BUSINESS

ACQUISITIONS

2004 Joseph D. Lehrer

 The Role of the
Transactional Attorney is
to Add Value to a
Business Transaction
 ADDING VALUE TO A
TRANSASCTION
By structuring the transaction to enhance
financial return, reduce risk and limit costs.
Using multiple skill sets to shepherd the
Transaction.
Working as a member of a team, including
the client and other professionals.
Facilitating the consummation of a
beneficial Transaction
 BASIC ROLES OF THE
ACQUISTION ATTORNEY
Design the Structure of the Transaction
Implement Reduction of Risk
Negotiate the Details of the Transaction
Prepare Documentation of the Transaction
Create Congruency Between: (i) the Business
Goals and the Expectations for the
Transaction and (ii) The Structure and
Documentation of the Transaction
 Reduction of Risk

Planning and assisting the

investigatory due diligence process

Identifying business, regulatory and

legal risks

Providing Remedies and Recourse

 COMMON RISKS
Financial Risks
Environmental
Employment Laws
Employee Benefits
Commercial Litigation
Tax
Intellectual Property Infringement
Antitrust
PROTECTION AGAINST RISK

Ability to Abort a Bad Transaction

Allocating Risk Between Buyer and Seller
Representations and Warranties
Indemnification Procedures to Protect
Buyer Against Misrepresentations and
Breaches of Warranties
Insurance
 THE ATTORNEY AS THE
NEGOTIATOR
Enhancing value through negotiation
Negotiating the allocation of financial
and legal risk between the parties
Creating mutually beneficial solutions
 THE COURSE WILL
EMPHASIZE THE USE OF
INTERDISCIPLINARY
SKILLS

Interdisciplinary Skills Include

Legal, Financial and Business
Skills
INTERDISCIPLINARY LEGAL
SKILLS
Corporations Intellectual Property
Contracts Antitrust
Tax Securities
Real Estate Environmental
Labor and Uniform Commercial
Employment Code
Employee Benefits Insurance
 EXTRA-LEGAL
INTERDISCIPLIANRY
BUSINESS SKILLS
Managerial and Cost Accounting
Finance
Marketing
Valuation
Negotiations
 DOCUMENTATION OF THE
TRANSACTION
Provide Congruency among the expectation
of the client, the negotiated transaction and
the documentation of the transaction
Coordinate the Documentation with the
results of Due Diligence
Use Familiar Formats and Procedures of
Documentation to Reflect the Transaction
THE ACQUIRED SKILL

TO APPLY MULTI- LEGAL AND

EXTRA-LEGAL DISCIPLINES IN
A SEAMLESS MANNER WITHIN
A SINGLE TRANSACTION
 CLIENTS EXPECT THE
BUSINESS ATTORNEY
To Be a Constructive Counselor Regarding
Price and Structure of a Transaction
Possess Multiple Legal and Business Skills
Based Upon Interdisciplinary Education and
Experience of Many Deals
Be a Facilitator Who Finds Solutions for
Both the Buyer and Seller
Be a Constructive Negotiator Who
Creatively Avoids Impasse
THE ACQUISITION LAWYER
WHAT IS THIS
COURSE
ABOUT?
(What is the Common Goal
of the Buyer and Seller?)
 $
$

$ $
MONEY
 COURSE DESCRIPTION

Motivations of Buyers and Sellers

Financial Motivations
Other Motivations
In Order to Understand Financial
Motivations Must Be Familiar With
Elementary Accounting Concepts
Valuation Techniques
VALUE ANALYSIS REQUIRES
Basic Knowledge of Financial Statements
Analysis of the Balance Sheet and Income
Statement
Analysis of the Statement of Cash Flows
Additional Information of Target Disclosed in
Notes to Financial Statements
Analysis of Financial Projections
Sufficient Knowledge to Identify Synergies
Marketing and Revenue Enhancement
Expense Savings
 CRTITICAL CONCEPUTAL
ANALYSIS OF VALUE
Value Based on Targets Assets and Liabilities
Those Reflected on the Balance Sheet
Those Not Reflected on the Balance Sheet
Value Based on Historical Financial Results
Earnings
Cash Flow
Value Based upon Comparable Companies
Stock Market Values
Value Based Upon Perceived Synergies
 CRTITICAL CONCEPUTAL
ANALYSIS OF VALUE
Value Based Upon Net Discounted Future
Cash Flow of the Business
How to Predict Future Cash Flow
What Discount Rate to Use Based Upon
Expected Return, Perceived Risk and Cost of
Funds
How to Integrate Synergies of Multiple
Businesses Within Such Analysis
NEW CONCEPTS AND TERMS
EBITDA (Earnings Before Interest, Taxes,
Depreciation and Amortization) and Cash
Flow
Leverage and Leveraged Buy-Out (LBO)
Multiples
Discount Rate and Present Value
Cost of Capital
ROI (Return on Equity)
IRR (Internal Rate of Return)
 STRUCTURING THE
TRANSACTION

Considerations for the Structure

Acquiring the Attributes and Avoiding
Unwanted Liabilities
Accounting Issues
Tax Issues
Basic Acquisition Structures
 PRELIMINARY
NEGOTIATIONS AND
INVESTIGATION

Confidentiality Agreements
Letter of Intent
Due Diligence Investigation
 IDENTIFICATION OF
REGULARLY RECURRING
ISSUES
Successor Liability
Labor and Employment Issues
Intellectual Property Issues
Corporate Law Issues
Environmental Issues
 ISSUES RELATED TO
DOCUMENTATION
What is being Acquired
Purchase Price Payment Provisions
Representations and Warranties
Covenants
Conditions for Closing
Indemnity Provisions
 FINANCING THE
TRANSACTION
Working Knowledge of Financing
Techniques (Secured, Unsecured,
Mezzanineetc.)
Interplay of Finance, Accounting,
Creditors/Debtors Rights and Securities
Law
 CORPORATE GOVERNANCE
Decision Making Process of Public Vs.
Private Corporation
Duties of Directors
Who Decides Whether to Sell, to Whom
and for How Much?
The Shareholders?
The Directors?
The Courts?
Takeover Defenses
 SPECIFIC ISSUES RELATED
TO PUBLICLY HELD
TARGETS
Takeover Techniques
Hostile vs. Friendly Bids
The Special Case of the Management Buy-
Out
Defensive Techniques to a Hostile Bid
State Anti-Takeover Provisions
 ANTITRUST ISSUES

General Antitrust Principals

Determination of Undue Share of Market
Pre-Merger Notification Requirements
 COURSE PROCEDURES
Assignments will be sent by E-Mail and will be
Posted at the Business Acquisitions Web Site
I will try to have all written assignment materials
downloadable from the Course Web Site
Some Assignment Materials are to be picked up at
Room 301
Use of Links to the Internet For Some
Assignments
Each Class PowerPoint Presentation will be in a
Printable Form on the Web Site Prior to Class
 COURSE PROCEDURES
Attendance will not be taken, but grades will
likely correlate to class attendance
Preparation is expected , and students who
are not prepared for Class volunteer for
extra assignments
Class participation will not always be
Voluntary
Teacher may miss some classes -- make up
on Fridays to be announced
 COURSE PROCEDURES
Last Years Test Was a 24 Hour Open Book
Take Home Exam. I expect the same this year, but
I may change my mind based on student input and
the size of the class.
The Exam Will Test Students Ability to Apply
Interdisciplinary Skill, and will Hopefully also be
a Learning Experience.
The Test Will Cover the Assignment Materials and
Emphasize the Items Covered in Class (Including
Items Not Contained on the Power Point
Presentations).
 I can be reached at:

JOSEPH D. LEHRER
jdl@greensfelder.com
MOTIVATIONS OF BUYER
AND SELLER

What Causes The

Urge to Merge?
 DO MERGERS SUCCEED?

Is The Economist right when saying (January

9, 1999 After the deal ):

"Study after study of past merger waves have

shown that two of every three deals have not
worked; the only winners are the shareholders
of the acquired firm, who sell their company for
more than it is really worth."
 GRADING MERGERS

McKinsey says that 74% of

Acquisitions Fail to Create
Shareholder Value
KPMG Says that it is 83%
 REASONS FOR FAILURE

In the Context of an Actual or Perceived

Auction, Buyers Overpay. (Reverse
Engineering of the Price to be Paid)
Poor Due Diligence
Inadequate Protection Against Risks
Underestimate the Problems of Post-Deal
Integration
 MOTIVATIONS OF A BUYER
Creation of Synergies -- The Value of the
Whole Exceeds the Sum of the Parts
Reduction or Elimination of Redundant
Expenses
Enhance Revenues by Access to Customers,
Technology and/or Marketing
Gain Human Resources -- Intellectual
Capital and Resources
Utilize Buyers Equity as Currency
 MOTIVATIONS OF A BUYER

Diversification
Perceived Undervalued Target (e.g., assets
at below replacement cost or break-up
value)
Managerial Ego, Ambition and Hubris
MOTIVATIONS OF A SELLER

Privately Held Companies:

Family and Estate Planning Issues
Successorship Issues
Price Offered is Higher than Present Value of
Business
Diversify Wealth
Lifestyle Issues
MOTIVATIONS OF A SELLER
Publicly Held Company
Value to Shareholders
Desire for an Exit for Large Shareholders
Managements Desire (Possibly because of
Stock Options)
Internal Political Reasons
Financial or Liquidity Pressures
 Nov03 Oct03 Sep03 Aug03

Announced Deals 39 37 30 33

Number of Deals Disclosing a 31 30 28 28

Price

Total Deal Value Disclosed ($ $ $ $ $

Mil) 23,142.0
Nov02 74,299.9
Oct02 20,970.4
Sep02 5,672.8
Aug02

Announced Deals 43 30 35 36

Number of Deals Disclosing a 40 28 29 29

Price

Total Deal Value Disclosed ($ $ $ $ $

Mil) 18,241.0 3,343.9 3,087.3 3,168.7
 M&A Activity
U.S. and U.S. Cross-Border
Transactions
Year to Date 1/6/2004
Year Deals Value($bil
2004 90 $2.0
2003 8,232 $530.2
2002 7,411 $441.6
2001 8,545 $683.0
2000 11,123 $1,268.6
1999 9,628 $1,387.4
1998 8,047 $1,283.4
1997 7,848 $674.8
1996 5,862 $469.1
1995 3,510 $356.0
1994 2,997 $226.7
1993 2,663 $176.4
1992 2,574 $96.7
1991 1,877 $71.2
1990 2,074 $108.2
1989 2,366 $221.1
Number of Announced M&A Transactions
YTD YTD
Transactio 9/30/01 9/30/00 % Chg
n Size
$1 Billion + 98 162 -39.5%
$500M to 73 132 -44.7%
$999M
$250M to 111 208 -46.6%
$499M
$100M to 277 403 -31.3%
$249M
$50M to 253 410 -38.3%
$99M
$25M to 321 404 -20.5%
$49M
$10M to 453 547 -17.2%
$24M
Under 696 800 -13.0%
$10M
Not 4,018 4,640 -13.4%
Disclosing
Price
 1997 1998 1999 2000 2001

Net M&A Announcements 7,800 7,809 9,278 9,566 8,290

Total Dollar Value Offered $ 657.1 $ 1,191.9 $ 1,425.9 $ 1,325.7 $ 699.4

$ 100 Million + Deals 873 906 1,097 1,150 703

$ 1 Billion + Deals 120 158 195 206 121

Median Price (Millions) $ 30.0 $ 33.5 $ 39.6 $ 36.0 $ 22.6

Average Price (Millions) $ 218.1 $ 385.6 $ 421.4 $ 352.9 $ 233.4

Method of Payment

Cash 40% 44% 46% 49% 45%

Stock 33% 30% 30% 32% 27%

Debt 0% 0% 0% 1% 1%

Combination 27% 26% 24% 18% 27%

 LBO Purchase Price Multiples
Average Purchase Price/Adjusted EBITDA Multiples: LBOs <$250 MM
8.0

7.0x 7.0x
7.0
Multiple of EBITDA

6.3x
6.1x 6.2x
6.0
5.9x
5.5x

5.0

4.0
'95 '96 '97 '98 '99 '00 '01
With available leverage declining from 5.0x in 97 to 3.5x in 2001, equity IRR
models decrease from 35% to 16%.

Source: PMD/S&P
Average Debt on Highly Leveraged
Loans Has Decreased
Total Debt as Multiple of EBITDA

5.0x 4.9x
6.0
4.3x 4.1x
5.0 3.5x

4.0

3.0

2.0

1.0

0.0
'97 '98 '99 '00 '01

Source: PMD/S&P
 Total Equity Contribution as
50%
a Percent has Increased 41%
Equity as Percent of Enterprise Value

40% 38%
36%
32%
30%
30%
25% 26%
22% 24% 23%
21%
20%
13%
10%

0%
'89 '90 '92 '93 '94 '95 '96 '97 '98 '99 '00 '01
Within a 5 year timeframe, with only 60% debt and assuming no multiple
expansion, EBITDA has to almost double to produce a low 30% IRR.

Source: PMD/S&P & Berkshire Partners

What Collapsed the M&A Market?

Tighter Bank Loan Market

Weakened Public Equity Markets
Concern About Direction of the U.S.
Economy
Expectations of Sellers/Buyers were Out of
Balance
Aftermath of September 11, 2001
Bad Merger Results from Mega-Deals (i. e.,
the bubble burst)
 M&A Market Collapse
Buyers were constricted by capital markets
It was difficult to obtain loans (i.e., difficult to
leverage)
Sellers were unwilling to part with companies at
depressed values
Distressed assets represent overhang
Bankruptcies (e.g. Enron, Global Crossing,
McLeod)
Big buyers became big sellers (e.g. Lucent, Tyco)
 WHAT WILL REJUVINATE
THE M & A MARKETS?

More Security and Certainty About Global

Security Issues
Rationalization of Long Term Values by
both Buyers and Sellers
Corporate Profit Growth
Technology and Productivity Advancements
 WASSERSTEINS FIVE
PISTONS FOR M&A
Regulatory and Political Change
Technological Developments
Fluctuations in the Financial Markets
Leadership Style
Drive for Scale
Liptons Article Identifies Exogenous
Factors and Autogenous Factors
Affecting Mergers
Exogenous Factors: Regulatory, Political,
Markets, Taxes, Financing, Currency
Fluctuations, etc,
Autogenous Factors: Diversification, Response
to Technological Change, Vertical Integration,
Horizontal Integration, Quest for Global
Market, Cost Cutting, Pressure to Grow
Shareholder Value, Response to Industrial
Consolidation, etc.
 MERGER WAIVES
1893-1904: Consolidation of Railroads,
Oils, Steel, ..etc. (Rockefeller, Vanderbilt,
Carnegie)
Motivated in large part by New Technologies
Consolidation of Fragmented Industries (e.g.,
Railroads)
Fueled by Foreign Money (Instituted by J. P.
Morgan)
 MERGER WAIVES
1919-1929: Further Consolidation and
Vertical Integration (e.g., automobile
industry)
Motivated by New Technologies:
Automobile, Airplanes, Movies and Radio
Personalities: Ford, Durant,
 MERGER WAIVES
1955-1973: Era of the Conglomerate
Large Players: ITT (Harold Geneen), LTV
(Jimmy Ling)
Diversification, not Consolidation, was the
Driver
The Hodge Podge Acquisitions look
Irrational in Retrospect
 MERGER WAIVES
The 1980s: The Growth of LBOs,
Financial Buyers, MBOs, and the Hostile
Takeover, Break Up LBOs, etc.
Spurred in Large Part by Sophisticated
Financing and Leverage
Personalities: Milken, T. Boone Pickens,
KKR, Perelman,..etc.
 MERGER WAIVES
1993-2000: Merger Mania
Motivated by:
Deregulation (Banks, Broadcasting, etc.)
Relaxation of Antitrust Restraints
Technology
Foreign Investment
Cheap Money
Globalization
Fueled by the Irrational Exuberance of
Stock Market Valuations
 MERGER & ACQUISITION
BASICS
An Acquisition is the Purchase of a
Business
Acquisition of Assets of a Corporation
Acquisition of the Stock of a Corporation
A Merger is the Combination of Two
Corporations
 TYPES OF M & A
Horizontal - Combining Similar Products or
Services
Vertical - Combining Two Firms Along
Value-Chain (Such as a Supplier and
Customer)
Conglomerate - Two Companies in
Completely Different Industries Combine
 M & A BASICS

Acquisition of a Privately Held

Company
Acquisition of a Publicly Held
Company
 MERGER & ACQUISITION
BASICS
An Acquisition is the Purchase of a
Business
Acquisition of Assets of a Corporation
Acquisition of the Stock of a Corporation
A Merger is the Combination of Two
Corporations
 STOCK PURCHASE
Buyer purchases all of the issued and
outstanding stock of the Targets
shareholders
As a consequence, all assets and all
liabilities are acquired by virtue of Buyer
owning target as wholly owned subsidiary
Think of a Corporation as a Box
In an Acquisition Structured as a Stock
Purchase, the Acquirer Purchases the
Entire Corporation (i.e., the entire box)
including everything inside of the Box
(i.e., all assets and all liabilities)
But without Investigation, the Buyer may
not Know what is Inside the Box
There could be an Unpleasant
Surprise Inside the Box
 STOCK
SHAREHOLDERS BUYER
Purchase
Price

TARGET Stock Purchase

Transaction
 STOCK
SHAREHOLDERS
Cap Gains Tax BUYER
Purchase
Price

As a result of TARGET
Stock Purchase
 ASSET PURCHASE
Buyer Purchases Selected assets of the
Corporation
Assumption of selected liabilities of the
business
The Selling Company may retain specified
assets and liabilities
Normally, the selling corporation liquidates
after the transaction is completed
Inefficient tax consequences if the corporate
seller is not S Corporation
In an Asset Purchase the Buyer can Choose
what Assets and Liabilities are Acquired
 Asset
Shareholders Purchase

Liabilities
Assets BUYER
TARGET

Purchase
Price
 Statutory Stock Merger
A statutory merger of the Target into the
Buyer (or its subsidiary)
The Targets shareholders receive a Buyers
Shares of Stock in Exchange for Targets
shares.
The Combined Corporation Surviving the
Merger Possesses All of the Assets,
Liabilities and Obligations of Each of the
Two Corporations.
 USING THE ANLAOGY OF
THE BOX
Assume that everything in one box is
poured into the other box -- Everything is
Combined
There is no opportunity to pick and choose
which liabilities are going into the
combined box
The owners of both boxes end up owning
the combined box, as the survivor to the
Merger.
 Buyers
Target S-Hs
S-Hs

Target Merger Buyer

Statutory Merger A Reorg.

 Target Buyers
S-Hs S-Hs

BUYER
Targets
As a result
of the
Assets & Liabilities
Merger