Video instructions and help with filling out and completing Who Form 8815 Transaction

Instructions and Help about Who Form 8815 Transaction

This next session I think we've been looking forward to for some time now Rick and I met many months ago and had planned out this concept and I'm so pleased to see it now coming together because both Rick and Keith are going to walk through a mock negotiation they're going to endeavor to cover three different issues in an M&A transaction and this really hits to the spirit of what we're doing with transaction advisors is to understand and uncover the best practice in putting deals together and collectively I think we can advance the practice of a better more strategic more thoughtful negotiations better deals and certainly this will hit right on the right home in terms of that ambition so with that let me turn it over to Rick and Keith we're going to lead this next session thanks okay well thank you William can everybody hear me okay good so my name is Rick Klieman I'm joined this afternoon by my Hogan Lovells colleague Keith Lau I'm somewhat embarrassed to admit on behalf of both of us that between the two of us we have more than six decades of collective M&A experience and advise yeah it's depressing to even say that but our focus today as Williams suggested is going to be on negotiating M&A deals and in particular negotiating certain purchase price formulations that I'm guessing many of you in the audience have dealt with before and also time permitting excuse me we're going to address a growing and at times annoying trend that has emerged in the negotiation of key provisions in the acquisition agreement and that is the reliance and I would almost say blind reliance on these now widely proliferated deal point studies that many of you have seen these are statistical surveys that purport to tell practitioners what's so-called market terms are in a deal and we'll close with that because we have some interesting and somewhat caustic observations on on that but today we're going to illustrate for you some of the give-and-take that goes on in the the purchase price formulations that we're going to be talking about today and to do that we're going to slip into character with me on the buy side and keep on the sell side I'm going to play the role of the lawyer for a publicly traded buyer I know many of you are affiliated with publicly traded companies in this case a serial Technic flyer and that has its sights set on a target company a technology company represented by Keith and for most purposes today we can assume that the target company Keith's client is a privately held company and again this is a scenario that should be familiar to many of you you should all have in front of you the materials for today's presentation there's a little stack here at the front of the room if you haven't received one but they should have been passed out please keep them close at hand because we're going to refer to them periodically and of course feel free to interrupt at any time with questions if you have any during this session so we're going to begin by talking about acquisition currency and the type of deal consideration that's used by the buyer to pay for the deal and as most of you know the basic choices here are both cold hard cash number one and number two shares of the buyer stock or some combination of those two now the first chart in the materials behind you know a little hold virtual tab one because they're not really tabs but just sheets of paper mark tab one you know identifies some of the factors and considerations you have to take into account in determining what type of acquisition currency to use and let's assume as we move into character that the buyer and the target company have already reached some sort of basic agreement on valuation so let's have at it Keith you know we've agreed that the company you're representing the target company is worth a cool three hundred million dollars and your client the target company has 10 million shares outstanding that comes out to a price of $30 a share right that's right Rick what our clients have decided is a price of $30 a share that's exactly what we want yeah now does your client actually have a preference as to whether it would want to receive that $30 a share in stock or cash what would it prefer yeah so it prefers stock our founders have a very low basis in their shares and they really don't want to pay tax this year they want to decide when they pay tax so they'd prefer stock so they can get a tax-free deal right recognize that one of the key advantages of a stock swap over pure cash acquisition is the ability to do the acquisition on a tax-free actually a tax-deferred basis but I'll tell you Keith that we understand your desire for four stock consideration in this case and I will tell you that our bankers and our corporate development folks are not wild about us using our stock as acquisition currency because the stock deal is simply going to be much less accretive to our earnings per share than a cash deal and the investment bankers in the audience will tell you that that's because the cost of equity capital in the current market and generally almost in all markets is materially higher than the cost of debt capital in the marketplace and so as we show on the chart here a stock or stock meal is going to be less accretive for the buyers EPS than a than a cash deal but on the other hand I will say that my client is not sitting on a ton of domestic cash right now my client has a lot