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FinancialManagement:Printicomm's
ProposedAcquisitionofDigitech:Negotiating
PriceandFormofPayment
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...

TheCasePapers
INTRODUCTION:

CasePapers
APAStyleGuides

TheOwlatPurdue
Printicommwasacompanythathandledelectronicandpapersubmissionsof
APAStyle.org
printcopythroughouttheworld.InDecember1998,JayRisher,VPof
CoatesLibrary
Printicomm,proposedanacquisitionofDigitech.Rishernegotiatedaletterof
intentfortheexclusiverightstopurchaseDigitechhowever,thiswould
MLAStyleGuides
expireintwoweeks.AdiscrepancycamewhenRisherbelievedthevalueof
Digitechwasnogreaterthan$30millionandthetwoleadersofDigitech
TheOwlatPurdue
valuedtheirfirmat$40million.ItwascrucialforRishertodecideonthe
WhatisMLAStyle?
correctdealstructureasRisherhopedtomaintainDigitechemployeesafter
OurCollegeCasePapers
theacquisition.Bothcompanieswouldcomplementeachotherafterthe
acquisitionandofferedconsiderablegrowthpotential.
Home
FrankGreene,founderandownerofDigitech,hopedtosellDigitechandretire
SolarPower
withinthenextfewyearswhileitsvaluewasattractive.Greenecomparedthe
saleofDigitechtomanyotherrecentlysoldfirmsthatwentfor1012times
NonProfit
EBITDA.ThevalueofDigitechwassaidtobeafunctionofGreenes
involvement,whichwouldsooncauseanotherincongruityinthesaleprice.
CreativeBrief
Risherwasonlywillingtopayamaximumof$30millionforDigitechand
remainedfirmonthispriceafterhisvaluationcalculationthrougha
Theology
discountedcashflowanalysis.Biddingwarscontinuedandthefinaloffering
BusinessLaw
was$28millionforDigitechandafirmholdingpricebyGreeneof$40million
forthecompany.
Startups
RisherwasconcernedhewouldlosetheDigitechdealandothercompetitors
BusinessFinance
wouldquicklyacquirethem.Asaresultofthis,heproposedanearnoutfor
thetransaction.Twodifferentearnoutstructureswereproposedone
KotaFibres
extendingpaymentstoGreeneandCEOJepBuckinghamoverthenextfive
yearsbasedonDigitechearningcertainoperatingincometargets.Thesecond
Printicomm(fake
earnoutproposalofferedcontingentpaymentsoverthenextthreeyears.
company)
Afterfocusingonafixedpricedealvs.anearnoutbaseddeal,Risherfeltboth
partiescouldreachansuitableenterprisevaluation.Afterbothproposals,
Jetblue
RishercontemplatedfourstrategicalternativesPrinticommcouldaccept
FourSeasons
developingthesametechnologyDigitechcouldofferontheirown,find
anothercompanytopurchase,thefixedpricedealfortheacquisition,andthe
Genzyme
earnout.Printicommsexclusiverighttonegotiatepriceandformofpayment
withDigitechendedintwoweeks.Rishermustrecommendthemost
attractivestructuretoGreenethatwillalsobenefithiscompany.
ETHICALCONCERNS

Ethicalissueswerenotmadeapparentinthecasehowever,Risheriswilling
todowhateverittakestoacquireDigitech.Todoso,heisseekingan
alternativeoptionofanearnouttohelptoresolvedifferencesbetweenhimself
andGreene.Fishermustbecarefultodesignthetermsoftheearnoutsothat
Printicommisprotectediftheexpectedgrowthdoesnthappenbutalso
rewardGreeneiftheexpectedfutureofthisacquisitiondoesendupoccurring.
ThecompleteddiscountedcashflowanalysisandvaluationsofDigitechgive
ustwoentirelydifferentvalues.Rishermustattempttobridgethegapinthe
twovaluationsthroughsomeformoffixedandcontingentpaymentsto
Greene.
Asthisbusinessdealhasntyetplayedout,ethicscanplayalargefactorin
negotiation.RisheriseagertoacquireDigitechandhisneedsandwantsmay
easilybecomemoreimportantthantreatingGreeneinasociallyacceptable
manner.Inthiscircumstance,Risherwillattempttoestablishaplantoonly
pay$30millionforDigitechthatdoesntdirectlystatethistoGreene.Itisnt
unethicaltoproposeanearnoutbutmoresoahappymediumbetweenboth
parties.Risherwillmostlikelyactwithhighmoralandethicalstandardsashe
hopestohaveGreenesinvolvementaftertheacquisitionaswellasmaintain
alloftheloyalemployeesofDigitechwhohaveworkedforthecompanyfor
quitesometime.
LeadershipAnalysis/Recommendation
TwomainleadersstoodoutinproposedacquisitionofDigitechJayRisher,VP
andcontrollerofPrinticomm,andFrankGreene,founderandownerof
Digitech.Risherisanextremelywiseleader.Fromthebeginning,he
recognizedthatmuchofDigitechssuccesswasduetotheirtwomainleaders.
Alongwiththis,hedecidedthatafteracquiringDigitech,hewouldlikethese
twoindividualstoremainwithPrinticommforfiveyearstomanagethe
operationsofDigitech.Rishersleadershipstylecanbecharacterizedas
democratic.Hemakesthefinalchoicesinthebusinessyetincludesseveral
othersareincludedduringthedecisionmakingprocess.Hevaluesthe
knowledgeableandskillfulemployeesatbothPrinticommandDigitechand
believesthesmoothnessoftheacquisitionwillinturnresultinhardworking
andsatisfiedemployees.ThisleadershipstylepermitsRishersemployeesto
becomepartofthedecisionteam,allowingthecompanytomakebetter
decisionswhicharemorelikelytobeprofitable.
FrankGreenefoundedDigitechcloseto10yearsprior.Thiscompanywasbuilt
onhardwork,knowledge,andexpertise.Greenehadastrongemotionalbond
withcompanyandhisloyalemployees.Hewantedtosellthecompanyand
retire,yetwasinnorushtowaitfortherightofferasheknewDigitechhada
highvalue.Hisleadershipstylecanbeeasilycharacterizedasacharismatic
leader,leadingbyinfusingenergyandeagernessintohisteammembers.A
charismaticleaderisalsoonewhoiscommittedtotheircompanyforthelong
run.GreeneiswillingtocontinuerunningdaytodayoperationsofDigitech
untilhisdayofretirementalthoughhewasfinanciallystabletosellthe
companyseveralyearsprior.
Coincidentally,evenRisheracknowledgesGreeneasacharismaticleader,
statinghewasntcomfortableprovidingafinancialforecastforthenextfive
yearsforDigitechbecauseofGreenesrelationshipwithhisemployees.
GreeneandBuckingham,anotherDigitechleader,agreedtohavecontinued
involvementforthefollowingfiveyearsafterthesaleafterRishersrequest.
Overall,Greeneisextremelywiseandwillingtowaitfortherightofferifthe
acquisitionwithPrinticommdoesntplayoutasplanned.ItisidealforGreene
toretirebuteasilydeterminablethatheswillingtoworkuntilhiscompanyis
ingoodhandsandwiththedollaramountherequires.
FINANCIALANALYSIS
Printicommsstrategywastogrowthroughacquisitions.JayRisher,Vice
PresidentandControllerofPrinticommbelievedtheacquisitionofDigitech
wouldhaveasignificantandpositiveimpactontheperformanceoftheir
JournalServicesandPointofPurchasedivisions.
Risherhadtodecidefromseveralalternatives:
DevelopDigitechstechnologyinhouseifapurchasepricecouldnotbe

reached.
Printicommmaytrytofindanothercompanytopurchase.
Secureafixedprice(easiestalternative)Thisonlyrequiredastandard
purchaseandsaleagreementhowever,thetwocompaniesremained
farapartonthefairvaluationforDigitech.IfPrinticommpaida
premiumprice,thenthemanagementofDigitechmaynotstayto
growthebusiness.Itwasessentialtohavethebusinessknowledge
passedfromDigitechtoPrinticomm.
Pursueanearnoutthiswasanacquisitionpaymentmechanism
wherebysomeportionofthepurchasepriceoftheacquiredcompany
(Digitech)wouldbepaidbytheacquisitioncompany(Printicomm)only
iftheagreedupongoalswerereached.
Therewerethreeelementsforasuccessfulearnout:theearnoutshouldbe
basedonachievableperformancegoalsforDigitechafterclosing:Digitechs
managementshouldreceiveadequatecompensationDigitechsmanagement
shouldreceiveadequateresourcesandfreedomtoachievethesegoals.
ThefirstearnoutstructurewouldextendpaymentstoGreeneand
Buckingham,twoemployeesofDigitech,overthenextfiveyears(ExhibitI).
Thesepaymentswouldbebasedonachievingcertainoperatingincome
targets.Thetargetswereasfollows:
Plan
1

Earnout
Targets

Plan
2

Earnout
Targets

1999

$2.5million

1999

$2.0million

2000

$3.0million

2000

$2.5million

2001

$3.0million

2001

$2.5million

2002

$3.5million

2003

$3.5million

Thesecondplanwouldonlyoffercontingentpaymentsoverthenextthree
years.Theamountswouldbelowerastherewaslessuncertainty(ExhibitII).
ThefreecashflowsareshowninexhibitsIandII.Therationaleisthe(EBIT),
earningsbeforeinterestandtaxes,istheincomethecompanyearnswithout
regardastohowthebusinessisfinanced.Ifthemanagementweretorun
thebusinessintothegroundthentheycoulddistributethecashflowto
ownersandcreditors.Mostcompanieshowever,retainsomeofthecashflow
topayforcapitalexpenditures.So,thefreecashflowiswhatisavailablefor
distributiontocreditorsandthisistheamountaftertaxes,depreciation,
capitalexpendituresandworkingcapital.
Theoperatingratiowhichistotalexpenses/salesisbetween88and90%on
boththeprojectionsbyPrinticommandDigitech.Thisratioindicatesthe
expensesarealmostequaltothesalesrevenuefortheproduct.
Theprofitmargin,whichisnetincome/sales,iseachsalesdollarthatis
filteredintoincome.Basedonprofitmarginsofsimilarcompanies,theprofit
marginsareinthemediumrange.Thenetincomeisatthelowendbasedon
industrycomparability.
Alsocapitalexpendituresincreasesignificantlyonbothexhibits.Capital
expendituresarelargeexpenditureswhicharedepreciatedovertimeandthis
mayalsoindicateanincreaseinlongtermdebt.Thisisreallyindicatedinthe
case.
Iftheearnouttargetswerebasedonoperatingincomeonly,thenthetargets
wouldbeachievedforallyearsforbothstructures.However,ifitsbasedon
incomeaftertaxes,thenthetargetsin2001and2002fortheDigitech
projectionswouldbeachieved.PerthePrinticommprojections,onlythe2001
targetinthesecondstructurewouldbeachieved.Alsobasedontheearnout
ratiosbelow,assumingarateof5%,thenetpresentvaluesforthefouryear
payoutisobviouslymoreduetothetimevalueofmoney.Thepurchasing
powerofadollarisworthmoretodaythantomorrowduetoinflationand
otherfactors.

Presentvaluedata
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
2nd
structure

$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

CURRENTEVENTS:
Atthetimeofthecasetherewereapproximately52,000printing
establishmentsthroughouttheUnitedStates.Themajorityoftheprinting
companiesservicedlocal,stateandregionalareas.Printicommwasanational
entitywithmorethan70citiesacrosstheU.S.utilizingitsservices.Thecase
eventstakeplacein1998atimewhentheinternetwasevolvingasthe
premierplacetodobusiness.Between1995and2001aneventreferredtoas
thedotcombubblesurfaced.Thisbubblewasatimewheninternetand
technologybasedcompaniesracedtothewebtosecuretheirpositionasthe
dominantleaderintheirrespectiveindustry.Thebubble,however,burstin
2000whenthebottomdroppedoutoftheinternetIPOmarket,causingthe
majorityofthecompaniestoeithergooutofbusiness,orbeacquiredby
larger,unscathedfirms.
Risher,awisebusinessman,wasawareoftheexplosivegrowthandvaluethe
internetofferedhiscompany.HealsoknewthatunlessPrinticommwasable
toevolveinparalleltotheinternet,itwouldnotsurvive.Therefore,his
pursuitofacquiringDigitechwasintegralforthecompanyslongterm
existence.Digitechownedasoftwareproductwhichconvertedphotographs
andprintmaterialsintoelectronicformats,catalogedthematerials,and
storedtheminamessageanddatarepositorylinkedtoatemplateforlater
reproductionandretrievalthiswasthebirthofPrinticommsEnterprise
ContentManagement(ECM)solution.
In1999RisherandGreenereachedanagreementforPrinticomms
acquisitionofDigitech.The3yearearnoutagreementwasfavorabletoboth
partiesinvolved,andgavePrinticommtheabilitytocompetedirectlywithits
internetandtechnologybasedcompetitors.RisherandGreenecontinuedto
developtheMarketelegenceECMproductoverthenext12months.TheECM
productbecametheindustrystandardforbusinessgradedigitalasset
managementsolutions.TheECMproductcontinuedtooutperformtheother
servicesofferedbyRisherscompany.In2000RisherandGreeneworked
togethertoevaluatetheexistingdivisionsofthecompany.Thegoalofthis
evaluationwastoidentifyunderperformingdivisionsandeithergrowthem,
combinethemwithasuccessfuldivision,orremovethemaltogether.
Basedonhistoricandforecastedgrowthpattern,aswellasfactorsexpectedto
supportthegrowthoftheU.S.printedproductoutputoverthenextfive
years,RisherandGreenedecidedonthefollowing(Bruner2007):
DissolvethePrinticommGraphicsSolutionsdivisionthissegment
wasthelowestperformingareaofthecompanyreportinglossesfor3
consecutiveyears.
DissolvetheSpecialtyPackagingandPromotionalPrintingdivisionthe
internetreducedtheneedforphysicalpromotionalprintingandallowed
sellerstobidonthelowestcostdistributionandpackagingcenter
thereforedecreasingPrinticommspositioninthemarketsignificantly.
CombinetheFinancialCommunicationsandPointofPurchasedivisions

thismergergavePrinticommamorepowerfulplacementinthe
marketbycombiningfinancialandretailpointofpurchasesystems.
Combineparentdivision,PrinticommwithitsTechnologySolutions
divisiontoformanewparentcompany,PrinticommTechnology
Solutions(PTS)focusesonelectronictechnologysolutionssimplifies
organizationalstructure.
EconomicImpact
Thenewcompanystructure,thereliabilityandspeedoftheinternet,andthe
increaseinrevenuerelatedtothesuccesssotheECMproduct,allprovided
PTSwithmeanstocontinuedpositivegrowth.Asforecastedinthecompanys
financialstatements,salesroseby35%between1999and2000,andinto
2009haverealizedanaverageof11%growtheachyear.Sincethe
acquisitionandrestructuringof1999and2000,PTShasacquiredmany
smallernichecompanies,andpartneredwithmanylargeentitiestoexpandits
businessoperations.Abrieftimelineisshownbelow:
2001RisherandGreenetakecompanypublicwithanIPOof$12per
share(comparabletoindustrycompetitorslistedincase).Offering8
millionsharestoinvestors,thereturnisover$90million.
2001dotcombubblebursts,PTSacquiresseveralinternetbased
technologycompanies(cheaply)tobuildontheirexistingPointofSales
division.TheseacquisitionsofferPTSonlinecommerceenginesfor
internetsellingandprocurement.
2002RishertakesoverasCEO,GreeneisanointedCOO.
2003PTSpartnerswithKodaktoprovidedonlinephotosharingand
printsales.
2004PTSisawardedwiththeECMproductoftheyearbyMicrosoft
Corporation.Thatsameyear,MarketelegenceispurchasedbyMicrosoft
for$3.2billion.
2007PTSisawardedcontractswiththeU.S.governmenttomanage
alldigitalassetsofthemilitary.
2008PTSacquiresKinkosCopyCentersandbeginstosellfranchises
tolocalbusinessesoverseas.
Today,PTS(formerlyPrinticomm),underthedirectionofJayRisherandPaul
Greene,continuestogrowandexpanditsglobalpresence.Thecompanyhas
developedastrongmanagementteamandisguidedbytheirmission:
PTSwilloperateinanethicalmanner,growingourdigitalprintand
technologyofferingsthroughinternalresearchanddevelopment,acquisition
andsoundbusinessdecisionsinfavorofouremployees,stakeholdersand
customers.Thecompanywillstrivetogivebacktoourcommunity,toprotect
ourenvironment,andsustainasafeandhealthyplaceforouremployees.
RECOMMENDATIONSANDCONCLUSIONS
Basedonthealternativespresentedabove,wewouldrecommendtheearnout
overthreeyearstotheDigitechmanagementinordertokeepthe
managementandexpertiseinthecompany.Thisalternativewouldenable
Printicommtoestablishgoalsfortheearnoutandthethreeyearpayout
wouldbelesscostlytothecompany.
RisherrealizesthatifPrinticommweretolosetheDigitechacquisitionthat
anothercompany,mostlikelyacompetitor,wouldquicklyapproachDigitech
withamoreappealingprice.Inaddition,Printicommisinneedofexpanding
itsinternetandtechnologybasedofferings.DigitechsMarketelengence
productisamusthaveforRisher.Theproductisalignedwiththewaythe
industryismovinglessfocusonhardcopyprint,morefocusonconvertingto
digitalassetmanagement.
REFERENCES
Higgins,RobertC.(2007).AnalysisforFinancialManagement.(pp.6771,250
252,354).NewYork:McGrawHillIrwin,2007).
Bruner,RobertF.(2007).CaseStudiesinFinance.(pp.680,681).NewYork:
McGrawHillIrwin,2007)

"Kodak,LeaderinDigitalImaging,AnnouncesUniquePartnershipsthatPlace
Interactive..."Reuters.comWorldNews,FinancialNews,BreakingUS&
InternationalNews.Retrieved13Apr.2009.
http://www.reuters.com/article/pressRelease/idUS39239+10Jul
2008+PRN20080710>.
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