M&A and Private Equity Viewpoints

New Summary of Global Anti-Bribery Enforcement Activity Highlights U.S. Leadership and the Importance of FCPA Due Diligence for M&A Transactions

Rebecca Hoskins — Wed, 16 Jun 2010 08:55:47 -0800

Last week TRACE International released its first ever summary of worldwide anti-bribery activity, covering 33 years of global enforcement. Interestingly, TRACE also announced plans to release annual reports on this topic going forward. TRACE found that the United States is by far the world leader in anti-bribery enforcement – accounting for 75% of anti-bribery enforcement actions initiated world-wide. Other countries in their top five list are: the United Kingdom, Denmark, Germany, and Italy. Moreover, as the recent Imnospec case illustrates, the SEC and DOJ are increasingly cooperating with other countries' enforcement agencies on anti-bribery cases.

The United States will likely remain the world leader in this area with the SEC's increased emphasis on FCPA enforcement. Additionally, the recently passed Dodd bill includes increased incentives for whistleblowers – contemplating rewards of up to 30% of any fines collected as the result of FCPA enforcement actions. These incentives, if implemented, would further condense the time to decide whether to report a potential FCPA violation. Early self-reporting is a first step in cooperating with the SEC and DOJ and often leads to lower fines, as was the case with Imnospec.

FCPA compliance has also become a hot topic in the M&A field. Latin Node and similar cases indicate that reliance on unsubstantiated representations and warranties regarding FCPA compliance in the definitive agreement for an M&A transaction may not be enough. Risk-based FCPA due diligence can help an acquiror identify potential FCPA violations by a target company during the due diligence phase, before signing a definitive agreement. An assessment of a target company's FCPA compliance risk can be a useful first step. This generally includes evaluating the risk of corruption in each country where the target does business. Transparency International's corruption index map is a great resource for this.

The following due diligence actions may be appropriate, based on the results of the initial risk assessment:
• Include in the initial due diligence request list specific questions regarding the target's FCPA compliance program and any due diligence procedures that the target has implemented for third party agents;
• Conduct on-site interviews and audits regarding high-risk transactions;
• Use resources provided by the U.S. Department of Commerce's International Company Profile program; and
• Include FCPA compliance experts on legal and accounting due diligence teams.

We suggest documenting any due diligence efforts that an acquiror undertakes to confirm a target company's FCPA compliance.

Here are some examples of "red flags" that may be found during due diligence:

• Use of third party agents to arrange business with governmental entities;
• Employment of senior management with close ties to government officials; or
• Payments for which documentation is not available or the purpose for which appears to be vague.
If an acquiror discovers any red flags, here are some examples of follow-up that may be helpful:
• submit follow-up due diligence requests regarding the compliance issue;
• engage forensic accountants to audit all of target's transactions in a particular category, such as employee reimbursements;
• consult with in-country experts regarding relevant local customs or practices; or
• conduct on-site interviews of implicated employees or agents.
If an FCPA violation is uncovered, the acquiror will likely want to evaluate whether the proposed transaction still makes sense from an economic and reputational perspective. If so, it may be advisable for the acquiror to immediately begin discussions with the target regarding self-reporting and otherwise cooperating with the SEC and DOJ.

Thanks to Adam Glant, a business associate in the firm's Seattle office, for contributing to this post.

Jonathan Ingram Discusses New Staff Legal Bulletin Easing the Post-Merger De-Registration Process for Public Company Targets

Stewart M. Landefeld — Wed, 26 May 2010 08:16:54 -0800

At the Society of Corporate Secretaries and Governance Professional's 2010 SEC Hot Topics in Seattle on May 19, Jonathan Ingram, Deputy Chief Counsel of the SEC's Division of Corporation Finance, discussed the Staff's new Staff Legal Bulletin No. 18 issued in March 2010. See www.governanceprofessionals.org/society/chappn.asp

Jonathan walked through the Division's March 15, 2010 SLB 18. The Staff's goal in issuing SLB 18 is to clarify that acquired public companies – which no longer have public shareholders following a sale – may rely on Exchange Act Rule 12h-3 to suspend reporting obligations under Section 15(d) of the Exchange Act. In a textbook "plain English" explication, Jonathan described the ways that a registrant can terminate or suspend its public reporting obligations. Noting that reporting obligations for acquired public companies with a class of securities registered under Section 12(b) or 12(g) of the Exchange Act arise under Section 13, he explained how these companies deregister their Exchange Act registrations and thereby terminate Section 13 reporting obligations following a sale:

For a 12(b) exchange-listed company, filing a Form 25; and
For a 12(g) company with under 300 record holders (or 500 and under $10MM in assets), using Form 15.

Jonathan went on to explain that the vast majority of public companies also have reporting obligations under Section 15(d) of the Exchange Act because they have offered securities pursuant to an effective Securities Act registration statement at some point in their history. For 12(b) and 12(g) companies, the reporting obligations under Section 15(d) technically spring into effect when an issuer has deregistered its securities under the Exchange Act. So, in addition to deregistering securities by filing a Form 25 or Form 15, acquired public companies also need to suspend their Section 15(d) reporting obligations in order to avoid having to file periodic and current reports under the Exchange Act after a sale. Although Section 15(d) itself contains language addressing the conditions under which such reporting obligations may be suspended, Exchange Act Rule 12h-3 is essentially a "safe harbor" rule that allows companies to suspend their 15(d) reporting obligations if certain conditions are met (including the filing of a Form 15).

SLB 18 itself describes the requirements for Rule 12h-3, specifically, that a registrant must:

Be current in its Exchange Act reporting obligations;
Have under 300 record holders (or under 500, and under $10MM in assets); and
Not have had a Securities Act registration statement declared effective or updated under Securities Act Section 10(a)(3) in the fiscal year for which suspension is requested.

It is this last requirement, particularly the Section 10(a)(3) "gotcha", that has raised questions about whether an acquired public company could rely on Rule 12h-3 to suspend its Section 15(d) reporting obligations: most public companies have shelf registration statements (e.g., S-8s and S-3s) that may have become effective in years past but are automatically updated pursuant to Section 10(a)(3) by the filing of their annual reports on Form 10-K each year. On its face, Rule 12h-3 was unavailable to most acquired public companies because they had shelf registration statements that were automatically updated during the fiscal year in which the sale occurred. Because of this "trap for the unwary", the Staff regularly received requests for, and granted, no-action letters permitting acquired public companies to rely on Rule 12h-3 to suspend their Section 15(d) reporting obligations. In an effort to stem the flow of incoming no action letter requests, the Staff promulgated SLB 18.
Now, SLB 18 makes clear that an issuer may use Form 15 to suspend its Section 15(d) reporting obligations under Rule 12h-3 if the registrant:

Does not have a class of securities registered or required to be registered under Section 12 of the Exchange Act (accordingly, a registrant may need to first file a Form 15 or 25);
Satisfies the 300 (or 500) record holder tests and otherwise satisfies Rule 12h-3;
Has deregistered any unsold securities registered on Securities Act registration statements; and
Has filed all Exchange Act reports required to be filed prior to the filing of the Form 15.

See the SLB at www.sec.gov/interps/legal/cfslb18.htm

New FTC/DOJ Guidelines Provide Increased Transparency for Horizontal Merger Review

Barry Reingold — Thu, 06 May 2010 08:41:56 -0800

On April 20, 2010, the Federal Trade Commission and the Antitrust Division of the U.S. Department of Justice jointly released their proposed revisions to the Horizontal Merger Guidelines for public comment. The updated guidelines are the result of a series of joint public workshops over the past six months, as well as the agencies' collective experiences since 1992, when they last revised the guidelines. The proposed revisions reflect the agencies' current approach to review of horizontal mergers, that is, mergers between actual or potential competitors, including refinements previously identified in their 2006 "Commentary on the Horizontal Merger Guidelines." Interested parties may submit comments on the proposed revisions through May 20, 2010.

The proposed guidelines reflect current practice by the agencies, as well as clarify the current guidelines. Highlights of the proposed guidelines include:

Government Analysis Is Fact-Specific. The government's merger analysis does not use a single methodology, but is a fact-specific process through which the agencies use various tools to analyze whether a merger may substantially lessen competition. The agencies' analysis is intended to be flexible.
Market Definition is a Means to the End, Not the End. Market definition, which identifies the area of effective competition between the merging firms - and through it the market's size, participants and degree of concentration - is a tool the agencies use to the extent it may predict the merger's likely competitive effects. Market definition is a part of, but not the result of, the analysis. In some cases, market definition may not be necessary.
Don't Ignore Evidence of Head-to-Head Competition. The agencies place great weight on evidence of head-to-head competition between the merging firms – that is, the extent to which one merger partner has in the past responded directly to the other's prices, product launches, technical innovations and marketing and advertising campaigns. This evidence is typically in the documents and data contemporaneously created and regularly used by the firms' managers. During merger review, in its decision whether to challenge the transaction, the agency staff gives no weight to company presentations that ignore these documents and data. Thus, where the companies believe the government is likely to investigate a proposed merger, company counsel should review this internal documentation as early as possible during negotiation and due diligence.
Get Your Key Customers on Board. The agencies seek the views of important customers of the merging firms. Where there is strong evidence that key customers regard the merging firms as the closest competitors in the relevant market, the agencies may challenge the transaction, despite the existence of more distant competitors. Accordingly, merger planning should include an early and well thought out program to educate key customers about the competitive benefits of the proposed merger.
Industries with Bargaining and Auctions May Face More Detailed Scrutiny. The agencies pay special attention to markets that are characterized by bargaining and auctions between buyers and sellers, usually of intermediate goods. They believe that the anticompetitive effects in these markets are likely proportional to the frequency with which, before the merger, one of the merging parties had been runner-up when the other won the business. Here too, early customer education may be critical to successful merger review.
Degree of Concentration Is a Significant Factor in Determining Anticompetitive Effect, But Thresholds Increase. The degree of concentration in the relevant market, both before and after a proposed merger closes, continues to play an important role as an signal of the merger's anticompetitive (or lack of anticompetitive) effect. On this point, the proposed guidelines increase the relevant market concentration thresholds, called the Herfindahl-Hirschman Index, which adds together the square of the market concentration, out of a total of 100 for the entire market, of each of the players in that market. As described in the table below, "Unconcentrated Markets"—those in which anticompetitive effects are unlikely—increase from below 1000 to below 1500. "Moderately Concentrated Markets"—those that raise potentially competitive concerns—increase from between 1000 and 1800 to between 1500 to 2500. "Highly Concentrated Markets"—those in which mergers potentially raise significant competitive concerns—increase from above 1800 to above 2500. Although these increases suggest a more tolerant attitude toward horizontal mergers, in reality they reflect the agencies' current practice.

Hart-Scott-Rodino "Gun-Jumping" Penalties for Alleged Abuse of "Ordinary Course of Business" Provisions of Merger Agreement

Barry Reingold — Thu, 11 Feb 2010 14:37:52 -0800

On January 21, 2010, the U.S. Department of Justice (DOJ) filed in federal court in Washington, D.C. a complaint and consent decree requiring two merging companies (Smithfield Foods (Smithfield) and Premium Standard Farms LLC (Premium Standard)) to pay $900,000 in civil penalties for violations of the "file and wait" provisions of the Hart‑Scott‑Rodino Antitrust Improvements Act of 1976 (the Act).

Case Summary

The companies were direct competitors in the pork products market. The merger agreement included traditional "conduct of business" provisions that required Smithfield's consent to material changes in Premium Standards' operations during the Act's waiting period.

The complaint alleges that after signing the merger agreement, but before filing their premerger notifications and waiting the mandatory 30 days, Smithfield (the acquiring company) began to exercise operational control over a core element of Premium Standard's business, its hog procurement contracting. Significantly, DOJ did not allege that the merger itself violated antitrust law, nor did DOJ allege that the "conduct of business" provisions themselves were unlawful. To the contrary, the complaint recognized Smithfield's legitimate interests in preserving Premium Standard's value during the Act's waiting period:

"The Merger Agreement contained certain customary interim "conduct of business" provisions limiting Premium Standard's operations during the Section 7A waiting period to protect Smithfield's legitimate interests in maintaining Premium Standard's value without impairing Premium Standard's independence. These included provisions regarding Premium Standard's rights to assume new debt or financing, issue new voting securities and sell assets, as well as requirements that Premium Standard "carry on its business in the ordinary course consistent with past practice. The Merger Agreement also conditioned the closing of the transaction on the absence of any material adverse effect, as such agreements customarily do."

It was Smithfield's premature exercise of operational control over Premium Standard's ordinary course contracts to control the price, quantity and duration of Premium Standard's hog procurement contracts, which are central to the firm's business, that violated the Act.
For this reason, neither the Smithfield complaint nor the related consent decree provides guidance on the more difficult issueof whether the terms of "conduct of business" provisions alone may constitute unlawful gun-jumping. How far buyers and sellers may go in negotiating and implementing such provisions may pose one of the most difficult issues merger partners have to address in the course of a transaction.

The DOJ provided some guidance on this issue in its 2006 complaint and consent decree in United States v. QUALCOMM Inc. and Flarion Technologies, Inc. There, the DOJ alleged that unlawful gun-jumping occurred through "conduct of business" provisions that, among other things, provided the buyer with the right to approve (a) all agreements by the seller to license its intellectual property, (b) all agreements involving the obligation of pay or receive $75,000 or more, and (c) the seller's business presentations to customers or prospective customers.

Practical Take-Aways

Taken together, Smithfield and QUALCOMM are consistent with the government's long-held view that although merging companies may during the Act's waiting period plan for their post‑consummation operations as a consolidated entity, a target firm cannot surrender its independence, especially with respect to critical competitively sensitive operations. Doing so based on nominally standard "conduct of business" provisions in the merger agreement does not shield the parties from liability for "gun-jumping."

In addition to approving bids and contracts, the companies should not, without prior consultation with counsel:

Engage in joint sales or marketing activities;
Abandon product lines;
Shut down or substantially curtail manufacturing or research and development operations;
Implement major reductions in force; or
Assign employees of one company responsibility for operations of the other company.

Observing these guidelines during the Act's waiting period may be less than ideal for the merger partners, who may have spent substantial time and effort negotiating the transaction. Failing to observe the guidelines, however, may subject both of the companies to the legal costs entailed by a compliance investigation under the Act, and, ultimately, to the prospect of civil penalties of up to $16,000 per day, notwithstanding the fact the merger itself may be entirely lawful. Because daily penalties continue to accrue from the date the parties begin engaging in gun-jumping until 30 days after they make all necessary corrective filings under the Act (a period that can encompass many months), penalties can easily exceed $1 million.

Letters of Intent: Traps for the Unwary

Ellen Torvik — Wed, 10 Feb 2010 17:07:19 -0800

A recent ruling made by the Delaware Court of Chancery serves as a reminder to exercise caution in drafting letters of intent.

In Global Asset Capital, LLC ("Global") v. Rubicon US Reit, Inc. ("Rubicon"), C.A. No. 5071-VCL (Del. Ch. Nov. 16, 2009), the Delaware Court of Chancery ordered Rubicon to stop engaging in activities that the court ruled constituted a breach of Rubicon's obligations under its letter of intent (LOI) with Global.

Background

A summary of the facts as alleged in the case: Facing possible bankruptcy, Rubicon decided to enter into an LOI with Global that contemplated that Rubicon would file for bankruptcy in conjunction with signing a final agreement with Global. Under that agreement, Global would act as a stalking horse bidder in a court-supervised auction of Rubicon's assets.

The LOI also prohibited Rubicon from disclosing the terms of the LOI to third parties and prohibited Rubicon from soliciting other offers during the term of the LOI. In addition, the LOI included a provision that the parties would work toward negotiating a final agreement.

Soon after signing the LOI, Rubicon disclosed the terms of the LOI to its creditors to gain leverage in an effort to relieve its liquidity problems. Rubicon then failed to respond to Global's initial draft of a final agreement and instead proceeded to solicit alternative offers.

Not surprisingly, Global filed suit against Rubicon asking the Court to enjoin Rubicon from further disclosing the terms of the LOI and entertaining alternative offers. Global also asked the court to compel Rubicon to move forward with a finalizing an agreement and filing for bankruptcy.

Rubicon argued that since it no longer had an urgent liquidity crisis, the LOI had essentially expired. Alternatively, Rubicon argued that even if it was obligated under the LOI, the fiduciary duties of its directors to keep the company out of bankruptcy conflicted with the LOI, and therefore, its performance under the LOI was excused.

The Court granted Global's motion and ordered Rubicon to stop disclosing the terms of the LOI and soliciting other offers. In its analysis, the Court emphasized several key points.

First, sufficiently clear LOI's do create enforceable obligations. If the parties don't intend to create enforceable obligations, then they should expressly say so in the LOI.

Second, an agreement to negotiate in an LOI represents a concrete obligation to do so and failure to meet this obligation may constitute a breach of the agreement.

Finally, the Court pointed out that Delaware courts don't recognize an inherent fiduciary-out where the obligations in a contract conflict with the fiduciary duties of the company's directors - if contracting parties want to have a fiduciary out, they must include express language allowing for it.

Practical Take-Aways

The Global case serves as an important reminder:

Always indicate in an LOI which provisions are intended to be binding and which are not.
Do not include a covenant to work toward a final agreement unless you intend to do just that.
Include express language allowing for fiduciary or other outs if that is the intent is that one or more of the parties are to have such an out.

New HSR Thresholds Announced

Betsy Kristoferson — Wed, 10 Feb 2010 16:55:10 -0800

The Federal Trade Commission (the FTC) recently announced that the reporting thresholds under Section 7 of the Clayton Act, known as the Hart‑Scott-Rodino Antitrust Improvements Act of 1976 (the Act), will be decreased.

The Act requires all parties to certain transactions, including mergers and acquisitions that meet or exceed the Act's jurisdictional thresholds, to notify the FTC and the Antitrust Division of the Department of Justice and wait a designated period of time before consummating those transactions. The 2000 amendments to the Act require the FTC to revise the Act's jurisdictional and filing fee thresholds annually, based on the change in gross national product. Certain related thresholds and limitation values in the Hart-Scott-Rodino (H‑S‑R) rules will also be adjusted. The decreased thresholds will apply to all transactions that close on or after February 22, 2010.

Reporting Thresholds

Current Reporting Thresholds. Certain transactions, including acquisitions of voting securities or assets, acquisitions of non-corporate interests, or the formation of joint venture corporations or other entities, are subject to the reporting requirements of the Act if the transaction meets a two-part test based on the size of the transaction and the size of the parties.

The size-of-transaction test is met if the transaction is valued at more than $65.2 million.

The size-of-parties test is met if the ultimate parent entity of one of the parties to the transaction has $13 million in total assets or annual net sales and the ultimate parent entity of another party to the transaction has $130.3 million in total assets or annual net sales. However, the size-of-parties test does not apply to transactions valued at more than $260.7 million.

Decreased Reporting Thresholds. Under the new thresholds:

The size-of-transaction test is met if the transaction is valued at more than $63.4 million.
The size-of-parties test is met if the ultimate parent entity of one of the parties to the transaction has $12.7 million in total assets or annual net sales and the ultimate parent entity of another party to the transaction has $126.9 million in total assets or annual net sales.
The threshold at which the size-of-parties test does not apply is decreased to transactions valued in excess of $253.7 million.

Additional Information

Discussions of other recent laws, regulations and rule proposals of interest to public companies are available on our Web site.

This post is intended for general guidance. Parties contemplating a transaction should consult antitrust counsel to determine whether any particular transaction is reportable under the Act and evaluate any antitrust concerns raised by the transaction. Parties should also keep in mind that a transaction that is not reportable because it does not meet the Act's reporting thresholds is not exempt from agency scrutiny of the potential anticompetitive effects of the transaction. The FTC, the Department of Justice and State Attorneys General (as well as private parties) may challenge a transaction as anticompetitive even when no H-S-R filing was required for the transaction. Therefore, all transactions should be reviewed for compliance with Section 7 of the Clayton Act prior to closing.

FCPA: Interesting Note From "SEC Speaks" Conference

Stewart M. Landefeld — Fri, 05 Feb 2010 13:54:55 -0800

Cheryl Scarboro, the head of the new SEC Division of Enforcement's specialized Foreign Corrupt Practices Act (FCPA) Unit, made an interesting comment for M&A counsel, Friday morning at the "SEC Speaks" conference in Washington, D.C. In response to a question from former Commissioner Campos on whether due diligence efforts in M&A transactions lead to efforts by SEC Enforcement, Ms. Scarboro replied yes: "A lot of the cases come to us because of the [Merger & Acquisition] due diligence process resulting in self-reporting [by registrants]."

This is a good reminder of the importance of the diligence process -- to be aware of the FCPA red flag and, in instances where potential failures to comply with the FCPA are discovered, to conduct a special assessment to determine if that discovery may trigger a self-reporting duty, and whether that is a duty of the purchaser or of the target.

Last year, this FCPA blog quoted Cheryl Scarboro and Mark Mendelson of the DOJ on the increased sophistication of M&A diligence for FCPA http://wrageblog.org/2009/09/17/the-latest-fcpa-forecast-from-u-s-regulators/ - - referring to the Haliburton procedure.

Due diligence in connection with transactional activity. Mark [Mendelson of the DOJ] believes that the importance of due diligence in anti-bribery compliance programs has finally taken hold, at least among most large multinationals. He finds that practices in this area have become much more sophisticated and that many more companies are coming into the DOJ, in the M&A context, with due diligence at the top of their agenda (e.g., Opinion Procedure Release 08-02).

DOJ and Haliburton crafted the "Haliburton procedure" http://www.justice.gov/criminal/fraud/fcpa/opinion/2008/0802.html when Haliburton wished to make an acquisition rapidly, but did not have adequate time prior to closing conduct due diligence and assess FCPA risk. So, Haliburton approached the DOJ to ask if it could separate the business for a period of time post-closing while it conducted post-closing FCPA diligence. Haliburton would then immediately impose its own Code of Conduct and provide FCPA training to all target personnel - -within 60 days of closing. The DOJ agreed to the procedure, with a full FCPA review and reporting in the 180 days post-Closing.

What Every Entrepreneur Needs to Know About Selling a Company to a Private Equity Buyer

Scott Joachim — Mon, 23 Nov 2009 14:48:31 -0800

If you're an entrepreneur running an emerging company with a strategy of exploring an M&A exit, then this post was created for you.

There are basically two types of buyers: strategic buyers and financial buyers. Rather than constructing precise definitions of these two profiles, for the sake of this post, let's assume that (1) a strategic buyer is a large-cap, publicly-traded company with plenty of cash on its balance sheet and a growth strategy that includes a meaningful M&A program, and (2) a financial buyer is a private equity fund.

In his new book, "Never Make the First Offer (Except When You Should)", Donald Dell concisely points out one of the principal guidelines for negotiating a deal: Know Your Audience. While this tenet seems obvious, in my experience, sellers sometimes either aren't aware, or can under-estimate the importance, of the distinct profile and objectives of the financial buyer as compared to the strategic buyer.

The purpose of this post is to try to shed some light on some of these basic distinctions for entrepreneurs thinking about an M&A exit. While each deal has its own set of circumstances, and each party in any given deal may have unique objectives, there are some generalized distinctions between these two types of buyers. Two of the core distinctions are discussed in this post—namely, strategic and financial buyers' (1) objectives, and (2) approach to pricing. In turn, these comparative distinctions drive other aspects of deals with strategic and financial buyers that are not explicitly discussed in this post (e.g., financing contingencies).

OBJECTIVES

Unsurprisingly, most buyers—strategic and financial alike—engage in acquisitions to make money. That said, the key differentiator between strategic and financial buyers is that financial buyers are structured at their inception to put money to work for a defined period of time (typically exiting each investment within three to five years) with a certain expected return on their investment upon exit, and each fund making those investments has a limited life (e.g., 10 years). The strategic buyer, on the other hand, often has either no or a flexible targeted return, and often has no real time horizon for achieving that return; rather, the acquisition is expected to be . . . strategic. Compared to the financial buyer, the strategic buyer (1) can be relatively flexible and patient in procuring a return on its investment, (2) might engage in a riskier M&A strategy that assumes some smaller acquisitions might be worth pursuing even if some acquisitions ultimately fail, and (3) can execute an M&A transaction for strategic reasons that have little to do with producing absolute returns above benchmarks for competing investments (e.g., the buyer may decide to spend several million dollars precluding a competitor from entering a certain space, even if the target is not projected to directly add to the buyer's bottom line).

Knowing and proactively attending to the financial buyer's objectives upfront can make all the difference in building and maintaining momentum from an initial meeting through closing the deal and, as a result, maximizing value. For example, a financial buyer will typically be razor-focused throughout the due diligence process on any developments that might have an impact on its financial modeling. Each dollar shortfall of, say, EBITDA, is not just a dollar to the financial buyer. The reason relates to pricing.

PRICING

One way to appreciate the distinction between how financial and strategic buyers price acquisitions is to think about two classes of buyers with differing motivations for purchasing a house. The young family hoping to live in a house for many years to come and enjoy its intangible benefits, in some ways, is much like the strategic buyer. While the young family will reach its price limit based on perceived value and availability of funds, there may be no formula or identifiable metric that will be applied by this buyer to methodically determine value or its price threshold. On the other hand, the home developer, in some ways, resembles the financial buyer. The home developer will, in determining its top price, calculate the cost of purchasing the house, the cost of developing the house, the cost of financing the property in the interim period, the market risk of holding the house during that period, and the fair market value of the development team's time in building and re-selling the house—all compared to returns that could reasonably be expected from an alternative investment during that time period. The young family may run a similar analysis, but will have some freedom to make exceptions and out-spend the home developer if it makes sense on some intangible level. For example, some young families might pay a seemingly high premium to buy a house with "the perfect kitchen" (as an aggressive technology company might pay a sensible premium for some IP that is perceived to be of high value but is too early in its evolution to relate to an identifiable market); the home developer, however, would only pay a premium for the perfect kitchen if the developer could infer a positive (or at least not a negative) incremental return; absent that inference, the perfect kitchen is simply a drain on projected returns.

Financial buyers typically price acquisitions based on cash flow, which is usually calculated based on some variation of an EBITDA (earnings before taking into account deductions for interest, tax, depreciation and amortization expenses) metric. The price, from the financial buyer's perspective, is often phrased as an "EBITDA multiple".

For example, if the target's EBITDA (either for the last 12 months or as projected for the next 12 months) is $5 million and the purchase price that the financial buyer would need to pay to get the deal is $25 million, then the "EBITDA multiple" would be 5x.

Pricing based on an EBITDA multiple is of critical importance to the financial buyer, since the banks providing debt financing for the transaction will reach their funding limit based on an EBITDA multiple as well. The multiple as of any given time will depend on a variety of factors, including broader market conditions. For example, a senior lender may be willing to provide an amount of debt equal to 2x EBITDA, and a mezzanine or subordinated lender may be willing to provide an amount of debt equal to 1x EBITDA. That leaves an additional 2x EBITDA, which would be financed by cash, in the form of an equity infusion, by the financial buyer.

Essentially, the financially buyer has put 40% down on its investment, and has leveraged the remainder. In performing its financial due diligence, the financial buyer will run elaborate financial models designed to provide insight as to whether a later resale of the subject company is likely to command a price that achieves a certain baseline return on the financial buyer's equity investment (often in the 20%+ range). These ROI targets are designed to (1) attract and maintain the inflow of funds from the financial buyer's limited partner investors who, in turn, monitor their returns from private equity partnership interests as compared to alternative investment opportunities and (2) provide a sufficient "carry" to the financial buyer (i.e., the general partner of the fund) and its principals.

The strategic buyer doesn't have such rigid restraints, but, on the flip-side, the strategic buyer cannot necessarily be expected to be twice (or more, on the basis of leverage) as excited for a deal that might be projected to produce twice the EBITDA of a competing acquisition target. The deal has to make strategic sense—whatever that means in the context of the particular buyer and seller (typically technology and human resources)—with less regard to financial projections than that applied by the financial buyer.

PRACTICAL TAKE-AWAYS

Like Dell's advice to "Know Your Audience", the above overview is fairly basic and obvious on its face, but is hopefully a good reminder that not every M&A exit is the same, and a seller can have a meaningful opportunity to maximize value by customizing its approach to a deal depending on the profile and objectives of the likely buyer.

More specifically, consider the following:

· Company Information: A seller might consider preparing customized offering materials (e.g., a teaser / executive summary, information statement, etc.)—one set for strategic buyers and one set for financial buyers. While the overall information may be largely identical, the prioritization and emphasis could vary between the two sets of documents.

· Price Expectations: A seller should approach a sale process armed with up-to-date information as to (1) recent comparable sales from which its value assumptions are derived, with further comparisons of prices obtained from financial vs. strategic buyers, and (2) the current availability and terms of debt financing for the acquisition.

· Readiness to Transact: If the seller has a need, for whatever reason, to quickly initiate a sale process and must prioritize its preparation for engaging with potential buyers, the management team should consider whether to focus on financial statements and systems, confirming adequate protection of its core intellectual property, gauging its employees' interest in continuing employment with certain potential buyers, etc. commensurate with the profile and likely priorities of the likely buyer.

· Hiring Advisors: The seller should consider hiring a reputable investment banker with industry-specific expertise and experience engaging with strategic and financial buyers alike. The seller should also engage counsel and other advisors with particular expertise successfully completing deals with the type of buyer likely to engage with the selling company.

J.P. Morgan Releases 2009 M&A Holdback Escrow Report

Scott Joachim — Mon, 23 Nov 2009 14:42:40 -0800

JPMorgan Chase & Co. recently published its 2009 M&A Holdback Escrow Report. The study summarizes data points relating to holdback escrow accounts used in M&A transactions. The study defines "holdback escrow" as an escrow structure in which a portion of the deal consideration is placed into escrow as security for any post-closing purchase price adjustments or indemnification claims. The sample size of the study is 443 transactions between January 2007 and June 2008 in which J.P. Morgan was engaged.

A few observations:

Escrow Deposit Amount: The study reflects that 7 – 15% of the purchase price was deposited in 51% of deals reviewed in the study, with 10% of the purchase price as the median amount deposited. (See page 5 of the study).
Escrow Lifespan: 50% of agreements reviewed in the study specified a termination date to disburse funds, and 50% provided that the escrow would terminate only upon written instruction of the parties to disburse funds. For deals with scheduled disbursement dates, the time periods for disbursements ranged from one month to 72 months. The most common scheduled disbursement dates were set at 12, 18 and 24 months from the closing date. (See page 6 of the study).
Claims—Generally: Claims were made in 40% of the deals reviewed in the study. Of that 40%, 25% of such claims related to a working capital or other contemplated purchase price adjustment and the remaining 75% related to indemnification claims. Of 178 indemnification claims made by buyers, 176 received a recovery of some amount. The average recovery was 60% of the original claim. (See page 9 of the study).
Types of Indemnification Claims: Of all indemnification claims made in the deals reviewed in the study, those claims were categorized as follows: (1) breach of representations and warranties (40%); (2) not specified or "other" (33%); (3) accounts receivable (11%); (4) tax (7%); (5) environmental (3%); and (6) litigation (2%). (See page 10 of the study).

Thanks to Michael Balliet for sending us the study.

IPOs--THE COMEBACK

Brett Miller — Fri, 02 Oct 2009 07:54:55 -0800

After two years with few new issues, private equity firms are helping drive what appears to be a resurgence of an IPO market. The IPO market is showing some signs of resiliency for the remainder of 2009 and potential for significant growth in 2010 (see deal charts below). For private equity funds, the IPO market's rebound provides opportunities for liquidity and enables their portfolio companies to clean up their balance sheets by increasing equity and using the proceeds of an offering to pay off outstanding debt.

The recent up-tick includes issues on both U.S. and foreign exchanges (e.g., the U.K., Canada, and Australia are also experiencing increased fund-related IPO activity). Analysts project that the best prospects are in recession-proof sectors, such as education, energy, health care, and discounters.

Despite the recent up-tick in IPO activity, the capital markets remain unpredictable and fragile, and investor appetite for new issues may very well show volatility. Equity in highly-leveraged companies is increasingly difficult to sell, affordable credit is scarce, and the dilutive effect of new issuances on existing equity exposes companies and their boards to investor scrutiny. Private equity’s ability in the near-term to navigate these challenges will be critical in obtaining liquidity in the capital markets.

Cautious Optimism Sets Tone for Recent Silicon Valley Tech Buyout Panel

Scott Joachim — Mon, 21 Sep 2009 12:28:15 -0800

On Thursday, September 17th, I co-moderated a panel in the Silicon Valley with Jennifer Muller of Houlihan Lokey entitled "Critical Insights Into Technology Buyouts". Our top-notch panel included:

Charlie Rice -- Senior Director, Corporate Development, Symantec Corp.
Dave Sobota -- Director, Corporate Development, Google Inc.
Steven Marder -- Digital Media Industry Advisor, Avista Capital Partners
Jared Ruger -- Vice President, Bertram Capital
Steve Macko -- Managing Director, Wells Fargo Foothill

The panel relayed valuable insights into: (1) the company sale process from the buyer's perspective; (2) some of the key differences and synergies between strategic and private equity acquirers; (3) the state of the debt financing market; and (4) the state of the technology M&A market.

Reflecting on some of the recent macro economic and M&A market trends, the general sentiment was one of "cautions optimism". That said, some of the key buy-side themes we've been seeing over the course of the last 18 months or so continue unabated: (1) buyers remain cautious; (2) buyers' focus on due diligence is as thorough as ever; (3) debt financing continues to present significant obstacles to the market generally, and particularly for private equity buyers; (4) sellers' pricing expectations should be tempered given overall market conditions; and (5) sellers should be prepared to discuss pricing structures that create a shared risk of future performance, including earnouts.

This "M&A Market Overview" (PDF), prepared by Houlihan Lokey, was presented as context for the panel's broader discussion.

Thanks to all of the panelists and to our co-host for a fantastic event.

ABA Releases 2009 Strategic Buyer/Public Target M&A Deal Points Study

Scott Joachim — Wed, 16 Sep 2009 17:05:29 -0800

The American Bar Association just released the 2009 Strategic Buyer/Public Target Mergers & Acquisitions Deal Points Study. The study, prepared by the M&A Market Trends Subcommittee of the M&A Committee of the ABA's Business Law Section, analyzes publicly-available acquisition agreements for acquisitions of U.S. publicly-traded targets by publicly-traded and other strategic acquirers for transactions announced in 2008. Of the 103 deals comprising the study, 66% were all-cash, 15% were all-stock and 19% were a mix of cash and stock.

Economic Distress At Home Spurs Opportunities Abroad

Brett Miller — Tue, 15 Sep 2009 09:27:06 -0800

The outcry to rein in speculative investing and curb past excesses has left private equity funds and other investors wary that proposed regulations in the U.S. and E.U. could hinder deal-making in these markets. With economic distress and regulatory uncertainty defining the domestic investment environment, U.S.-based funds are increasingly pursuing new opportunities in foreign markets that are more hospitable, even if less traditional.

For example, funds are increasingly looking to enter the Chinese market with its improved liquidity, continued growth, and government support of increased domestic investment. Sequoia Capital raised a yuan-denominated VC fund in 2008 and more recently Blackstone Group LP, First Eastern Financial Investment Group, and CLSA established yuan-based funds in Shanghai. Both the Carlyle and Kohlberg Kravis Roberts funds are reportedly considering the same.

Another unconventional location that analysts are predicting to thrive is the Islamic private equity market. Such deals will likely be focused on the Middle East and North Africa, which present both significant challenges (e.g., navigating divergent investment criteria, low liquidity, and a lack of information for investors), and potentially huge upside in emerging markets where distressed sellers are unloading assets at depressed prices. In addition to low valuations, these emerging markets feature good access to capital and strong mid-market growth.

India presents another market where private equity funds have found a stable investment environment with consistent returns. Current investments are heavily focused on small and medium enterprises, which have been hard hit by the credit crunch. Private equity investment in India began in the late 1990’s and remains robust. Today, India’s strongest investment opportunities are in the infrastructure, education, health care, and food and beverage sectors.

Of course, international investments, particularly in emerging countries, offer many obstacles and risks in addition to their great potential. But today’s reduced deal flow in the U.S. and E.U. may be steering funds to broaden their sites and explore less conventional alternatives.

LBOs with Controlling Stockholders: Lessons From Recent Delaware Case

Scott Joachim — Wed, 09 Sep 2009 20:34:59 -0800

A recent decision by the Delaware Court of Chancery -- Louisiana Municipal Police Employees' Retirement System v. Feritta (Del. Ch. July 28, 2009) -- reinforces the responsibility of a board of directors to assertively defend the interests of the non-controlling stockholders when negotiating a buyout with a controlling stockholder on the buy-side. In this case, the controlling stockholder was the CEO who held a significant equity stake and led discussions with the lender group providing financing for the transaction.

My colleagues, Andrew Bor, Naomi Sheffield, Pat Simpson and Evelyn Cruz Sroufe, recently prepared this Client Alert summarizing the Delaware Court of Chancery's decision rejecting the defendants' motion to dismiss claims against the board and the CEO/controlling stockholder for breach of the duty of loyalty and corporate waste, and setting forth some very useful practical tips.

The key practical take-aways in the Client Alert include:

A target's board should identify and use all possible leverage when negotiating with a controlling stockholder; however little leverage the board thinks it has, it must test its assumptions about what terms the controlling stockholder (or other parties, such as any lenders providing debt financing) will accept;
The board must actively oversee a CEO who is also the controlling stockholder negotiating an interested-party transaction with respect to parallel transactions that could affect both the outcome of and the leverage of the parties in the interested-party transaction.

The case is a good reminder that if a board is negotiating with a controlling stockholder, its actions will be viewed critically, and even good-faith errors may be perceived with 20/20 hindsight to have been driven by an improper intent to benefit the controlling stockholder.

Distressed M&A: WARN Act Claims Against Private Equity Sponsors -- A Catch-22 for Fund Managers

Ted Wern — Tue, 08 Sep 2009 13:59:57 -0800

Today's economic climate is forcing portfolio company managers to make tough operations decisions that may affect large numbers of employees. Private equity fund sponsors are increasingly compelled to weigh in on operating decisions to salvage their investment and fulfill their duties as board members. However, increased involvement in day-to-day management of portfolio companies can, in some cases, expose private equity funds and their principals to costly employee claims. As employees of failed businesses search for deeper pockets, funds are increasingly becoming targets of WARN Act and other "look-through" claims.

The WARN Act requires certain employers to provide at least 60 days notice to employees prior to conducting mass layoffs or plant closures. The remedy for violation is payment of wages for the entire 60 day period. A WARN Act claim against a private equity or other investment fund will turn on whether the fund was an "employer". The employer analysis involves five factors: (1) common ownership, (2) common directors/officers, (3) de facto exercise of control, (4) unity of personnel policies and (5) dependency of operations. This test is typically less stringent than traditional veil-piercing analysis. Lawmakers are also considering changes to the WARN act to make the notice periods and penalties more onerous for the employer.

It is generally difficult to make a WARN Act claim stick against a private equity fund, as most funds provide only high level strategic guidance and there are a number of employer exceptions in the act. However, the risk could increase as economic distress forces fund managers to take a more active role in day-to-day decisions. It is not practical to suggest that the equity sponsor sit on the sidelines and watch its equity evaporate in a distressed situation, but fund managers should be cognizant of the risks that come with a more active portfolio management role.

Fund managers might consider the following when faced with this dilemma:

Some fund principals may serve as officers of the portfolio company solely for the purpose of executing documents and may also supplement/replace management with professionals from the fund. This could be mis-interpreted in a WARN Act situation and should be considered carefully.
Funds often enter into management/advisory agreements with portfolio companies to compensate them for their advisory activities, but the list of "duties" should be reviewed and narrowed as appropriate.
Although funds that own a controlling equity position will typically control the governing board of the company, funds might consider a smaller presence on the board in exchange for voting and other contractual rights.
D&O insurance policies should be scrutinized to ensure coverage for WARN Act and similar claims.
D&O indemnification agreements should be reviewed to ensure that all "bells and whistles" are included to protect directors and officers to the fullest extent permitted by applicable law.

Beyond the WARN Act, there are a number of other laws and common law principles that the plaintiff's bar may employ in their search for deep pockets, including wage and hour claims, "piercing-the-corporate veil" theories and fiduciary duty claims. (We will discus other areas of exposure for private equity sponsors in distressed situations, beyond the WARN Act, in future posts.) Although D&O insurance may provide some comfort, being personally named in a lawsuit is a harsh reality for any professional. Bottom line for any equity sponsor: before diving head-first into a distressed situation, always check the water depth first...

Purchase Agreement Study by Houlihan Lokey

Scott Joachim — Wed, 26 Aug 2009 15:00:00 -0800

Houlihan Lokey recently published its annual Purchase Agreement Study. The study summarizes selected terms of middle-market change-of-control transactions in which Houlihan Lokey served as financial advisor to either the buyer or the seller between 2002 and 2008, including approximately 100 transactions closed in 2008. As noted in the study, "[t]here is no consensus on what constitutes 'fair and normal' or 'market,' as terms vary based on the specific facts and circumstances of a transaction."

A few observations:

Earn-Outs: The study reflects that earn-out provisions were included in 13% of 2008 reviewed transactions, up only slightly from 12% of 2007 reviewed transactions (page 6 of the study). I suspect a much more significant jump in 2009 vs. 2008 transactions, based largely on the twin difficulties of the current M&A market: lack of available debt financing and disparity in pricing expectations between buyer and seller.
Seller Notes: The study reflects that seller notes were issued in 6% of 2008 reviewed transactions, up only slightly from 5% of 2007 reviewed transactions (page 6 of the study). As with earn-outs and for the same reasons, I suspect a much more significant jump in 2009 vs. 2008 transactions.
Pricing/EBITDA Multiples: The study reflects that the median EBITDA multiple for 2008 reviewed transactions was 7.2x (page 7). Note that the multiple decreases to 7.0x isolating transactions with enterprise values less than $100 million (page 8). Note also the trend line of median EBITDA multiples in 2006 (9.9x), 2007 (8.5x) and 2008 (7.0x). Looks like a straight line down toward a 5.5x EBITDA multiple for deals in the sample size for 2009.

Thanks to Jennifer Muller and Jeff Tarbell of Houlihan Lokey for sending us the study.

Non-Disclosure Agreements: Over-Thought on Occasion?

Scott Joachim — Fri, 21 Aug 2009 12:15:00 -0800

Yesterday, I met with a friend who is corporate counsel at a large and well-respected private equity fund that, like many financial investors, looks at dozens of potential transactions each week. In most cases, the company seeking funding will request a company-friendly Non-Disclosure Agreement (NDA), fully-stacked with all of the bells and whistles that, frankly speaking, are in some cases mostly absent from the company's agreements with its own employees and strategic partners (which NDAs can ultimately be critically important under some circumstances). The investor then needs to engage its counsel in the process, a back-and-forth negotiation ensues, it's signed up, and, at least 90% of the time, the deal goes nowhere in any event.

We were discussing the fact that NDAs have become increasingly complicated over the last several years, and questioned whether the time and effort (including attorneys' fees expended on finalizing the NDA) is really justified in light of the relatively small risk of damages of any significance flowing from a breach of confidentiality (particularly in the context of a private company seeking funding). While a more-detailed discussion of the exciting dueling positions that companies and investors can take in negotiating an NDA may please some readers, I'll relent in favor of the vast majority of you and cut to the chase: Certainly, there are situations where a fully-negotiated, detailed NDA makes good sense. That said, is there also a context where it makes better sense to adopt s simpler approach? Perhaps there are at least some circumstances where a company seeking funding and the potential investor might be better off collectively living with the risk of how a court would fill in the gaps in the very unlikely event of litigation on the matter, and adopt the following as the entirety of their NDA:

"[Potential Investor] hereby agrees to (1) use reasonable care to maintain and protect the confidentiality of all confidential information received by [Potential Investor] from [Company] and Its representatives relating to the Company and the [Investment Opportunity] and (2) refrain from using such confidential information except in connection with its evaluation of the [Investment Opportunity] or a related purpose.

POTENTIAL INVESTOR

x______________________"

Thoughts?

Share-Exchange Mergers of Private Companies: An Over-Looked Opportunity?

Scott Joachim — Sun, 16 Aug 2009 13:45:22 -0800

It goes without saying that the two most significant obstacles in the current M&A market are:

A disparity in price expectations between buyer and seller; and
The buyer's inability to secure debt financing on acceptable terms (if at all).

This reality begs the question: How, if at all, can these obstacles be avoided, or at least mitigated, assuming two private companies otherwise agree that they would be stronger united rather than going it alone? One possibility is the share-exchange merger.

Share-exchange mergers of private companies are not without their challenges. Some of the key issues that need to be addressed:

Valuation: While a share exchange merger side-steps the issue of cash or liquidation value that is more directly impacted by broader market conditions, a share-exchange merger nevertheless requires valuations of the two companies, at least relative to one another, for purposes of setting the appropriate share-exchange ratio. In at least some cases, it should be easier for parties to avoid the heartache of knowing that they would be selling at a steep discount to what their companies would have been worth two or three years ago after a full auction in a robust M&A market, and focus exclusively on their relative valuation today. If the parties themselves cannot agree, third-party valuation firms can be retained to settle the score, and/or contingent consideration tied to specified performance metrics can be integrated into the deal to adjust the valuation at some point post-closing. (Contingent consideration provisions, aka "earn-outs", are not for the faint of heart, however. More on that in a future blog post.)
Existing Debt Facilities: While additional debt may not be required to finance the transaction, existing debt facilities in place with the merging companies will need to be managed as a result of several factors:

1. The proposed merger will likely constitute a change of control or significant transaction under existing loan documents, triggering a consent right by the lenders;

2. Financial covenants in the existing loan documents may need to be adjusted on a post-merger basis; and

3. Assuming the pre-existing debt facilities can remain in place and co-exist on a post-closing basis, the banks will need to negotiate an inter-creditor agreement addressing, among other things, priority of liens over secured assets. (N.B.: Inter-creditor agreements can be tough to negotiate, particularly in the current market.)

Board Control and Management Teams: It is an obvious point that two boards will become one and two management teams will need to be combined. That said, this can be trickier in the context of a 50/50 (or similar) merger than in a cash buyout where it is clear that one party is the buyer and the other party is the seller. Cultural fit and consistent strategic plans are increasingly important in direct proportion to the "equality" of the merger.
Equity Plans: Existing equity incentive plans will need to be reviewed and likely combined or at least amended to both provide consistent incentives across the newly-combined employee base and fit within the new capital structure. In a down market such as the current market, re-pricing underwater options may also be appropriate.
Securities Law Compliance: Federal and state securities laws will need to be complied with, since each company's shareholders will, in essence, be offered equity in the combined entity rather than cash consideration.
Tax Issues: Tax advisors should be consulted in the planning stages to help structure the exchange transaction in a manner that most effectively preserves tax-free status.

While we have seen several share-exchange mergers between private companies over the last 12+ months, absent a substantial near-term improvement in market conditions, we expect to see many more of these kinds of deals in the next several months. Let us know your thoughts by commenting below.

Financial Buyers Entering the Market for Corporate Carve Outs

Peter Lawrence — Fri, 14 Aug 2009 12:35:14 -0800

Corporate carve-outs are on the rise, according to Q2 2009 deal data. Buyout Magazine found that corporate carve-outs made up 14% of the overall deal market in the second quarter of 2009. This represents a 233% increase compared to the full-year 2008, when corporate carve-outs made up only 6% of all reference transactions.

As recently as 2008, financial buyers were a distant second to strategic buyers acquiring businesses through carve-outs (PDF). Private equity funds are now increasing their percentage share of the carve out market.

Historically, carve-outs were done by strategic acquirers to complement or expand their existing business lines. Carve-out targets could be integrated into an existing platform, and the acquiring company would capitalize on efficiencies of scale.

In the current market, while some strategic acquirors are seizing opportunities to exploit historical lows in valuations of targets, other strategics faced--with declines in revenues and liquidity and cost-cutting pressures--have either slowed (if not halted) their M&A strategy, or have reversed course and disposed of non-core assets and divisions themselves. These developments have effectively ceded ground to financial buyers eager to step into fill the void.

Financial buyers performing carve outs currently appear to be targeting the middle market($100 million to $1 billion). This is likely the the result, at least in part, of a lack of available financing drying up deal activity in the higher end market, and its forcing increased competition in the middle market as traditional participants in the larger market focus on middle market carve out prizes. But the Deloitte survey cautions, consistent with our experience, that transactions with lower enterprise values are often as complex (and, in some cases, more complex) as larger carve out transactions and require just as much due diligence to identify and quantify the risks and costs associated with such transactions.

Since financial buyers generally do not approach carve out transactions with an eye towards integrating the target into an existing platform, their due diligence should regard the target as a stand-alone business whose key functions will need to be nurtured and scaled post-closing. Transition services from the selling parent will be critical during this period following closing, as many of the efficiencies of scale available with the parent will no longer be available. Due diligence should focus on the cost of implementing a stand-alone platform and related issues including (1) developing intellectual property goodwill that is not dependent on any reputation effect of the parent, (2) identifying intellectual property that was historically exploited by both the parent (or its other affiliate) and the carved-out entity which would require cross-licensing arrangements, and (3) purchasing insurance (and tail coverage) for the target. Diligence should also examine the underlying reasons why the parent is entering into the carve out transaction (e.g., whether any of target’s principal customers and/or suppliers are at risk of ceasing their own operations or terminating or reducing their level of support for the carve out entity). These are just a few examples, and each carve out transaction will have its own unique set of business issues that will require proactive diligence, planning and negotiation.

In short, carve out transactions present unique challenges that require comprehensive due diligence efforts that can be far more complicated that a typical acquisition of a stand-alone, independent enterprise. As financial buyers look to expand their portfolios through carve out acquisitions, they should not underestimate the challenges present in closing a carve out transaction simply because of its enterprise value.

Posted by Peter Lawrence and Siddesh Bale

Hart-Scott Rodino: More Than Ever, Second Requests Doom Deals

Barry Reingold — Wed, 12 Aug 2009 13:21:20 -0800

The FTC and DOJ just published their fiscal year 2008 HSR enforcement statistics. Although the total number of filings was down 22% from FY 2007, 82.4% of filings went through without any agency inquiry. In cases where one of the agencies opened a preliminary investigation, 86.1% of the investigations were ultimately closed without issuance of a second request. These percentages are on line with earlier years.

But of the 41 unlucky deals that did draw second requests, 90% (37) were challenged, resulting in a consent decree, litigation or an abandoned deal. This is a higher percentage than in prior years (traditionally 65% to 80%). So, more than ever, issuance of a second request is the kiss of death, to be avoided at all costs by pre-filing analysis of antitrust issues and effective advocacy during any preliminary investigation.