1

Merger and Acquisition-SHAREHOLDER VALUE ADDED MAXIMIZATION AND ITS LEGAL ASPECTS

Focus on Due diligence and Bidding wars

ByArthur Mboue

2

WHY A M&A ADVISOR MUST MASTER CORPORATE FINANCE?

• Advising client– Drafting corporate agreements (projects, contracts, M & A)– Litigating legal cases where valuation, corporate dissolution, liquidation,

reorganization, projects feasibility and distribution are in court• Dealing with Delaware judges

– Almost all 5 Delaware corporate judges are versed with both corporate law and financial expertise

– Mastering of interaction between corporate finance and principles and its legal principles

• Duty of care compliance– The burden of proof requires CEO and top Executives as a team including you to show

to the Court that you did seek the best available care (due care) against fake and overvalued consulting advises

• Dealing with top Executives and consultants– Must have commonality of Financial interpretations, evaluative processes and financial

transactions– Reviewing valuation works– Reviewing bidding prices– Advising executives on bidding strategies

3

When Corporate Finance is on Trial?

• DISAGREEMENTS ABOUT PROJECTS FINANCIAL FEASIBILITY ANALYSIS (PRIORITY)

• DISAGREEMENTS ABOUT CORPORATE VALUATION CALCULATION (bidding prices, appraisal methodology,..)

• ALLEGATIONS OF AGGRESSIVE ACCOUNTING• DISAGREEMENTS ABOUT REPORTING

METHODOLOGIES• DISAGREEMENTS ABOUT FORECASTING

4

Mergers and the Industry Life CycleIndustry Life Cycle Stage Industry Description Motives for Merger Types of MergersPioneering development (early). Surviving their 1st year is their main concern

Industry exhibits substantial development costs and has low, but slowly increasing, sales growth.

Younger, smaller companies may sell themselves to larger companies to mature or declining industries or look for ways to merge with big company

Only opportunity for these manager founders to either lead a big company or pocket big cash

Conglomerate Horizontal

Rapid accelerating growth

Industry exhibits high profit margins helped by low competition

Explosive growth in sales may require large capital requirements to expand existing capacity, deal with backlog and customer satisfaction.

Conglomerate Horizontal

Mature growth Industry experiences a drop caused by the entry of new competitors, but growth potential exists

Mergers may be undertaken to achieve economies of scale, savings, operational efficiencies

More vertical than horizontal

Stabilization and market maturity

Very competitive industry and environment

Merger focuses on acquisition of smaller co and competitors for the acquisition of special research and technical abilities to improve quality and cut costs. Cross border acquisition may help, what it needed a high quality product at low price to compete

Horizontal acquisition is the focus

Deceleration and flat growth industry

Industry faces stable and declining growth

Some vertical mergers with foreign ‘accent’ can improve profit

Merger with small competitors can keep them alive or on life support for a longtime

Horizontal Vertical Conglomerate

any thing to survive

5

What is Take-over?• Corporate combination (with subset merger, acquisition, takeover, tender over,…) is a

transaction between two or more corporations with a least one corporation ceasing to exist as soon as the new corporate entity is registered

• Takeover; A takeover occurs when a bidder acquires a target company with or w/o the consent of the shareholders of the target company. Takeover processes with the purchase of shares from shareholders of the target at a specified price including financial and/or control premium. At the end the bidder/purchaser can get control of the company agenda including right to appoint its own board of directors as a new majority owner of the company. This phase is called a tender offer

• There are 2 methods for structuring in which an acquirer seeks to purchase a US public– A single step merger– 2 steps merger (tender over and back end)

• Factors influencing the acquirer option of methods include:– Lead time,– complexity, – approval process,– state of incorporation of the target, – availability of financing, – methods of financing, – motive of acquisition, – synergies target, – valuation of the target

6

Transaction Characteristics

Form of the Transaction

• Stock purchase• Asset purchase

Method of Payment

• Cash• Securities• Combination of cash and securities

Attitude of Management

• Hostile• Friendly• Compliant

7

Different Method of Takeovers• Conglomerate: take over of one company operating in

totally different industries. The main purpose of this kind of takeover is diversification

• Reverse: reverse takeover is a type of takeover where private company acquires a public company

• Backflip: backflip is any sort of takeover in which the acquiring company turns itself into subsidiary of the purchased company

• Horizontal: a takeover of one company by another company in the same industry

• Vertical: takeover by one company to supplier, distributor, of the same industry

8

Types of Takeover

• Enactment: Enactment takeovers are governed by specific laws. It is when the company is legally forced to take-over another company by law

• Friendly: it is the result of a contractual agreement between a competent and informed bidder CEO and his group and a competent and informed target CEO and his group under no threat and compulsion. The BoD can join directly the negotiation and accepts the offer

• Hostile: is one in which the CEO and board of the target attempts to prevent the merger offer from being successful

• Bailout: When a Gov’t or profitable company acquires control of a financially challenged company with a goal of returning it to a strong financial position. For instance after 2008 crisis, company did use governmental tarp funds to finance, purchase shares and/or exchange shares while following a governmental dictated rehabilitation plan

9

Who Wants what? • Buyers wants

– No competition– No competing bid– Quick transaction– Access to real data (non public

data)– Its board wants a low price

and control over the process– The bidder shareholders want

to minimize the amount paid to target shareholders, not paying more than the pre-merger value of the target plus the value of the synergies

• Target wants– Board chooses buyer– Board chooses terms of

transactions– Protection against

shareholders lawsuits– Its board wants a highest

price offer and control over the process

– Prefer share payment– The target shareholders

want to maximize the gain and accept nothing below the per-merger market value

10

Interdisciplinary Legal & Business Skills, Legal Focus

• Corporations• Contracts• Tax• Real Estate• Labor and Employment• Employee Benefits

• Intellectual Property• Antitrust• Securities • Environmental• Uniform Commercial Code• Insurance

11

Extra Interdisciplinary Legal and Business Skills, Business Focus

• Managerial and Cost Accounting• Finance • Marketing• Valuation• Negotiations• PR

12

Clients Expect the Merger and Acquisition Attorney

• To be a constructive counselor regarding bid, price and structure of a transaction

• Possess multiple legal and business skills based upon interdisciplinary education and experience of many ‘deals’

• Be a facilitator who finds solutions for both the buyer and seller

• Be a constructive negotiator who creatively avoids impasse and delay

• Fix all missteps and anger of the pre-merger talks

13

Different Types of Acquisition Agreements

Types of agreements Status of Ownership

Investment AgreementPrivateAsset Purchase Agreement

Stock Purchase Agreement Private/Public

Merger Agreement (one step) Mostly Public

Merger Agreement (with tender offer), two steps Public

14

Method of Payment• Cash offering

– Cash offering may be cash from existing acquirer balances or from a debt issue.• Securities offering

– Target shareholders receive shares of common stock, preferred stock, or debt of the acquirer.

– The exchange ratio determines the number of securities received in exchange for a share of target stock.

• It is dictated by the market price. Timing is very important• Factors influencing method of payment:

– Sharing of risk among the acquirer and target shareholders. (mostly shifting risk from the target to the acquirer)

– Signaling by the acquiring firm to the market analysis.• Stock exchange is a signal that the bidder is overvalued

– Capital structure of the acquiring firm– Shareholder value added

15

Short Form Merger

Long Form Merger

Short Form Merger

Long Form Merger

Acquisition Completed

Acquisition Completed

Acquisition Completed

Acquisition Completed

Acquisition Completed

Acquisition Completed

4-8 weeks< 40 business days

3-5 months8-10 weeks

5-12 weeks

3-6 months

2-3 months (all cash)3-4 months (part/all

stock)

1-2 months

Timing

Tender Offer/ Share Exchange

Offer

100% Cash

Part Cash/Part Stock

90%

< 90%(but more than 50%)

90%

< 90%(but more than 50%)

Filing of Articles of Merger & squeezing out Minority

> 50% voteof all shareholders & squeeze

out minority

Filing of Articles of Merger & squeeze out minority

> 50% voteof all shareholders & squeeze

out minority

Merger(any form of

consideration)

Post Proxy

SECReview

NoSEC Review

Post Proxy

> 50% shareholder vote

> 50% shareholder vote

Strategy Leading to the Acquisition of a Public Company

251(H) Merger

251 (h) Merger

Tender Offer Back end Merger

Single step Merger

16

Tender Offer vs Merger Timing (100% Cash Transaction of Delaware Public Companies)

2006 2007 2008 2009 2010 2011 2012 2013 20140

20

40

60

80

100

120

140

160

Med

ian

num

ber o

f day

s to

clos

e

17

Comparative MethodsIssues Tender offer Exchange Offer Long Form Merger

Timing Shorter time to achieve control Maybe shorter time to achieve 100% ownership

Complexity Less complex than merger if 100% cash offer

May be less complex than share exchange offer and ‘back end’ merger if offer is all or part shares

Documentation Simpler documentation if 100% cash. SEC certification is not required

Detailed documentation proxy statement requiring SEC certification of S-4

Success Does not guarantee immediate acquisition of 100% of target stick in the tender offer

Achieve 100% ownership or acquisition merger fails

Market Practice Generally achieve control of target after 20 -40 business days

Achieve control after 2-4 months (4 months for SEC review of stock deal)

Regulatory Clearance

Mostly not too long waiting because early commencement is allowed and expedited review is the new SEC internal policy

It depends on the time needed for anti-trust, financing and funding reviews and potential 2nd request. It is demanding both SEC and state regulations

18

What is a Tender Offer? • The Williams Act of 1968 does not define the term “tender offer.” But, it can be defined as

an offer made directly to target shareholders • The courts have used two tests to determine whether a series of purchases or offers

constitutes a “tender offer” within the meaning of the Williams Act of 1968:– Eight Factor Test also called Wellman test because of Wellman v. Dickinson, 475 F. supp.

783, 823-24 (S.D. NY. 1979), the court did approve the use of eight factor test by the SEC to determine whether a series of purchases constitutes a ‘tender offer’ — No single factor is dispositive and you need not have all eight factors.

1. active and widespread solicitation of public shareholders; 2. solicitation for a substantial percentage of target’s stock; 3. offer made at a premium over the prevailing market price; 4. terms are firm rather than negotiable; 5. offer contingent on the tender of a minimum number of shares; 6. offer open for a limited period of time; 7. offeree subjected to pressure to sell stock; and8. public announcements precede or accompany rapid accumulation of large

amounts of target’s stock. – Totality of Circumstances Test: Courts have also applied this test to determine whether

a transaction involves a tender offer that should be subject to the statutory requirements and SEC’s rules (investor decision of the offerees). Since Rand v. Anaconda-Ericsson, Inc, 794 F.2d 84,3848-49 (2d Cir. 1986) cert. denied, 479 U.S. 987 (1986) (citing Hanson Trust PLC v. SCM Corp, 774 F.2d 47 (2d Cir. 1985)) , Some circuit courts have examined whether there is a likelihood that, unless Section 14(d) is complied with, there will be a substantial risk that shareholders will lack information needed to make a carefully considered appraisal of the bidder’s proposal/offer.

19

The Impact of the Tender Offer Rules

20

Steps Leading to a Bidding War of the Target

• STEP 1: Establish a motive for any panned merger and acquisition

• STEP 2: Choosing a target (after due diligence,…)• STEP 3, Valuing the target company with the planned

merger and acquisition in mind• STEP 4, Deciding on the method of payment, cash, stock or

a combination of both, and then arrangement of required cash financing

• STEP 5, Choosing the accounting method for the merger/acquisition purchase pooling

• STEP 6, Determine a caps, collars, floors and ceiling for a bidding war negotiation

21

Step 1- Motives for Merger

Shareholder value added

• Tax consideration• Cross selling• Synergy• Economies of scale (reduced duplicate department, operations, or positions)• Increased market power/increased revenue • Acquiring unique technical capabilities or resources• Unlocking hidden value• Resource transfer (overcoming information asymmetry or combining scarce resources)• Financial restructuring/business mix restructuring• Geographical diversification

Cross-Border Mergers

• Exploiting market imperfections• Overcoming adverse government policy• Technology transfer• Product differentiation• Following clients• Tax incentive and treaty• Following natural resource roots (closer)

Non shareholder value added Motives

• Diversification• Bootstrapping earning• Shareholder value added• Managers’ personal compensation package• Overextension• Empire building• Vertical integration

22

STEP 2, Choosing a Target Company for Acquisition (Due Diligence)

If reason is Target Company

Undervaluation • The focus of the acquirer is to get the target at the lowest price

Financial Synergy • Tax savings provides a tax benefit to acquirer• Debt capacity will provide credit rating for more credit money at

lower rate• Cash, will bring more funding to the company

Operating Synergy • It will be a cost saving with huge economies of scale• It will have a good growth

Control • Underperformed share will catch up this market confidence and value maximization later

Diversification • The target company must be different from the acquirer to reduce risk in case

Manager’s Interest • Bounce manager ego, managerialism size and executive compensation

23

Documentation of the Transaction

• Provide congruency among the expectation of the company top managment, the negotiated transaction and the documentation of the transaction

• Coordinate the documentation with the results of Due Diligence

• Use procedures of documentation to reflects the transaction with normal formats

• Successfully negotiate for a non public data of the target

24

Merger Due Diligence• Due diligence staff must utilize analytical method based

analysis and conclusions. This team must use scientific method to predict, explain, value and/or give substance to theory. This team must also utilizes archival methods based analysis and conclusions on objective data collection from 3rd parties and the company (friendly)

• Main difficulties– Drawing boundaries around the subject matter of the

company– Ethic of the team, dealing properly with own personal impulse

and/or relationship with this subject company– Dealing with missing (doubtful) data (use replacement cost

analysis or mostly a comparable methods)

25

Main Steps toward a careful Due Diligence

A- Preparation: staff must build up knowledge about the due diligence. The process is to research, understand, value and help the company avoid or minimize risks related to this planned acquisition

B- Plan: the plan will focus on (1)- contingent liabilities (pending litigation, environmental unresolved cases or other problems (2)-material contract of the target (contingent contracts) (3)-employee issues (executive compensation contracts,…) (4)- restriction on the conduct of target business (Div’d…)-

C-Data Collection: -gathering data, -search more data, -trace sources of this data, -interpret these data-interviews-surveys your peers at the end

D-Assessing Data (1)-Check all relevant regulatory filings documents, (2)-Check press reports, (3)-Check company and affiliates websites, (4)-talk or interview former employee, directors,… (5) watch everything about the company

E-Data Analysis techniques: coding, identify pattern for comparisons purpose, codes can be based on: themes, ideas, concepts, terms, phrases or keywords

F-Data Dissemination: very well written, organized and detailed documents for CEO and his team use: -memo style, working paper style, books style, news articles style or teaching materials style. You can make a presentation to them or talk to them while answering their concerns

26

Due Diligence- Documents to be analyze• Documents

– Websites (sec.gov, finra.gov, fdic.gov,… subject company and its affiliates)

– Video and images of executives and events– Webcasts– Microfilms– Other documents with coded words

• Varieties of documents to be analyzed– Conversation analysis– Narrative analysis– Discourse analysis

27

Due Diligence- Participant Observation

• Observe first hand the activities of the executives– Overt- gathering from posted videos, webcasts,..– Covert- spy or espionage style because w/o their knowledge- it

will increase reliability of the data because they are acting here without any intent of selling anything

• Former staff, executives and directors can talk but sometimes it might be anger and lies in their statements about the company they once serve– Structured interviews– Semi-structured interviews– Unstructured interviews (little talk)

28

Due Diligence

• Survey-– At the end organize and conduct a survey without

intervention or interference of your own staff, especially if the media and personal interest of your staff was involved

– Do it because writing any report about your due diligence

– After writing the report, make sure they did have opportunities to read this report and make some correction

‘Not every thing that counts can be counted, and not every thing that

can be counted counts”

Dr. Albert Einstein

Ich Liebe der forsher

Performing Research on the SEC website

Home | J obs | Fast Answers | Site Map | Search

About the SEC Filings & Forms Regulatory Actions Staff Interps I nvestor I nfo News & Statements Litigation ALJ I nformation for... Divisions

Search SEC documents

Search Terms: Basic Search Search Help

Advanced Search Search terms

All of these words: This exact phrase: Any of these words: None of these words:

Section(s) to search

Corporation Finance Enforcement

Investment Management Litigation

Regulatory Actions Trading & Markets

Accounting and Auditing Enforcement Releases

Division of Corporation Finance No-Action, Interpretive and Exemptive Letters

Last modified: 07/30/2009

Contact|Employment|Links|FOIA|Forms|Privacy

31

Step 6-Determining Possible Bids

32

Evaluating Bids: FormulasFormulas with

Target shareholders’ gain = Premium = - • = price paid for the target company• = pre-merger value of the target company

Acquirer’s gain = synergies – Premium = S – (- ) • S= Synergies created by the business combination

= + + S - C • = post merger value of the combined companies

• = pre-merger value of the acquirer• C = cash paid to target shareholders

33

Evaluating Bidding Wars StrategiesYou must know that every number used in the valuation is measured with error, either because of flawed method to describe the past or because of uncertainty about the future (only God can)After each valuation methodology, you must document these results• SVA for the bidder• SVA for the target• SVA post mergerCome up with boundaries• Target must have floor bidding price (it will not accept something

lower than this price)• Bidder must have a ceiling bidding price (it will not offer more than

that) and all alternatives (3 or 4)• PS: conduct sensitivity analysis of these prices• Negotiators must have all these

34

Evaluating Bidding Wars Strategies

• Negotiators ( target and bidder)must have all these prices for the negotiating tables– Start with the lower price (the other party does not

know what you have in mind or on paper, feel free to disclose your boundaries)

– PS: Achtung to a bidder negotiators, low balling is only directed to desperate seller party (they want to sell at any price, but other sellers’ boundaries very seriously) or it can trigger unnecessary defense strategies with their exorbitant cost related implementation

35

Winners and Losers of the Mergers• Winners

– Target shareholders- merger often create value for the target company)

– Consulting Lawyers (when it reach the court circuit, it will be a lot of checks coming from both sides)

– Consulting accountants each project for liquid)– Management (incentives and promotion)– Bankers (a lot of money and fees to trade hands)

• Losers– Bidder shareholders (mostly with a hostile bidder, costs rea too high

including high premium, payback uncertain). In addition share for share exchange can really affect the market share of the bidder.

– Competition (sometimes customers, consolidation can reduce competition and quality while increasing prices, it why anti-trust examination reduces this exposure)

36

Mergers that Create Value

• Buyer is strong.• There is not target hostility.• Transaction premiums are relatively low.• Number of bidders is low.• Initial market reaction to the news is

favorable.

37

A Strong Defense Requires a Multi-Talented Team

• Management-leads the defense and keeps the board informed of the events

• Investment bank-analyzes the bidder’s offer, assists with the target’s response to the offer and the development of the defense campaign platform, strategy and tactics

• Law firm-briefs the BoD on fiduciary duties, ensures compliance with the federal securities laws and state corporate law, reviews all communication, drafts any proxy/tender offer materials, and handles any litigation

• Proxy solicitor: analyzes the prospectus for success, identifies the shareholders, sets up investor meetings, organizes meetings and calls with proxy advisory firms, and tracks the flow of tenders or votes

• Financial PR firm- drafts press releases, ‘fight’ letters and other communications, and works with the media

38

Post Merger Integration• Neglected but very important phase to maximize shareholder’s value

(avoid early divesture)• Newly acquired company’s manager are concerned with

– Loss of autonomy– Personal recognition– Career advancement in the large company– Job security in the large company– Lack of expertise in running the new mega MNC, lack of technical expertise in

the new production, manufacturing facilities or lack of uniform culture • Solution:

– Reassurance with contractual agreement it needed– Impose a discipline– Fire toxic managers (do not want to surrender to the new leadership and work

environ) – Training and education of top manager and others– Implementation of an uniform culture strategy and moral for all (it will take

time)