Deal Structures And Legal Points

Question 1

What is an exchange ratio and when would companies use it in an M&A deal?

Answer 1

Alternate way of structuring a 100% stock M&A deal, or any M&A deal with a portion of stock involved
- normally determine number of shares to issue by dividing the company EV by buyer’s stock price
- with exchange ratio, tie number of new shares to buyer’s own shares, e.g. seller receives 1.5 shares of buyer’s shares for each 1 of its own.
Buyer will prefer if stock price assumed to fall, sellers prefer fixed dollar amount in stock unless they believe buyer’s share price will rise post transaction

Question 2

Isn’t there still some risk with an exchange ratio? If the stock price swings wildly in one direction or the other, the effective purchase price would be very different. Is there any way to hedge against that risk?

Answer 2

Yes, use something called a collar, which guarantees a certain price based on the range of buyer’s stock price to sellers.
- of buyer share price falls below x amount per share, seller still receives x amount per share.
- if buyer share price below x and y amount, normal exchange ratio is used
- if buyer goes above y, seller can only receive y value per buyer share.
Not terribly common but reduce risks on both sides

Question 3

Walk me through most important terms of a purchase agreement in an M&A deal

Answer 3

• purchase price: stated as a per-share amount for public companies, EPP - a number - for private companies
• form of payment
• transaction structure
• treatment of options
• employee retention

Question 4

What’s an Earnout and why would a buyer offer it to a seller in an M&A deal?

Answer 4

A form of deferred payment in an M&A deal, most common with private companies and start-ups, unusual for public sellers
- usually contingent on financial performance or other goals, well pay you more if you can hit x amount in revenue
- use to incentivise sellers to perform well.