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Mergers and Acquisitions from A to Z
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However, these complex transactions carry significant risk, and it is absolutely vital for all involved in the deal to make sure they are guarding themselves against costly mistakes that have been the downfall for many leaders and organizations before them.
Complete with new case studies, checklists, and updated sample documents, law attorney and author Andrew Sherman walks you through every step of the process—from valuation to securities laws to closing and successful integration.
Updated with the latest trends and regulatory developments, this fourth edition of Mergers and Acquisitions from A to Z explains further how to:
- conduct due diligence,
- calculate the purchase price,
- understand the roles and risks for boards, and more.
When done correctly and cautiously, while fully educated on all avenues of the process, your company’s next merger or acquisition should be an exciting, profitable time as you take steps to eliminate rivals, extend territory, and diversify offerings.
But you must first be prepared! Don’t make another deal without Mergers and Acquisitions from A to Z and its strategic, legal guidance by your side.
ISBN-13: 9780814439029
Media Type: Hardcover(Fourth Edition)
Publisher: AMACOM
Publication Date: 04-10-2018
Pages: 372
Product Dimensions: 6.30(w) x 9.10(h) x 1.20(d)
Age Range: 18 Years
ANDREW J. SHERMAN is a partner in the Washington, D.C., office of Jones Day and an internationally recognized authority on the legal and strategic issues of emerging and established companies. A top-rated adjunct professor in the MBA and Executive MBA programs at the University of Maryland and Georgetown University Law School, he is the author of Harvesting Intangible Assets, Franchising and Licensing, and Mergers Acquisitions from A to Z .
There is virtually an infinite number of ways in which a corporate merger or acquisition may be structured. There are probably as many potential deal structures as there are qualified and creative transactional lawyers and investment bankers. The goal is not to create the most complex, but rather to create a structure which fairly reflects the goals and objectives of the buyer and seller. Naturally, not all of the objectives of each party will be met each time-there will almost always be a degree of negotiation and compromise. Virtually all structures, even the most complex, are at their roots basically either mergers or acquisitions, including the purchase or consolidation of either stock or assets. The creativity often comes in structuring the deal to achieve a particular tax or strategic result or to accommodate a multistep or multiparty transaction. This chapter will look at some of the typical structures as well as a few alternative types of transactions such as spin-offs, shell mergers, and ESOP's. At the heart of each transaction are the following key issues which will affect the structure of the deal: How will tangible and intangible assets be transferred to the purchaser from the seller? Atwhat price and according to what terms? What issues discovered during due diligence may affect the price, terms or structure of the deal? What liabilities will be assumed by the purchaser? How will risks be allocated among the parties? What are the tax implications to the buyer and seller? What are the long-term objectives of the buyer? What role will the seller have in the management and growth of the underlying business after closing? To what extent will third-party consents or governmental filings/approvals be necessary? What arrangements will be made for the key management team of the seller (who may not necessarily be among the selling owners of the company)? Does the buyer currently have access to all of the consideration to be paid to the seller or will some of these funds need to be raised from debt or equity markets? There is a wide variety of corporate, tax and securities law issues that affect the final decision as to the structure of any given transaction. Each issue must be carefully considered from a legal and accounting perspective. However, at the heart of each structural alternative are the following basic questions: Will the buyer be acquiring stock or assets of the target? In what form will the consideration from the buyer to the seller be made (e.g., cash, notes, securities, etc.)? Will the purchase price be fixed, contingent or payable over time on an installment basis? What are the tax consequences of the proposed structure for the acquisition (see Chapter 6)? Stock vs. Asset Purchases Perhaps the most fundamental issue in structuring the acquisition of a target company is whether the transaction will take the form of an asset or stock purchase. Each form has its respective advantages and disadvantages, depending on the facts and circumstances surrounding each transaction. The buyer and seller should consider the following factors in determining the ultimate form of the transaction: Stock Purchases The Buyer's Perspective: Advantages 1. Tax attributes carryover to buyer (e.g., net operating loss and credit carryforwards). 2. Avoids many of the restrictions imposed on sales of assets in loan agreements and potential sales tax. 3. Preserves the right of the buyer to use seller's name, licenses and permits. 4. No changes in corporation's liability, unemployment or workers' compensation insurance ratings. 5. Nontransferable rights or assets (e.g., license, franchise, patent, etc.) can usually be retained by the buyer. 6. Continuity of the corporate identity, contracts and structure. The Seller's Perspectives: Advantages 1. Taxed only on the sale of stock. 2. All obligations (i.e., disclosed, not disclosed, unknown and contingent) and nontransferable rights can be transferred to the buyer. 3. Gain/loss is usually capital in nature. 4. If stock held by individuals is IRC Section 1244 stock and is sold at a loss, the loss is generally treated as ordinary. 5. May permit sellers to report gains from sale of stock on the installment basis. 6. Does not leave the seller with the problem of disposing of assets which are not bought by the purchaser. The Buyer's Perspective: Disadvantages 1. Less flexibility to cherry pick key assets of seller. 2. The buyer may be liable for unknown, undisclosed or contingent liabilities (unless adequately protected in the purchase agreement). 3. No step-up in basis (i.e., seller's basis is carried over to the buyer at historical tax basis). 4. Normally does not terminate existing labor union collective bargaining agreement(s) and generally results in the continuation of employee benefit plans. 5. Dissenting shareholders' have a right of appraisal for the value of their shares with the right to be paid appraised value or remain a minority shareholder. The Seller's Perspective: Disadvantages 1. Offer and sale of the company's securities may need to be registered under certain circumstances. 2. Seller cannot pick and choose assets to be retained. 3. May not use the corporation's net operating loss and credit carryforwards to offset gain on sale. 4. Loss on sale of stock may not be recognized by corporate shareholder who included the company in its consolidated income tax return. Asset Purchases The Buyer's Perspective: Advantages 1. The buyer can be selective as to which assets of target will be purchased. 2. The buyer is generally not liable for seller's liabilities unless specifically assumed under contract. 3. Step-up in basis of assets acquired equal to purchase price allowing higher depreciation/amortization deductions. 4. Buyers are generally free of any undisclosed or contingent liabilities. 5. Normally results in termination of labor union collective bargaining agreement(s) and employee benefit plans may be maintained or terminated. 6. Buyers may elect new accounting methods. The Seller's Perspective: Advantages 1. Sellers maintain corporate existence. 2. Ownership of nontransferable assets or rights (e.g. licenses, franchises, patents, etc.) are usually retained. 3. Corporate name and goodwill can generally be maintained. 4. Corporation's tax attributes (e.g., net operating loss and credit carryforwards) are retained. The Buyer's Perspective: Disadvantages 1. No carryover of seller corporation's tax attributes (e.g., net operating loss and credit carryforwards). 2. If a bargain purchase, step-down in basis of assets. 3. Nontransferable rights or assets (e.g., license, franchise, patent, etc.) cannot be transferred to buyers. 4. Transaction more complex and costly in terms of transferring specific assets/liabilities (i.e., title to each asset transferred and new title recorded; state sales tax may apply). 5. Lender's consent may be required to assume liabilities. 6. Loss of corporation's liability, unemployment or workers' compensation insurance ratings. The Seller's Perspective: Disadvantages 1. Double taxation if the corporation also liquidates. 2. Generates various kinds of gain or loss to sellers based on the classification of each asset as capital or ordinary. 3. Transaction more complex and costly in terms of transferring specific assets/liabilities (i.e., title to each asset transferred and new title recorded; state sales tax may apply). 4. Bill of Sale must be comprehensive with exhibits attached in order to ensure that no key assets are overlooked and as a result not transferred to the buyer. 5. A variety of third-party consents will typically be required to transfer key tangible and intangible assets to the buyer. 6. Seller will be responsible for liquidation of the remaining corporate "shell" and distributing the proceeds of the assets sale to its shareholders, which may result in a double taxation unless a Section 338 election is made. 7. Asset acquisition requires compliance with applicable state bulk sales statutes, as well as state and local sales and transfer taxes. Tax and Accounting Issues Affecting the Structure of the Transaction In a given merger or acquisition, there is a wide variety of tax and accounting which must be considered and understood as part of the negotiation and structuring of the transaction. These issues will affect the valuation and pricing as well as the structure of the deal and may be a condition precedent to closing. This section will provide an overview of the basic tax and accounting issues to be addressed in a merger or acquisition, but will be limited to a summary because the tax laws are very complex and constantly changing. You should discuss the accounting issues with the Certified Public Accountant (CPA) who will serve as a part of the acquisition team. Mergers and acquisitions may be completely tax-free, partially tax-free or entirely taxable to the seller. Each party and their advisors will have their own, often differing, views on how the transaction should be structured from a tax perspective, depending on the non-tax strategic objectives of both buyer and seller in the transaction and the respective tax and financial position of each party. In some cases the tax consequences will be the primary driving force in the transaction and in other cases the tax issues are secondary or even a non-issue. In addition to the taxable aspects of the structure of the transaction, there will be a wide variety of other tax issues to be considered, such as the tax basis of the assets acquired, the impact of the imputed interest rules on the transaction, and the tax aspects of any deferred consideration and/or incentive compensation to the seller. It is relevant to highlight an example that conveys the degree to which tax can be an impediment to a transaction. In one situation the CEO of the seller had negotiated a "carve-out" with his board, and received some of the new combined company's stock as personal income. That income, however, created over a million dollars in cash tax liability. This tax liability presented a significant challenge to getting the deal done. The CEO, who deserved credit for the deal, now had a strong incentive to prevent the deal from happening. Navigating tax liability issues, like the one in this example, are critical steps to successful deal closure. The general tax-related goals of the seller usually include: Deferring the taxation of the gain realized on the sale of the business to a future date (such as if the seller acquires the buyer's securities, which may appreciate in value, but the seller need not generally pay taxes on these gains until these securities are sold). Classifying the income which is recognized as capital gain and not as ordinary income. Ensuring that cash is available to pay for taxes as they become due, and to avoid the "double tax" at both the corporate and the shareholder level. Again, the strategic objectives must be balanced against the tax consequences. If the seller has an immediate need for liquidity or has no desire to receive the buyer's securities (the seller may not accept the buyer's post-closing vision and plans for the combined entities), then it will be difficult to achieve nontaxable status. Over the years, the changes to the federal tax laws have chipped away at the buyer's motivations for having the transaction characterized as tax-free. The buyer's ability to "carry over" favorable tax attributes of the seller has been diminished such that the buyer's use of its own securities as consideration to pay the seller often have to do more with preservation of cash than with applicable tax laws. If the transaction is taxable, then the "stepped-up" basis will be increased to equal to the fair market value of the consideration paid to the seller. If the transaction is non-taxable, the buyer is able to "carry over" the seller's tax basis to its own financial statements. If the buyer would prefer to carry these assets on the balance sheet at the stepped-up tax basis (such as if the buyer is paying much more than the seller's tax basis) or if the buyer would prefer not to issue securities to the seller to prevent dilution of ownership, then the buyer should opt for a taxable transaction. Based upon our experience, resolving the tax issues effectively between the parties is critically important. This issue directly impacts the price of the transaction and each party's perception of the fair value. Taxable vs. Non-Taxable Deals Taxable Purchase of stock for cash, promissory notes or other non-equity consideration Purchase of assets for cash, promissory notes or other non-equity consideration Taxable transactions generally anticipate that the seller will have little or no continuing equity participation in the acquired company. Nontaxable An exchange of the buyer's stock for the seller's stock. An exchange of the buyer's stock for all or substantially all of the seller's assets Nontaxable transactions generally anticipate a continuing, direct or indirect equity participation in the acquired company by the seller or its shareholders. Most corporate acquisitions will be deemed to be taxable transactions if structured as either a purchase of stock or assets in exchange for cash, promissory notes or other forms of consideration. Nontaxable transactions usually fall more into the category of a merger in that they involve an exchange of the target company's stock or assets for the purchaser's equity securities or of a subsidiary created by the purchaser, coupled with some direct or indirect continuing relationship between the buyer and the seller and their respective shareholders. These nontaxable transactions must fall within one of several reorganization categories contained in IRS Code Section 368. Tax-Free Reorganizations If the parties choose to structure the transaction as a tax-free reorganization, then the requirements set forth below must be followed: The three principal forms of "Tax-Free Reorganizations Under the Internal Revenue Code" are: (a) Type A Statutory Merger, (b) Type B "Stock-for-Stock" Merger, and (c) Type C "Stock-for-Assets" Merger. "A" Reorganizations A Type A reorganization is a statutory merger or consolidation under state law. No express limitations are imposed on the type of consideration that can be used in the transaction or on the disposition of assets prior to the merger. This is a very flexible acquisition device that permits shareholders to receive property including cash in addition to stock of the acquiring corporation. "B" Reorganizations Type B reorganizations are an acquisition by one corporation, in exchange solely for all or part of its voting stock or that of its controlling company. If, immediately after the acquisition, the acquiring corporation has control (at least 80 percent of the total combined with power of all classes of stock and at least 80 percent of the total number of shares of all other classes of stock) of such other corporation (whether or not the acquiring corporation had control immediately before the acquisition). Counsel to the buyer, however, must be particularly sensitive to any cash payment, such as a finder's fee or the payment of appraisal rights to dissenting shareholders. "C" Reorganizations Type C reorganizations are an acquisition by one corporation, in exchange solely for all or part of its voting stock (or that of its parent) and of "substantially all" of the properties of another corporation. The transferor corporation must distribute the stock, securities, and other properties it receives from the acquiring corporation, as well as any retained assets, as part of the plan of reorganization. The tax aspects of the proposed transaction are among the most important issues to be addressed by the acquisition team. These laws are complex and are constantly changing. Therefore, knowledgeable advisors should be carefully consulted. (Continues...) Read an Excerpt
Mergers And Acquisitions from A to Z
By Andrew J. Sherman Milledge A. Hart AMACOM BOOKS
Copyright © 2006 Andrew J. Sherman
All right reserved.
ISBN: 0-8144-0880-X
Chapter One
Structuring the Deal
Excerpted from Mergers And Acquisitions from A to Z by Andrew J. Sherman Milledge A. Hart Copyright © 2006 by Andrew J. Sherman. Excerpted by permission.
All rights reserved. No part of this excerpt may be reproduced or reprinted without permission in writing from the publisher.
Excerpts are provided by Dial-A-Book Inc. solely for the personal use of visitors to this web site.
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"Mergers & Acquisitions from A to Z is a comprehensive, straightforward, authoritative, and surprisingly reader-friendly how-and-whether-to-do-it handbook on acquiring, selling, and merging companies. It includes everything you need to know. It contains all the questions to ask, the factors to consider in deciding whether and when to buy or sell and how to weigh them, the checklists to create, and the pitfalls to guard against. The absence of unnecessary jargon is as refreshing as the material is enlightening." — Joel L. Fleishman, Professor of Law and Public Policy, Terry Sanford Institute of Public Policy, Duke University "Mergers & Acquisitions from A to Z is a must-read for every entrepreneur driving a fast-growth company. The authors’ characterization of the latest trends and best practices empower the deal maker with the ability to see around the corner and sidestep disaster." — Richard T. Cole, CEO, Geeks On Call America, Inc. "As an attorney, there is no better resource for a dealmaker than Andrew Sherman. [He is] a highly rated instructor for our M&A certification program at NYU, [and] his book should be made required reading for every middle-market transaction advisor." — Michael R. Nall, CPA, CM&A, Founder, Alliance of Merger & Acquisition Advisors "This book is a treasure trove of very useful information for both buyers and sellers in corporate mergers & acquisitions. [The authors have] kept the pace moving by providing just the right information. It is extremely well written with examples and tools that buyers and sellers can use right out of the box as they firm up their M&A strategies. I highly recommend this book as a key ingredient for any corporate M&A department." — Shiv Krishnan, President & CEO, INDUS Corporation "Sherman and Hart have done a terrific job assembling and synthesizing the basic, yet critical, issues to be aware of before/during/after the deal. A well-rounded, up-to-date primer filled with pragmatic information that will serve as an excellent reference regardless the reader's M&A experience." — Edward J. Hayes, Jr. Executive Vice President and Chief Financial Officer Quantum Corporation "After reading Andrew's book, it became clear that his insight and processes assist entrepreneurs looking to expand their businesses. Andrew's book offers guidance for non-U.S.-based businesses considering mergers and acquisitions in the United States." — Nancye Miller, CEO, the Entrepreneurs' Organization" What People are Saying About This
From the Publisher
Contents ACKNOWLEDGMENTS ix INTRODUCTION TO THE THIRD EDI T ION xi CHAPTER 1 The Basics of Mergers and Acquisitions 1 Understanding Key Terms 1 What’s All the Fuss About? 3 Why Bad Deals Happen to Good People 8 Why Do Buyers Buy, and Why Do Sellers Sell? 9 CHAPTER 2 Preparing for the Dance: The Seller’s Perspective 13 Conducting a Thorough EOTB Analysis 17 Preparing for the Sale of the Company 17 Common Preparation Mistakes 29 Other Considerations for the Seller 31 CHAPTER 3 Initiating the Deal: The Buyer’s Perspective 34 Assembling the Team 34 Developing an Acquisition Plan 35 Applying the Criteria: How to Narrow the Field 43 Approaching a Company That Is Not for Sale 44 Dealing with the Seller’s Management Team 45 Directory of M&A Resources for Prospective Buyers (and Sellers) 46 CHAPTER 4 The Letter of Intent and Other Preliminary Matters 51 Proposed Terms 52 Binding Terms 52 Common Reasons Why Deals Die at an Early Stage 59 Preparation of the Work Schedule 60 Another Predeal Task: The Growing Debate About the Role and Usefulness of Fairness Opinions 61 CHAPTER 5 Due Diligence 65 Best Practices in Due Diligence in the Era of Accountability 2.0 66 Legal Due Diligence 74 Business and Strategic Due Diligence 83 Conclusion 91 Appendix to Chapter 5: Post-Sarbanes-Oxley Due Diligence Checklist 92 The Disclosure Requirements 93 Checklist of Items Post-Sarbox 97 CHAPTER 6 An Overview of Regulatory Considerations 101 Introduction 101 Environmental Laws 102 Federal Securities Laws 103 Federal Antitrust Laws 106 Waiting Periods 109 Labor and Employment Law 113 CHAPTER 7 Structuring the Deal 120 Stock vs. Asset Purchases 122 Tax and Accounting Issues Affecting the Structure of the Transaction 126 One-Step vs. Staged Transactions 130 Method of Payment 132 Nontraditional Structures and Strategies 135 CHAPTER 8 Valuation and Pricing of the Seller’s Company 144 A Quick Introduction to Pricing 146 Valuation Overview 147 CHAPTER 9 Financing the Acquisition 155 An Overview of Financing Sources 156 Understanding the Lender’s Perspective 159 Financing Deals in Times of Turmoil 160 Steps in the Loan Process 164 Equity Financing 168 CHAPTER 10 The Purchase Agreement and Related Legal Documents 189 Case Study: GCC Acquires TCI 191 Sample Schedule of Documents to Be Exchanged at a Typical Closing 209 CHAPTER 11 Keeping M&A Deals on Track: Managing the Deal Killers 252 Communication and Leadership 253 Diagnosing the Source of the Problem 254 Understanding the Types of Deal Killers 254 Curing the Transactional Patient 256 Maintaining Order in the M&A Process: Simple Principles for Keeping Deals on Track 257 Conclusion 258 CHAPTER 12 Postclosing Challenges 259 A Time of Transition 260 Staffing Levels and Related Human Resources Challenges 264 Customers 267 Vendors 268 Physical Facilities 268 Problems Involving Attitudes and Corporate Culture 269 Benefit and Compensation Plans 271 Corporate Identity 272 Legal Issues 272 Minimizing the Barriers to the Transition 273 Postmerger Integration Key Lessons and Best Practices 277 Conclusion 280 CHAPTER 13 Alternatives to Mergers and Acquisitions 281 Growth Strategy Alternative 1: Joint Ventures 282 Growth Strategy Alternative 2: Franchising 287 Growth Strategy Alternative 3: Technology and Merchandise Licensing 299 Growth Strategy Alternative 4: Distributorships and Dealerships 306 INDEX 309 Table of Contents