Mergers and Acquisitions Course Project Proposal - Netflix and Roblox

Week 2 Due March 8th

Our team will use Netflix and Roblox, with Netflix being the acquiring company and Roblox being the target acquisition. There are many opportunities for synergies with these two firms, both are stand-alone companies that are publicly traded, and this merger could be a lucrative opportunity for both companies.

The Target Company Selections List contains a listing of parent companies and potential target companies (acquirees) that you may choose from to select the specific acquisition scenario that you'll research and document for your project. Keep in mind that the rest of the course will be spent conducting the due diligence necessary to document and present an informed recommendation for your proposed acquisition target, so be sure to choose a combination of parent and target acquisition companies that interests your group members.

Your team's Course Project Proposal for Acquisition will be a brief written proposal directed at the parent company's executive management team, explaining your choice for the selected acquisition target (acquiree). Remember that this document is intended as an initial "pitch" to senior management of the parent company, and you need to justify your plan to move forward and expand the parent company's effort to conduct a due diligence endeavor further investigating the acquisition target. You should accordingly include an overview of the chosen target company and explain why it makes sense to the parent company to look into this potential business acquisition. This proposal addresses the who, what, where, when, why, and a bit about the how for the proposed acquisition. You'll consider multiple factors in this proposal and should incorporate a brief analysis providing an industry overview along with a discussion of the current and expected economic climate. Key questions relating to the typical content of an industry overview are included in Appendix C: Due Diligence Checklist is below.

Although it's understood that this early deliverable is written with the intent of initially identifying a potentially suitable acquisition, the later portions of the project subsequently seek to research and justify the proposed purchase of the target company for the acquiring firm's senior management. It's possible that in the course of conducting the project, your research and analysis instead might convince your group that the proposed acquisition scenario will not add value for the acquirer or is perhaps too risky. If this ultimately turns out to be the case for your project, consider that this is a realistic scenario and simply continue your project exactly as planned, but with the understanding that your final deliverables may instead recommend against purchasing the proposed target company rather than attempting to convince senior management to move forward with the acquisition. Either way, the project work will take the same path, but your quality research, analysis, and documentation may lead your group to present a different final conclusion and recommendation regarding the acquisition, and that's just fine as long as the due diligence is thorough and well documented.

The general topic of mergers and acquisitions was covered in Chapter 22, including a lengthy discussion of the key topics to address in a due diligence proceeding. This appendix includes a more detailed checklist that can be used as a master list, picking only those topics that appear to be relevant to the due diligence tasks at hand.

1. What is the size of the industry?

2. How is the industry segmented?

3. What is the industry's projected growth and profitability?

4. What are the factors affecting growth and profitability?

5. What are the trends in the number of competitors and their size, product innovation, distribution, finances, regulation, and product liability?

1. When and where was the company founded, and by whom?

2. What is its history of product development?

3. What is the history of the management team?

4. Has the corporate location changed?

5. Have there been ownership changes?

6. Have there been acquisitions or divestitures?

7. What is its financial history?

1. Obtain the articles of incorporation and bylaws. Review for the existence of preemptive rights, rights of first refusal, registration rights, or any other rights related to the issuance or registration of securities.

2. Review the bylaws for any unusual provisions affecting shareholder rights or restrictions on ownership, transfer, or voting of shares.

3. Review the terms associated with any preferred stock or unexercised warrants.

4. Describe any antitakeover provisions.

5. Obtain certificates of good standing for the company and all significant subsidiaries.

6. Obtain the minutes from all shareholder meetings for the past five years. Review for proper notice prior to meetings, the existence of a quorum, and proper voting procedures; verify that stock issuances have been authorized; verify that insider transactions have been approved; verify that officers have been properly elected; verify that shares are properly approved and reserved for stock option and purchase plans.

7. Obtain the minutes of the executive committee and audit committee for the past five years, as well as the minutes of any other special board committees. Review all documents.

8. If the company is publicly held, obtain all periodic filings for the past five years, including the 10-K, 10-Q, 8-K, and Schedule 13D.

9. Review all annual and quarterly reports to shareholders.

10. Obtain a list of all states in which the company is qualified to do business and a list of those states in which it maintains significant operations. Determine if there is any state where the company is not qualified but should be qualified to do business.

11. Review the articles of incorporation and bylaws of each significant subsidiary. Determine if there are restrictions on dividends to the company. For each subsidiary, review the minutes of the board of directors for matters requiring disclosure. Also review each subsidiary's legal right to do business in each state in which it operates.

12. Review the company's correspondence with the SEC, any national exchange, or state securities commission, other than routine transmittals, for the past five years. Determine if there are or were any enforcement or disciplinary actions or any ongoing investigations or suggestions of violations by any of these entities.

13. Review all corporate insurance, using a schedule from the company's insurance agency. If there is material pending litigation, determine the extent of insurance coverage and obtain insurance company confirmation.
14. Review all pending and threatened legal proceedings to which the company or any of its subsidiaries is a party. Describe principal parties, allegations, and relief sought. This includes any governmental or environmental proceedings. Obtain copies of existing consent decrees or significant settlement agreements relating to the company or its subsidiaries.

15. Review the auditors’ letter to management concerning internal accounting controls and procedures, as well as any management responses.

16. If there has been a change in accountants during the past five years, find out why.

18. Review any reports of outside consultants or analysts concerning the company.
19. Review any correspondence during the past five years with the EPA, FTC, OSHA, EEOC, or IRS. Determine if there are any ongoing investigations or suggestions of violations by any of these agencies.

19. Research any press releases or articles about the company within the past year (see Bloomberg.com, NEXIS, Equifax, etc.).

20. Review all contracts that are important to operations. Also review any contracts with shareholders or officers. In particular, look for the following provisions:

    Default or termination provisions

    Restrictions on company action

    Consent requirements

    Termination provisions in employment contracts

    Ownership of technology

    Cancellation provisions in major supply and customer contracts

    Unusual warranties or the absence of protective provisions

21. Review any required regulatory compliance and verify that necessary licenses and permits have been maintained, as well as ongoing filings and reports.

22. Review all current patent, trademark, service mark, trade name, and copyright agreements, and note renewal dates. Determine which patents have commercial applications. Estimate the possibility of extending the duration of patent protection.

23. Review all related-party transactions for the past three years.

24. Review the terms of any outbound or inbound royalty agreements.

25. Was any company software (either used internally or resold) obtained from another company? If so, what are the terms under which the code is licensed? Are there any associated royalty payments?

26. Review all legal invoices for the past two years.

27. Obtain a copy of any factoring agreements.

28. Obtain copies of all outsourcing agreements.

1. Review all board resolutions authorizing the issuance of stock to ensure that all shares are validly issued.

2. Review debt agreements to which the company or any subsidiary is a party, as well as all debt guarantees. Note any restrictions on dividends, on incurring extra debt, and on issuing additional capital stock. Note any unusual consent or default provisions. If subordinated debt securities are being issued, compare new subordination provisions with the provisions for other agreements for compatibility. Review the latest borrowing base certificates. Inquire whether there are any defaults or potential defaults.

3. Review any disclosure documents used in the private placement of securities or loan applications during the preceding five years.

4. Review all documents affecting ownership, voting, or rights to acquire the company's stock for required disclosure and significance to the purchase transactions, such as warrants, options, security holder agreements, registration rights agreements, shareholder rights, or poison pill plans.

1. Obtain copies of any employment agreements, and document any change in control clauses that will trigger the cancellation of employee loans, severance payments, or the acceleration of vesting in such benefits as stock options.

2. Obtain copies of any noncompete agreements.

3. Obtain copies of any salesperson compensation agreements.

4. Obtain copies of any director compensation agreements.

5. Obtain copies of any option plans.

6. Summarize any loan amounts and terms to officers, directors, or employees.

7. Obtain any union labor agreements.

8. Determine the number of states to which payroll taxes must be paid.

9. Obtain a copy of the employee manual.

10. Obtain a list of all employees, their current compensation, and compensation for the prior year.

11. Summarize the names, ages, titles, education, experience, and professional biographies of the senior management team.

12. Obtain copies of employee resumes.

13. What has been the employee turnover rate for the past two years?

14. Obtain a copy of the organization chart.

1. Summarize sales by customer for the current and past year.

2. Summarize sales by product for the current and past year.

3. Summarize the backlog by customer.

4. Summarize the backlog by custom work and standard products.

5. Determine how much staffing is required to complete the existing backlog of custom work.

6. Determine the seasonality of revenue.

7. Determine the amount of ongoing maintenance revenue from standard software products.

8. Obtain copies of all outstanding proposals, bids, and offers pending award.

9. Obtain copies of all existing contracts for products or services, including warranty and guarantee work.

1. Obtain copies of all asset leases, and review for term, early payment, and bargain purchase clauses.

2. Obtain copies of all office space lease agreements, and review for term and renewal provisions.

3. Review the title insurance for any significant land parcels owned by the company.

4. Obtain current detail of accounts receivable.

5. Obtain a list of all accounts and notes receivable from employees.

6. Obtain a list of all inventory items, and discuss the obsolescence reserve.

7. Obtain the current fixed asset listing, as well as depreciation calculations.

8. Review the bad debt reserve calculation.

9. Obtain an itemized list of all assets that are not receivables or fixed assets.

10. Obtain any maintenance agreements on company equipment.

11. Is there an upcoming need to replace assets?

12. Discuss whether there are any plans to close, relocate, or expand any facilities.

13. Itemize all capitalized R&D or software development expenses.

1. Verify wage and tax remittances to all government entities and that there are no unpaid amounts.

2. Obtain a list of all accounts payable to employees.

3. Review the sufficiency of accruals for wages, vacation time, legal expenses, insurance, property taxes, and commissions.

4. Review the terms of any lines of credit.

5. Review the amount and terms of any other debt agreements.

6. Review the current accounts payable listing.

7. Obtain copies of all unexpired purchasing commitments (purchase orders, etc.).

1. Obtain audited financial statements for the last three years.

2. Obtain monthly financial statements for the current year.

3. What are the revenues and profits per employee?

4. What is direct labor expense as a percentage of revenue?

5. Obtain copies of federal tax returns for the last three years.

6. Verify the most recent bank reconciliation.

7. Determine profitability by product, by customer, and by segment.

8. Obtain a copy of the business plan and budget.

1. Does the company use the Internet for internal use as an interactive part of operations? What functions are used in this manner?

2. Has the company's firewall ever been penetrated, and how sensitive is the information stored on the company network's publicly available segments?

3. Does the company provide technical support information through its Web site?

4. Are Web site usage statistics tracked? If so, how are they used for management decisions?

5. In what way could operational costs decrease if the company's customers interacted with it through the Internet?

1. Who are the key development personnel involved with the creation, coding, and evaluation of software products? What is their tenure and educational background?

2. How much money is invested annually in development? As a proportion of sales?

3. What is the strategic plan for the development of new products? What is the timeline for their introduction? To what markets are they targeted?

4. How many patches were required to make the last major software release stable and commercially viable?

5. What was the average time required to resolve customer software problems?

6. How many customer accounts have been lost due to a software upgrade? What reasons did they give for dropping maintenance?

7. What operating system platforms are the target for the company's software products? Is there a plan to port any company products to other platforms? For what proportion of existing products has this been done?

8. Does the company use structured programming techniques that allow for easy software updating, maintenance, and enhancement?

9. What development languages and tools do the development staff use now? Are there plans to change to other languages and tools?

10. What are the attributes that make the company's products unique?

11. What is the company's strategy in designing new products (e.g., quality, support, special features)?

1. What types of advertising and promotion are used?

2. Does the company have a Web site? Who owns the site, and how is it hosted?

3. Does the company use e-mail for marketing notifications to customers?

4. What are the proportions of sales by distribution channel?

5. How many customers can the company potentially market its products to? What would be the volume by customer?

6. What is the company's market share? What is the trend?

7. Are there new markets in which the products can be sold?

1. What is the sales strategy (e.g., add customers, increase support, increase penetration into existing customer base, pricing, etc.)?

2. What is the structure of the sales organization? Are there independent sales representatives?

3. Obtain the sales organization chart.

4. How many sales personnel are in each sales position?

5. What is the sales force's geographic coverage?

6. What is the sales force's compensation, split by base pay and commission?

7. What was the sales per salesperson for the past year?

8. What was the sales expense per salesperson for the past year?

9. What is the sales projection by product for the next 12 months?

10. Into what category do customers fall—end users, retailers, OEMs, wholesalers, and/or distributors?

11. Who are the top ten customers, based on sales volume?

12. What is the historical sales volume to all customers for the past three years?

13. How many customers are there for each product, industry, and geographic region?

14. What is the average order size?

15. Does the company have an Internet store? Does the site accept online payments and orders? What percentage of total sales come through this medium?

16. How many customers have current subscriptions or maintenance for the company's software? What is the dollar amount per customer? What is the growth rate in the number of customers?

17. What is the structure of the technical support group? How many people are in it, and what is their compensation?

18. Obtain a list of all customers who have stopped doing business with the company in the last three years.

1. Obtain a summary of all R&D projects currently underway, including their current status, estimated time and cost to complete, and estimated unit costs as compared to target costs.

2. Determine the need for key staff positions to complete current R&D projects.

3. Estimate the worst-case, average-case, and best-case scenarios for revenue streams resulting from current R&D projects.

4. Estimate the types of patents that may be filed as a result of current R&D projects, and determine how these patents could be used to enhance the company's competitive position and/or block the positions of competitors.

1. Verify if any special bonuses are to be paid to acquiree employees in the event of a merger or acquisition, and quantify the amount.

2. Determine if the acquiree has agreed to an extension of the IRS's statute of limitations for reviewing the acquiree's tax records, and adjust the review period for the following items to match the resulting longer period subject to IRS audit.

3. Verify that employees are properly categorized as contractors versus employees, as well as exempt versus nonexempt.

4. Verify compliance with filing dates for federal, state, and local payroll tax deposits.

5. Verify that all payroll tax returns have been filed by the required dates.

6. Verify that annual state unemployment rate notices have been incorporated into unemployment tax remittances.

7. Reconcile wages reported on quarterly Forms 941 to year-end Forms W-2 for both federal and state reporting.

8. Search for payroll tax liabilities recorded in the general ledger that have not been cleared by scheduled payment due dates.

9. Examine the number and size of payroll tax remittance penalties paid to determine if the remittance process has significant ongoing weaknesses.

10. Determine if the acquiree is being audited for various payroll taxes, and determine the size of the tax amounts under review.

11. Match the employee benefits listed in the employee handbook to benefits expenditures and related employee deductions actually being made.

1. Review the unemployment rate notices and reserve balances for every state in which the acquiree has employees.

2. Determine the matching contribution levels for pension plans.

3. Determine the pension plan eligibility criteria and vesting period.

1. Document banking relationships, available credit lines, and collateral.

2. Document all foreign exchange and interest rate hedging activities and identify areas of risk.

3. Document investment strategies and related policies.

4. Document transfer pricing policies and note government audits in this area.

5. Identify all funds invested in nonliquid assets, and determine their first possible liquidation dates and associated penalties for early liquidation.

6. Determine the extent and accuracy of cash forecasting systems.

1. What is the company's intent in forcing the acquired company to use its business practices?

2. What are the decision-making processes of the company?

3. What are the performance monitoring and bonus payment systems of the company?

4. How does the company resolve conflicts?

5. What types of formal and informal communication systems are used by the company?

6. What is the command structure of the company?

Complexity

1. Evaluate the number and variability of revenue sources.

2. Review the size and volatility of individual revenue transactions.

3. Review the volatility of the effective tax rate.

4. Investigate differences between tax and book income.

5. Review off-balance-sheet assets and liabilities.

Other

1. Discuss revenue recognition policies.

2. Construct a cash forecast through the end of the year.

3. Obtain a copy of the chart of accounts.

4. Determine risk management strategies and insurance coverage.

5. Is there a 401(k) plan? Any company contribution? Who manages it? Are contribution payments current?

6. Evaluate the company benefit plan to determine its cost, as well as the amount of employee participation.

7. Obtain a list of all significant accounting policies.