Thank you for downloading this AMACOM eBook. Sign up for our newsletter, AMACOM BookAlert, and receive special offers, access to free samples, and info on the latest new releases from AMACOM, the book publishing division of American Management Association. To sign up, visit our website: www.amacombooks.org To learn more about the American Management Association visit: www.amanet.org The copyright information for this title may be found at the end of this eBook file. MERGERS AND ACQUISITIONS FROM A TO Z • FOURTH EDITION • MERGERS AND ACQUISITIONS FROM A TO Z • FOURTH EDITION • Andrew J. Sherman Contents Acknowledgments Introduction to the Fourth Edition 1. The Basics of Mergers and Acquisitions Understanding Key Terms Why Bad Deals Happen to Good People Why Do Buyers Buy, and Why Do Sellers Sell? 2. Preparing for the Dance: The Seller’s Perspective Conducting a Thorough EOTB Analysis Preparing for the Sale of the Company Common Preparation Mistakes Other Considerations for the Seller Getting Deal Terms and Structure That Fit the Seller’s Objectives, Personal Needs, and Post-closing Plans 3. Initiating the Deal: The Buyer’s Perspective Assembling the Team Developing an Acquisition Plan Applying the Criteria: How to Narrow the Field Approaching a Company That Is Not for Sale Dealing with the Seller’s Management Team Directory of M&A Resources for Prospective Buyers (and Sellers) 4. The Letter of Intent and Other Preliminary Matters Proposed Terms Binding Terms Common Reasons Why Deals Die at an Early Stage Preparation of the Work Schedule The Growing Debate About the Role and Usefulness of Fairness Opinions 5. Due Diligence Best Practices in Due Diligence in the Era of Accountability 2.0 Legal Due Diligence Business and Strategic Due Diligence Conclusion Appendix to Chapter 5: Post-Sarbanes-Oxley Due Diligence Checklist The Disclosure Requirements Checklist of Items Post-Sarbox 6. The Board’s Role in M&A Specific Board Responsibilities Legal Responsibilities 7. An Overview of Regulatory Considerations Introduction Environmental Laws Federal Securities Laws Federal Antitrust Laws Waiting Periods Labor and Employment Law 8. Structuring the Deal Stock vs. Asset Purchases Tax and Accounting Issues Affecting the Structure of the Transaction One-Step vs. Staged Transactions Method of Payment Nontraditional Structures and Strategies 9. Valuation and Pricing of the Seller’s Company The Future of EBITDA A Quick Introduction to Pricing Valuation Overview 10. Financing the Acquisition An Overview of Financing Sources Understanding the Lender’s Perspective Financing Deals in Times of Turmoil Steps in the Loan Process Equity Financing 11. The Purchase Agreement and Related Legal Documents Case Study: GCC Acquires TCI Sample Schedule of Documents to Be Exchanged at a Typical Closing 12. Keeping M&A Deals on Track: Managing the Deal Killers Communication and Leadership Diagnosing the Source of the Problem Understanding the Types of Deal Killers Curing the Transactional Patient Maintaining Order in the M&A Process: Simple Principles for Keeping Deals on Track Conclusion 13. Post-closing Challenges A Time of Transition Staffing Levels and Related Human Resources Challenges Customers Vendors Physical Facilities Problems Involving Attitudes and Corporate Culture Benefit and Compensation Plans Corporate Identity Legal Issues Minimizing Barriers to the Transition Post-merger Integration Key Lessons and Best Practices Common Areas of Post-closing Disputes and Litigation Conclusion 14. Special Challenges (and Opportunities) in Cross-Border Transactions 15. Alternatives to Mergers and Acquisitions Growth Strategy Alternative 1: Joint Ventures Growth Strategy Alternative 2: Franchising Growth Strategy Alternative 3: Technology and Merchandise Licensing Growth Strategy Alternative 4: Distributorships and Dealerships Index About the Author Free Sample from Leading at the Edge by Dennis N.T. Perkins with Margaret P. Holtman and Jillian B. Murphy About AMACOM Books Acknowledgments The author would like to thank Timothy Burgard and his team at AMACOM Books, for all of their hard work on the editing and organization of the manuscript. I would like to thank my partners at Seyfarth Shaw for their unconditional support including Chairman Pete Miller, Corporate Department Chair Paul Mattingly, M&A Practice Group Chair Susie Saxman and my colleagues Steve Meier, Andrew Lucano, Lisa Damon, Laura Maechtlen, John Shine, and Bob Bodansky as well as the entire corporate M&A team in the D.C. office. For general research support, I am very grateful for the efforts of Nick Rosenberg and Anjali Vohra, M&A associates at Seyfarth Shaw, and Eric Czubiak, my nephew and rising 3L at USC Law. As always, my assistant, Evelyn Capps was a key player in pulling everything together and helping to produce an organized and informative manuscript. And in perpetuity, I gratefully acknowledge my wife, Judy, my son, Matthew, and my daughter, Jennifer, for tolerating my commitment to writing over the years, when clearly we could have been doing something together a bit more fun. Introduction to the Fourth Edition “It was the best of times; it was the worst of times.” When Dickens first shared this quote with the world, he was not referring to the current state of the merger and acquisition (M&A) markets but he might as well have been. In the time between the publication of the third edition of this book in 2010 and today, the overall financial markets and the levels of M&A activity have experienced both polar opposites and everything in between. From the seemingly insatiable appetite for middle- market companies that private equity firms and other buyers had in 2006 and 2007, thereby driving valuations through the roof, to the fast ending to the party and the sobering effects of a virtual halt in 2008 to 2009, sending valuations on a downward spiral, to the tepid economic recovery and GDP growth from 2012 to 2016, this was not a good time if you prefer merry-go- rounds to roller-coaster rides at the amusement park. According to Mergermarket, there were 17,369 deals announced worldwide in 2016 and 4,951 deals in the United States, with a total value of $3.25 trillion. These figures represent a wide variety of industries driven by a wide range of strategic and financial buyers with the biggest deal of the year being AT&T’s proposed high-profile acquisition of Time Warner for over $100 billion, which at the time of publication had been challenged by the Department of Justice (late 2017). Merger and acquisition activity in the United States increased slightly in terms of the number of deals from the first quarter of 2017, the total deal value being 3,554 deals worth $678 billion, an 8.9 percent increase over Q1 of 2016. In January of 2017, the value of M&A deals worldwide for the month totaled $280 billion, the second largest January for M&A on record, but things began to cool as the reality of the challenges to implementing the economic and tax aspects pieces of the Trump agenda began to set in. By midyear 2017, global M&A deals were at $1.59 trillion, down well over 15 percent from 2016 deals at the half-year point. Mergers and acquisitions are a vital part of both healthy and weak economies and are often the primary way in which companies are able to provide returns to their owners and investors. Mergers and acquisitions play a critical role in both sides of this cycle, enabling strong companies to grow faster than their competition and providing entrepreneurs with rewards for their efforts, while ensuring that weaker companies are more quickly swallowed or, worse, made irrelevant through exclusion and ongoing share erosion. Mergers and acquisitions have played a variety of roles in corporate history, ranging from the “greed is good” corporate raiders buying companies in a hostile manner and breaking them apart in the 1980s to today’s trend of using mergers and acquisitions for strategic growth and to foster industry consolidation. During the 1980s, nearly half of all U.S. companies were restructured, more than 80,000 were acquired or merged, and over 700,000 sought bankruptcy protection in order to reorganize and continue operations. The 1980s featured swashbucklers and the use of aggressive tactics to gain control over targets. The 1990s were equally dynamic in terms of companies evolving through upsizing and growth, down-sizing, rollups, divestitures, and consolidation, but focused on operational synergies, scale efficiencies, increases in customer bases, strategic alliances, market share, and access to new technologies. This period, however, came to a crashing end with the bursting of the tech bubble and the global recession that followed. The wave of M&A activity seen from 2004 to 2007 was driven by the more general macroeconomic recovery and several key trends. First, many companies had exhausted cost cutting and operational efficiencies as a means of increasing profitability and were looking to top-line growth as a primary enabler of shareholder return. The increased pressure to grow turned the spotlight on the opportunity to achieve growth through acquisition. Second, the M&A market had been supported by the return of corporate profits and, with them, improved stock price valuation. The improved valuations enabled corporations to leverage their internal currencies to acquire target companies that were willing to swap their illiquid private stock for valuable public-company shares. Third, interest rates were hovering at historical lows, enabling firms to cost-effectively utilize debt to finance acquisition-based growth. From 2008 to late 2009, the wave of M&A activity was driven by weak economic conditions around the globe. The strong, cash-rich companies and firms began bargain shopping, picking off distressed and downtrodden competitors at a fraction of their market value compared to expectations just a short twelve to eighteen months earlier. Today, many large and midsize companies have begun to refocus on their core business lines, triggering divestitures and spin-offs of under-performing divisions or subsidiaries.