Mergers & Acquisitions
Cleveland
Spring 2018
General Overview
M&A Timeline
CEO-to-CEO Discussion
BOD Authorizes: Attorneys & Bankers Retained
Have to retain and consult experts to fulfill duties
Bankers & Valuation Issues; Acts & Impact on financial statements
Confidentiality Agreement: LOI; No Shop?
LOI: Some clients want, make sure on the same page before start all the investigating, some think dumb idea
No Shop: Don’t want Target playing field while you’re serious
Due Diligence: Public v. Private; Cash v. Securities
Exxon info public, Koch not, different investigations, different protections need be provided
Different protections/investigations if acquirer is paying cash or stock, Cash=Acquirer Investigate, Stock=Both
Draft Agreement: Public v. Private; Cash v. Securities
Misrepresentation in Agreement: if private can sue few sellers with deep pockets; if public can’t sue many sellers (SHHs) with small pockets
BOD Meeting & Approval
BOD approves, makes contract subject to SHH approval
SHH Proxy Statement; SHH Meeting; SHH Approval
SHH must approve contract that BOD creates with approval
Consents by Government and 3rd Parties
Government Approval, if implicates government, anti-trust, etc.
3rd Party Approval, if 3rd party intellectual property licenses, don’t want to acquire without IP licenses
SHH Suits for Injunctive Relief
Follow all steps, get BOD and Majority SHH approval, but some SHH think price should be higher, SHH suits to stop the deal, if deal goes thru courts unlikely to enjoin, now suits just about money
Closing
Deal closes when target gets consideration (cash, stock)
Appraisal Proceedings?
States used to have unanimity of approval, as corporations got bigger states got rid of these laws, appraisal proceedings are now a way a right to veto a merger, merger still goes thru, but you cash out and walk away, only appraisal proceedings if deal goes thru, complicated, many exceptions
Valuation
Buyer willing to buy for $100 but wants to buy for less, Seller willing to sell for $50 but wants to sell for more
How to divide the surplus?
Would be equal if there was equal bargaining power, but this is not the case
How to value a Private Target? Public Target?
Private:
Public: NYSE price isn’t the per share price to buy controlling share of corporation, must pay more (Control Premium)
Valuation based on Negotiations
Financial Statements (F/S)
All valuations traced back to the F/S
Comparables
Other acquisitions in this industry recently have paid market price + 25% so that is what we will pay
Cash as Consideration v. Securities of Bidder
Cash is cash, but if paying with securities there are concerns: am I getting the stock at a high or low price
Exchange Ratio
Negotiate to determine a ratio (3 Target Shares for 1 Acquirer Share)
Floating Exchange Ratio, can allow the exchange ratio to float within certain parameters based on stock price
Collar
Certain parameters by how much the stock price can float, only can float so much than fixed for some period
Walkaways
Certain parameters for how far the stock price can float before target has right to walk away and kill the deal
CVRs (contingent valuation rights)
I will give you something contingent on you accurately predicting the future
You say you have wonderful new product but it is untested, I will give you something of value contingent on this product actually being of value, if turns out bad don’t get the thing of value, work out get thing of value
M&A waves
Talking about spinning off things that are NOT part of what you are good at, acquiring things that you are good at.
Winner’s curse
You won the target BUT you paid too much
Buyer’s remorse
The Role of Financial Advisors:
Financial advisors assist Bidder in its decision as to how much to pay to acquire Target, which necessarily requires Bidder to value Target’s business.
Target will have it own financial advisors to help it determine whether Bidder is offering a fair price to acquire Target’s business.
As part of negotiations, Bidder may require that Target share information about Target’s business and financial affairs so that Bidder can determine how much it should pay to acquire Target.
Use of Confidentiality Agreements:
This exchange of information between Bidder and Target may require the parties to share with each other highly sensitive, confidential and propriety information about their business.
Because each party wants to maintain its confidentiality, this concern leads to use of confidentiality agreement to protect misuse of business and finial information.
Early in the deal, the parties usually enter into a confidentiality agreement (also referred to as a non-disclosure agreement or NDA) to assure each other that confidential information shared during the acquisition process will be protected and not used for any purpose other than evaluating the proposed transaction.
Who are the deal players?
In mega-deals (i.e. AT&T acquisition of DirecTV), each side will generally have its own Wall Street Investment banker such as Goldman Sachs, Morgan Stanley. For smaller deal, smaller investment bankers involved.
Delayed Closing:
The actual transfer of the business typically will not occur until some later date as specified in the parties’ acquisition agreement. (I.e. the closing date)
In an M&A transaction, the acquisition agreement will typically specify responsibilities that the parties to the transaction must complete before closing on the acquisition.
Use of Non-Cash Consideration to Finance the Purchase Price:
When Bidder issues its stock in exchange for Target’s business, Target corp. will end up owning Bidder co. Stock
In this non-cash consideration, Target’s shareholders must decide how much they value the Bidder and in order to help the Target make this decision will require the Bidder to provide to Target’s shareholders information about Bidder’s business and it’s plans for the Target’s future after acquiring it.
The Due Diligence Process:
Is the process of information gathering and analysis which is undertaken by each party to the business acquisition
The focus is on gathering all relevant information to evaluate the other company’s business and financial affairs.
From the Bidder’s perspective:
The goal of its due diligence investigation of Target is to gain all the information it needs (good and bad) to make sure that it does not overpay.
From Target’s perspective
The scope of due diligence depends on the nature of acquisition consideration offered by Bidder.
In an all-cash deal- Target’s primary concern how adequate the price offered is
In acquiring Target in exchange for Bidder’s stock, Target shareholders need information about Bidder’s plans to integrate Target’s assets into Bidder
rget uses the proceeds from selling its assets to satisfy the claims of Target Co’s creditors and gives the remaining to its shareholders.
Board and shareholder approval of Bidder?
For Bidder, usually there is no voting requirement from the board or shareholders of the Bidder based on the ground that this transaction does not involve a fundamental change for the Bidder.
Board and shareholder approval of Target?
It is required that the Target Co.’s board must approve the transaction. THEN Target’s board must obtain Target’s shareholders approval. However, Target shareholder’s approval is only required if the sale of all of the company’s assets constitutes a fundamental change for Target Co.
Appraisal rights?
No appraisal rights given to Bidder and Target’s shareholders in sale of assets
Right of appraisal is limited to merger transactions only
(III): Stock Purchase for Cash (page 49)
Where Bidder acquire control over Target by approaching Target shareholders individually and offering to buy Target shares directly from individuals shareholders
Unlike direct mergers and sale of assets, this transaction does not involve Target.
Thus, the stock purchase agreement is directly between Bidder and the Individual shareholders of Target.
Target’s board?
Target’s board is not required to approve the transaction since Target itself is not a party to the transaction.
Target’s Shareholder?
No vote required of Target’s shareholders either
As a general rule, to make this type of acquisition happen, Bidder usually require that enough Target shareholders accept (by tendering their shares to Bidder) in order to give Bidder control over Target.
Even if the Bidder can’t get 100 percent of Target’s outstanding voting shares, the Bidder still tries to acquire effective control over Target even if the Target management opposes it.
In the case of a stock purchase, Target remains intact as does Bidder.
By purchasing all of (or at least a controlling interest in) Target stock, this types acquisition transaction will leave Target’s business in place to be operated as a wholly owned (or at least a controlled) subsidiary of Bidder.
Thus, this method of acquisition called change of control transaction because there has been a change in ownership of all of or at least a controlling interest in Target’s stock.
Since Target remains in place, all of Target’s assets remain available to satisfy the claims of Target’s creditors unlike the rule of successor liability of merger.
There are no appraisal rights available to the shareholder of either Bidder or Target in a stock purchase.
Generally,, in this stock purchase acquisition, there are No requirements for a shareholder vote and therefore no appriasal rights.
