The Ultimate Guide to Mergers and Acquisitions (M&A) - Wall Street Prep
SAVE THE DATE. Responding Deal Structures – Corporate Targets. 08 Vote considerations can also matter where by charter or by law, a merger requires a. Why do parties structure deals as option to acquire transactions? on the value as agreed upon by the parties on the date of the option grant. of an option and an acquisition agreement with fixed consideration even if the. Deal structures in the life sciences industry and their financial statement 20% of the total consideration is payable every anniversary date for a total of five.
Earn-out provisions are less common and are most often used to bridge the gap on valuation that may exist between the target and the acquirer. When drafting earn-out terms, it is important to have the milestones be as objective as possible. Typical milestones include future revenue and other financial metrics.
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Representations and Warranties The acquirer will expect the definitive agreement to include detailed representations and warranties by the target with respect to such matters as authority, capitalization, intellectual property, tax, financial statements, compliance with law, employment, ERISA and material contracts. Targets are typically uncomfortable with such a broad statement, but without such a representation an acquirer often will question whether the target is withholding certain information.
Acquirers and targets also struggle with the appropriateness of knowledge qualifiers throughout the representations. One of the initial issues to be determined is what types of indemnification claims will be capped at the escrow amount.
In some instances all claims may be capped at the escrow. Joint and Several Liability Related to the concept of indemnification is the issue of joint and several liability. It goes without saying that the acquirer will almost always desire to make each target stockholder responsible for the full amount of any future potential claims. Closing Conditions A section of the definitive agreement will include a list of closing conditions which must be met in order for the parties to be required to close the transaction.
These are often negotiated at the time of the definitive agreement although sometimes a detailed list will be included in the letter of intent.
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One of the more heavily negotiated closing conditions is the stockholder voting threshold which must be achieved for approval of the transaction. The target should review its stockholder structure carefully before committing to such a high threshold although from a target perspective, the more stockholders approve the transaction the better, but the target just does not want the acquirer to have the ability to walk away from the transaction.
Preferred shareholders have priority over other shareholders in terms of repayment. Preferred stock can be designed in various ways, depending in part on the governing corporate law. In general, the investor sets certain achievement milestones with an investee company that trigger certain payments to the fund. How much a fund manager then puts into the company at these different milestones varies, but managers should keep it simple and meet entrepreneurs at their level of sophistication.
Investing through preferred stock gives an investor fixed dividends. Common stock is subordinated to 1 all government claims or taxes, 2 all regulated employee claims e.
Warrants and options are similar in that both contractual financial instruments allow the holder special rights to buy securities. In a participating loan, the investor receives a payment linked to the profits or turnover of the company in which the investment is made. Some fixed-interest payments can also be included in the contract.
Convertible debt, or bonds with an equity warrant, are a type of bond that the holder can convert into shares of the company or cash of equal value at an agreed-upon price and up to a specified expiration date. Investors may demand more regular repayments from smaller companies as a way to manage their potential risk.
Mezzanine finance is a combination of debt and equity financing. The investor in a mezzanine facility accepts more risk than a provider of a senior loan, normally receiving a higher financial return. Common forms of mezzanine finance include subordinated loans, participating loans, and equity-related mezzanine instruments, such as convertible bonds and bonds with warrants.
In practice The merger proxy or merger prospectus is much easier to navigate than the merger agreement and is the primary data source used to understand key terms in the transactions. The termination fee will also be payable in certain circumstances if the Merger Agreement is terminated and prior to such termination but after the date of the Merger Agreement an acquisition proposal is publicly announced or otherwise received by the Company and the Company consummates, or enters into a definitive agreement providing for, an acquisition transaction within one year of the termination.
The breakup fee seeks to neutralize this and protect the buyer for the time, resources and cost already poured into the process. At deal announcement, the buyer and seller have both signed the merger agreement — a binding contract for the buyer. The go-shop explicitly allows the seller to explore competing bids after the merger agreement.
The MAC gives the buyer the right to terminate the agreement if the target experiences a material adverse change to the business. Fixed and floating exchange ratios Purchase price working capital adjustments The amount of working capital that a seller has on the balance sheet at the announcement date may be materially different from the amount it has at closing.
There was no working capital purchase price adjustment in the Linkedin Microsoft deal. In practice Working capital price adjustments are exceedingly rare in public deals.