FOURTH EDITION The Art of M&A A Merger/ Acquisition/ Buyout Guide Stanley Foster Reed Alexandra Reed Lajoux H Peter Nesvold McGraw-Hill New York San Francisco Washington, D.C Auckland Bogotá Caracas Lisbon London Madrid Mexico City Milan Montreal New Delhi San Juan Singapore Sydney Tokyo Toronto Copyright © 2007, 1999, 1995, 1989 by Stanley Foster Reed, Alexandra Reed Lajoux, and H Peter Nesvold 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 0-07-151034-6 The material in this eBook also appears in the print version of this title: 0-07-140302-7 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 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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 McGraw-Hill 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: 10.1036/0071403027 For more information about this title, click here CONTENTS PREFACE Chapter vii Getting Started in Mergers and Acquisitions Introduction Basic Terms Concluding Comments Notes Chapter Planning and Finding Introduction Strategic Planning for Operating Companies In-House Search Brokers and Finders Role of Investment and Commercial Banks in M&A General Regulatory Considerations for Buyers Antitrust Considerations for Acquisitions Hart-ScottRodino Concluding Comments Exhibit 2-1—Sample Checklist of Assets for Use in Complement/Supplement Analysis Exhibit 2-2—Sample Checklist of Risks for Use in Seeking Complementary Acquisitions Exhibit 2-3—Premerger Notification and Waiting Period Under Hart-Scott-Rodino Appendix 2A—Types of Organizational Structure Appendix 2B—Checklist of Assets Appendix 2C—Revision to the Horizontal Merger Guidelines Issued by the U.S Department of Justice and the Federal Trade Commission Notes Chapter Valuation and Pricing 77 Introduction Valuation Fundamentals Pricing Issues Special Considerations for Private Companies Expressing the Purchase Price in the Acquisition Agreement Concluding Comments Exhibit 3-1—Estimating the Cost of Capital Notes Chapter The Art of Financing and Refinancing 141 Introduction Financing Overview Financing Instruments: Equity vs Debt vs Hybrids Financing Sources Highly Leveraged Transactions Minimizing Borrowing Determining Structure in Debt Financing Senior Debt Sale-Leasebacks Pros and Cons of Preserving Debt and Lease Obligations Seller Takeback Financing Warrants Working Capital Debt of the Seller The Bank Book and Commitment Letter Other Principal Issues in Senior Loan Agreements Insurance Company Financing HighYield–(a.k.a “Junk”)–Bonds Bridge Loans Equity Investment Funds Registration Rights Intercreditor Issues Subordination Issues Intercreditor Agreements Fraudulent Conveyance and Other Litigation Concerns Refinancing Issues Concluding Comments Appendix 4A—Typical Subordination Provisions of Publicly Issued Notes.Appendix 4B—Typical Subordination Provisions of Privately Placed Institutional Notes.Appendix 4C—Typical Subordination Provisions of Seller Notes Notes CONTENTS iv Chapter Structuring Transactions: General, Tax, and Accounting Considerations 261 Introduction General Considerations Accounting Considerations Goodwill Impairment Testing Tax Considerations Concluding Comments Transaction Diagrams Notes Chapter The Due Diligence Inquiry 381 Introduction Getting Started Duration of Due Diligence Due Diligence Levels Relations with Seller Location of Due Diligence Research Evaluating Assets Litigation Analysis Emerging Legal Issues Due Diligence After Closing Concluding Comments Appendix 6A—Sample Confidentiality Agreement Appendix 6B—Due Diligence Checklist Appendix 6C—An Annotated Initial Document and Information Request List Appendix 6D—Index of Data Room Documents Notes Chapter Negotiating the Acquisition Agreement and the Letter of Intent 459 Introduction The Letter of Intent The Acquisition Agreement Components of the Agreement Introductory Material Representations and Warranties Covenants Conditions to Closing Indemnity Section Acquisitions from an Affiliated Group Transactions Involving Public Companies Negotiating and Documenting an MBO Employment Agreements Stockholders’ Agreements Concluding Comments Appendix 7A—Sample Letter of Intent Appendix 7B—Typical Merger Agreement and Commentary Notes Chapter Closing 613 Introduction The Basics of Closing Pre-Closing Closing Wire Transfers PostClosing Planning the Closing Concluding Comments Appendix 8A—Sample Closing Memorandum (Including a Detailed Schedule of Closing Documents) Note Chapter Postmerger Integration and Divestitures 645 Introduction Basic Concepts of Integration The Postmerger Plan Communicating the Integration Plan Combining Company Names Integrating Cultures Integrating Vision, Policy, Ethics, and Mission Statements Integrating Key Resources, Processes, and Responsibilities Integrating Resources Integrating Processes Integration of Key Responsibilities Legal Aspects of Shareholder Relations Commitments to Employees Postmerger Compensation: A Complex Issue Planning Pay Integration: A Strategic Overview Merging Benefit Plans Divestitures Concluding Comments Appendix 9A—Sample Postmerger Press Release Highlighting Strategic Motivation Appendix 9B—Sample Assets Checklist of Resources, Processes, and Responsibilities Appendix 9C—Integration Planning Worksheet Appendix 9D—Integration Timeline from a Midsized Acquirer Appendix 9E—Pairwise Comparison Notes CONTENTS Chapter 10 v Special Issues for M&A in Public Companies 785 Introduction General Considerations Sarbanes-Oxley and M&A Duties of Care, Loyalty, and Good Faith in M&A Director Responsibilities in Responding to Unsolicited Bids M&A Forms Tender Offer Basics Proxy Solicitations Merger Disclosure Issues Insider Trading Financing the Public Transaction Takeover Defenses Related State Laws Concluding Comments Notes Chapter 11 Workouts, Bankruptcies, and Liquidations 861 Introduction General Considerations Workouts Bankruptcy State Insolvency Proceedings Investing Opportunities: Structuring the Purchase of a Troubled Company Structuring a Leveraged Buyout to Minimize Insolvency Risk Financing Alternatives for Companies with Losses Accounting /Tax Issues for Companies with Losses Liquidation Concluding Comments Diagrams Showing Various Structures for Reorganizations and Workouts of Insolvent Companies The “Samex” Case: Illustrating the Vulnerability of the Bankruptcy Process to Fraud, and the Relative Finality of Acquisition Decisions Made in Bankruptcy Court Notes Chapter 12 Structuring Transactions with International Aspects 905 Introduction Nontax Issues Regarding Foreign Investment in the United States Acquisitions of Entities Involving Assets Located Outside the United States Foreign Exchange Financing International Tax and Disclosure Considerations Tax Considerations in Inbound Acquisitions FIRPTA Tax Considerations in Outbound Acquisitions Concluding Comments Notes A WOFC Case Study: J T Smith Consultants Landmark and Recent M&A Legal Cases 965 1005 Cases Alleging Impropriety in a Merger or in the Acquisition of a Business or Controlling Shares Cases Alleging Impropriety in the Valuation and/or Sale of a Business, Assets, or Controlling Shares Cases Involving M&A Agreements or Other Contracts Cases Alleging Violation of Antitrust Laws Cases Alleging Violations of Health, Safety, and Labor Laws Cases Dealing with Jurisdiction or Right to Sue Following a Merger Additional Recent Cases INDEX 1049 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 PR E FACE “The art and science of asking questions is the source of all knowledge.” Attributed to Adolf Augustus Berle Jr 1895–1971 As we go to press in early 2007, we are looking back on a banner year for M&A Nearly 30,000 companies announced transactions worth more than $3 trillion, showing solid growth on all continents and in most industries.1 Where there is growth, there is change, and where there is change, there will be questions The Art of M&A: A Merger/Acquisition/Buyout Guide, Fourth Edition, attempts to provide accurate, practical, and up-to-date answers to more than 1,000 questions dealmakers may have in this new environment Like the three editions before it, this one is organized in question-and-answer format, moving from general to specific questions in each topic area What is your burning question of the moment? It may be as basic as “What is a merger?” or it may be as arcane as “After a Section 338 acquisition, must the purchaser retain the acquired company as a subsidiary?” Whatever you want to know, you are likely to find the answers here—or at least a useful source reference ACKNOWLEDGMENTS The Art of M&A first saw the light of day two decades ago as the joint effort of an entrepreneur and a law firm The entrepreneur was Stanley Foster Reed, founder of the journal Mergers & Acquisitions The law firm was Lane & Edson, PC Alexandra Reed Lajoux served as project manager for the first edition, and as coauthor of later editions Because of the growing complexity of deal structures, for this fourth edition Reed and Lajoux have recruited an vii Copyright © 2007, 1999, 1995, 1989 by Stanley Foster Reed, Alexandra Reed Lajoux, and H Peter Nesvold Click here for terms of use viii PREFACE additional author, H Peter Nesvold, whose Wall Street experience enhances the quality of this edition This new edition still retains the expertise of Lane and Edson attorneys and many other experts cited in the earlier editions The following acknowledgements emphasize contributions to this fourth edition Chapter 1, Getting Started in Mergers and Acquisitions, and Chapter 2, Planning and Finding, still contain wisdom from Dr Robert H Rock, President, MLR Holdings, Philadelphia, and his colleagues Other notable experts whose views are featured here include Robert Baker of Tekacq M&A, Houston, Texas; Edward A Weihman, Dresdner Kleinwort Wasserstein, LLC, New York; Malcolm Pfunder, of Counsel, Gibson Dunn & Crutcher; Gerald Wetlaufter, professor of law, University of Iowa; Clive Chajet, Chajet Consultancy, New York, New York; and Mark Feldman, Versa Systems, Inc., Fremont, California Chapter 3, Valuation and Pricing, still benefits from the expertise of Al Rappaport, Principal, The LEK/Alcar Consulting Group, La Jolla, California, and various partners at Wesray Capital Partners, New York City Chapter 4, The Art of Financing and Refinancing, owes its greatest debt to the wisdom of J Fred Weston, Cordner Professor of Money and Financial Markets at the University of California, Los Angeles With Alexandra R Lajoux, he coauthored another book in this series, The Art of M&A Financing and Refinancing: Sources and Instruments for Growth (1999) Chapter 5, Structuring Transactions: General, Tax, and Accounting Considerations, contains updated versions of some material that has appeared in Alexandra R Lajoux and H Peter Nesvold, The Art of M&A Structuring: Techniques for Mitigating Financial, Tax, and Legal Risk (New York: McGraw-Hill, 2004) The authors also remain indebted to experts cited in previous editions of this book, including Martin Ginsberg, professor of law, Georgetown University, and Jack S Levin, Lecturer, University of Chicago Law School—and by extension their law firms Professor Ginsberg’s professional firm is counsel to the law firm of Fried, Frank, Harris, Shriver & Jacobson; and Professor Levin, through his professional firm, is a senior partner with the law firm of Kirkland & Ellis Anyone involved in merger transactions should consult their biennial two-volume book Mergers, Acquisitions, & Buyouts: A Transactional Analysis of the Governing Tax, Legal & Accounting Considerations (New York: Aspen Law & Business, 2006) Advice also came from Neil Falis, Towers Perrin, New York Chapter 6, The Due Diligence Inquiry, benefits greatly from the expertise of Charles M Elson, corporate director and director of the John L Weinberg Center for Corporate Governance at the University of Delaware This chapter has a checklist that includes elements suggested by Dan L PREFACE ix Goldwasser, a shareholder practicing law with the firm Vedder Price Kaufman & Kammholz PC, New York Chapter 7, Negotiating the Acquisition Agreement and the Letter of Intent, and Chapter 8, Closing, build on the basic wisdom of the original edition, but include updates from the authors Chapter 9, Postmerger Integration and Divestitures, is adapted from Alexandra Lajoux, The Art of M&A Integration, Second Edition (New York: McGraw-Hill, 2006) As such, the chapter owes a debt to the experts quoted in that book Of special note are the following experts: Manuel Sanches and Larry Dell of E-Know, Arlington, Virginia; Jim Jeffries, M&A Partners, Dallas, Texas; J Frederic Weston, cited above as the main expert consulted for Chapter 4; Robert Bruner, Dean, Darden School of Business, University of Virginia Chapter 10, Special Issues for M&A in Public Companies, as well as Chapter 11, Workouts, Bankruptcies and Liquidations, owes a general debt to the law firms of Weil Gotshal & Manges and Jones Day, thanks to the ongoing publications that keep the authors educated on trends in securities law, bankruptcy law, and legal trends in general Chapter 12, Structuring Transactions with International Aspects, owes a debt to Van Kirk Reeves, Reeves & Porter, Paris, France; and Riccardo Trigona, an attorney in Milan, Italy In closing, the authors extend sincere thanks to the top-notch professional editorial and production team that made this book possible, including Dianne Wheeler and her predecessor Stephen Isaacs, as well as Daina Penikas, Christine Furry, and Kay Schlembach NOTES For a detailed report on trends, see Thomson Financial’s “League Table” report at www.thomson.com INDEX Hostile acquisitions, (See also Takeover bids) HR (human resources), postmerger, 665–668, 674 HSR Act (Hart-Scott-Rodino Antitrust Improvements Act of 1976), 45, 55–61, 909 Human assets, 67 Human resources (HR), postmerger, 665–668, 674 Humana v Forsyth, 1015 Hurdle rates, 85–86, 105 Hybne Mohawk Industries v Williams, 838 Hybrid financing instruments, 144 I IITSSA (International Investment and Trade in Services Survey Act of 1976), 909, 918–919 Impairment loss, 288, 293–294 Improprieties, landmark and recent cases, 1007–1013 In-house search, 31–41 In re Caremark Int’l Inc Derivative Litigation, 790 In re CompuCom Systems, Inc., 791–792 In re Cox Communications Inc Shareholders Litigation, 1041 In re Emerging Communications, Inc S’holders Litig., 792 In re Federated Depart Stores, Inc., 366 In re First Databank Antitrust Litigation, 694 In re Healthco International, 1015–1016 In re IBP Inc Shareholders Litigation, 1027 In re J.P Morgan Chase & Co S’holder Litig., 1012 In re LNR Property Corp Shareholders Litigation, 1021–1022 In re PNB Holding Co Shareholders Litigation, 798, 1028 In re Toys “R” Us Shareholder Litigation, 1027–1028 Inbound acquisitions, 51, 906–913, 945–955 Incentive pay, 715, 717–718, 723 Income income approach to value, 290, 692 principles of, 946–947 rate structure, 306–307 statement of, 90 Subpart F, 959–960 treaties, 939–941 (See also Tax considerations) Incorporation, articles of, 266–267 Incorporators, 907 Indemnification acquisition agreements, 468, 485–498 indemnity plan, 428 registration rights, 217–218 sample provisions, 520–521, 596–603 Indenture, 201 Independently marketable, 385–386 Index of data room documents, due diligence, 451–454 Indexed institutional investors, 811 Indopco, Inc v C.I.R., 1042 Industry information, 32, 34–37, 51, 242–243 Information due diligence, 435–451 financial, due diligence, 418–419, 429–430, 440–442 on industries, 32, 34–37 on insolvent companies, 879–880 online resources, 32, 35, 82 outbound acquisitions, 956–957 supplied to government, HSR Act, 55 Initial basis, 303, 311–312 Initial documents, due diligence, 435–451 Initial public offerings (IPOs), 81, 123, 143, 148, 736 Insider trading, 205, 829–838, 920 1057 Insider Trading and Securities Fraud Enforcement Act (1988), 830 Insider Trading Sanctions Act (1984), 835 Insiders, 829–830 Insolvency, 861–904 vs bankruptcy, 862–863, 866–877 financing alternatives/accounting, 887–891 fraudulent conveyance, 234–235, 239, 884–885, 893–897 landmark and recent cases, 1043–1045 LBOs, 882–887 liquidation, 159, 304–305, 863, 866, 870, 891–892 stakeholder laws, 707 state insolvency proceedings, 878–882 tax issues, 889–891 transaction diagrams, 893–897 workouts, 249, 863–866, 879 (See also Bankruptcy) Installment sales, 320 Institutional equity investors, 114 Institutional investors, indexed, 811 Insurance company financing, 145, 196–200, 242–243, 400–401 Insurance policies, 400–401, 424 Intangibles accounting considerations, 286–291 asset transactions, 365 defined, 286 disclosures, 292–294 due diligence, 386, 419 entity structuring choices, 346–347 integrating, 669 Integration (See Postmerger integration) Intellectual assets, 66–67 Intent, fraudulent conveyances, 234–235 Intercreditor agreements, 219–222, 231–233 Interest rates bridge loans, 117, 197, 205–208 commercial loans, 180 debt structuring, 156 federal funds rates, 144, 180, 255n5 FRNs, 931–932 interest rates swap, 933 offshore currency, 928 prime rate, 144 reference rates, 180 restrictions, 351 Interim (bridge) loan, 117, 197, 205–208 Interim goodwill impairment test, 297 Interim period, 129–130 Interlayer debt, 203 Interlocking Directorate Act (1990), 55 Intermediaries, 42 Internal Control-Integrated Framework, 687–688 Internal financial controls, 668, 686–689 Internal rate of return (IRR) method, 88–89, 106 Internal Revenue Code (IRC) (See Tax considerations) Internal Revenue Service (IRS), 303, 733, 938 (See also Tax considerations) International aspects, structuring transactions, 905–964 annual transaction amounts, 905 Basel II, loan quality, 161 classification of entities, 941–945 commodity theory of M&A pricing, 103–104 competition, HSR Act, 60 disclosure, 936, 938–939 entity classification, 941–945 financing, 926–936 1058 International aspects, structuring transactions—Cont FIRPTA, 953–955 foreign exchange, 912, 921–926 inbound acquisitions, 51, 906–913, 945–953 landmark and recent cases, 1045–1047 outbound acquisitions, 51, 913–920, 955–962 repatriation of profits, 921, 923–926 syndicated loans, 928–930 tax issues, 937–962 vocabulary, 913–914 International Standards Organization (ISO) standards, 682–683 International wire transfer, 627 Introductory material, acquisition agreements, 468–469, 517, 521–523 Inventory, products, 177, 673 Investigation covenants, 384 Investment banks, 44–49, 80, 145, 147–148 Investment Company Act (1940), 145, 211 Investment method, 87–88, 105 Investor-buyers, 3, 9–10, 350, 648 IPOs (initial public offerings), 81, 123, 143, 148, 736 IRC (Internal Revenue Code) (See Tax considerations) IRR (internal rate of return) method, 88–89, 106 IRS (Internal Revenue Service), 303, 733, 938 (See also Tax considerations) ISO (International Standards Organization) standards, 682–683 J Jeffries, Jim, ix Johnson v VantagePoint Venture Partners, 1038 Joint ventures, 916 Jones Day LLP, ix Junior subordinated debt, 223 (See also Subordination provisions) Junk bonds, 118–119, 158–159, 200–207 K Kern, George C., Jr., 829 Key people protections, 503–504 Kirkland & Ellis LLP, viii Koppers Co v American Express Co., 1009 L Labor (See Employees and labor issues) Lajoux, Alexandra R., vii, 142 Land/real estate consolidation, 674 Landmark and recent cases, 1005–1048 agreements and contracts, 1022–1029 antitrust violations, 1029–1031 fees, 1039–1042 health/safety/labor law violations, 1031–1036 improprieties in M/A/B, 1007–1013 insolvent companies, 1043–1045 international transactions, 1045–1047 post-merger jurisdiction or right to sue, 1036–1039 tax law violations, 1042–1043 valuation/sale improprieties, 1013–1022 Lane & Edson, PC, vii Last-out participations, 887 Late payments, and insolvency, 863 Laven v Flanagan, 1010 Law of trusts, 887 Lawsuits (See Legal issues and litigation) Layers of debt, 158–159 Layoffs, 711 LBOs (See Leveraged buyouts (LBOs)) INDEX Lead parachutes, 852–853 Leadership, 31, 675 (See also Boards of directors; Management) Leases, 146, 158, 162–173 Legal issues and litigation acquisition agreements, 466–468, 521, 607–611 analysis of, and due diligence, 397–408 avoidance of lawsuits, 706–707 bring-down conditions, 619–620 bustup fees, 803 court challenges to valuations, 78 covenant triggers, 194 due diligence, 382, 397–409, 425–426, 434, 449–450 entity structuring choices, 337–342 executive compensation, 733 financing, 233–240 indemnification, 493 letter of intent, 383, 460–463, 514–516 litigation analysis, 397, 402–403 loan agreements, 186 outbound acquisitions, 916–920 regulatory considerations, 50 representations/warranties, 187–188 repurchase plans, 844 shareholder commitments, 695 target defects, 466–468 (See also Acquisition agreements and contracts; Fraudulent conveyances; Landmark and recent cases; Regulation and regulatory control; specific topics) Lehman scale, 44 LEK/Alcar Consulting Group, viii Lending (See Financing) Length of tender period, 820 Letter of credit, 174, 179, 185 Letter of intent, 383, 460–463, 514–516, 804 Leverage, 95, 101–102, 308 Leveraged buyouts (LBOs), 111–125 acquisition agreements, 502–504 acquisition workability, 113 bank book, 175–176 commitment letter, 178 conditions to closing, 185–186 covenants, 189 DCF concepts, 79, 120 debt-equity ratio, 124 debt structuring, 157–158 defined, ESOPs, 352–353 existing debt and lease obligations, 167 financing, 113–120, 149–152, 882–887 fraudulent conveyances, 233–237 free cash flow ratio, 120–124 HLTs, 150–152, 161, 703, 724 insolvency structuring, 882–887 international financing, 935–936 letter of credit, 185 loan length, 122–123 merger transactions, 271 prepayments, 184 pricing, 111–120, 123 private equity funds, 146 projections and future cash flow, 115–116, 124–125 reverse, for refinancing, 242 syndicates, 181 types of, Levin, Jack S., viii INDEX Levine, Dennis B., 833 Levinson v Basic, 1016–1017 Liabilities, 264, 277, 392, 701 Liability insurance, 413 LIBOR (London Interbank Offered Rate), 144, 180, 255n5, 928–929 Licensing, asset transactions, 365 Liens, 182–183, 187, 194, 223, 426–428 Limited liability company (LLC), 338–341, 343 Limited partner benefits, 209 Line of business reports, 397 Line of credit, revolving, 176–177 Liquidation, 159, 304–305, 863, 866, 870, 891–892 Liquidation value approach, 159, 887–888 Liquidity, international financing, 931–932 Liquidity ratios, 95 List brokers, as information source, 36 Literature search, 33–37 Litigation (See Legal issues and litigation) LLCs (limited liability company), 338–341, 343 Local content, foreign exchange, 924 Location concerns, 39–41, 47, 394–396, 616–617 Lock boxing, 188 Lockups, 795, 799–800 Logistics, postmerger, 683–684 London Interbank Offered Rate (LIBOR), 144, 180, 255n5, 928–929 Long-term shareholders, 697–698 Loss carrybacks/carryforwards, 279, 302, 314–315, 317 Losses (See Insolvency) Loyalty, duty of, 787, 789–791, 799–800, 802, 840–841, 886 M M&A formula (Lehman scale), 44 M&A integration, 646 (See also Postmerger integration) Madison Real Estate Immobbilien-Anlagegesellschaft Beschrankt Haftende KG v GENO One Financial Place, 1045–1046 Make-whole arrangements, 198 Managed care plans, 428 Management compensation, 302–303, 720 due diligence, 382, 424–426 HR postmerger, 665–668, 674 postmerger structures, 675–679 projections and cash flow, 115–116, 124–125 risk management and compliance programs, 413 skills, WOFC, 28 (See also Boards of directors) Management buyouts (MBOs), 353–363 acquisition agreements, 500–504 cash treatments, 362–363 defined, 5, 353 by employees, 356–360, 504–508 equity investment funds, 209 ESOPs, 354–355 key people protections, 503–504 nonqualified options, 363 nonrecourse note, 360 post-buyout employment, 505–506 private equity funds, 146 recourse loan, 361 special tax issues, 355 stockholders’ agreements, 508–513 structuring and tax issues, 353–363 third-party borrowing, 360–362 typical structure for, 353–354 1059 Mandatory prepayments, 184 Manufacturing, postmerger, 684 Margin-driven operations, WOFC, 28 Marginal cost of capital, 87 Market approach to value, intangible assets, 290–291 Market extension, WOFC, 21 Market segment organizational structure, 676 Market studies, due diligence, 419 Market value method, 89, 106–107 Marketing audit, 37 Material adverse change, 483–485 Materiality default provisions, 195 due diligence, 434–435, 443–448, 450–451 material facts, 401–402, 794–795 representations/warranties, 472–473 Matrix system, 11 Matthews v Groove Networks, Inc., 1041 Maximum value, 126–127 MBOs (See Management buyouts (MBOs)) McCarran-Ferguson Act (1945), 55 Medium-term note (MTN), 932 Meeting with target, 39–41, 47 Mehiel v Solo Cup Co., 1028 Merchant banks, 49–50, 145 Merchant Marine Act (1936), 908 Mere volunteers, 45 Merger transactions, 262, 268–274 Mergers, 2–4, 268–269, 773n4 (See also Acquisitions; specific topics) Merrill Lynch, Pierce, Fenner & Smith, Inc v Dabit, 831 Mezzanine financing, 146, 156–158, 200, 210–211 Milken, Michael, 200 Mineral Lands Leasing Act (1920), 908 Minimizing borrowing, 152–156 Minimum amounts, 489–490 Minnesota Invco of RSA #7 v Midwest Wireless Holdings, 1022 Minute books, 395–396 Mission statements, 14, 662–664 Model Business Corporations Act (1950), 789 Mortgages, 162–164, 885 Motivation, 350–351, 474–475, 646–647, 736 MTN (medium-term note), 932 Multiple jurisdiction bankruptcy, 874–875 Mutual funds, 145, 173–175, 211, 259n37 N NAFTA (North American Free Trade Agreement), 916 NAICS (North American Industry Classification System), 56 Name of company, 653, 655–660, 669–670 National Labor Relations Act (1935), 713 National Labor Relations Board, 712–713 National Starch, 336, 362, 365–366, 375 Negative goodwill, 295 Negative pledge, 182 Negotiation brokers and finders, 42 insurance company financing, 197–198 intercreditor issues, 219–222 letter of intent, 383, 460–463, 514–516 negotiating intermediaries, 42 pre-closing, 618–622, 630–631 refinancing terms, 206–208 (See also Acquisition agreements and contracts; Management buyouts (MBOs)) Nesvold, H Peter, viii INDEX 1060 Net operating losses (NOLs), 279–280, 315–317, 889–890 Net present value (NPV), 78–79, 87, 107–110 Net realizable value, 278 Net working capital ratios, 701 Neuberger Berman Real Estate Income Fund, Inc v Lola Brown Trust No 1B, 1038–1039 “New capital” exceptions, 182 Newark Morning Ledger Co v United States, 1042–1043 No-shop agreements, 461, 803–805 NOLs (net operating losses), 279–280, 315–317, 889–890 Non-Objecting Beneficial Owners (NOBO), 801 Nonbank banks, 147 Noncompete agreements, 287, 505, 521, 603–605, 715 Noncontravention representation, 187 Nondiversifying growth by acquisition, 16 Nonliquidating distribution, 304–305 Nonmonetary considerations antitakeover statutes, 854 Nonqualified options, MBOs, 363 Nonqualified pension plans, 427 Nonrecourse note, 360 Nonresident aliens, 946–947 Nonstockholder antitakeover statutes, 854 Nontax issues, inbound/outbound acquisitions, 51, 906–920 North American Catholic Educational Programming Foundation v Gheewalla, 1043–1044 North American Free Trade Agreement (NAFTA), 916 North American Industry Classification System (NAICS), 56 Note Purchase Agreements, 197–200 NPV (net present value), 78–79, 87, 107–110 No 16, APB, 274, 276–277, 287–288 No 17, APB, 291, 294 O Objecting Beneficial Owners (NOBO), 801 OBO (Objecting Beneficial Owners), 801 Odyssey Partners, L.P v Fleming Cos., 892 Off-site investigations, due diligence, 394–395, 407 Offer materials, tender, 817–819 Offshore bonds, 931 Offshore currency, 928 Olin Corporation v Federal Trade Commission, 1029–1030 Oliver v Boston University, 791, 1022 Omnibus Budget Reconciliation Acts (1990/1993), 910 Omnibus Trade and Competitiveness Act (1988), 908 Omnicare Inc v NCS Healthcare, 805, 1012–1013 On-site inquiries, due diligence, 391, 393–394, 407 One-step transactions, 808, 838 Online information resources, 32, 35, 82 Operations, 28, 80, 124, 382, 392, 671, 682–683 Operator-buyers, 3, 9–10, 111–112, 350, 648 Opportunity chart (See WOFC (wheel of opportunity/ fit chart) process Opportunity makers/takers, 33–34 Opportunity rankings, 30 Option to buy, sale-leaseback, 163 Options, equity-based financing, 258n25 “Ordinary course of business,” 475–476, 503 Organization chart, outbound, 956–957 Organizational assets, 67–69 Organizational structure, 12–13, 61–64, 381, 676–678 OSI Systems, Inc v Instrumentarium Corp., 1039 “Other constituency” antitakeover statutes, 854 Outbound acquisitions, 52, 913–920, 955–962 Outer Continental Shelf Lands Act (1985), 908 Outplacement, 714 Outside sources, due diligence, 426 Outstanding loan periods, 122–123 Over-allotment provisions, 148 Oversight, health care plans, 732 Ownership issues beneficial ownership, 800–801, 805–806 and control, 508–509 disclosure of, 938 ESOPs, 145, 213, 352–355, 842–843 outbound restrictions, 915–916 TOP, 716 P P/E (price/earnings) ratio, 106–107, 702 Pac-Man defense, 851–852 Pairwise comparisons, postmerger, 768–773 Pantry Pride, 799–800 Paper trail, 47 Parachutes golden, 409–410, 507–508, 716, 730–731, 734 lead, 852–853 tin, 716, 852–853 Paramount Communications v Time Inc., 851, 1017–1018 Parents, corporate, 678–679, 716–717 Pareto, Vilfredo, 61 Partial divestments, 155 Partial liquidations, 891–892 Participation agreement, 181 Partnerships, 209, 337–339 Pass-through entities, 319, 338 Patents, 287, 289–290 Patience, 426 Pay (See Compensation) Payback methods, 88, 105–106 Payments and fees bridge loans, 206 brokers and finders, 43–47 bustup and topping, 803 commercial banks, 176, 179–180 HMOs/PPOs, 730 junk bonds, 204 landmark and recent cases, 1039–1042 LBOs, 117–118 registration rights payments, 216–217 tender offers, 821 volunteers, 45 Payments-in-kind (PIK), 239–240 Pegram v Hedrich, 783n102 Penalties in commitment letter, 176 Pension plans/funds, 426, 710–712 Per-share data ratios, 95 Percs (preferred equity redemption cumulative stock), 243 Perfection requirements, conditions to closing, 185 Performance, 86, 205, 924 Perquisites, 715 Person, defined, 940 Personal bankruptcy, 867, 871–872 Personal savings, small businesses, 146 Pfunder, Malcolm, viii Physical assets, 64–65 Piggyback registration rights, 213, 215–216 PIK (payments-in-kind), 239–240 Plan-driven buyers, 3, 9–10, 111–112, 350, 648 Plan v deal-driven goals, 9–10 Planning and finding, 9–76 antitrust considerations for acquisitions, 53–55 brokers and finders, 41–47 commercial bank roles, 47–50 horizontal merger guidelines, 71–74 INDEX Planning and finding—Cont HSR Act, 55–61 in-house search, 31–41 investment bank roles, 47–50 organizational structure, 61–64 outbound acquisitions, 956–957 for postmerger integration, 649–654, 749–751 regulatory considerations, 50–53 sample documents, 64–71, 651–652 search-and-screen process, 31–41 strategic and financial buyers, 9–10 strategic planning, 10–31 (See also Regulation and regulatory control; WOFC (wheel of opportunity/fit chart) process) Plant consolidation, postmerger, 671–672, 684–685 Plants, postmerger, 671–672, 684–685 Pledge funds, 146 Point of service plans (POSs), 729 Poison pills, 721, 844–845, 854–855 Policy, postmerger, 662–663 Policy group, corporate strategy, 15–16 Pooling of interests accounting, 274–276, 318–325, 334–335 Pope, Alexander, Porter, Michael, 11 Positive comparability, 725–726 Positive continuity, 693 POSs (point of service) plans, 729 Post-acquisition debt tax issues, 350, 363–364 Post-buyout employment, 505–506 Post-closing activities, 410–413, 465, 629–630 Post-deal sell-offs, 154 Post-merger jurisdiction, landmark and recent cases, 1036–1039 Post-rejection steps, takeover bids, 840–841 Postmerger divestitures (See Divestitures) Postmerger integration, 645–784 announcements/press releases, 645, 652–653, 660, 689, 741–743 code of ethics, 662–663 communication of plan, 652–654 company name, 653, 655–660, 667–668 culture, 660–662 vs divestitures, 734–741 employee benefit plans, 726–733 employees, 707–734 ethics, 662–663 financial culture, 648 horizontal integration, 13, 18–21, 53, 57–60, 71–74 internal financial controls, 686–689 M&A integration, 646 mission statements, 662–664 motivation, 646–647 pairwise comparisons, 768–773 planning for, 649–654, 749–751 policy, 662–663 processes, 674–689 pros and cons, 647–648 reintegration, 648–649 resources, 664–674, 743–745 responsibilities, 689–714, 748 sample documents, 743–767 strategic culture, 648 timeline for, 752–767 vertical integration, 19–21, 53, 60 vision, 662–663 worksheet, 749–751 Powers, William C., Jr., 873–874 Powers Report, 873–874 1061 PPOs (preferred provider organizations), 428–429, 730 Pre-acquisition regulations, 915 Pre-closing activities, 618–622, 630–631 Preacquisition contingencies, 281–283 Preferred dividends, 144 Preferred equity redemption cumulative stock (percs), 243 Preferred provider organizations (PPOs), 428–429, 730 Preferred stock carrying amount, 367–368 as debt instrument, 144, 258n25 registration rights, 212–213, 218–219 vs subordinated debt, 170, 351–352 subordination provisions, 170, 229 Preincorporation agreements, 501–502 Premerger notifications, 54–56 Premiums, tender offers, 810–811 Prepackaged bankruptcy, 877 Prepayments, 164, 176, 184, 198–199, 204 Present value, 277–278 Preserving existing debt obligations, 164–167, 172–175 Price, defined, 79 Price/cash flow multiples, 123–124 Price/earnings (P/E) ratio, 106–107, 702 Pricing, 104–125 commodity theory, 102–104 comparable net worth to market value method, 89, 107–108 DCF method, 89, 108–110 debt-equity ratios, 124 financial ratios, 120–124 fixed price provisions, 128–131 free cash flow ratios, 121–124 international structuring, 938–939 investment (average rate of return) method, 87–88, 105 IRR method, 88–89, 106 LBOs, 111–120, 123 market value method, 89, 106–107 methods of, 104–110 NPV, 78–79, 87, 107–110 outstanding loan periods, 122–123 payback method, 88, 105–106 projections and future cash flow, 124–125 purchase price in acquisition agreement, 128–137 RVM, 87, 104–105 strategic buyer characteristics, 111–112 vs valuation, 79 (See also Purchase price) Pricing methods, valuation, 104–110 Prime rates, 180 Principal, subordination provisions, 223–224 Principal, target contact, 38–39 Private company acquisitions, 35–36, 125–128, 396–397, 787–788 Private (equity) investment funds, 145–146, 208–211 Private international financing, 931 Private offerings, 143 Private placements, 273–274 Privately negotiated tender offers, 822–823 Privatization, commodity theory, 103 Pro forma financials, 366–367 Pro rata purchases, 821 Procedural subordination provisions, 225–226 Procedures guide, strategic planning, 15–16 Process-complete manufacturing departments, 679 Processes, postmerger integration, 674–689 financial controls, 685–689 goals, 680 human resources, 674 INDEX 1062 Processes, postmerger integration—Cont logistics, 683–684 management structures, 675–679 manufacturing, 684 operations, 682–683 plant consolidation, 671–672, 684–685 production, 682, 684–685 products/services, 681–684 quality control systems, 682–683 sample documents, 745–748 space sharing, 679–680 standards, 680 supply, 682 Production, postmerger, 671–672, 682, 684–685 Products, 13, 20–21, 62–63, 676–677, 681–683 Professional services, 78–81, 129, 135–136, 384–386, 871, 885 Profit and organizational structure, 678 Profit margins, 28, 98 Profit performance ratios, 95 Profits and earnings, 304 Projections and cash flow, 115–116, 124–125 disclosures and tender offers, 818–819 environmental problem, 405 reasonably worst case, 125 Property/real estate consolidation, 674 Prospect lists, 34 (See also Target companies) Prospective cost/carryover basis, 311 Protections against fees, 45–46 Proxy solicitations, 785, 809, 823–827 Proxy statements, bank book, 175–176 Proxy voting, 695, 711, 826 Psychological leaders, 675 Public company acquisitions, 785–860 acquisition agreement transactions, 499–500 board of director responsibilities, 792–805 comparable net worth to market value method, 108 defined, 786 disclosure, 827–829 exhibits, 472 fiduciary duties, 787–792, 799–800, 805, 886–887 financing, 838–839 information sources on, 35 initial meeting, 40–41 insider trading, 205, 829–838, 920 international financing, 931 M&A forms, 805–806 vs private company, 35–36, 125–128, 396–397, 787–788 proxy solicitations, 785, 823–827 risk, 83–84 securities laws, 788–789 state laws, 788–789, 853–856 takeover bids, 792–805, 840–853 takeover defenses, 840–856 tender offers, 785, 806–823 (See also Takeover bids) Public filings, due diligence, 429–430 Public records, due diligence, 395–396 Public sales of securities (See Registration rights) Public sources, international financing, 926–927 Publishing tender offers, 813 Purchase price, 125–137 in acquisition agreements, 128–137 allocation of, 280–281, 326–328, 346 buy/sell arrangements, 512–513 contingencies, 281–282 Purchase price—Cont minimizing, 153–154 Statement 141, FASB, 276–277 (See also Pricing) Pushdown accounting, 368 Q Q ratio, 774n7 Qualified pension plans, 427 Qualified resident, 951–952 Quality control systems, 19, 682–683 Quantum meruit, 43 Quasi-junk bonds, 205 R Racketeer Influenced and Corrupt Organizations Act of 1970 (RICO), 46, 838 Rappaport, Al, viii Ratios, financial, 95–96, 120–121, 193–194, 701–702 Real estate consolidation, 674 Real estate investment trusts (REITs), 146, 871 Real estate leases, 146, 158, 162–173 Reasonable consent, 480 “Reasonably equivalent value,” 237–238, 883–886 Reasonably worst case projections, 125 Recapitalization (recap), 5–6 Recapitulation, 841–843 Receivables, commitment letter, 177 Reconciliation, cost of capital, 97 Record keeping, international, 939 Recourse loans, 361 Recovery from bankruptcy, 874 Red flags, due diligence, 392 Redstone, Sumner M., 137n1 Reed, Stanley Foster, vii Reeves, Van Kirk, ix Reference books, as resource, 35 Reference rates, 180 Refinancing financing, 240–243 letters of credit, 174, 179, 185 negotiating terms of, 206–208 security interests, 172 subordination provisions, 224–225, 229 (See also Financing) Regional base pay, 717 Registration rights, 211–219 Regulation and regulatory control, 50–61 antitrust concerns, 51, 53–55 blocking mergers, 694 brokers and finders, 42–43 due diligence, 433–434, 448–449 equity investment funds, 211 HLTs, 150–151 horizontal mergers guideline, 71–74 HSR Act, 45, 55–61, 909 legal issues and litigation, 50, 398 planning and finding, 50–53 premerger notification, 54–55 private vs public offerings, 143 representations/warranties, 187 types of, 51–53 (See also Federal securities laws) Regulation Fair Disclosure (Regulation FD), 828, 856n3 Reintegration, postmerger, 648–649 REITs (real estate investment trusts), 146, 871 Related filing schedules, 185–186 Relocation issues, 713–714 INDEX Renegotiating terms, refinancing, 240 Reorganization funds for, 879 tax-deferred, 324–325, 328–335 tax-free, 324–330, 351 Repatriation of profits, 921, 923–926 Repayment restrictions, foreign exchange controls, 921 Replacement cost, 278, 692 Replacement value method (RVM), 87, 104–105 Reporting company reports, 35–36 current significant events, 805 due diligence, 391 goodwill reporting units, 295–296, 300–301 industry research reports, 35 postmerger, 645, 652–653, 660, 675, 677, 689, 741–743 private company valuation, 126–127 registration rights, 213 Representations and warranties, 470–479 acquisition agreements, 468, 517–521, 525–566, 596–603 breached representations, 188–189 covenants, 194 exhibits/disclosure schedules, 470–472 financial statements, 187–189 knowledge issues, 475–479 materiality, 472–473, 489–491 motivation, 474–475 “ordinary course of business,” 475–476, 503 pre-closing, 618–622, 630–631 purpose of, 187–188, 470 scope of, 472–474 Repurchase plans, 844 Research locations, due diligence, 394–396 Reservation of rights, 401 Residence-of-the-seller rule, 945 Resident aliens, 942 Resources, postmerger integration, 664–674 brand identities, 669–670 equipment, 672–673 financial, 668–669 HR, 665–668 inventories, 673 land/real estate, 674 production plants, 671–672, 684–685 sample documents, 743–745 tangible, 671 Responsibilities, postmerger integration, 689–714 to customers, 690–694 to employees, 707–714 press releases, 689, 741–743 sample documents, 748 to shareholders, 694–707 Responsible leaders, 675 Restaurants, valuations, 80 Restrictions on transferability, 508–509 Restrictive covenants, 165, 550 Restructuring debt (workouts), 5, 249, 863–866, 879 Restructuring defenses, 841–842 Retention agreements, 716 Return on investment (ROI), 19–20, 28, 702 Revenue Reconciliation Act (1990), 910 Reverse LBOs, 242 Reverse mergers, 123, 269 Reverse subsidiary mergers, 269 Revlon v McAndrews & Forbes Holdings, 792–793, 799–800, 1023–1024 1063 Revolver loans, 118, 176–177, 199 Revolving debt, senior, 157, 160 Revolving line of credit, 176–177, 187 RICO (Racketeer Influenced and Corrupt Organizations Ac of 1970t), 46, 838 Right to accelerate, breached representations, 188 Right to sue, landmark and recent cases, 1036–1039 Riklis, Meshulam “Rik,” 200 Risk allocation in acquisition agreements, 465–468 currency risk, 922 discounting, 85 hurdle rates, 85–86 insolvency and LBO structuring, 882–887 material adverse change, 483–485 and purchase price, 154 strategic planning, 22, 25–26 utility function, 83–84 valuation, 83–86 WOFC, 22, 25–26 Robertson Stephens, 81 Rock, Robert H., viii ROI (return on investment), 19–20, 28, 702 Rollup, 16 Rule(s), U.S Code, 7, 668–669 (See also specific rules below) Rule 10b-5, 390–391, 830–832, 834–837 Rule 10e-3, 831, 834–837 Rule 13d-2, 816 Rule 13e-3, 801, 826 Rule 14d-6, 817 Rule 14d-10(a)(1), 271 Rule 14e-3, 834 Rule 16b-7, 832 Rule 19c-4, 849 Rule 141–10, 844 Rule 144, 273, 802 Rule 144a, 212 Rule 145, 272, 802 Rule 501 to 508, 273–274 Rules of thumb, valuation, 81–82 Rumors, handling, 652–653 RVM (replacement value method), 87, 104–105 S S corporations, 171, 337–338, 340, 342–343, 360, 891 Safety law violations, landmark and recent cases, 1031–1036 Salary, 715 Sale-leasebacks, 158, 162–164 Sale preparation, private company valuation, 126 Sample documents acquisition agreement, 517–611 assets, 64–71, 743–748 closing memorandum, 631–643 confidentiality agreement, 414–417 due diligence, 386–387, 418–435 employee due diligence, 432–433 integration planning, 749–751 integration timeline, 752–767 letter of intent, 514–516 merger agreement, 517–611 planning and finding, 64–71, 651–652 postmerger integration, 743–767 public company M&A forms, 805–806 subordination provisions, 247–257 Sanches, Manuel, ix Sandwich debt, 203 1064 Sarbanes-Oxley Act (2002) code of ethics, 662 due diligence, 168, 186, 382, 385, 455n1 good governance, 701 internal financial controls, 686–687, 779n56 investment banking, 48 outbound acquisitions, 918–919 pension funds, 712, 728 public company M&A, 789 SBA (Small Business Administration), 146, 149 SBICs (small business investment companies), 146, 149 SBUs (strategic business units), 13, 102–104 Schedule SC 8K, 805 Schedule SC 13D, 451, 805–806, 813–819, 827 Schedule SC 13E, 806, 827 Schedule SC 13G, 451, 814 Schedule SC 14A, 823–824, 826 Schedule SC 14D, 806, 817–819 Schedule SC S-3, 806 Schedule SC S-4, 806 Schnedier S.A., 841 Scienter requirements, 390, 834 Screening, search-and-screen process, 31–41 Search-and-screen process, 31–41 Seasonal supplements, 28–29 SEC (See Securities and Exchange Commission (SEC)) Second-lien loans, 887 Secondary offerings, 143 Section(s), U.S Code, (See also specific sections below) Section 1.1 to 1.9, 517, 521–523 Section 2.1 to 2.5, 517, 523–524 Section 3(a)(9), 842 Section 4.1 to 4.36, 517–518, 525–563 Section 5.1 to 5.7, 519, 564–566 Section 6.1 to 6.10, 519, 566–573 Section 7, 54–55 Section 8.1 to 8.2, 519, 573–574 Section 9.1 to 9.10, 519–520, 574–583 Section 10.1 to 10.6, 519–520, 584–587 Section 10(b), 390–391, 788, 834 Section 11, 788 Section 11.1 to 11.7, 519–520, 587–596 Section 12, 814 Section 12.1 to 12.8, 520–521, 596–603 Section 12(g), 826 Section 13(d), 789, 801, 814–817, 827 Section 14, 824, 826 Section 14.1 to 14.3, 521, 605–607 Section 14(d), 789, 827 Section 15.1 to 15.15, 521, 607–611 Section 15(d), 826 Section 16(b), 357, 733, 788, 800, 831–833 Section 18(a), 54 Section 78, 961 Section 83, 355–361, 363 Section 101(12), 867 Section 162(m), 410 Section 163, 351 Section 164, 960 Section 172, 889–890 Section 197, 346–347 Section 269B, 943 Section 279, 350–351 Section 280, 409, 721 Section 304, 344–346 Section 306(a), 789 Section 332, 892 INDEX Section 337, 892 Section 338, 268–269, 310–311, 314, 326, 344, 346, 350, 364, 376n5 Section 351, 322, 335–337, 345–346, 362, 375 Section 363(f), 879 Section 368, 324–325, 328–335, 364 Section 382, 315 Section 404, 168 Section 548, 884 Section 897(d), 950 Section 902, 961–962 Section 904(d), 961 Section 951–964, 958 Section 960, 961 Section 1042, 352–353 Section 1126(b), 877 Section 1248, 961–962 Section 1408, 874 Section 1504(d), 943–944 Section 4999, 721 Section 6038C, 939 Section D, 273–274 Section S-K, 260n45 Sector strategies, 13 Securities, defined, 786 Securities Act (1933) comfort letters, 136 defined, 786, 788 due diligence, 389 purchase price in acquisition agreement, 136 registration rights, 212–213 securities laws, 762, 838, 842 security, defined, 766 structuring, 272–274 (See also Public company acquisitions) Securities and Exchange Commission (SEC) bankruptcy protections, 881–882 comfort letters, 136 foreign firms, 939 fraudulent conveyances, 236 as information source, 35 internal financial controls, 686–689 MBOs, 354 offshore bonds, 931 outbound acquisitions, 918–919 private vs public offerings, 143 pro forma statements, 366–367 pushdown accounting, 368 registration rights, 217 securities laws, 788 shareholder commitments, 695 step-transaction, 271 (See also Federal securities laws; Public company acquisitions) Securities Exchange Act (1934) beneficial owners, 801 defined, 788 disclosure, 813–814, 823–824 due diligence, 389–391 employment and advisory security plans, 733 going private, 826 insider trading, 830–832, 837 public companies, 788–789 short-swing profit rule, 357, 788, 800 stock transactions, 271 (See also specific schedules) Securities Litigation Uniform Standards Act of 1998 (SLUSA), 830–831 INDEX Securitization, 242–243, 934–935 Security holders, registration rights, 212–214 Security interests, 172, 185 Security resales, 802 Security research firms, 35 Self-tenders, 843–844 Sell-off decision, WOFC, 30–31 Senior subordinated debt, 157–158, 160, 223 (See also Subordination provisions) Sensitivity analysis, 101, 106 Separable intangible asset, 286 Serial consolidation, 16 Service-level agreements (SLAs), 693 Services bank lending services, 179–180 extension, 20–21, 62–63, 676–677 postmerger, 681–684 professional, 78–81, 129, 135–136, 384–386, 871, 885 Setoff rights, 491 Severance agreements/plans, 507, 716 Shamrock Holdings v Arenson, 1028–1029 Shareholder value approach, 98–99, 698–699 Shareholders confidential voting, 849 cost of capital estimation, 98–99 litigation analysis, 398–399 postmerger responsibility to, 694–707 stockholder agreements, 508–513 tender offers, 821–822 Shelf registration, 212, 214 Shell Oil Co v Dagher et al, 1030–1031 Shell transactions, 123, 839 Shoemaker strategy, 18 Short-form mergers, 5, 808 Short-swing profit rule, 357, 788, 800 Short tendering, 822 SIBOR (Singapore Interbank Offered Rate), 928–929 SIC (Standard Industrial Classification) code, 33 Signatory levels, internal controls, 689 Signing bonuses, 715–716 Singapore Interbank Offered Rate (SIBOR), 928–929 Situation analysis, industry, 32 Six Sigma, 682 SLAs (service-level agreements), 693 SLUSA (Securities Litigation Uniform Standards Act of 1998), 830–831 Small business, 80, 146–147, 254n1 Small Business Administration (SBA), 146, 149 Small business investment companies (SBICs), 146, 149 Smith v Van Gorkom, 793–794, 1010–1011 Soft assets, 104–105 Software Toolworks Sec Lit, 1010 Solicitation, of proxies, 825 Solvency, fraudulent conveyances, 235 (See also Insolvency) Solvency opinions, 135–136, 239 Space sharing, postmerger, 679–680 Special class (alphabet) stock, 352, 849 Special committees of the board, 795–797 Special pay arrangement, 715–716, 723 Specific risk, 84 Spin-offs, 155, 335, 337, 364, 735–736 Sponsors (LBO buyers), 114 Squeeze-outs, 108 Staggered board provisions, 848 Staggered elections, 848 Stalking horse bidder, 889 Standard Industrial Classification (SIC) code, 33 1065 Standards, postmerger, 680 Standing agreements, 395 Stapled entities, 943 Star strategic planning classification, 11 State laws antitakeover statutes, 853–854 consolidated tax returns, 306, 316 income taxes, 364–365 insolvency proceedings, 878–882 public companies, 788–789, 853–856 takeover bids, 853–856 tax issues, 303, 364–365 Statement 52, 922 Statement 96, 280 Statement 109, 278–280, 317 Statement 141, 274, 276–277, 283–286 Statement 142, 286–301 Statement 144, 288 Status among lenders, intercreditor agreements, 233 Statute of Elizabeth law, 884 Statutory mergers, Step-transaction doctrine, 270–271, 326, 885–886 Step-up amounts, 313, 319 Stepped-up (cost) basis transactions, 310–314, 317–319, 343–344 Stock transactions carryover basis, 310–316, 319, 343–344, 889–890 entity structuring, 344–346 price and transfer, acquisition agreements, 468, 517, 523–524 taxable, 309–310 tender offers, 809 two-step, 270–271, 327, 808–810, 838–839 Stocking, 243 Stocks acquisition price determined by, 131 alphabet (special class), 352 vs assets, 262 common stock, 114, 212–215, 219, 258n25 employee stock purchase, 358–359 equity impact of financing with, 703–704 options for, 721 purchase transactions, 262, 267–268 registration rights, 218–219 risk measurement, 84 sample acquisition agreements, 517, 523–524 stock-based pay, 719 valuation of, 367–368 warrants, 158, 171–173, 201, 258n25 (See also Preferred stock; Shareholders) Stores, valuations, 80 Straight debt, 347–348 Strategic acquisitions, 3, 9–10, 111–112, 350, 648 Strategic business units (SBUs), 13, 102–104 Strategic buyers, 9–10 Strategic culture, postmerger, 648 Strategic planning, 10–31 assets, 22–24 benefits of, 11–12 board of directors, role of, 14 deal vs plan-driven goals, 9–10 defined, 10–11 Delphi process, 29–30 elements of, 14–15 fit charts, 27–29 inventory of strengths and weaknesses, 22–26 levels of, 12–13 procedures guide, 15–16 INDEX 1066 Strategic planning—Cont risks, 22, 25–26 search-and-screen process, 31–41 synergy, 27–29 WOFC, 17–31 Strengths (supplements), WOFC, 21–22, 27–29 Strike price, 923 Structuring considerations accounting, 274–294 asset transactions, 155, 262–267, 309–310 basic, of transaction, 302 debt finance, 156–159 entity choices, 337–347 financing, 156–159 financing acquisition debt, 347–353 goodwill impairment testing, 294–301 holding company structure, 148, 270–272, 325, 337, 353 for insolvent companies, 882–887, 889–891 LBOs, 882–887 MBOs, 353–363 merger transactions, 262, 268–274 organizational structure, 12–13, 61–64, 381, 676–678 outbound regulations, 916 pooling of interests accounting, 274–276, 318–325, 334–335 post-acquisition tax issues, 363–364 stock transactions, 262, 267–268 stockholder agreements, 510–511 subordination provisions, 229–231 tax-deferred transactions, 321–337 tax issues, 301–309, 347–353, 363–369 tax structure basics, 309–337 taxable transactions, 309–320 transaction diagrams, 369–375 transactional forms, 262–263 (See also International aspects, structuring transactions) Stub period, 129–130 Sublimits, inventory, 177 Subordination provisions absolute priority rule, 182 blockage, 225–226, 228 bridge loans, 207 corporate structure, 229–231 in debt instruments, 229 default, 226–227 duration of, 229 financing, 156–161, 169–170, 179–200, 223–231, 243–254 intercreditor issues, 219–221, 231–233 junk bond restrictions on, 204 LBO, 116–117 loan commitments, 176 negotiating substantive, 224–225 preferred stock, 170, 229 principal provisions, 223–224 procedural provisions, 226 quality of loans, 161 refinancing, 224–225, 229 sample documents, 247–257 seller security interests, 172 substantive vs procedural, 223–225 suspension provisions, 226 tranche B loans, 887–889 typical, 243–254 Subpart F, 958–960 Subsequent draws, 187 Subsidiaries, 269, 396–397, 871, 891 Substantially nonvested stock, 363 Substantive subordination provisions, 224–225 Success of mergers, 649–651 Successor plan rule, 727–728 Summary advertisement, tender offers, 813 Superfund, 403–405, 407 Superlien, 404 Supermajority provisions, 266–267, 847 Supplements, WOFC, 21–22, 27–29, 975–978 Suppliers, 15, 19, 399, 682, 864–865 Survival period, 487–488, 491–492 Survivors, 3–5 Suspension subordination provisions, 226 Swaps, 922–923, 932–934 Syndicated loans, international, 928–930 Syndicates, 179, 181 Synergy, 16, 27–29 Systematic risk, 83–84 T Tail, 400 Take-back provision, 721–722 Takebacks, 153, 156, 158, 169–171 Takeholders, registration rights, 217–218 (See also Shareholders) Takeover bids, 789–806 beneficial ownership, 801, 805–806 block purchases, 801–802 board of director responsibilities, 792–805 bustup fees, 803 defenses against, 721–722, 840–856 doctrine of entire fairness, 798 duty of care, 787, 789–794 expenses, 365–366 fairness opinions, 48, 78, 797 fees, 44 fiduciary duties, 793–795, 799–802 fiduciary out clause, 798–799, 804–805 lockups, 795, 799–800 material facts, 794–795 no-shop agreement, 461, 803–805 public companies, 792–805 security resales, 802 short-swing profits, 800 stakeholder laws, 707 topping fees, 803 (See also Tender offers) Takeover rumors, 137n1 Tangibles, 420–421, 671 Target companies defined, industry surveys, 37 purchase method and price, 276–277 reasons company is for sale, 78 search-and-screen process, 31–41 (See also specific topics) Target ownership plan (TOP), 716 Taubman, A Alfred, 852 Tax basis carryover basis transactions, 310–316, 319, 343–344, 889–890 cost basis transactions, 310–314, 317–319, 343–344, 889–890 defined, 263, 303 initial basis, 303, 311–312 INDEX Tax considerations, 301–353 ABC, 100 BPT, 949–953 cancellation of debt, 890 capital gains, 306–307, 946–947 concepts and definitions, 303–309 consolidated tax returns, 306, 316 debt vs equity, 348–350 disclosure, 936, 938–939 double taxation, 265, 307–308, 319–320, 338, 341 earnouts, 134–135 entity classification, 941–945 ESOPs and LBOs, 352–353 financing overview, 302–303 FIRPTA, 953–955 foreign tax credits, 960–961 golden parachutes, 409–410, 507–508, 716, 730–731, 734 inbound, 945–953 income tax treaties and principles, 939–941, 946–947 insolvency, 889–891 installment sales, 320 interest rate restrictions, 351 international structuring, 937–962 IRS private letters, 303 landmark and recent cases, 1042–1043 leases, 173 liquidations, 892 outbound, 955–962 post-merger debt, 350, 363–364 preferred stock vs subordinated debt, 351–352 pro forma financials, 366–367 pushdown accounting, 368 sample acquisition agreements, 520, 587–596 special class (alphabet) stock, 352 state and local taxes, 364–365 stock valuations, 367–368 straight debt, 347–348 structuring, 301–320, 347–353, 363–369 subordinated debt, 170 tax deductibility, 350–351, 365–366 tax-deferred transactions, 321–337 tax rates, 306–307 taxable transactions, 309–320 (See also Tax-free/tax-exempt transactions; specific section codes) Tax deductibility, 350–351, 365–366 Tax-deferred transactions, 321–337 continuity of business enterprise, 323–324 creeping transaction, 326–327 pros and cons, 321–322 reorganizations, 324–325, 328–335 Section 351, 336–337 Section 368, 324–325, 328–335 spin-offs, 155, 335, 337, 364 step transaction doctrine, 326 structuring, 321–337 Tax Equity and Fiscal Responsibility Act (1982), 910 Tax-free/tax-exempt transactions carryover basis, 310, 315 debt into equity recharacterization, 349–351, 362–363 ESOP rollover, 352–353 forward triangular mergers, 335–336 money market/mutual funds, 173–175, 259n37 post-acquisition, 363–364 qualification for, 322–324 reorganizations, 324–330, 351 1067 Tax-free/tax-exempt transactions—Cont spin-offs, 337 vs tax-deferred, 321–322 transaction diagrams, 372–373 Tax havens, 945 Tax Increase Prevention and Reconciliation Act (2005), 910 Tax Reconciliation Act (2006), 910–911 Tax Reform Act (1986), 309, 910 Tax year, 306 Taxable transactions, 309–320 asset vs stock acquisition, 309–310 carryover basis, 310–316, 319, 343–344, 889–890 cost basis, 310–314, 317–319, 343–344, 889–890 installment sales, 320 loss carrybacks/carryforwards, 279, 302, 314–315, 317 NOLs, 315–317 pass-through entities, 319 structuring, 309–320 Taxpayer Relief Act (1997), 910 Taxpayers, 963n5 Teamwork for Employees and Management (TEAM) Act, 713 Technology transfer, foreign exchange, 924–925 Tekacq M&A, viii Telecom Act (1996), 82 10–Ks and 10–Qs, 175–176, 367, 389, 826 Tender Offer Act (1968), 789 Tender offers, 806–823 commencement, 813 contacting target’s management, 812 control of board of directors, 821 defined, 785, 806–807 disclaimers, 819–820 disclosure requirements, 813–819 extension of offering period, 820 filing avoidance, 819 group formation, 814–815 length of offering period, 820 MBOs, 354 merger after closing, 810 offer materials, 817–819 one-step transactions, 808, 838 payments for, 821 practical considerations, 811–812 premiums, 810–811 privately negotiated purchases, 822–823 pro rata purchases, 821 projection disclosures, 818–819 vs proxy solicitation, 809 public companies, 785, 806–823 shareholder treatment, 821–822 short tendering, 822 stock transactions, 267, 809 tender offer statement, 817–818 two-step transactions, 808–810, 838–839 two-tier transactions, 809 withdrawal of, 820–821 (See also Takeover bids) Tentative carryback adjustment, 890 Term loans, 118, 145, 160, 206–207 Term sheets/commitment letters, 197 Termination acquisition agreements, 468, 521, 605–607 fees for, 179–180 registration rights, 218 1068 Texaco Inc v Dagher et al, 1030–1031 Texaco v Pennzoil Co., 463, 568, 872, 1024–1025 Third-parties, 360–362, 395, 623 360–day year, 183 Tie-in deals, 49, 51 Time issues acquisition dates, 281 closing dates, 412, 622–625 cure and grace periods, 195 due diligence, 368 equity investment funds, 210 exercise price, 171–172 HLTs, 150–151 insurance company financing, 196–197 integration timeline, 752–767 needed for closing, 614–615 registration rights, 215 search-and-screen process, 31–32 subordination provisions, 229 term loans, 118, 145 time horizons, valuation, 101 waiting period, HSR Act, 45, 55–56 Time-off, employee, 712 Tin parachutes, 716, 852–853 Tippees/tippers, insider training, 205, 829–838, 920 Title 11, U.S Code, 866–867, 869 TOP (target ownership plan), 716 Topping fees, 803 Total compensation, 716 Trade associations and trade shows, 32, 34 Trade debt in subordination provisions, 225 Trade policy, 912–913 (See also International aspects, structuring transactions) Trader investors, 697–698 Trading with the Enemy Act (1917), 918–919 Tranche B loans, 887–889 Tranches, 242–243, 887 Transaction diagrams, 369–375, 893–897 Transactional forms (See Structuring considerations) Treadway Companies, Inc v Care Corp., 1018–1019 Treaty shopping, 941 Trended analysis, 40 Trenwick America Litigation Trust v Ernst & Young, 1044 Trigona, Riccardo, ix Trust Indenture Act (1939), 201 Turnaround funds, 879 Turnarounds, 863–865 Turns-driven operations, WOFC programs, 28 20–day figure, 77 Two-step transactions, 270–271, 327, 808–810, 838–839 Two-tier offer, 808–809 Two-tier transactions, 809 Type A reorganizations, 324–325, 328–329 Type B reorganizations, 329–331 Type C reorganizations, 332–335 Type D reorganizations, 335 Typical documents (See Sample documents) U UbiquiTel v Sprint Corporation, 1013 UBIT (unrelated business income tax), 173 UCC (Uniform Commercial Code), 182–183, 264, 616, 625, 885 UFCA (Uniform Fraudulent Conveyance Act of 1918), 234, 884 UFTA (Uniform Fraudulent Transfer Act of 1984), 75n12, 234, 862, 884 INDEX Undervaluation, 78 Underwriting best efforts, 131–132, 148 bridge loans, 206 comfort letters, 137 due diligence, 391 public offerings, 143 registration rights, 218 Uniform Commercial Code (UCC), 182–183, 264, 616, 625, 885 Uniform Fraudulent Conveyance Act of 1918 (UFCA), 234, 884 Uniform Fraudulent Transfer Act öf 1984 (UFTA), 75n12, 234, 862, 884 Uniformity, historical, and valuation, 86 Unions, 264, 712–713, 925 Unisuper v News Corp., 1045 United States v Bestfoods, 51 United States v Gleneagles Inv Co., 236–237 United States vs Philadelphia National Bank et al., 1030 “Unreasonably small capital,” 234–235, 238 Unrelated business income tax (UBIT), 173 Unsatisfied closing conditions, 615 Unsolicited bids (See Takeover bids; Tender offers) Upstream guarantee, international, 936 Upstreaming, 237–238, 883 U.S Code (bankruptcy), 234–235, 843, 862, 866–870, 874–875, 884–885 (See also specific section codes) U.S ownership of foreign assets, 52 U.S persons, 942, 944 U.S real property holding corporation (USRPHC), 953–954 U.S real property interests (USRPIs), 953–954 U.S residents, 942, 945 U.S shareholder, 957–956 Useful economic life, intangible asset, 288–290 Users, target industry surveys, 37 USRPHC (U.S real property holding corporation), 953–954 USRPIs (U.S real property interests), 953–954 USX v Marathon, 809 Utility function, 83–84 V Valuation, 77–111 ABC, 100 capital rationing, 100–101 commodity theory, 102–104 comparable net worth to market value method, 89, 107–108 conglomerates, 111 cost of capital estimation, 87–99 DCF method, 89, 108–110 discounting, 85 divestiture option, 737 existing customers, 691–692 historical performance, 86 hurdle rates, 85–86 intangible assets, 290–291 investment (average rate of return) method, 87–88, 105 IRR method, 88–89, 106 landmark and recent cases, 1013–1022 leverage, 101–102 liquidation, 887–888 market value method, 89, 106–107 NPV, 78–79, 87, 107–110 INDEX Valuation—Cont overview, 77–79 payback method, 88, 105–106 preferred stock, 367–368 vs price, 79 pricing methods, 104–110 private company considerations, 125–128 professional guidance to determine, 79–81 ratios, 96 reasonably equivalent value, 883–886 risk, 83–86 rules of thumb, 81–82 RVM, 87, 104–105 sale-leaseback, 164 shareholder value approach, 98–99, 698–699 specialists in, 78–80 time horizons, 101 (See also Pricing) Value, defined, 79 Value drivers, 96 Van Gorkom, Jerome, 793–794 Variant method, 130–131 Varity Corp v Howe, 712 Veasey, Norman, 389 Venture capital firms, 145–146 Verification of facts, due diligence, 391–392 VERs (voluntary export restraints), 917 Vertical integration, 19–21, 53, 60, 685 Virginia Bankshares, Inc v Sandberg, 1036–1037 Vision, 14, 662–663 Vocabulary, international, 913–914 Voluntary export restraints (VERs), 917 Volunteers, 45 Voting, 233, 511, 826 Vulture funds, 879 W Waiting period, HSR Act, 45, 55–56 Waivers, 181, 197–198, 621–622 Walker, David, 711 Wall Street rule, 44 WARN Act, 738–739 Warranties (See Representations and warranties) Warrants, 158, 171–173, 201, 258n25 Weaknesses (complements), WOFC, 21–22, 27 Web sites, valuations of, 82 Weihman, Edward A., viii 1069 Weil Gotshal & Manges LLP, ix Welfare plans, 733 Wellman v Dickinson, 807 West, Kenneth B., 660 Weston, J Fred, viii, 142, 647 Wetlaufer, Gerald, viii The Wharf (Holdings) Ltd et al v United International Holdings, Inc., et al., 1016–1017 Wheel of opportunity/fit chart (See WOFC (wheel of opportunity/fit chart) process) White knights/white squires, 850–851 Wildcat strategic planning classification, 11 Williams Act (1968), 789, 909 Winans, R Foster, 833–834 Winn, Philip, 891 Wire transfers, 625–628 Withdrawal of tender offers, 820–821 W.L Gore & Associates, Inc v Wu, 1029 WOFC (wheel of opportunity/fit chart) process, 17–31 assets, 22–24 basic structures, 18–20 case study, 965–1004 Delphi process, 29–30 discovery process, 20–21 diversification mode, 20–21 fit chart, 20–22, 27–29 free-form diversification, 20 fundamental questions, 17 horizontal integration, 18–21 inventory of strengths and weaknesses, 22–26 opportunity ranking, 30 product/service extension, 20 risks, 22, 25–26 sell-off decision, 30–31 strategic planning, 17–31 synergy, 27–29 vertical integration, 19–20 Work-in-process inventory, 278 Working capital, 157, 173–175, 258n24 Workouts, 5, 249, 863–866, 879 Y Yolton et al v El Paso Tennessee Pipeline Co., 1035–1036 Z Zell, Sam, 881 ABOUT THE AUTHORS Stanley Foster Reed, M.B.A., P.E., has taught at the College of Charleston and consulted on numerous global deals, including Allied Chemical, Gillette, Schering-Plough, and Seiko Watch Corporation He was the original publisher of Mergers & Acquisitions and Directors & Boards magazines, among other publications Alexandra Reed Lajoux, M.B.A, Ph.D., is chief knowledge officer of the National Association of Corporate Directors She is author of The Art of M&A Integration, and coauthor of The Art of M&A Due Diligence, The Art of M&A Structuring, and The Art of M&A Financing and Refinancing H Peter Nesvold, Esq., CFA, CPA is a managing director and senior equity analyst at Bear Stearns His diverse background in law, finance, and accounting offers unique perspective and depth of expertise into the structure and financial reporting of highly complex corporate transactions An active author on financial topics, he coauthored The Art of M&A Structuring Copyright © 2007, 1999, 1995, 1989 by Stanley Foster Reed, Alexandra Reed Lajoux, and H Peter Nesvold Click here for terms of use ... variables—complements and supplements (see the case in the back of the book) The anonymous allocations of each participant to each of the variables are tallied and summed These averages are then made known to the. .. from the expertise of Al Rappaport, Principal, The LEK/Alcar Consulting Group, La Jolla, California, and various partners at Wesray Capital Partners, New York City Chapter 4, The Art of Financing... which a major part of the acquired assets is subsequently sold off to retire the debt that financed the transaction What is a recapitalization? This is not an acquisition but can make a company