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Around PS700,000 of cash is payable immediately, and PS400,000 will be deferred in four equal six monthly instalments starting six months from completion of the acquisition, 461,538 ordinary shares in Northern Bear which are valued at approximately PS400,000 and a maximum of PS1.4m of contingent cash payable under various earnout agreements.
One class structure that has worked is for the first 50- or 75-minute class (or first half of a 180-minute class) to be devoted to a combination of in-class discussion of cross-cultural elements of negotiations and/or valuations and/or earnout agreements. Part of that first class could also be devoted to students working in teams to develop what they believe are the best approaches for Katsumi and Javier to take in the negotiation.
The primary subject matter of this case concerns the cross-cultural negotiation of an earnout agreement between Denshi Global Holdings, a publicly-traded Japanese company, and Informatica de Sistemas, S.A,.(IDS) a private Spanish company that Denshi is seeking to acquire.
To resolve this issue, Katsumi has proposed an "earnout agreement" with payment by Denshi to Javier of all or a portion of the "valuation gap" based on IDS performance in the future.
During the second 50- or 75-minute class (or second half of a 180-minute class), the professor can conduct an in-class discussion of the negotiating strategy students think would be best for Katsumi and Javier, the important issues to be negotiated, the relative values each should place on those issues, the concessions they think might be appropriate, and the goals they are attempting to achieve in the final earnout agreement.
The concepts of a "valuation gap" and earnout agreement used to bridge that gap are simple concepts to understand and are used often in acquisition negotiations.
However, in addition to the earnout agreement readings cited above, several supplementary articles on negotiating that could be assigned are by Sebenius (2001), Sussman (1999), and Cullinan, Le Roux, & Weddigen (2004) as well as books by Shell (2006), Thompson (2004), and Ury, W., Fisher, R.
If an earnout agreement is necessary, Denshi normally has an earnout structure in which a performance milestone must be met in full for an earnout payment to be received.
The possible performance milestones associated with an earnout agreement are Revenue, Gross Profit, and Net Profit.
Conversely, if the earnout agreement had payments denominated in yen, then a stronger or weaker yen against the euro during the earnout period would have no financial impact on Denshi.
The objective of the upcoming final stage of the Denshi/IDS negotiation between Javier Portilla and Katsumi Shimura is to explore the possibility of overcoming the "valuation gap" impasse through an earnout agreement and to agree on the term of Javier's employment agreement with Denshi.