M&A Deal Structuring Process M&A and Other Restructuring Activities M&A M&A Process Deal Alternative Environment Structuring Restructuring Strategies 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 Alternative Structures Tax & Accounting Issues 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 and – 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 agreement – 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 integration Minimizing or sharing risk Partnership/joint venture Holding company Gaining control while limiting Holding company investment 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 liability) 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 shareholders) • 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 dilution) – 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 Shareholders • 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 assets. • Taxable transactions occur when the acquirer uses – Something other than its own stock – Buys an insufficient amount of the target’s stock or assets 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.