Anatomy of a Merger Between 2 Small IT Services Firms

Firm 1 Acquirer is a 20 year old IT services firm with annual revenue of approximately $3 million and 18 employees, including the 49 year old owner, serving small to medium size for profit and non profit organizations with desktop users of 3 50. There are approximately 200 active clients. The firms reputation is growing and it has been picking up impressive new clients regularly and it has been a desirable place for IT techs to seek employment.

Firm 2 Acquiree is a small 35 year old IT services firm with annual revenue of approximately $ 200,000 and 2 employees ( 73 year old owner and 1 employee). They serve about 8 10 active small clients and have another 25 or so very small and often inactive clients. The firm makes very little profit in excess of the compensation paid to the owner and employee. There are virtually no assets in the company other than the client list and a few PCs. There are limits to the scope of services offered by this small firm and has lost clients due to the firm lacking the horsepower and depth and breadth of staff to serve many clients.

The acquirer has been growing rapidly and has decided to complement organic growth with acquisitions.

Here are the deal terms for the merger. It was a cash-less transaction. That is, the acquirer did not pay any cash up front to seller at the time of the merger. The potential consideration to the seller from the acquirer is structured to be paid over 2 years, paid quarterly, based on the retainage of existing clients of the seller and the revenue generated from those clients over the first 2 years. If the client discontinues doing business with the acquirer, the consideration to the seller stops. In addition, the seller owner was granted a commission plan paying him commissions on any new business that he brings to the acquirer over the first 2 years. And, the acquirer agreed to hire the sellers employee tech at the same salary and benefits that he had under the seller.

QUESTIONS

1. What was the main reason(s) for the larger company to merge the smaller company into the larger company?

2. What was the main reason(s) for the smaller business to merge into the larger business?

3. What measurments will the larger acquirer most likely use to determine if the merger was successful short term and long term?

4. What measurements will the smaller acquired firm to most likely use to determine if the merger was successful short and long term?

5. What are the main risk(s) to the acquiring larger firm with regard to the merger being successful?

6. What are the main risk(s) to the smaller acquired firm with regard to it being successful?

7. What purchase deal term(s) was offered by the acquirer to mitigate risks to success?

8. What purchase deal term(s) was accepted by the acquired firm owner to mitigate risks to success?

9. What is your general overall opinion of this merger transaction........would you have done it as acquirer or acquiree?