Docstoc

Chapter 10 Deal Structuring Process

Document Sample
Chapter 10 Deal Structuring Process Powered By Docstoc
					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.

				
DOCUMENT INFO
Shared By:
Categories:
Stats:
views:16
posted:9/27/2011
language:English
pages:12