Jep Buckingham over the next five

years based on Digitech earning certain operating-income targets. The second

earnout proposal offered contingent payments over the next three years.

After focusing on a fixed-price deal vs. an earnout-based deal, Risher felt both

parties could reach an suitable enterprise valuation. After both proposals,

Risher contemplated four strategic alternatives Printicomm could accept;

developing the same technology Digitech could offer on their own, find

another company to purchase, the fixed-price deal for the acquisition, and the

earnout. Printicomm’s exclusive right to negotiate price and form of payment

with Digitech ended in two weeks. Risher must recommend the most

attractive structure to Greene that will also benefit his company.

ETHICAL CONCERNS

Case Papers

APA Style Guides

The Owl at Purdue

APA Style.org

Coates Library

MLA Style Guides

The Owl at Purdue

What is MLA Style?

Our College Case Papers

Home

Solar Power

Non Profit

Creative Brief

Theology

Business Law

Startups

Business Finance

Kota Fibres

Printicomm (fake

company)

Jetblue

Four Seasons

Genzyme

7/23/2019 PRintcomm's Proposed Structure

http://slidepdf.com/reader/full/printcomms-proposed-structure 2/6

Ethical issues were not made apparent in the case; however, Risher is willing

to do whatever it takes to acquire Digitech. To do so, he is seeking an

alternative option of an earnout to help to resolve differences between himself

and Greene. Fisher must be careful to design the terms of the earnout so that

Printicomm is protected if the expected growth doesn’t happen but also

reward Greene if the expected future of this acquisition does end up occurring.

The completed discounted cash flow analysis and valuations of Digitech give

us two entirely different values. Risher must attempt to bridge the gap in the

two valuations through some form of fixed and contingent payments to

Greene.

As this business deal hasn’t yet played out, ethics can play a large factor innegotiation. Risher is eager to acquire Digitech and his needs and wants may

easily become more important than treating Greene in a socially acceptable

manner. In this circumstance, Risher will attempt to establish a plan to only

pay $30 million for Digitech that doesn’t directly state this to Greene. It isn’t

unethical to propose an earnout but more so a happy medium between both

parties. Risher will most likely act with high moral and ethical standards as he

hopes to have Greene’s involvement after the acquisition as well as maintain

all of the loyal employees of Digitech who have worked for the company for

quite some time.

Leadership Analysis/Recommendation

Two main leaders stood out in proposed acquisition of Digitech; Jay Risher, VP

and controller of Printicomm, and Frank Greene, founder and owner of

Digitech. Risher is an extremely wise leader. From the beginning, he

recognized that much of Digitech’s success was due to their two main leaders.

Along with this, he decided that after acquiring Digitech, he would like these

two individuals to remain with Printicomm for five years to manage the

operations of Digitech. Risher’s leadership style can be characterized as

democratic. He makes the final choices in the business yet includes several

others are included during the decision-making process. He values the

knowledgeable and skillful employees at both Printicomm and Digitech and

believes the smoothness of the acquisition will in turn result in hard working

and satisfied employees. This leadership style permits Risher’s employees to

become part of the decision team, allowing the company to make better

decisions which are more likely to be profitable.

Frank Greene founded Digitech close to 10 years prior. This company was built

on hard work, knowledge, and expertise. Greene had a strong emotional bond

with company and his loyal employees. He wanted to sell the company andretire, yet was in no rush to wait for the right offer as he knew Digitech had a

high value. His leadership style can be easily characterized as a charismatic

leader, leading by infusing energy and eagerness into his team members. A

charismatic leader is also one who is committed to their company for the long

run. Greene is willing to continue running day-to-day operations of Digitech

until his day of retirement although he was financially stable to sell the

company several years prior.

Coincidentally, even Risher acknowledges Greene as a charismatic leader,

stating he wasn’t comfortable providing a financial forecast for the next five

years for Digitech because of Greene’s relationship with his employees.

Greene and Buckingham, another Digitech leader, agreed to have continued

involvement for the following five years after the sale after Risher’s request.

Overall, Greene is extremely wise and willing to wait for the right offer if the

acquisition with Printicomm doesn’t play out as planned. It is ideal for Greene

to retire but easily determinable that he’s willing to work until his company is

in good hands and with the dollar amount he requires.

FINANCIAL ANALYSIS

Printicomm’s strategy was to grow through acquisitions. Jay Risher, Vice

President and Controller of Printicomm believed the acquisition of Digitech

would have a significant and positive impact on the performance of their

Journal Services and Point of Purchase divisions.

Risher had to decide from several alternatives:

Develop Digitech’s technology in-house if a purchase price could not be

7/23/2019 PRintcomm's Proposed Structure

http://slidepdf.com/reader/full/printcomms-proposed-structure 3/6

reached.

Printicomm may try to find another company to purchase.

Secure a fixed price (easiest alternative) - This only required a standard

purchase and sale agreement; however, the two companies remained

far apart on the fair valuation for Digitech. If Printicomm paid a

premium price, then the management of Digitech may not stay to

grow the business. It was essential to have the business knowledge

passed from Digitech to Printicomm.

Pursue an earnout - this was an acquisition payment mechanism

whereby some portion of the purchase price of the acquired company(Digitech) would be paid by the acquisition company (Printicomm) only

if the agreed upon goals were reached.

There were three elements for a successful earnout: the earnout should be

based on achievable performance goals for Digitech after closing: Digitech’s

management should receive adequate compensation; Digitech’s management

should receive adequate resources and freedom to achieve these goals.

The first earnout structure would extend payments to Greene and

Buckingham, two employees of Digitech, over the next five years (Exhibit I).

These payments would be based on achieving certain operating income

targets. The targets were as follows:

Plan1 EarnoutTargets Plan2 EarnoutTargets

1999 $2.5 million 1999 $2.0 million

2000 $3.0 million 2000 $2.5 million

2001 $3.0 million 2001 $2.5 million

2 00 2 $ 3.5 million

2 00 3 $ 3.5 million

The second plan would only offer contingent payments over the next three

years. The amounts would be lower as there was less uncertainty (Exhibit II).

The free cash flows are shown in exhibits I and II. The rationale is the (EBIT),

earnings before interest and taxes, is the income the company earns without

regard as to how the business is financed. If the management were to runthe business into the ground then they could distribute the cash flow to

owners and creditors. Most companies; however, retain some of the cash flow

to pay for capital expenditures. So, the free cash flow is what is available for

distribution to creditors and this is the amount after taxes, depreciation,

capital expenditures and working capital.

The operating ratio which is total expenses/sales is between 88 and 90% on

both the projections by Printicomm and Digitech. This ratio indicates the

expenses are almost equal to the sales revenue for the product.

The profit margin, which is net income/sales, is each sales dollar that is

filtered into income. Based on profit margins of similar companies, the profit

margins are in the medium range. The net income is at the low end based on

industry comparability.

Also capital expenditures increase significantly on both exhibits. Capital

expenditures are large expenditures which are depreciated over time and this

may also indicate an increase in long-term debt. This is really indicated in the

case.

If the earnout targets were based on operating income only, then the targets

would be achieved for all years for both structures. However, if it’s based on

income after taxes, then the targets in 2001 and 2002 for the Digitech

projections would be achieved. Per the Printicomm projections, only the 2001

target in the second structure would be achieved. Also based on the earnout

ratios below, assuming a rate of 5%, the net present values for the four year

payout is obviously more due to the time value of money. The purchasing

power of a dollar is worth more today than tomorrow due to inflation and

other factors.

7/23/2019 PRintcomm's Proposed Structure

http://slidepdf.com/reader/full/printcomms-proposed-structure 4/6

Present value data

Earnout

targets $2,500,000.00 $3,000,000.00 $3,000,000.00 $3,500,000.00

Net

present

value

$2,380,952.38 $2,857,142.86 $2,857,142.86 $3,333,333.33

Earnout

targets-

2ndstructure

$2,000,000.00 $2,500,000.00 $2,500,000.00

Net

present

value

$1,904,761.90 $2,380,952.38 $2,380,952.38

CURRENT EVENTS:

At the time of the case there were approximately 52,000 printing

establishments throughout the United States. The majority of the printing

companies serviced local, state and regional areas. Printicomm was a national

entity with more than 70 cities across the U.S. utilizing its services. The case

events take place in 1998; a time when the internet was evolving as the

premier place to do business. Between 1995 and 2001 an event referred to asthe “dot-com bubble” surfaced. This “bubble” was a time when internet- and

technology-based companies raced to the web to secure their position as the

dominant leader in their respective industry. The “bubble”, however, burst in

2000 when the bottom dropped out of the internet IPO market, causing the

majority of the companies to either go out of business, or be acquired by

larger, unscathed firms.

Risher, a wise businessman, was aware of the explosive growth and value the

internet offered his company. He also knew that unless Printicomm was able

to evolve in parallel to the internet, it would not survive. Therefore, his

pursuit of acquiring Digitech was integral for the company’s long-term

existence. Digitech owned a software product which converted photographs

and print materials into electronic formats, cataloged the materials, and

stored them in a message-and-data repository linked to a template for later

reproduction and retrieval; this was the birth of Printicomm’s EnterpriseContent Management (ECM) solution.

In 1999 Risher and Greene reached an agreement for Printicomm’s

acquisition of Digitech. The 3 year earnout agreement was favorable to both

parties involved, and gave Printicomm the ability to compete directly with its

internet- and technology-based competitors. Risher and Greene continued to

develop the Marketelegence ECM product over the next 12 months. The ECM

product became the industry standard for business-grade digital asset

management solutions. The ECM product continued to out perform the other

services offered by Risher’s company. In 2000 Risher and Greene worked

together to evaluate the existing divisions of the company. The goal of this

evaluation was to identify under-performing divisions and either grow them,

combine them with a successful division, or remove them altogether.

Based on historic and forecasted growth pattern, as well as factors expected to

support the growth of the U.S. printed-product output over the next five

years, Risher and Greene decided on the following (Bruner 2007):

Dissolve the Printicomm Graphics Solutions division – this segment

was the lowest performing area of the company; reporting losses for 3

consecutive years.

Dissolve the Specialty Packaging and Promotional Printing division – the

internet reduced the need for physical promotional printing and allowed

sellers to bid on the lowest cost distribution and packaging center;

therefore decreasing Printicomm’s position in the market significantly.

Combine the Financial Communications and Point-of-Purchase divisions

7/23/2019 PRintcomm's Proposed Structure

http://slidepdf.com/reader/full/printcomms-proposed-structure 5/6

– this merger gave Printicomm a more powerful placement in the

market by combining financial and retail point of purchase systems.

Combine parent division, Printicomm with its Technology Solutions

division to form a new parent company, Printicomm Technology

Solutions (PTS) – focuses on electronic technology solutions; simplifies

organizational structure.

Economic Impact

The new company structure, the reliability and speed of the internet, and the

increase in revenue related to the success so the ECM product, all provided

PTS with means to continued positive growth. As forecasted in the company’s

financial statements, sales rose by 35% between 1999 and 2000, and into

2009 have realized an average of 11% growth each year. Since the

acquisition and restructuring of 1999 and 2000, PTS has acquired many

smaller niche companies, and partnered with many large entities to expand its

business operations. A brief timeline is shown below:

2001 - Risher and Greene take company public with an IPO of $12 per

share (comparable to industry competitors listed in case). Offering 8

million shares to investors, the return is over $90 million.

2001 – dot com bubble bursts, PTS acquires several internet-based

technology companies (cheaply) to build on their existing Point of Sales

division. These acquisitions offer PTS on-line commerce engines for

internet selling and procurement.

2002 – Risher takes over as CEO, Greene is anointed COO.

2003 – PTS partners with Kodak to provided online photo sharing and

print sales.

2004 – PTS is awarded with the ECM product of the year by Microsoft

Corporation. That same year, Marketelegence is purchased by Microsoft

for $3.2 billion.

2007 – PTS is awarded contracts with the U.S. government to manage

all digital assets of the military.

2008 – PTS acquires Kinko’s Copy Centers and begins to sell franchises

to local businesses overseas.

Today, PTS (formerly Printicomm), under the direction of Jay Risher and Paul

Greene, continues to grow and expand its global presence. The company has

developed a strong management team and is guided by their mission:

“PTS will operate in an ethical manner, growing our digital print and

technology offerings through internal research and development, acquisition

and sound business decisions in favor of our employees, stakeholders and

customers. The company will strive to give back to our community, to protect

our environment, and sustain a safe and healthy place for our employees.”

RECOMMENDATIONS AND CONCLUSIONS

Based on the alternatives presented above, we would recommend the earnout

over three years to the Digitech management in order to keep the

management and expertise in the company. This alternative would enable

Printicomm to establish goals for the earnout and the three year payout

would be less costly to the company.

Risher realizes that if Printicomm were to lose the Digitech acquisition that

another company, most likely a competitor, would quickly approach Digitech

with a more appealing price. In addition, Printicomm is in need of expanding

its internet- and technology-based offerings. Digitech’s Marketelengence

product is a “must-have” for Risher. The product is aligned with the way the

industry is moving; less focus on hardcopy print, more focus on converting to

digital asset management.

REFERENCES

Higgins, Robert C. (2007). Analysis for Financial Management. (pp.67-71,250-

252,354). New York: McGraw-Hill Irwin, 2007).

Bruner, Robert F. (2007). Case Studies in Finance. (pp. 680, 681). New York:

McGraw-Hill Irwin, 2007)

7/23/2019 PRintcomm's Proposed Structure

http://slidepdf.com/reader/full/printcomms-proposed-structure 6/6

"Kodak, Leader in Digital Imaging, Announces Unique Partnerships that Place

Interactive..." Reuters.com - World News, Financial News, Breaking US &

International News. Retrieved 13 Apr. 2009.

http://www.reuters.com/article/pressRelease/idUS39239+10- Jul-

2008+PRN20080710>.

** Casepapers.com is not responsible for your grade, or liable for any student being accused of, or found guilty of plagiarism. In other words, if you purcha

a paper, be smart enough to modify the wording and information to make it your own.

contact me @ teamcambier@yahoo.com for questions

Copyright © 2009 Casepapers.com