General Background:

• You are the Chief Mergers and Acquisitions Strategy Officer of Global Conglomerate, Inc. ("Global Conglomerate")
• You have been asked to develop an 8-10 minute presentation for the company's Board of Directors regardingtwomajor acquisitions that the company would like to make during the next six months.
  • Because of the board members' business schedules and geographical dispersion, the board often meets virtually.
  • You have been asked to make a video recording of your presentation.

Understandingthe Bargaining Context:

• Your overall bargaining strategy will depend on the goals, preferences, and general characteristics of the parties involved:
  • The Buyer - Global Conglomerate
  • The Seller(s) - the venture capitalists who own a controlling share of the start-up companies being sold
  • The Four Start-Up Companies - what the Buyer and Seller(s) are bargaining over

I. The Buyer - Global Conglomerate

• Global Conglomerate is a manufacturer of "smart" consumer products - i.e., any products with built-in internet-of-things and artificial intelligence ("AI) capabilities.
• Global Conglomerate is interested in expanding into the artificial intelligence large language models space - i.e., generative AI.
  • It is considering acquiring2start-up companies:
    • One in the embedded chatbot space
    • The other in the supply-chain management chatbot space
  • For more information about the background technology, seeMcKinsey & Company,What is Generative AI?(January 2023).

Actions

• Global Conglomerate has narrowed down its search to4potential companies that it may be interested in acquiring.
  • These four companies are controlled by2venture capitalists.

Section II. The Sellers - The Two Venture Capitalists

• Venture capitalists raise funds from institutional investors and wealthy individuals which they in turn invest in start-up companies.
  • Important Note:
    • Under their contracts with these investors, venture capitalists will havebetween 7-8 yearsto invest the funds and convert the start-up companies into businesses that can be sold through an initial public offering ("IPO") or through a private sale to a third party.
    • Venture capitalists will generally liquidate profitable companies that cannot be sold at asufficiently high premiumin an IPO or private sale. These viable, but not sufficiently valuable companies are referred to in the industry as "the living dead" or "zombie companies."
      • For more information on the "living dead" and the fiduciary duties that venture capitalists owe to founders and common stockholders, see,In re Trados Inc. Shareholder Litigation, Del. Ch., 73 A.3d 17 (2013) - read pp. 48-54.

Actions

• When venture capitalists invest in start-up companies, they gain control over the board of directors. Venture capitalists will thus have the ultimate say on how the start-up is manage and over all key corporate decisions, including to:
  • Sell the start-up to the public via an IPO
  • Sell the start-up to a third party via a private sale
  • Fire the company's founder(s) and replace them with professional managers
  • Liquidate the start-up
• Global Conglomerate will be bargaining with one or both of the following venture capitalists:
  • Venture Capitalist 1: WWU Ventures Capital LP (" WWU-VC")
    • The venture capital limited partnership is in its third year out of seven--i.e., WWU-VC has four more years to convert its portfolio companies into companies that can be taken public via an IPO or sold to a third party in a private transaction.
  • Venture Capitalist 2: VCVC LP ("VCVC")
    • The venture capital limited partnership is in its seventh year.
    • VCVC will thus be forced to sell or liquidate its portfolio companies in the next 11 months and payout any proceeds to the limited partners (and themselves).

Section III. The Four Start-Up Companies

• The Two Embedded AI Start-ups - First Bargaining Context - Global Conglomerate will attempt to purchaseoneof the following two companies:
  • Company 1: Embedded ChatBot, Inc.
    • Has received one round of financing from WWU-VC.
    • The company is about to emerge from the early, seed stage.
    • The product is still in the early, proof-of-concept stage.
    • The company's future rests on the shoulders of the small group of founding AI researchers. It is these researchers that are the company's greatest asset at the moment.
    • One possible acquisition strategy here is for Global Conglomerate to purchase the company just to bring that group of AI researchers on board. This type of acquisition is sometimes referred to as aqui-hiring.
  • Company 2: Micro-ChatBot, Inc.
    • Has received five rounds of financing from VCVC.
    • Company has three products in the market.
      • One of them is already profitable, but the other two have not yet developed a clientele.
    • The company has a $500 million revolving credit agreement with Silicon Mountain Bank, and currently owes $400 million under the loan agreement. As part of the loan agreement the company must maintain $100 million at all time in a deposit account with Silicon Mountain Bank.
• The Supply-Chain Management AI Companies- Second Bargaining Context - Global Conglomerate will attempt to purchaseoneof the following two companies:
  • Company 3: Supply-Chain AI, Inc.
    • The company is just beginning to market its first product.
    • It has received two rounds of VC funding from WWU-VC.
    • The company is expected to start producing profits in two years, at the earliest.
    • WWU-VC has recently brought in a professional CEO to replace the founder, who is now the Chief Technology Officer.
    • The company has one patent and two trademarks. It also has two patents pending.
    • The company's intellectual property portfolio is valued at between $20 million and $80 million.
      • This variability is primarily due to the two patents pending, one of which is being challenged in litigation by SuperTech, Inc. a Fortune 500 company.
  • Company 4: Supply-Chain and Vendors Chat, Inc.
    • The company's main product has been in the market for the last three years.
    • VCVC is the sole venture capitalist.
    • VCVC owns 70% of the voting shares. The other 30% is owned by the company's founder and 10 other key employees.
    • After ChatGPT went viral and the generative AI space became more volatile, the company postponed a planned IPO.
    • The company is currently working on updating its product to make it more competitive with ChatGPT and similar products.

Section IV. Pre-Acquisition Due-Diligence Best Practices - Relevant for Your Bargaining Strategy Analysis

• Change of Control Provisions in loans, other debt, and certain key contracts
  • If Global Conglomerate purchases a company subject to such provisions, it will be required to immediate payoff any outstanding debt and assume obligations under certain key contracts.
• Existing liens, mortgages, and security interests on a start-up company's real estate, equipment, inventory, intellectual property, etc.
• Ongoing material litigation and potential litigation, other potential legal exposure in tort, contracts, intellectual property, etc.
• Ongoing regulatory actions or potential regulatory actions - including existing or potential statutes and regulations affecting the products sold by the target companies.

ASSIGNMENT

Global Conglomerate's Board of Director has asked you to develop a bargaining strategy for the two potential acquisitions. Your bargaining strategy should address questions, such as the following:

• What two start-up companies should Global Conglomerate try to acquire?
• Should Global Conglomerate try to purchase both at the same time, or sequentially?
• Should Global Conglomerate acquire two companies from one venture capitalist, or should it buy one company from each venture capitalist?
• You should take into account and address potential sources of bargaining power, including:
  • Impatience or time discounting
  • Outside options
  • Private information - i.e., informational asymmetries, including information about the "quality" of the companies being sold, of the company's products and innovation pipeline, and the company's intangible assets, such as intellectual property and the human capital of its employees
  • Pre-bargaining commitments
  • Credibility and trust
• You should also take into account any other factors that you believe that the Board of Directors should know before it follows through on attempting to acquire the two start-up companies.

Mechanics

• This first Part of the presentation assignment, you will make and submit
  • An outline on your negotiation topic and
  • A draft of your PowerPoint (PPT) presentation