MAKING m & a DEALS HAPPEN This page intentionally left blank MAKING M & A DEALS HAPPEN ROBERT STEFANOWSKI McGraw-Hill New York Chicago San Francisco Lisbon London Madrid Mexico City Milan New Delhi San Juan Seoul Singapore Sydney Toronto Copyright © 2007 by The McGraw-Hill Companies, Inc All rights reserved Manufactured in the United States of America Except as permitted under the United States Copyright Act of 1976, no part of this publication may be reproduced or distributed in any form or by any means, or stored in a database or retrieval system, without the prior written permission of the publisher 0-07-150881-3 The material in this eBook also appears in the print version of this title: 0-07-144740-7 All trademarks are trademarks of their respective owners Rather than put a trademark symbol after every occurrence of a trademarked name, we use names in an editorial fashion only, and to the benefit of the trademark owner, with no intention of infringement of the trademark Where such designations appear in this book, they have been printed with initial caps McGraw-Hill eBooks are available at special quantity discounts to use as premiums and sales promotions, or for use in corporate training programs For more information, please contact George Hoare, Special Sales, at george_hoare@mcgraw-hill.com or (212) 904-4069 TERMS OF USE This is a copyrighted work and The McGraw-Hill Companies, Inc (“McGraw-Hill”) and its licensors reserve all rights in and to the work Use of this work is subject to these terms Except as permitted under the Copyright Act of 1976 and the right to store and retrieve one copy of the work, you may not decompile, disassemble, reverse engineer, reproduce, modify, create derivative works based upon, transmit, distribute, disseminate, sell, publish or sublicense the work or any part of it without McGraw-Hill’s prior consent You may use the work for your own noncommercial and personal use; any other use of the work is strictly prohibited Your right to use the work may be terminated if you fail to comply with these terms THE WORK IS PROVIDED “AS IS.” McGRAW-HILL AND ITS LICENSORS MAKE NO GUARANTEES OR WARRANTIES AS TO THE ACCURACY, ADEQUACY OR COMPLETENESS OF OR RESULTS TO BE OBTAINED FROM USING THE WORK, INCLUDING ANY INFORMATION THAT CAN BE ACCESSED THROUGH THE WORK VIA HYPERLINK OR OTHERWISE, AND EXPRESSLY DISCLAIM ANY WARRANTY, EXPRESS OR IMPLIED, INCLUDING BUT NOT LIMITED TO IMPLIED WARRANTIES OF MERCHANTABILITY OR FITNESS FOR A PARTICULAR PURPOSE McGraw-Hill and its licensors not warrant or guarantee that the functions contained in the work will meet your requirements or that its operation will be uninterrupted or error free Neither McGraw-Hill nor its licensors shall be liable to you or anyone else for any inaccuracy, error or omission, regardless of cause, in the work or for any damages resulting therefrom McGrawHill has no responsibility for the content of any information accessed through the work Under no circumstances shall McGraw-Hill and/or its licensors be liable for any indirect, incidental, special, punitive, consequential or similar damages that result from the use of or inability to use the work, even if any of them has been advised of the possibility of such damages This limitation of liability shall apply to any claim or cause whatsoever whether such claim or cause arises in contract, tort or otherwise DOI: 10.1036/0071447407 Professional Want to learn more? We hope you enjoy this McGraw-Hill eBook! If you’d like more information about this book, its author, or related books and websites, please click here To my parents, Bob Sr and Eleanor, for realizing that a good education is one of the best gifts they could provide to their children, and to my sisters, Patty, Deb, and Sue for all of their support over the years Finally, to Amy, Lauren, Rachel, and Megan for the love, understanding, and fun they provide every day! This page intentionally left blank For more information about this title, click here CONTENTS Introduction ix CHAPTER The M&A Environment CHAPTER Sourcing the Deal CHAPTER The First Round 27 CHAPTER Due Diligence: The Internal Side 45 CHAPTER Due Diligence: The External Side 61 CHAPTER Financial Modeling and Final Valuation 75 CHAPTER Pulling It All Together 95 CHAPTER Final Bid Strategies/Structuring the Deal 107 CHAPTER Legal, Regulatory, and Other Issues 127 CHAPTER 10 The Importance of Integration 153 CHAPTER 11 Special Considerations for Sellers 173 CHAPTER 12 M&A Trends, Career Paths, and Other Topics 187 vii viii Contents APPENDIX A Ten Steps for Better Acquisitions 201 APPENDIX B Sample Due Diligence Information Requests 207 APPENDIX C Sample Asset Purchase Agreement 219 INDEX 273 Sample Asset Purchase Agreement 269 any objection that it may now or hereafter have to the laying of the venue of any such suit, action or proceeding in any such court or that they any such suit, action or proceeding that is brought in any such court has been brought in an inconvenient forum During the period a Legal Dispute that is filed in accordance with this Section 11.6 is pending before a court, all actions, suits or proceedings with respect to such Legal Dispute or any other Legal Dispute, including any counterclaim, cross-claim or interpleader, shall be subject to the exclusive jurisdiction of such court Each Party hereby waives, and shall not assert as a defense in any Legal Dispute, that (a) such Party is not subject thereto, (b) such action, suit or proceeding may not be brought or is not maintainable in such court, (c) such Party’s property is exempt or immune from execution, (d) such action, suit or proceeding is brought in an inconvenient forum or (e) the venue of such action, suit or proceeding is improper A final judgment in any action, suit or proceeding described in this Section 11.6 following the expiration of any period permitted for appeal and subject to any stay during appeal shall be conclusive and may be enforced in other jurisdictions by suit on the judgment or in any other manner provided by applicable Laws Section 11.7 Severability Any provision hereof that is prohibited or unenforceable in any jurisdiction shall, as to such jurisdiction, be ineffective to the extent of such prohibition or unenforceability without invalidating the remaining provisions hereof, and any such prohibition or unenforceability in any jurisdiction shall not invalidate or render unenforceable such provision in any other jurisdiction To the extent permitted by Law, each Party hereby waives any provision of law that renders any such provision prohibited or unenforceable in any respect Section 11.8 Counterparts This Agreement may be executed in two or more counterparts, each of which shall be deemed an original, and it shall not be necessary in making proof of this Agreement or the terms hereof to produce or account for more than one of such counterparts Section 11.9 Enforcement of Certain Rights Nothing expressed or implied herein is intended, or shall be construed, to confer upon or give any Person other than the Parties, and their successors or permitted assigns, any right, remedy, obligation or liability under or by reason of this Agreement, or result in such Person being deemed a third-party beneficiary hereof Section 11.10 Waiver Any agreement on the part of a Party to any extension or waiver of any provision hereof shall be valid only if set forth in an instrument in writing signed on behalf of such Party A waiver by a Party of the performance of any covenant, agreement, obligation, condition, representation or warranty shall not be construed as a waiver of any other covenant, agreement, obligation, condition, repre- 270 APPENDIX C sentation or warranty A waiver by any Party of the performance of any act shall not constitute a waiver of the performance of any other act or an identical act required to be performed at a later time Section 11.11 Integration This Agreement and the documents executed pursuant hereto supersede all negotiations, agreements and understandings among the Parties with respect to the subject matter hereof (except for that certain Confidentiality Agreement, dated as of [DATE], by and between the Purchaser and the Company) and constitute the entire agreement among the Parties with respect thereto Section 11.12 Compliance with Bulk Sales Laws Each Party hereby waives compliance by the Parties with the “bulk sales,”“bulk transfers” or similar Laws and all other similar Laws in all applicable jurisdictions in respect of the transactions contemplated by this Agreement Section 11.13 Cooperation Following the Closing Following the Closing, each Party shall deliver to the other Parties such further information and documents and shall execute and deliver to the other Parties such further instruments and agreements as any other Party shall reasonably request to consummate or confirm the transactions provided for herein, to accomplish the purpose hereof or to assure to any other Party the benefits hereof Section 11.14 Transaction Costs Except as provided above or as otherwise expressly provided herein, (a) the Purchaser shall pay its own fees, costs and expenses incurred in connection herewith and the transactions contemplated hereby, including the fees, costs and expenses of its financial advisors, accountants and counsel, and (b) the Company and the Shareholder shall pay the fees, costs and expenses of the Company and the Shareholder incurred in connection herewith and the transactions contemplated hereby, including the fees, costs and expenses of their financial advisors, accountants and counsel [Note: Add any other applicable miscellaneous provisions.] Sample Asset Purchase Agreement 271 IN WITNESS WHEREOF, the Parties have caused this Agreement to be duly executed, as of the date first above written [PURCHASER] By: _ Name: Title: [COMPANY] By: _ Name: Title: [SHAREHOLDER] By: _ Name: Title: This page intentionally left blank Index Boldface numbers indicate illustrations; t indicates a table 338H10 tax elections, stock purchases and, 119–120 Access to Information clause, 130–131 Accountability, integration process and, 167 Accounting issues, 145–149, 155, 191 economic profit vs., 148–149 fair market valuation and, 147 FAS 141 and 142 in, 145–147, 155 goodwill as asset and, 145, 155 integration process and, 155 Acquisition defined, x–xi Acquisition purchase price estimation, discounted cash flow (DCF) method and, 82–83 Acquisition vehicles See Structuring the deal Advisors, x Aetna, “All-hands” status reviews, integration process and, 167–168 Allocation of purchase price, in asset purchases, 137 Antitrust concerns, 145, 175–176 AOL, 78, 156–157, 158 Assessing chance of winning, 22–23 Asset-oriented financial modeling, 87–88 liquidation value in, 88 pros and cons of, 88 tangible book value in, 87 total asset value in, 87 Asset purchases, 115–117, 117, 184 allocation of purchase price in, 137 contracts for, 129–137 current market value determination in, 117 FAS 141 and 142 in, 145–147, 155 goodwill as asset in, 145–147, 155 legal issues pertaining to, 128–137 step-up in basis and, 117 third-party consents in, 137 AT&T, divestiture and antitrust, 175–176 Auctions, competitive, 13–14 Audits, postclosing, 204 Availability of information, due diligence and, 50 BancOne, 3t, 19 BankAmerica, Bank of America, 156 Banking sector M&As, 3, Barbarians at the Gate, x, 187 Barnett, 3t “Baskets,” 138–139 Best practices in integration, 166–169 Bidding, 37–38 bid price calculation for, 75–76 due diligence requirements and, 38 employee protection clauses and, 122–123 factors influencing success of, 38 final bid letters in, 97–100, 101–103 final bid strategies and structuring the deal, 107–126 financing details and, 38 first-round bid submission in, 41–42 first round negotiations and, 37–41 material adverse change (MAC) clauses, 100, 142–143, 205–206 preliminary bids in, 37–41 purchase price “claw back” provisions and, 113 earnouts and, 111–113, 112 exchange ratio and, 108 gap in, closing, 108–109 premium percentages paid and, 110–111 price-asset method to determine, 109–111, 110 price-stock method to determine, 108–109 royalties, consulting agreements, employment agreements and, 114 timing constraints and, 114–115 speed of, 38 strategies for, 37–38 Blackstone, 188 Bluffing, in negotiation, 193–194 Board of directors presentation, 98–99 Boatman’s Bank, 3t, Brand value, integration process and, 160–161 Brooktrout Technology, 105–106 Burger King, 188 273 Copyright © 2007 by The McGraw-Hill Companies, Inc Click here for terms of use 274 Business development, ix Buy vs build decision, 70–71, 71 Buyer considerations “financial buyers” and, 154 representations and warranties, 132 “strategic buyers” and, 154 C corporations, 120 See also corporations Capital asset pricing model (CAPM), discounted cash flow (DCF) method and, 81–82 “Caps,” 138–139 Careers in M&As, 189–192 consultants in, 191 job responsibilities of, 190–191 skill set required for, 189–190 Carryover basis, stock purchases and, 118–119 Case, Stephen, 78 Cash flow forecasting, financial modeling and, 80–87 Centralized approach to integration, 159–161, 159 “Change in control” clauses, 116 Chase, 3t Chemical Bank, 3t CIT, 12 CitiCorp, 3t “Claw back” provisions, 113 Closing the deal conditions precedent to, 132–133 limitations placed on target’s operations between signing and, 133, 134 “Clubbing” of private equity firms, 188 Cold calling, bidding and, 15–16 Communication plan development, 163–165 integration process and, 163–165, 168 Community relationships, integration process and, 165 Company selection for M&As, Compaq, 23, 108 Competition, due diligence and, 51 Competitive advantage, speed as, 24 Competitive auctions, 13–14 assessing chance of winning in, 22–23 early warning sign identification and, 23–24 privately negotiated sales vs., 178–179 Compliance procedures, due diligence and, 68–69 Confidentiality issues, 28, 131 due diligence and, 50, 182 Index Conglomerates, Conseco Finance, 1–2, Conservatism, 154 Consultants in M&As, 191 Consulting agreements, purchase price determination and, 114 Contingent payments, 202 Contracts and purchase agreements, 129–137, 205 Access to Information clause in, 130–131 allocation of purchase price in, 137 asset purchases and, 137 conditions precedent to closing state in, 132–133 confidentiality clauses in, 131 Definitions section in, 130 governing law statement in, 137 integration process and issues and, 162–163 international companies and, enforcement, 197 limitations placed on target’s operations between signing and closing, 133, 134 List of Exhibits section in, 130 material adverse change (MAC) clauses, 100, 142–143, 205–206 negotiating in, 135, 136 purchase price in, 130 purchaser’s indemnity statement in, 137 representations and warranties of buyer in, 132 of seller in, 131–132 seller’s indemnity statement in, 133–136 stock vs asset purchases, 129 third-party consents in, 137 variables in, 129 Cooperation and integration, 169 CoreStates, 3t Corning Incorporated, xi, 169–170 Corporate business development groups, ix Corporate culture integration of, 72, 159–160, 168 negotiating tactics and, 195–196 Corporate strategy, linking to, for efficient M&As, 21–22 Corporations, 140, 191 postmerger development of, 163 tax issues pertaining to acquisition vehicle type for, 120–121 Cost of equity, discounted cash flow (DCF) method and, 81–82 Covenants not to compete, 140–141 Culture See Corporate culture Index Current market value determination, asset purchases and, 117 Customer relationships, integration process and, 160, 164 CVS, 161, 161 Data rooms, for due diligence, 181–182 Deal breakers, 95 due diligence disclosures and, 52 “expectation gaps” and, 107 last-minute requests and, dealing with, 124–125 Lockheed Martin/Titan Corporation as example of, 105 Deal brokers, bidding and, 17–18 Deal flow identification, first round negotiations and, 12, 13 “Deal funnel,” 13 Decentralized approach to integration, 157–159, 157 Definitions section, in contracts, 130 Definitions, x–xi DePamphilis, Donald, 169 Dimon, Jamie, 19 Discount rate determination, discounted cash flow (DCF) method and, 81 Discounted cash flow (DCF) financial model, 80–87 acquisition purchase price estimation in, 82–83 cost of equity and capital asset pricing model (CAPM) in, 81–82 discount rate determination in, 81 free cash flows to the equity (FCFE) in, 80–81 to the firm (FCFF) in, 81 internal rate of return (IRR) in, 83, 85 pros and cons of, 83–84 weighted average cost of capital (WACC) in, 82 Dow Chemical, xi, 169–170 Dow Corning joint venture, xi, xi, 169–170 Due diligence, xii, 5, 45–60, 95–96, 203 bidding and, 38 Brooktrout Technology example of, 105–106 buy vs build decision and, 70–71, 71 case study in, 105–106 confidentiality agreements and, 182 data rooms for, 181–182 external side of, 61–74 compliance procedures and, 68–69 275 environmental issues in, 67–68 finance department’s role in, 66 human resources’ role in, 63–64 information acquisition by, 61–62 integration and, 72–73 key steps in, 62–73 legal department’s role in, 67–68 operations/information technology department’s role in, 71–72 risk assessment in, 64–65 sales/marketing department’s role in, 69–71 tax accounting and, 67 final bid letters generated from, 97–100, 101–103 financial information and, 66, 79 first round negotiations and, 40–41 human resources’ role in, 63–64 indexing information for, 182 information requests in, 207–217 financial information in, 211–213 general company background in, 207–208 human resources information in, 208–210 legal/environmental issues in, 214–216 operations issues in, 217 risk assessment in, 210–211 sales and marketing issues in, 216–217 tax issues in, 213–214 integration process and, 72–73, 162 internal side of, 45–60 availability of information and, 50 case studies in, 54–60 competition and, 51 confidentiality issues and, 50 “deal killer” issues uncovered during, 52 groups represented on team for, 48 importance of, 45–46 information request form for, 58–59 information request preparation by, 50–51 investment banks as source of data for, 50–51 leader’s role in team for, 48–49 locating information for, 51 management of, 47–51 pro forma financial statement example in, 60 size of team in, 49–50 “surprises” uncovered by, 54–60 team selection for, 47–51 276 Due diligence, internal side of (Cont’d.) upper management involvement in, 52–53 investment advisors for, 177–178 key steps in, 62–73 nonsolicitation agreements and, 182 risk assessment in, 64–65 Sarbanes-Oxley legislation and, 143–144 screening deals in, 20 seller considerations and, 181–183 summarizing results of, 96 target employee interactions during, 182 time period limitations for, 182 Early buy-in, 21, 22 Early warning sign identification, 23–24 Earnouts, 111–113, 112, 202 EBITDA data, 80, 86 Eckerd Drug, 161, 161 Economic profit vs accounting, 148–149 EDGAR database, 36 Efficiency in M&As, 21–24 assessing chance of winning in, 22–23 early buy-in for, 21, 22 early warning sign identification and, 23–24 link to strategic marketing/corporate strategy in, 21–22 Employee issues, 72–73, 169, 208–210 attitudes as, 72–73 integration process and, 160, 164 morale maintenance as, 183–184 seller considerations and, 183–184 Employee obligations (ERISA), 138 Employee protection clauses, 122–123 Employment agreements, purchase price determination and, 114 Environment for M&As, 1–8 Environmental issues, 138, 214–216 due diligence and, 67–68 Estate planning, seller considerations and, 174–175 Exchange ratio, 108 “Expectation gaps,” 107 Exxon, Failed M&As, 2–3, 2, 153–154, 154, 155 Fair market valuation, 147 Fairness opinion, 31–32 Fairness, in negotiation, 195 Fairness options, 184 FAS 141 and 142 in, 145–147, 155 FedEx, 13 Index Final acquisition model example, 91–93 Final bid letters, 97–100, 101–103 material adverse change (MAC) clauses, 100, 142–143, 205–206 Finance department’s role in due diligence, 66 in integration process, 166 “Financial buyers,” 154 Financial information, 211–213 due diligence and, 66 format for, GAAP and, 66 Sarbanes-Oxley legislation and, 143–144 Financial model generation, 75–94 asset-oriented methods for, 87–88 liquidation value in, 88 pros and cons of, 88 tangible book value in, 87 total asset value in, 87 bid price calculation and, 75–76 cost synergy calculation using, 77 creating the model for, 33–34, 34, 89–90 discounted cash flow (DCF) approach to, 80–87 acquisition purchase price estimation in, 82–83 by year, 80 cost of equity and capital asset pricing model (CAPM) in, 81–82 discount rate determination in, 81 example of, 84–85 free cash flows to the equity (FCFE) in, 80–81 to the firm (FCFF) in, 81 internal rate of return (IRR) in, 83, 85 pros and cons of, 83–84 weighted average cost of capital (WACC) in, 82 due diligence information and, 79 EBITDA data in, 80, 86 expanding original models in, 76 final acquisition model example of, 91–93 first round negotiations and, 32–34, 34 forecasting results using, steps in, 76–77 GAAP income approach to, 88–93 creating model in, 89–90 pros and cons of, 90–93 sensitivity analysis in, 90 generally accepted accounting principles (GAAP) and, 80 hockey stick projection in, 35–36, 35 iterative, ongoing process of, 78–79 market-based methods for, 86–87 Index performance forecast preparations and, 183 pro forma models for, 34–37 projecting financial performance using, 76 purchase price determination and, 95 revenue synergy calculation using, 76–77 seller projection evaluation in, hockey stick projection in, 35–36, 35 synergies in, 76–77, 78 Financing, bidding and, 38 First Chicago, 3t First Interstate, 3t First-round bid submission, 41–42 First round negotiations, 27–44 bidding strategies for, 37–38 confidentiality agreements in, 28 conservative approach to, 41 due diligence and, 40–41 fairness opinion generation in, 31–32 financial model generation for, 32–34, 34 first-round bid submission in, 41–42 getting invited back after, strategies for, 39–41 individual characteristics of deal affecting, 27 investment banker selection for, 28–31 letter of intent in, 39, 40 leveraging public information in, 36–37 limited data and, coping with, 34–37 management relations in, development of, 39–40 preliminary bid placement in, 37–41 pro forma models for, 34–37 seller projection evaluation in, hockey stick projection in, 35–36, 35 First Star, 3t First Union, 3t, Fleet Bank, 156 Flexibility, in integration process, 168 Flipping, “private equity flips,” 176 Forecasting financial outcomes, 76–77, 183 Foreign ownership limits, international companies and, 197 Forms of corporate structure, 140 postmerger development of, 163 tax issues pertaining to, 120–121 Free cash flows to the equity (FCFE), 80–81 to the firm (FCFF), 81 Functional integration, 165–166 GAAP income financial modeling method, 88–93 277 creating model in, 89–90 sensitivity analysis in, 90 Generally accepted accounting principles (GAAP), 66, 80, 88–93 See also GAAP income financial modeling method Gillette, 32 Goldman Sachs, 31–32 Goodwill as asset, 145–147, 155 Governing-law statement in contract, 137 Green Tree Financial, Harrison, William, 19 Hart-Scott-Rodino antitrust filing, 145, 175 Hedge funds, x, 187–189, 191 Hewlett, Walter, 23 Hewlett-Packard, 23, 108 Hilbert, Stephen, 1–1 History of recent M&As, 1–6 Hockey stick projection, 35–36, 35 Homegrocer.com, Human resources’ role in due diligence, 63–64 in integration process, 166 Indemnitors, 141–142 Indemnity “baskets,” “caps,” and “survival periods” in, 138–139 indemnitors for, 141–142 purchaser’s statement of, 137 seller’s statement of, in contract, 133–136 Indexing information, due diligence and, 182 Information requests Access to Information clause in contracts and, 130–131 in due diligence, 50–51 Information technology department’s role in due diligence, 71–72 Institutionalization of integration process, 166 Integration process, 153–171, 203 accountability in, 167 accounting issues and, 155 best practices in, 166–169 brand value and, 160–161 centralized approach to, 159–161, 159 communication plan development in, 163–165, 168 community relationship and, 165 conservative trends in M&As and, 154 contract issues and, 162–163 cooperation in, 169 278 Integration process (Cont’d.) corporate culture and, 72, 159–160, 168 customer relationships and, 160, 164 decentralized approach to, 157–159, 157 due diligence and, 72–73 due diligence team’s role in, 162 employee issues and, 72–73, 160, 164, 169 finance department and, 166 flexibility in, 168 functional aspects of, 165–166 human resources and, 166 importance of, 153–154, 154 institutionalization of, 166 international companies and, 197–198 investor relationships and, 164–165 joint ventures and, special challenges of, 169–170 legal issues in, 166 marketing and, 165 operations/information technology department’s role, 166 partnerships and, special challenges of, 169–170 planning for, 73 postmerger organization development in, 163 purchasing department and, 165 R&D and, 165 rating agency scrutiny and, 155 reverse strategy for, 161–162 roles and responsibilities defined for, 166–167 Sarbane-Oxley accountability and, 155–156 shared standards, services, spaces in, 169 status reviews of, 167–168 steps in, 162–166 strategic alliances and, special challenges of, 169–170 strategies for, 157–162 supplier relationships and, 160, 164 synergies and, difficulty of achieving, 155–157 team for, 204–205 trends and, impact of current industry trends on, 154–156 unique issues in, 73 Integration team, 204–205 Internal rate of return (IRR), 83 International issues, 145, 196–198 antitrust reviews as, 145 enforcement/court systems and, 197 foreign ownership limits and, 197 Index integration process and, 197–198 legal issues of, 197 taxes as, 196–197 Internet resources, Investment advisors, 177–178 Investment banks/banking/bankers, x, 190 bidding and, as callers in, 18–19 cultivating relationship with, 203 due diligence and, as source of data for, 50–51 fairness opinion generation by, 31–32 proactive approach with, 202 pros and cons to use of, 28–31 selection of, 28–31 seller considerations and, hiring investment advisors and, 177–178 Investor demand and M&As, integration process and, 164–165 Joint ventures, xi, 140, 169–170 integration process and, special challenges of, 169–170 JP Morgan, 19 Keeping deals on track, 124 Key employee issues, 141 Kinkos, 13 Kodak, Kohlberg, Kravis and Roberts (KKR), x Last-minute requests, dealing with, 124–125 LBO groups, x Leahy, Bob, Brooktrout Technology, 105–106 Legal department’s role in due diligence, 67–68 legal issues, 214–216 “baskets” and, 138–139 buyer-sensitive areas in, 137–138 “caps” and, 138–139 contracts and, 129–137 covenants not to compete and, 140–141 employee obligations (ERISA) and, 138 environmental liabilities and, 138 forms of corporate structure and, 140 indemnitors and, 141–142 inside vs outside counsel for, 127–128 integration process and, 166 international companies and, 197 key employee issues as, 141 material adverse change (MAC) clauses as, 100, 142–143, 205–206 Index special expertise areas in, outside counsel for, 128 stock vs asset purchases and, 128–137 “survival periods” and, 138–139 tax issues and, 128–138 Letter of intent, 39, 40 Leverage, in negotiations, 194–195 Leveraging strategic marketing groups, first round negotiations and, 11–12 Limitations placed on target’s operations between contract signing and closing, 133, 134 Limited liability corporations (LLCs), 140 tax issues pertaining to acquisition vehicle type for, 120–121 Liquidation value, asset-oriented financial modeling and, 88 List of Exhibits section, in contracts, 130 Listening skills, in negotiation, 196 Lockheed Martin, 105 Management relations, 191–192 first round negotiations and, development of, 39–40 proactive approach to, 201–202 Management teams, Managing the M&As process, 103–104 Market-based financial modeling methods, 86–87 Market selection for M&As, Material adverse change (MAC) clauses, 100, 142–143, 205–206 Merger, defined, xi Mergers, Acquisitions and Other Restructuring Activities, 169 Minority equity investment, xi Nabisco, x NationsBank, 3t Negotiating strategies, 135, 136, 190, 192–196 bluffing in, 193–194 case study in, 193 corporate culture and, 195–196 fairness in, 195 focus on major issues in, 192 leverage in, 194–195 listening skills important to, 196 patience in, 192–194 purchase agreements and, 205 relationship and trust development in, 194 New York Times, on HP/Compaq M&As, 23 279 Noncompete clauses, 140–141 Nondisclosure agreements (NDAs), 28, 29 Nonsolicitation agreements, due diligence and, 182 Nonstrategic division divestiture, 175 Norwest, 3t Numbers of M&As in U.S., Operations issues, 217 due diligence and, 71–72 integration process and, 166 Opportunistic approach to M&As, 12–13 Partial sales, 179 Partnerships, 169–170 integration process and, special challenges of, 169–170 tax issues pertaining to acquisition vehicle type for, 121–122 Performance forecast preparations, 183 Polaroid, 188 Poorly performing division divestiture, 176 Postclosing audits, 204 Postmerger organization development, 163 Premium over book value ratios, 4, Premium percentages paid, purchase price, 110–111 Presentations, 190 Pressure for M&As Price-asset method to determine purchase price, 109–111, 110 Price-stock method to determine purchase price, 108–109 Private deals, 180 Private equity firms, x, 187–189, 191 “clubbing” by, 188 “flips” and, 176 Proactive approach to acquisition, 201–202 Procter and Gamble, 32 Profit vs accounting, 148–149 Pro forma financial statement example, 60 first round negotiations and, 34–37 Proprietary deal flow in M&As, 15–19 cold calling and, 15–16 deal brokers in, 17–18 investment bankers as callers in, 18–19 third-party callers in, 16–17 Public accounting, 191 Public deals, 179–180 Public information, leveraging, in first round negotiations, 36–37 Purchase agreements See Contracts and purchase agreements 280 Purchase price acquisition form and, interplay of, 120 allocation of, in asset purchases, 137 “claw back” provisions and, 113 contract’s note of, 130 determination of, 95 earnouts and, 111–113, 112 exchange ratio and, 108 fair market valuation and, 147 gap in, closing 108–109, 108 premium percentages paid and, 110–111 price-asset method to determine, 109–111, 110 price-stock method to determine, 108–109 royalties, consulting agreements, employment agreements and, 114 timing constraints and, 114–115 Purchaser’s indemnity statement, 137 Purchasing department, integration process and, 165 Pure play companies, Quality vs quantity of earnings, Rating agencies, 7, 155 Regulatory issues, 143–145 Hart-Scott-Rodino antitrust filing and, 145 Sarbane-Oxley legislation and, 7, 143, 144, 155–156 Related corporate roles in M&As, ix–x Relationships development, in negotiation, 194 Representations and warranties of buyer, 132 of seller, 131–132 Research and development (R&D), integration process and, 165 Resolution Trust Company (RTC), 114–115 Resource targeting for M&As, Resources, 36 Reverse integration, 161–162 Risk allocation, 123–124 Risk assessment, 64–65, 190, 210–211 RJR Nabisco, 187 Roles and responsibilities defined for integration, 166–167 Roll-up strategies, Royalties, purchase price determination and, 114 S corporations See Corporations Sales and marketing issues, 216–217 Index Sales/marketing departments buy vs build decision and, 70–71, 71 due diligence and, 69–71 integration process and, 165 Sarbane-Oxley legislation, 7, 143–144, 155–156 SBC, 175–176 Screening deals, 20 Scrutiny, 154 SEC U.S (Securities and Exchange Commission), 36 Seller considerations, 173–186 antitrust concerns and, 175–176 auctions vs privately negotiated sales, 178–179 cash needs of seller and, 173–174 due diligence and, 177–178, 181–183 employee morale and, 183–184 estate planning and, 174–175 fairness options and, 184 financial vs strategic buyers and, 180–181 forms of consideration selection in, 184 investment advisors and, 177–178 nonstrategic division divestiture and, 175 partial sales and, 179 performance forecast preparations, 183 poorly performing division divestiture and, 176 private deals and, 180 “private equity flips” and, 176 public deals and, 179–180 reasons for selling and, 173–176 terms vs prices and, relative importance of, 179–180 Seller’s indemnity statement, 133–136 Seller’s representations and warranties, 131–132 Sellers’ market and M&As, 5–6 Senior management See Upper management Sensitivity analysis, GAAP income financial modeling and, 90 Shared standards, services, spaces, in integration, 169 Skill set for M&As careers, 189–190 Sourcing the deal, 9–26 company selection in, competitive auctions in, 13–14 deal flow identification in, 12, 13 efficiency in M&As, tools for, 21–24 assessing chance of winning in, 22–23 early buy-in for, 21, 22 Index early warning sign identification and, 23–24 link to strategic marketing/corporate strategy in, 21–22 leveraging strategic marketing groups in, 11–12 market selection in, opportunistic approach to, 12–13 proprietary deal flow in, 15–19 cold calling and, 15–16 deal brokers in, 17–18 investment bankers as callers in, 18–19 third-party callers in, 16–17 resource targeting for, screening deals in, 20 speed as competitive advantage in, 24 strategy approach to, 9–11, 10 Speed as competitive advantage, 24, 38 Statement of Financial Accounting Standards (FAS) 141 and 142, 145–147, 155 Status reviews, integration process and, 167–168 Step-up in basis, in asset purchases, 117 Stock-for-stock acquisitions, 4–5 Stock purchases, 117–120, 119, 184 carryover basis concept and, 118–119 contracts for, 129–137 legal issues pertaining to, 128–137 tax advantages of, 118 338H10 tax elections and, 119–120 Strategic alliance, 3, 169–170 See also Joint ventures; Strategic alliance integration process and, special challenges of, 169–170 “Strategic buyers,” 154, 180–181 Strategic marketing/corporate strategy, linking to, for efficient M&As, 21–22 Strategic marketing groups, first round negotiations and, 11–12 Strategy approach to M&As, 9–11, 10 Structuring the deal acquisition vehicles in, selecting form of, 115–120 asset purchases in, 115–117, 117 “change in control” clauses and, 116 employee protection clauses and, 122–123 “expectation gaps” and, 107 keeping deals on track while, 124 last-minute requests and, dealing with, 124–125 purchase price and, interplay of, 120 281 risk allocation and, 123–124 stock purchases in, 117–120, 119 Sungard, 188 Supplier relationships, integration process and, 160, 164 “Survival periods,” 138–139 Synergies difficulties of, 155 financial issues and, 76–77, 78 integration process and, 156–157 Tangible book value, asset-oriented financial modeling and, 87 Tax issues, 120–122, 138, 213–214 asset purchases and, 128–137 corporations and, 120–121 due diligence information and, 67 FAS 141 and 142 in, 145–147, 155 forms of business organization and, 120 international companies and, 196–197 legal issues and, 128–137 partnerships and, 121–122 purchaser’s indemnity statement in, 137 seller’s indemnity statement in contracts and, 133–136 stock purchases and, 118–120, 128–137 Ten Steps for Better Acquisitions, 201–206 due diligence and, 203 integration process and, 203 integration team and, 204–205 investment banking and, 203 material adverse change (MAC) clause and, 205–206 negotiation and, 205 postclosing audits and, 204 proactive approach in, 201–202 top management involvement as, 202 “troubled companies” and, 202 Third-party callers, bidding and, 16–17 Third-party consents, asset purchases, 137 Time period limitations for due diligence, 182 Time Warner, 78, 156–158 Timing constraints, on price determination, 114–115 Titan Corporation, 105 Top management See upper management Total asset value, asset-oriented financial modeling and, 87 Toys “R” Us, 188 Travellers, 3t Trends in M&As, 6–7, 187–189 hedge funds and, 187–189 282 Trends in M&As (Cont’d.) integration process and, 154–156 private equity firms and, 187–189 “Troubled companies,” 202 Trust, in negotiations, 194 Tyco, 6, 12 UBS, 31–32 U.S Federal Trade Commission (FTC), 145 U.S Securities and Exchange Commission (SEC), 36 United Technologies, Upper management, approval of, 96–97 board of directors presentation for, 98–99 due diligence and, 52–53 Index involvement of, 202 US Ban Corp, 3t Value of total M&As transactions to present, 3, Wall Street (movie), 187 Wal Mart, Wamu, 3t Warranties, 131–132 Webvan, Weighted average cost of capital (WACC), 82 Wells, 3t White, Lawrence J., 23 Winning, assessing chance of, 22–23 ABOUT THE AUTHOR B ob Stefanowski, CPA, CMA, CFE, is the president and CEO of GE Commercial Finance’s Global Media and Communications unit, which provides debt and financing solutions to the telecommunications, media, cable, and publishing industries He is also an adjunct professor of finance at New York University’s Stern School of Business, specializing in M&A Copyright © 2007 by The McGraw-Hill Companies, Inc Click here for terms of use .. .MAKING m & a DEALS HAPPEN This page intentionally left blank MAKING M & A DEALS HAPPEN ROBERT STEFANOWSKI McGraw-Hill New York Chicago San... grow has resulted in a proliferation of M&A activity in recent years, both in the United States and abroad As a result, the ability to understand M&A and get deals done has become a critical skill... functions needs to be knowledgeable about the fundamentals of M&A to ensure that the CHAPTER right deals are pursued and, just as important, bad deals are avoided NOTES Robert Townsend, Jill Ferguson,