When it comes to negotiating an M&A deal, the David Barzilay expansion team sees the big picture while contemplating a transaction. So many issues need to be addressed up front, more so even before the deal is inked or the letter of intent phase. Both the acquiring as well as the target company need to consider certain factors up front while negotiating a merger and acquisition transaction deal.
#1 Deal Structure: What’s On the Table
There are many alternatives for structuring deal, such as an asset sale, merger or stock purchase. Within each alternative, there are certain legal interests and considerations which must be taken into account. Material issues need to be considered when the deal structure is being negotiated. Deal structure considerations include tax consequences, third-party contractual requirements for consent and transference of liability.
A transaction is either taxable or tax-free. It all depends on the tax structure. While asset sales and stocks have tax consequences for both parties, the deal can be structured so that portions of sales proceeds come under the deferred tax. From the acquirer’s perspective, asset sales offer value, provided the acquiring company’s tax base in assets equals the purchase price or the FMV/fair market value. In a stock purchase, the selling company’s shareholders pay long-term capital gains provided the stock is owned for a considerable period of time. Merger or recapitalization can lead to deferred taxes.
Each acquisition comes with its own set of tax consequences. Maximizing the returns and availing tax benefits is all part of the David Barzilay investment strategy.
Additionally, there are differences in the transference of liabilities depending on the class of the deal. In an asset sale, for instance, only liabilities designated as assumed to be relegated to the acquirer while the target covers remaining liabilities. Third-party consents and stockholder approval also play a role in effective deal-making.
#2 Cash Or Equity: Mode of Payment for the Transaction
The method of transaction payment is a key factor for both target as well as acquiring company. Cash is the liquid yet low-risk alternative for the target. Equity payments are issued to stockholders of the target company at a ratio determined as per the relative size of the target value. Payment methods should aim at making deals flexible, according to the David Barzilay expansion team. The value acquirers place on the target company should reflect FMV.
#3 Working Capital Adjustments: Meeting Business Requirements
Deal teams also need to consider working capital adjustment as a component of the purchase price. The acquirer needs to insure the target has enough working capital to meet demands of the business once the deal is inked, including debt obligations for traders and promises to customers. Target companies may seek benefits for asset infrastructure enabling a business to grow and generate profits. Essentially, these would have served as a motivation for the acquirer to purchase the business to start with.
The David Barzilay expansion team strategises to ensure enough working capital adjustment to ensure a smooth transition for the acquihired company.
#4 Escrow and Earn-out Conditions
Post the negotiation, letters of intent issued should indicate any factors that influence purchase price, and must be taken into account, such as escrows and earn-outs. The purpose is to provide recourse for acquirers in the event of problems in representation or warranties made by the target. Escrows are standards in any deal. But the terms can vary across M&A transactions. Earn-out provisions are used for closing the gap on valuation between the acquirer and the target. Earn-out is tied to a future performance of the business, with targets or stockholders benefiting from any specific milestones being met. While drafting earn-out terms, milestones need to be as objective as possible. Future revenue and financial metrics must be considered.
#5 Warranties and Representations
Acquirers need to have a definitive agreement for detailed warranties and representations by targets with respect to aspects like intellectual property, authority, capitalisation, financial statements, compliance with employment, material contracts and law requirements. Representations need to be carefully studied as breaches can lead to indemnification by acquiring companies.
#6 Target Indemnification
Indemnification of the target is always one of the most debated points in merger and acquisition deals and transactions. Types of indemnification claims capped at the escrow are to be considered.
#7 Several and Joint Liability
Associated with indemnification is the concept of several and joint liability. Due to the fact that most M&A deals involve multiple target stockholders, a chief consideration is the extent to which target’s stockholders, post-closing, will participate in indemnification obligations. As per joint liability, every target stockholder may be liable. If the liability are several, target stockholders may be implicated for their relative contributions to the damages. So, these are some of the grey areas that need to be considered on the negotiating table.
#8 Closing Terms and Conditions
The agreement also has certain closing conditions and terms that must be attained for the deal to be inked. These are negotiated at the time of a definitive agreement. Conditions include relevant approvals, modification in target firm’s business or financial situation, the potential for litigation, failure of delivery options for legal opinions and specific nature of shareholder approval. A heavily negotiated closing condition is the voting threshold for stockholders that must be approved for the transactions.
#9 A Question of Timing
With respect to any deal, the acquisition parties should also review long-term lead issues quickly. Filings and the time period during which they are to be made must be considered.
#10 Non Compete or Solicit Terms
In any deal, there is a condition not to complete or solicit by target stockholders for a certain time frame or post the termination of the relationship with the target company. Specifically, the non-compete and non-solicit terms ensure the business remains competitive and its customer network is not poached.
So, the David Barzilay expansion deal team focuses on all these factors while considering an acquisition’s terms. Inking the deal is as much about setting favourable terms and conditions, as it is about understanding where the risks lie. Making adequate provisions for contingencies forms the core of effective M&A deal-making.