Week 8&9

Question 1

Hypothesis: a buyer wants to buy company X. Two basic structures can be used therefor:

Answer 1

Question 2

How to choose between an asset deal and a share deal?

Answer 2

Question 3

Declaration of Intent (The impact of stock market law on M&A transactions)

Answer 3

when crossing certain thresholds (e.g. in France, 10% or 20% of capital or voting rights): disclosure of the purchaser’s intent regarding the company within a certain time period

Question 4

Mandatory takeovers: (The impact of stock market law on M&A transactions)

Answer 4

when holding more than a third of the capital or voting rights of a listed company, a shareholder is required to acquire all of the share capital of the company.

Question 5

Non-Disclosure Agreements (NDA):

Answer 5

Confidentiality agreement covering Seller’s information disclosed in the data room

Question 6

Due Diligence (DD):

Answer 6

• Examination of the target company
• Focus areas: financial, legal, tax, IP, IT, environment, market/commercial situation of the company, real and personal property, insurance and liability coverage, debt instrument review, employees’ benefits, labor matters, etc

Question 7

Letters Of Intent (LOI)

Answer 7

• Detailed offer with a price
• Non-binding
• Can be subject to a satisfactory SPA, completion of the due diligence, absence of MAC, etc.

Question 8

Price clauses

Answer 8

–Purchase price adjustment clauses

–Locked box mechanism

–Earn-out clauses

Question 9

Purchase price adjustment clauses

Answer 9

• Net debt clauses: The net debt will be deducted from the purchase price at closing
• Net working capital clauses: A target amount of working capital reflecting the level required to operate the business is set. Variation from the target at the closing date leads to an increase/decrease of the purchase price
• Capex clauses: restrict or require investment spent in line with agreed or budgeted amounts

Question 10

Locked box mechanism

Answer 10

• Fixed price mechanism
• Based on a historical accounting situation
• Contractual agreement forbidding cash flow out of the company and increase of debt

Question 11

Earn-out clauses

Answer 11

• Upfront payment (enterprise value + cash – debt = equity value)
• Additional performance-related component

Question 12

Representations of the Seller

Answer 12

statements about the present state of the company. When they appear to be false, they may lead to indemnification and even to the annulment of the contract if the Buyer relied on them to enter the contract

Question 13

Warranties (How to deal with the estimated value of assets and assumed liabilities?)

Answer 13

contractual protections against an event happening after closing which originated prior to the deal:

• Any increase in the liability
• Any assets value decreasing
• Any loss caused by an incomplete or inexact representation
• Any non-performance of the Seller’s obligations

Question 14

Two types of indemnification for breach of Seller’s warranty:

Answer 14

• Indemnity guarantee
• Price adjustment guarantee

Question 15

Indemnity vs. guarantee

Answer 15

Indemnity is a contractual obligation of one party (indemnitor) to compensate the loss occurred to the other party (indemnitee) due to the act of the indemnitor or any other party. In contrast, a guarantee is an obligation of one party assuring the other party that guarantor will perform the promise of the third party if it defaults.

Question 16

Means to limit Seller’s liability

Answer 16

• Disclosures: List of disclosed issues which will not give rise to Seller’s liability
• Threshold
• Cap
• Duration

Question 17

Means to ensure Buyer’s compensation

Answer 17

• Escrow
• First demand bank guarantee
• Corporate guarantee
• Insurance

Question 18

Escrow

Answer 18

a legal concept in which a financial instrument or an asset is held by a third party on behalf of two other parties that are in the process of completing a transaction. The funds or assets are held by the escrow agent until it receives the appropriate instructions or until predetermined contractual obligations have been fulfilled. Money, securities, funds, and other assets can all be held in escrow.

For example, a company selling goods internationally wants to be certain that it will get paid when the goods reach their destination. Conversely, the buyer wants to pay for the goods only if they arrive in good condition. The buyer can place the funds in escrow with an agent and give irrevocable instructions to disburse them to the seller once the goods arrive. This way, both parties are safe, and the transaction can proceed.

Question 19

Poison pill

Answer 19

a tactic utilized by companies to prevent or discourage hostile takeovers. A company targeted for a takeover uses a poison pill strategy to make shares of the company’s stock unfavorable to the acquiring firm.

There are two types of poison pills:

1. A “flip-in” permits shareholders, except for the acquirer, to purchase additional shares at a discount. This provides investors with instantaneous profits. Using this type of poison pill also dilutes shares held by the acquiring company, making the takeover attempt more expensive and more difficult.
2. A “flip-over” enables stockholders to purchase the acquirer’s shares after the merger at a discounted rate. For example, a shareholder may gain the right to buy the stock of its acquirer, in subsequent mergers, at a two-for-one rate.

Question 20

Shareholder rights plan

Answer 20

To avoid being the target of a hostile takeover by a larger firm, a corporate board might adopt a defensive strategy called a shareholder rights plan. Such plans allow existing shareholders the right to purchase additional shares at a discount, effectively diluting the ownership interest of any new, hostile party. Most plans are triggered whenever one individual or entity obtains a certain percentage of total ownership, leading to the nickname “poison pill.”

An example of a poison pill defense occurred in 2012, when Netflix announced a shareholder rights plan had been adopted by its board just days after investor Carl C. Icahn acquired a 10% stake. The new plan stipulated that with any new acquisition of 10% or more, any Netflix merger or Netflix sales or transfers of more than 50% of assets, existing shareholders can purchase two shares for the price of one.

Question 21

White knight

Answer 21

A white knight is an individual or company that acquires a corporation on the verge of being taken over by a force deemed undesirable by company officials, otherwise known as a black knight. While the target company doesn’t remain independent, a white knight is viewed as a preferred option to the hostile company completing their takeover. Unlike a hostile takeover, current management typically remains in place in a white knight scenario, and investors receive better compensation for their shares.

Question 22

Greenmail

Answer 22

Like blackmail, greenmail is money that is paid to an entity to make it stop an aggressive behavior. In mergers and acquisitions, it is an anti-takeover measure where the target company pays a premium, known as greenmail, to purchase its own stock shares back (at inflated prices) from a corporate raider. Once the raider accepts the greenmail payment, generally it agrees to stop pursuing the takeover and not to purchase any more shares for a specified number of years. The term “greenmail” stems from a combination of blackmail and greenbacks (dollars). The great number of corporate mergers that occurred during the 1980s led to a wave of greenmailing. During that time, it was suspected that some corporate raiders initiated takeover bids to make money through greenmail with no intention of following through on the takeover.

Question 23

Pac-man defence

Answer 23

a defensive tactic used by a targeted firm in a hostile takeover situation. In a Pac-Man defense, the target firm then tries to acquire the company that has made the hostile takeover attempt. In an attempt to scare off the would-be acquirers, the takeover target may use any method to acquire the other company, including dipping into its war chest for cash to buy a majority stake in the other company.

Question 24

Hostile takeover defenses:

Answer 24

• Particular company types (e.g. société en commandite par actions in France)
• Shareholders’ rights plan (poison pill)
• Staggered board of directors
• White knight bidder
• Management Buyout (MBO)
• Greenmail
• Increasing debt
• Making an acquisition
• Acquiring the acquirer (the Pac-Man defense)

Question 25

Arms length agreement

Answer 25

In an arm’s length transaction is a one in which the buyers and sellers of a product act independently and have no relationship to each other. The concept of an arm’s length transaction ensures that both parties in the deal are acting in their own self-interest and are not subject to any pressure or duress from the other party. It also assures third parties that there is no collusion between the buyer and seller.

Question 26

Earn-out

Answer 26

a contractual provision stating that the seller of a business is to obtain additional compensation in the future if the business achieves certain financial goals, which are usually stated as a percentage of gross sales or earnings. If an entrepreneur seeking to sell a business is asking for a price more than a buyer is willing to pay, an earnout provision can be utilized. In a simplified example, there could be a purchase price of $1,000,000 plus 5% of gross sales over the next three years.