Chapter 10 Deal Structuring Process

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Chapter 10 Deal Structuring Process Powered By Docstoc
					M&A Deal Structuring Process
                              M&A and Other

     M&A           M&A Process               Deal          Alternative
  Environment                             Structuring     Restructuring

   Motivations      Business &             Public &       Divestitures,
    for M&A       Acquisition Plans    Private Company    Spin-Offs, &
                                           Valuation      Carve-Outs

Common Takeover   Search Through          Financial       Bankruptcy &
  Tactics and     Closing Activities      Modeling         Liquidation
   Defenses                              Techniques


                                       Tax & Accounting
         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 understand
   – the primary components of the process
   – common linkages.
      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 structure is that which
   – Satisfies as many of the primary objectives of
     the parties involved as necessary to reach
   – Subject to an acceptable level of risk
              Acquisition Vehicle
  Acquirer’s Objective (s)      Potential Organization
Maximizing control           Corporate (C or S) or
Facilitating postclosing      divisional structure
Minimizing or sharing risk   Partnership/joint venture
                             Holding company
Gaining control while limiting Holding company
Transferring ownership       Employee stock ownership
  interest to employees       plan
          Post-Closing Organization
   Acquirer’s Objective (s)        Potential Organization
Integrate target immediately   Corporate or divisional
Centralize control in parent   structure
Facilitate future funding
Implement earn-out             Holding company
Preserve target’s culture
Exit business in 5-7 years
Assume minority position
Minimize risk                  Partnerships
Minimize taxes                 Limited liability companies
Pass through losses
                    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 liquidation)
   – Convertible preferred stock (Incl. attributes of common & pref.)
   – Debt (secured and unsecured) (Lower risk in liquidation)
   – Real property (May be tax advantaged)
   – Some combination (Meets needs of multiple constituencies)
• Closing the gap on price
   – Balance sheet adjustments (Ignores off-balance sheet value)
   – Earn-outs or contingent payments (May shift risk to seller)
   – Rights, royalties, and fees (May create competitor & seller tax
   Form of Acquisition: Buyer’s Perspective
• Cash purchase of assets (Permits “cherry picking,” asset write-up;
  limits liabilities, & no minority owners; but lose tax attributes and
  assets not specified in contract and incur transfer taxes)
• Cash purchase of stock (All assets incl. tax & intellectual property
  transfer automatically but responsible for all liabilities and minority
• Mergers (More flexible payment terms, assets transfer automatically,
  no minority shareholders or transfer taxes but responsible for all
  liabilities and subject to shareholder approval)
• Alternatives to mergers
    – Stock for stock (May operate as subsidiary; possible EPS
    – Stock for assets (Similar to cash purchase of assets)
• Staged transactions (Provides greater strategic flexibility but
  postpones synergy realization)
    Legal Form of Selling Entity
• A seller’s concern about the form of acquisition may
  depend on its own legal structure.
• C-corporations are subject to double taxation, while
  subchapter S, limited liability companies, and
  partnerships are not.
• C corporation shareholders generally prefer a stock for
  stock transaction to defer their tax liability.
• Subchapter S, limited liability companies, and
  partnership investors may be indifferent to a sale of
  assets or stock.
     Tax Considerations: Impact on Seller
• Business combinations may be
   – Tax free
   – Partially taxable
   – Wholly taxable
• Non-taxable transactions occur when acquirer stock is
  used to buy substantially all of the target’s stock or
• Taxable transactions occur when the acquirer uses
   – Something other than its own stock
   – Buys an insufficient amount of the target’s stock or
   Tax Considerations: Impact on
 Combined Businesses’ Shareholders

• Avoiding double or triple taxation

• Allocating losses to owners
        Things to Remember…
• Deal structuring addresses identifying and
  satisfying as many of the primary objectives of
  the parties involved and determining how risk
  will be shared.
• Deal structuring consists of determining the
  acquisition vehicle, post-closing organization,
  the form of payment, the form of acquisition,
  legal form of selling entity, and tax structure.
• Choices made in one area of the “deal” are likely
  to impact other aspects of the transaction.

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