Mergers and Acquisitions Basics

Negotiation and Deal Structuring

Donald DePamphilis

• Publisher: Academic Press
• Year: 2010
• Print ISBN: 9780123749499
• eBook ISBN: 9780080959108
• Topic: Economics
• Subtopic: Management
• Index: Economics

Negotiations form the heart of mergers and acquisitions efforts, for their conclusions contain both anticipated and unforeseen implications. Don DePamphilis presents a summary ofnegotiating and deal structuring that captures itsdynamic process, showing readers howbrokers, bankers, accountants, attorneys, tax experts, managers, investors, and others must work together and what happens when they don't.Writtten for those who seek a broadly-based view of M&A and understandtheir own roles in theprocess, this book treads a middle ground between highly technical and dumbed-down descriptions of complex events. It mixestheory withcase studies so the text is current and useful. Unique and practical, this book can add hard-won insightsto anybody's list of M&A titles..- Presents negotiation as a team effort- Includes all participants, from investment bankers to accountants and business managers- Emphasizes the interactive natures of decisions about assets, payments, and appropriate legal structures- Written for those who seek summarizing, non-technical information

Chapter 1. Introduction to Negotiating Mergers and Acquisitions

Pfizer, the pharmaceutical industry behemoth, was growing increasingly uneasy in early 2008. It had few blockbuster drugs in the pipeline, and several of its major revenue-generating drugs were about to lose patent protection. Pfizer had made several major acquisitions earlier in the decade and now looked to acquire another drug company to offset potential revenue losses. CEO Jeffrey Kindler placed a call to Wyeth Pharmaceutical's chief executive that spring.

Pfizer, the pharmaceutical industry behemoth, was growing increasingly uneasy in early 2008. It had few blockbuster drugs in the pipeline, and several of its major revenue-generating drugs were about to lose patent protection. Pfizer had made several major acquisitions earlier in the decade and now looked to acquire another drug company to offset potential revenue losses. CEO Jeffrey Kindler placed a call to Wyeth Pharmaceutical's chief executive that spring.

Talks heated up in the summer months but appeared to collapse when the global banking system went into a meltdown that September. Each in a series of what appeared to be restarts over the next several months faltered on Wyeth's concerns that Pfizer could not finance the deal. Only in late January 2009, when a consortium of banks signed a loan commitment, was an agreement reached.

Pfizer, like many firms that have engaged in mergers and acquisitions (M&As) over the years, followed a pattern: management determined that an acquisition was the best way to implement the firm's business strategy; a target was selected that fit with the strategy; and a preliminary financial analysis yielded satisfactory results. It was then time to approach the target and initiate negotiations, a process that generally begins with the buyer establishing what it believes to be a reasonable initial offer price range based on preliminary information. Although a potential buyer may wish to avoid being too specific at first contact, it may be unavoidable. The seller may demand some indication of price before proceeding to release any additional information to the buyer. A wise buyer intent upon proceeding will provide a tentative purchase price or indication of value for the target firm subject to performing adequate due diligence.

Here, negotiation is considered a process that begins when the prospective buyer makes its initial contact with the potential target firm, and the target expresses interest in exploring the possibility of being acquired. You will learn about common negotiating strategies and the complexities of deal structuring. Also here, negotiation in the M&A context is viewed from a comprehensive, or macro, perspective, not the narrow viewpoint of negotiation often held by one or another of the key participants whose close collaboration is required for success, whether they are lawyers, accountants, investment bankers, or business managers.

Words in bold italics are the ones most important for you to understand fully; they are all included in a glossary at the end of the book.

Throughout this book, a firm that attempts to acquire or merge with another company is called an acquiring company, acquirer, or bidder. The target company or target is the firm being solicited by the acquiring company. Takeovers or buyouts are generic terms for a change in the controlling ownership interest of a corporation. ¹

¹For a more detailed discussion of this material, see DePamphilis (2009).

Key Participants in Negotiating Mergers and Acquisitions

Many individuals contribute to a successfully completed negotiation. Four groups play pivotal roles: senior or operating management, investment bankers, lawyers, and accountants.

Senior/Operating Management

Ultimately, senior management is responsible for the business strategy adopted by the firm and the firm's decision to use an acquisition to implement this strategy in order to achieve the firm's vision and objectives rather than “going it alone” or partnering with another firm. When the decision to acquire is made, senior management must assemble a team to find suitable target firms, approach the targets, and negotiate and complete an acquisition.

Senior management is responsible for communicating its preferences about how the acquisition process should be managed, a timetable for completing the acquisition, and who will be the “deal owner”—the individual responsible for making it all happen. Management preferences provide guidance by stipulating selection criteria for potential acquisition targets, and may include the industry or market segment to be targeted; the approximate size of the firm or maximum purchase price; financial characteristics of a desirable target including profitability and growth rate; and nonfinancial attributes such as intellectual property, manufacturing, or distribution capabilities. Management may also express a willingness to engage in a hostile takeover. Preferences could also indicate management's choice of the form of payment (stock, cash, or debt), willingness to accept temporary earnings per share dilution, preference for a stock or asset purchase, desire for partial or full ownership, and limitations on contacting competitors.

The “deal owner”—frequently a high-performing manager—leads the acquisition effort and the negotiation, and should be appointed by senior management very early in the process. It could be a full- or part-time position for someone in the firm's business development unit or an individual expected to manage the operation once acquired. Some deal owners are members of the firm's business development team with substantial deal-making experience. Depending on circumstances, it may make sense to appoint two deal owners: the individual who will be responsible for eventual operation and integration of the target and an experienced dealmaker in a supporting role.

It is the deal owner's responsibility to oversee the negotiation process and ensure that the final agreement of purchase and sale satisfies the acquiring firm's key objectives. In an asset purchase, the contract should entitle the acquirer to rights to specific products; patents; copyrights or brand names; and all needed proprietary technologies, processes, and skills. The deal owner (in consultation with senior management) will have to choose which liabilities to assume. With a purchase of target stock all known and unknown assets and liabilities transfer to the buyer, and the deal owner ultimately is responsible for ensuring that a thorough due diligence has taken place so that the extent of the risk assumed by the buyer is well understood.

Investment Bankers

Amid the turmoil of the 2008 credit crisis, the traditional model of the mega-independent investment bank as a highly leveraged, largely unregulated, innovative securities underwriter and M&A advisor floundered. Lehman Brothers was liquidated, and Bear Stearns and Merrill Lynch were acquired by commercial banks JPMorgan Chase and Bank of America, respectively. In an effort to attract retail deposits and to borrow from the U.S. Federal Reserve System (the “Fed”), Goldman Sachs and Morgan Stanley converted to commercial bank holding companies subject to Fed regulation.

Although the era of the thriving independent investment banking behemoth may be over, the financial markets will continue to require investment banking services. Traditional investment banking activities will continue to be in demand. They include providing strategic and tactical advice and acquisition opportunities; screening potential buyers and sellers; making initial contact with a seller or buyer; and providing negotiation support, valuation, and deal-structuring guidance. Along with these traditional investment banking functions, the large “universal banks” (e.g., Bank of America/Merrill Lynch) will maintain substantial broker-dealer operations, serving wholesale and retail clients in brokerage and advisory capacities to assist with the complexity and often huge financing requirements of the mega-transactions. Investment banks also often provide large databases of recent transactions, which are critical in valuing potential target companies.

Lawyers

Lawyers play a pervasive role in most M&A transactions. They are intimately involved in structuring the deal, evaluating risk, negotiating many of the tax and financial terms and conditions (based on input received from accountants; see following section), arranging financing, and coordinating the timing and sequence of events to complete the transaction. Specific tasks include drafting and reviewing the agreement of purchase and sale and other transaction-related documentation, providing opinion of counsel letters to the lender, and defining due diligence activities.

The legal framework surrounding a typical large transaction has become so complex that no one individual can have sufficient expertise to address all the issues. For these complicated transactions, legal teams can consist of more than a dozen attorneys, each bringing specialized expertise in a given aspect of the law such as M&As, corporate, tax, employee benefits, real estate, antitrust, securities, environmental, and intellectual property. In a hostile transaction, the team may grow to include litigation experts. In relatively small private transactions, lawyers play an activ...

Table of contents

• Cover Image
• Table of Contents
• Front-matter
• Copyright
• Preface
• Acknowledgments
• Chapter 1. Introduction to Negotiating Mergers and Acquisitions
• Chapter 2. Selecting the Form of Acquisition Vehicle and Postclosing Organization
• Chapter 3. Selecting the Form of Payment
• Chapter 4. Selecting the Form of Acquisition
• Chapter 5. Tax Structures and Strategies
• Chapter 6. Accounting Considerations
• Chapter 7. Financing Structures and Strategies
• Chapter 8. The Role of Takeover Tactics and Defenses in the Negotiation Process
• Glossary
• References
• Index