Question

Negotiating the acquisition of Intellectual Property and Financial Liabilities, Human Capital, and Price and Consideration Issues. You have discovered KP&T is claiming some if the IP is proprietary when it is actually in the public domain. How will you resolve this open source issue? For financial liabilities, will you handle any liabilities or obligations not required to be set forth in a balance sheet? How will you negotiate the terms of the generally accepted accounting practices (GAAP)? How will you negotiate KP&Ts options and incentive arrangements for the employees being absorbed? How will you negotiate the severance packages for the employees that are let go? Will the takeover “price” be calculated on an “indebtedness free and cash free” basis at the closing (enterprise value)? Or will you assume or take subject to KP&T’s indebtedness and be entitled to the seller’s cash (equity value)? What are the advantages/disadvantages of each?

Answer 1

We have the following 3 item heads to consider

1. Intellectual Properties
2. Financial Liabilities
3. Human Capital

If the IP is already present in the public domain , the acquiring company has to check if it is there illegally . In case it is there illegally ,KP & T may still be able to get some value for it . However it would be lesser than the actual value because the acquiring company may well argue that it would not be able to get full benefit of the acquisition. It would also have to carry out lawsuits against anybody who has encroached on the IP . Legal costs would be involved and therefore the acquiring has to factor in this and value the IP accordingly .

Financial liabilities can be valued accurately without much debate and would have to be settled by the acquiring company

Human Capital is the trickiest part . If the acquiring company is ready to absorb all the employees it will solve a lot of problems But even in this scenario , some employees would always opt for a severance package . In this circumstance we would require to finalyze details of the severance packages with KP & T. The incentive structure that is there for the employees now would have to be reviewed.