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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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If you can’t convince them,

confuse them.

—Harry S. Truman


Course Layout: M&A & Other Restructuring Activities

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

Business Alliances

Private Company


Regulatory Considerations

Search through Closing Activities

Accounting & Tax Considerations

Divestitures, Spin-Offs & Carve-Outs

Takeover Tactics and Defenses

M&A Integration

Financial Modeling Techniques

Financing Strategies

Bankruptcy & Liquidation



learning objectives
Learning Objectives
  • Primary Learning Objective: To provide students with a knowledge of the M&A deal structuring process
  • Secondary Learning Objectives: To enable students to understand
    • the primary components of the process,
    • payment considerations, and
    • legal considerations.
deal structuring process
Deal Structuring Process
  • Deal structuring involves identifying
    • The primary goals of the parties involved in the transaction;
    • Alternatives to achieve these goals; and
    • How to share risks.
  • The appropriate deal structure is that which
    • Satisfies as many of the primary objectives of the parties involved as necessary to reach agreement
    • Subject to an acceptable level of risk

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

parties involved?

major components of deal structuring process
Major Components of Deal Structuring Process
  • Acquisition vehicle
  • Post-closing organization
  • Form of payment
  • Form of acquisition
  • Legal form of selling entity
  • Accounting Considerations
  • Tax considerations
factors affecting alternative forms of legal entities
Factors Affecting Alternative Forms of Legal Entities
  • Control by owners
  • Management autonomy
  • Continuity of ownership
  • Duration or life of entity
  • Ease of transferring ownership
  • Limitation on ownership liability
  • Ease of raising capital
  • Tax Status

Question: Of these factors, which do you believe is often the most important? Explain your answer.

discussion questions
Discussion Questions
  • What is an acquisition vehicle? What are some of the reasons an acquirer may choose a particular form of acquisition vehicle?
  • What is a post-closing organization? What are some of the reasons an acquirer may choose a particular form of post-closing organization?
form of payment
Form of Payment
  • Cash (Simple but creates immediate seller tax liability)
  • Non-cash forms of payment
    • Common equity (Possible EPS dilution but defers tax liability)
    • Preferred equity (Lower shareholder risk in liquidation)
    • Convertible preferred stock (Incl. attributes of common & pref.)
    • Debt (secured and unsecured) (Lower risk in liquidation)
    • Real property (May be tax advantaged through 1031 exchange)
    • Some combination (Meets needs of multiple constituencies)
  • Closing the gap on price and risk mitigation
    • Balance sheet adjustments (Ignores off-balance sheet value)
    • Earn-outs or contingent payments (May shift risk to seller)
    • Rights, royalties, and fees (May create competitor & seller tax liability)
    • Collar arrangements (Often used when acquirer’s share price has a history of volatility)
collar arrangements based on a floating share exchange ratio ser to protect target shareholders 1 2
Collar Arrangements Based on a Floating Share Exchange Ratio (SER) to Protect Target Shareholders1,2

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.

case study alternative collar arrangements based on fixed value and fixed share exchange ratios
Case Study: Alternative Collar Arrangements Based on Fixed Value and Fixed Share Exchange Ratios

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.

multiple price collars around acquirer flextronics share price to introduce some predictability
Multiple Price Collars Around Acquirer Flextronics Share Price to Introduce Some Predictability

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.

flextronics idw share exchange using fixed value ser floats and fixed share exchange agreements
Flextronics-IDW Share Exchange Using Fixed Value (SER Floats) and Fixed Share Exchange Agreements
form of acquisition means of transferring ownership governed by state statutes
Form of Acquisition (Means of Transferring Ownership): Governed by State Statutes
  • Statutory one-stage (compulsory) merger or consolidation:
    • Stock swap statutory merger by majority vote of both firms’ shareholders
    • Cash out statutory merger (form of payment something other than common stock)
  • Asset acquisitions (buying target assets)
    • Stock for assets
    • Cash for assets
  • Stock acquisitions (buying target stock via tender offer)
    • Stock for stock
    • Cash for stock
  • Special applications of basic structures
    • 2-stage stock acquisitions (Obtain control & implement backend merger)
    • Triangular acquisitions
    • Leveraged buyouts
    • Single firm recapitalizations

Key Point: Each form represents an alternative means of transferring


statutory one stage mergers and consolidations
Statutory One-Stage Mergers and Consolidations
  • Stock swap statutory merger: Two legally separate and roughly comparable in size firms merge with only one surviving. Shareholders of target (selling) firm receive voting shares in the surviving firm in exchange for their shares.
  • Cash-out statutory merger: Selling firm shareholders receive cash, non-voting preferred or common shares, or debt issued by the purchasing company.
  • Procedure for statutory mergers: Assume Firm B is merged into Firm A with Firm A surviving:
    • Firm A absorbs Firm B’s assets and liabilities as a “matter of law.”
    • Boards of directors of both firms must approve merger agreement
    • Shareholders of both firms must then approve the merger agreement, usually by a majority of outstanding shares. Dissenting shareholders must sell their shares.
  • Voting rule exceptions: Parent firm shareholder votes not required when
    • Acquiring firm shareholders cannot vote unless their ownership in the acquiring firm is diluted by more than one-sixth or 16.67%, i.e., Firm A shareholders must own at least 83.33% of the firm’s voting shares following closing. (Small scale merger exception)1
    • Parent firm holds over 90% of a subsidiary’s stock. (Parent-sub merger exception; also called a short-form merger)
    • Certain holding company structures are created (Holding company exception) .
  • Advantages/disadvantages: All target assets and liabilities (known/unknown) transfer to acquirer as a “matter of law,” flexible payment terms, and no minority shareholders or transfer taxes but responsible for all liabilities and subject to shareholder approval.

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.

asset aquisitions 1
Asset Aquisitions1
  • Cash for assets acquisition: Acquiring firm pays cash for target firm’s assets, accepting some, all, or none of target’s liabilities.
    • If substantially all of its assets are acquired, target firm dissolves after paying off any liabilities not assumed by acquirer and distributing any remaining assets and cash to its shareholders2
    • Shareholders do not vote but are “cashed out”
  • Stock for assets acquisition: Acquirer issues shares for target’s assets, accepting some, all, or none of target’s liabilities.
    • If acquirer buys all of target’s assets and assumes all of its liabilities, the acquisition is equivalent to a merger.
    • Listing requirements on major stock exchanges require acquiring firm shareholders to approve such acquisitions if the issuance of new shares is more than 20% of the firm’s outstanding shares
    • Target’s shareholders must approve the transaction if substantially all of its assets are to be sold
  • Advantages/disadvantages: Allows acquirer to select only certain target assets and liabilities; asset write-up & no minority shareholders but lose tax attributes and assets not specified in contract and incur transfer taxes

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.

stock acquisitions
Stock Acquisitions
  • Cash for stock acquisitions: Acquirer buys target’s stock with cash directly from target’s shareholders and operates target as a wholly- or partially-owned (if < 100% of target shares acquired) subsidiary
  • Stock for stock acquisitions: Acquirer buys target’s stock directly from target’s shareholders, generally operating target in a parent/subsidiary structure
  • Advantages/disadvantages: Eliminates need for target shareholder vote (buying from target shareholders); tax attributes, licenses, and contracts transfer to acquirer; and may insulate parent from subsidiary creditors but responsible for all liabilities and have minority shareholders
special applications of basic structures
Special Applications of Basic Structures
  • Two stage stock transactions:
    • First stage: Acquirer buys target stock via a tender offer to gain controlling interest and owns target as a partially owned subsidiary
    • Second stage (backend merger): Acquirer merges a partially owned subsidiary into a wholly owned subsidiary giving minority shareholders cash or debt for their cancelled shares. Also known as a freeze out or squeeze out.
    • Advantages/disadvantages: Very popular as acquirers gain control more rapidly than if they attempted a one-step statutory merger which requires boards and shareholders to approve merger agreement but may require substantial premium to gain initial control.
  • Triangular acquisitions: Acquirer creates wholly owned sub which merges with target, with either the target or the sub surviving
    • Advantages: Avoids acquirer shareholder vote as parent sole owner of sub and limits parent exposure to target liabilities; however, acquirer shareholder vote may be required in some states if new stock issued dilutes current shareholders by more than one-sixth
special applications of basic structures cont d
Special Applications of Basic Structures Cont’d
  • Leveraged buyout (LBO): LBO sponsor (a limited partnership) creates shell corporation funded with sponsor equity.
    • Stage 1: Shell corporation raises cash by borrowing from banks and selling debt to institutional investors
    • Stage 2: Shell buys 50.1% of target stock, squeezing out minority shareholders with a back end merger in which remaining shareholders receive debt or preferred stock.
  • Single firm recapitalization: Enables firm to squeeze out minority shareholders.
    • Firm with minority shareholders creates a wholly-owned shell and merges itself into the shell through a statutory merger.
    • All stock in the original firm is cancelled with the majority shareholders in the original firm receiving stock in the surviving firm and minority shareholders receiving cash or debt.
discussion questions1
Discussion Questions
  • What is the difference between the form of payment and form of acquisition?
  • What factors influence the determination of form of payment?
  • What factors influence the form of acquisition?
determining purchase price and control premium the nbc universal nbcu case
Determining Purchase Price and Control Premium: The NBC Universal (NBCU) Case
  • Comcast and General Electric (GE) announced on 12/2/09 that they had agreed to form a JV that will be 51% owned by Comcast, with the remainder owned by GE.
  • GE was to contribute NBC Universal (NBCU) valued at $30 billion and Comcast was to contribute TV networks valued at $7.25 billion.
  • Comcast also was to pay GE $6.5 billion in cash. In addition, NBCU was to borrow $9.1 billion and distribute the cash to GE.
nbc universal nbcu jv valuation purchase price determination and resulting control premium
NBC Universal (NBCU) JV Valuation, Purchase Price Determination, and Resulting Control Premium

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.

discussion questions2
Discussion Questions
  • Suppose two firms, each of which was generating operating losses, wanted to create a joint venture. The potential partners believed that significant operating synergies could be created by combining the two businesses resulting in a marked improvement in operating performance. How should the ownership distribution of the JV be determined?
  • Discuss the advantages and disadvantages of your answer to question one.
  • Should the majority owner always be the one managing the daily operations of the business? Why? Why not?
things to remember
Things to Remember…
  • Deal structuring addresses identifying and satisfying as many of the primary objectives of the parties involved and determining how risk will be shared.
  • Deal structuring consists of determining the acquisition vehicle, post-closing organization, the form of payment, the form of acquisition, legal form of selling entity, and accounting and tax considerations.
  • Choices made in one area of the “deal” are likely to impact other aspects of the transaction.