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1、M&A Deal Structuring Process: Payment & Legal Considerations,If you cant convince them, confuse them. Harry S. Truman,Learning Objectives,Primary Learning Objective: To provide students with a knowledge of the M&A deal structuring process Secondary Learning Objectives: To enable students to understa
2、nd the primary components of the process, payment considerations, and legal considerations,Deal Structuring Process,Deal structuring involves identifying The primary goals of the parties involved in the transaction; Alternatives to achieve these goals; and How to share risks. The appropriate deal st
3、ructure is that which Clearly defines the rights and obligations of the parties involved and satisfies as many of their primary objectives as necessary to reach agreement Subject to an acceptable level of risk Questions: 1. What are common high priority needs of public company shareholders? Private/
4、family owned firm shareholders? 2. How would you determine the highest priority needs of the parties involved?,Major Components of Deal Structuring Process,Acquisition vehicle Post-closing organization Form of payment Form of acquisition Legal form of selling entity Accounting Considerations Tax con
5、siderations,Factors Affecting Alternative Forms of Legal Entities,Control by owners Management autonomy Continuity of ownership Duration or life of entity Ease of transferring ownership Limitation on ownership liability Ease of raising capital Tax Status Question: Of these factors, which do you beli
6、eve is often the most important? Explain your answer.,Acquisition Vehicle,Post-Closing Organization,Discussion Questions,What is an acquisition vehicle? What are some of the reasons an acquirer may choose a particular form of acquisition vehicle? What is a post-closing organization? What are some of
7、 the reasons an acquirer may choose a particular form of post-closing organization?,Form of Payment,Cash (Simple but creates immediate seller tax liability) Non-cash forms of payment Common equity (Possible EPS dilution but defers tax liability) Preferred equity (Lower shareholder risk in liquidatio
8、n) Convertible preferred stock (Incl. attributes of common lower risk in liquidation) Real property (May be tax advantaged through 1031 exchange) Some combination (Meets needs of multiple constituencies) Closing the gap on price and risk mitigation Balance sheet adjustments (Ignores off-balance shee
9、t value) Earn-outs or contingent payments (May shift risk to seller) Rights, royalties, and fees (May create competitor & seller tax liability) Collar arrangements (Often used if acquirers share price has a history of volatility),Collar Arrangements1,2,Objective: To guarantee an offer price per shar
10、e (OPPS) within a range for target firm shareholders. Offer Price Per Share = Share Exchange Ratio (SER) x Acquirers Share Price (ASP) = Offer Price Per Target Share x Acquirers Share Price Acquirers Share Price Collar Arrangement: Defines the maximum and minimum price range within which the OPPS va
11、ries. SER x ASP (lower limit) Offer Price Per Share SER x ASP (upper limit) Example: A target agrees to a $50 purchase price based on a share exchange ratio of 1.25 acquirer shares for each target share. The value of the each acquirer share at the time of the agreement is $40 per share. The target s
12、hareholder is guaranteed to receive $50 per share as long as the acquirers share price stays within a range of $35 to $45 per share. The share exchange ratio floats within the $35 to $45 range in order to maintain the $50 purchase price. ($50/$35) x $35 ($50/$40) x $40 ($50/$45) x $45 1.4286 x $35 1
13、.25 x $40 1.1111 x $45 1For a fixed value agreement the dollar offer price per share is fixed and the number of shares exchanged varies with the value of the acquirers share price. Acquirer share price changes require re-estimating the share exchange ratio. Variable or floating exchange ratios are u
14、sed most often when the acquirers share price is volatile. Fixed share exchange agreements, in which the SER does not vary, are more common since they involve both firms share prices and allow both parties to share in the risk or benefit of fluctuating share prices. 2SER generally calculated based o
15、n the 10 to 20 trading day period ending 5 days prior to closing. The 5-day period provides time to calculate the appropriate acquirer share price and to incorporate into legal documents.,Case Study: Alternative Collar Arrangements Based on Fixed Value (SER Floats) and Fixed Share Exchange Ratios,On
16、 9/5/2009, Flextronics agreed to acquire IDW in a stock- for-stock merger with an aggregate value of approximately $300 million. The share exchange ratio used at closing was calculated using the Flextronics average daily closing share price for the 20 trading days ending on the fifth trading day immediately preceding the closing. Transaction terms identified the following three collars: 1. Fixed Value Agreement (SER floats-offer price fixed within a range): Offer
