M&A Deal Structuring

Process: Payment &

Legal Considerations
 Course Layout: M&A & Other
Restructuring Activities

Part I: M&A Part II: M&A Part III: M&A Part IV: Deal Part V:
Environment Process Valuation & Structuring & Alternative
Modeling Financing Strategies

Motivations for Business & Public Company Payment & Business

M&A Acquisition Valuation Legal Alliances
Plans Considerations

Regulatory Search through Private Accounting & Divestitures,

Considerations Closing Company Tax Spin-Offs &
Activities Valuation Considerations Carve-Outs

Takeover Tactics M&A Integration Financial Financing Bankruptcy &

and Defenses Modeling Strategies Liquidation
Techniques

Cross-Border
Transactions
 Learning Objectives

• Primary Learning Objective: To provide

students with a knowledge of the M&A
deal structuring process
• Secondary Learning Objectives: To enable
students to understand
– the primary components of the process
and
– common linkages.
 Deal Structuring Process
• Deal structuring involves identifying
– The primary goals of the parties involved in
the transaction;
– Alternatives to achieve these goals; and
– How to share risks.
• The appropriate deal structure is that which
– Satisfies as many of the primary objectives of
the parties involved as necessary to reach
agreement
– Subject to an acceptable level of risk
 Major Components of
Deal Structuring Process
1. Acquisition vehicle
2. Post-closing organization
3. Form of payment
4. Form of acquisition
5. Legal form of selling entity
6. Accounting Considerations
7. Tax considerations
Factors Affecting Alternative Forms
of Legal Entities
1. Control by owners
2. Management autonomy
3. Continuity of ownership
4. Duration or life of entity
5. Ease of transferring ownership
6. Limitation on ownership liability
7. Ease of raising capital
8. Tax Status
 Acquisition Vehicle
Acquirer’s Objective (s) Potential Organization
Maximizing control Corporate (C or S) or
Facilitating postclosing divisional structure
integration
Minimizing or sharing risk Partnership/joint venture
Holding company
Gaining control while limiting Holding company
investment
Transferring ownership Employee stock ownership
interest to employees plan
 Post-Closing Organization
Acquirer’s Objective (s) Potential Organization
Integrate target immediately Corporate or divisional
Centralize control in parent structure
Facilitate future funding
Implement earn-out Holding company
Preserve target’s culture
Exit business in 5-7 years
Assume minority position
Minimize risk Partnerships
Minimize taxes Limited liability companies
Pass through losses
 Discussion Questions
1. What is an acquisition vehicle? What are
some of the reasons an acquirer may
choose a particular form of acquisition
vehicle?
2. What is a post-closing organization?
What are some of the reasons an
acquirer may choose a particular form of
post-closing organization?
 Form of Payment
• Cash (Simple but creates immediate seller tax liability)
• Non-cash forms of payment
– Common equity (Possible EPS dilution but defers tax liability)
– Preferred equity (Lower shareholder risk in liquidation)
– Convertible preferred stock (Incl. attributes of common & pref.)
– Debt (secured and unsecured) (Lower risk in liquidation)
– Real property (May be tax advantaged through 1031 exchange)
– Some combination (Meets needs of multiple constituencies)
• Closing the gap on price
– Balance sheet adjustments (Ignores off-balance sheet value)
– Earn-outs or contingent payments (May shift risk to seller)
– Rights, royalties, and fees (May create competitor & seller tax
liability)
 Form of Acquisition: Buyer’s Perspective
• Cash purchase of assets (Permits “cherry picking,” asset write-up; limits
liabilities, & no minority owners; but lose tax attributes and assets not
specified in contract and incur transfer taxes)
• Cash purchase of stock (Assets transfer automatically but responsible for all
liabilities and minority shareholders; avoids shareholder approval (buying
from target shareholders); contracts and licenses may require consent to
assignment)
• Mergers (More flexible payment terms, assets transfer automatically, no
minority shareholders (potential “cramdown”) or transfer taxes but
responsible for all liabilities and subject to shareholder approval)
• Alternatives to mergers
– Stock for stock (By operating as subsidiary avoid need for contract and
license consent as continuity of ownership maintained; avoids target
shareholder approval; possible EPS dilution)
– Stock for assets (Similar to cash purchase of assets)
• Staged transactions (Provides greater strategic flexibility but postpones
synergy realization)
 Discussion Questions

1. What is the difference between the form

of payment and form of acquisition?
2. What factors influence the determination
of form of payment?
3. What factors influence the form of
acquisition?
 Legal Form of Selling Entity
• A seller’s concern about the form of acquisition (i.e., sale
of assets or stock) may depend on its own legal
structure.
• C-corporations are subject to double taxation, while
subchapter S, limited liability companies, and
partnerships are not.
• C corporation shareholders generally prefer a stock for
stock transaction to defer their tax liability.
• Subchapter S, limited liability companies, and
partnership investors may be indifferent to a sale of
assets or stock.
 Accounting Considerations
Considerations Implications
• Contingent payouts valued at • Potential increase in earnings
acquisition date (closing) and volatility may make earn-outs
revalued as new data less attractive as form of
becomes available payment
• Deals valued at closing rather • Value of equity-financed deals
than announcement date can change significantly
between announcement and
closing
• Goodwill periodically reviewed • Threat of major write-downs
for impairment may discourage overpayment
for targets
 Tax Considerations:
Impact on Seller Shareholders
• Business combinations may be
– Tax free
– Partially taxable
– Wholly taxable
• Non-taxable transactions occur when mostly acquirer
stock is used to buy substantially all of the target’s stock
or assets.
• Taxable transactions occur when the acquirer uses
– Something other than its own stock
– Buys an insufficient amount of the target’s stock or
assets
 Tax Considerations: Impact on
Combined Businesses’ Shareholders

• Avoiding double (i.e., by firm and

shareholder) or triple taxation (i.e., by firm;
shareholder on sale proceeds & possible
liquidating dividend)
• Allocating losses to owners
 Things to Remember…
• Deal structuring addresses identifying and
satisfying as many of the primary objectives of
the parties involved and determining how risk
will be shared.
• Deal structuring consists of determining the
acquisition vehicle, post-closing organization,
the form of payment, the form of acquisition,
legal form of selling entity, and accounting and
tax considerations.
• Choices made in one area of the “deal” are likely
to impact other aspects of the transaction.