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M&A Deal Structuring Process: Payment & Legal Considerations. If you can’t convince them, confuse them. —Harry S. Truman. Course Layout: M&A & Other Restructuring Activities.
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—Harry S. Truman
Part I: M&A Environment
Part II: M&A Process
Part III: M&A Valuation & Modeling
Part IV: Deal Structuring & Financing
Part V: Alternative Bus. Strategies
Motivations for M&A
Business & Acquisition Plans
Public Company Valuation
Payment & Legal Considerations
Search through Closing Activities
Accounting & Tax Considerations
Divestitures, Spin-Offs & Carve-Outs
Takeover Tactics and Defenses
Financial Modeling Techniques
Bankruptcy & Liquidation
Questions: 1. What are common high priority needs of public company
shareholders? Private/family owned firm shareholders?
2. How would you determine the highest priority needs of the
Question: Of these factors, which do you believe is often the most important? Explain your answer.
Objective: To guarantee an offer price per share (OPPS) within a range for target firm shareholders.
Offer Price Per Share = Share Exchange Ratio (SER) x Acquirer’s Share Price (ASP)
= Offer Price Per Target Share x Acquirer’s Share Price
Acquirer’s Share Price
Collar Arrangement: Defines the maximum and minimum price range within which the OPPS varies.
SER x ASP (lower limit) ≤ Offer Price Per Share ≤ SER x ASP (upper limit)
Example: A target agrees to a $50 purchase price based on a share exchange ratio of 1.25 acquirer shares for each target share. The value of the each acquirer share at the time of the agreement is $40 per share. The target shareholder is guaranteed to receive $50 per share as long as the acquirer’s share price stays within a range of $35 to $45 per share. The share exchange ratio floats within the $35 to $45 range in order to maintain the $50 purchase price.
($50/$35) x $35 ≤ ($50/$40) x $40 ≤ ($50/$45) x $45
1.4286 x $35 ≤ 1.25 x $40 ≤ 1.1111 x $45
1For a floating share exchange ratio, the dollar offer price per share is fixed and the number of shares exchanged varies with the value of the acquirer’s share price. Acquirer share price changes require re-estimating the share exchange ratio. Floating exchange ratios are used most often when the acquirer’s share price is volatile. Fixed share exchange ratios are more common since they involve both firms’ share prices and allow both parties to share in the risk or benefit of fluctuating share prices.
2SER generally calculated based on the 10 to 20 trading day period ending 5 days prior to closing. The 5-day period prior to closing provides time to calculate the appropriate acquirer share price and incorporate into legal documents.
On 9/5/2009, Flextronics agreed to acquire IDW in a stock- for-stock merger with an aggregate value of approximately $300 million. The share exchange ratio used at closing was calculated using the Flextronics average daily closing share price for the 20 trading days ending on the fifth trading day immediately preceding the closing. Transaction terms identified the following three collars:
1. Fixed Value Agreement (SER floats): Offer price was calculated using an exchange ratio floating inside a 10% collar above and below a Flextronics share price of $11.73 and a fixed purchase price of $6.55 per share for each share of IDW common stock. The range in which the exchange ratio floats can be expressed as follows:a
[$6.55/$10.55] x $10.55 ≤ [$6.55/$11.73] x $11.73 ≤ [$6.55 /$12.90] x $12.90
.6209 x $10.55 ≤ .5584 x $11.73 ≤ .5078 x $12.90
.6209 shares of Flextronics stock issued for each IDW share (i.e., $6.55/$10.55) if Flextronics declines by up to 10%
.5078 shares of Flextronics stock issued for each IDW share (i.e., $6.55 /$12.90) if Flextronics increases by up to 10%
2. Fixed Share Exchange Agreement (SER fixed): Offer price calculated using a fixed exchange ratio inside a collar 11% and 15% above and below $11.73 resulting in a floating purchase price if the average Flextronics\' stock price increases or decreases between 11% and 15% from $11.73 per share. (See the next slide.)
3. The target, IDW, has the right to terminate the agreement if Flextronics\' share price falls more than 15% below $11.73. If Flextronics\' share price increases more than 15% above $11.73, the exchange ratio floats based on a fixed purchase price of $6.85 per share.b (See the next slide.)
aThe share exchange ratio varies within a range of plus or minus 10% of the Flextronics’ $11.73 share price.
bIDW is protected against a potential “free fall” in Flextronics share price, while the purchase price paid by Flextronics is capped at $6.85.
Price Increase Above Acquirer Share Price of $11.73
Fixed Share Exchange Agreement:
Allows Purchase Price to Change
Within a Range1
Fixed Value Agreement: Allows Floating Share Exchange Ratio to Hold Purchase Price Constant2
Price Decrease Below Acquirer Share Price of $11.73
1Fixed share exchange agreement represents range in which acquirer and target shareholders share risk of fluctuations in acquirer share price.
2Fixed value agreement represents range in which the target shareholders are protected from fluctuations in the acquirer’s share price.
Key Point: Each form represents an alternative means of transferring
1This effectively limits the acquirer to issuing no more than 20% of its total shares outstanding. For example, if the acquirer has 80 million shares outstanding and issues 16 million new shares (.2 x 80), its current shareholders are not diluted by more than one-sixth, since 16/(16 + 80) equals one-sixth or 16.67%. More than 16 million new shares would violate the small merger exception.
1In acquisitions, acquiring firms usually larger than target firms.
2Usually, acquirer purchases 80% or more of the fair market value of the target’s operating assets and may assume some or all of the target’s liabilities. In some cases, courts have ruled that acquirer is responsible for target liabilities as effectively liquidating or merging with the target.
1Equals the sum of NBCU ($30 billion) plus the fair market value of contributed Comcast properties ($7.25 billion) and assumes no incremental value due to synergy. These values were agreed to during negotiation.
2The $9.1 billion borrowed by NBCU and paid to GE will be carried on the consolidated books of Comcast, since it has the controlling interest in the JV. In theory, it reduces Comcast’s borrowing capacity by that amount and should be viewed as a portion of the purchase price. In practice, it may reduce borrowing capacity by less if lenders view the JV cash flow as sufficient to satisfy debt service requirements.
3The control premium represents the excess of the purchase price paid over the book value of the net acquired assets and is calculated as follows: [$22.85 / (.51 x $37.25] -1.
4The minority/liquidity discount represents the excess of the fair market value of the net acquired assets over the purchase price and is calculated as follows: [$14.40/(.49 x $37.25)] -1.