Applied mergers and acquisitions bruner pdf free download

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Applied Mergers and Acquisitions. Calamos, John P. New York: McGraw-Hill, This book allows readers to gain a true mastery of the principles underlying financial modeling and valuation by helping them to: Develop flexible and accurate valuation analysis incorporating cash flow waterfalls, depreciation and Recommended Readings iciaired Allison , M. New York : Wiley , Astrachan , J. Mergers , Acquisitions , and Employee Anxiety. This edition's greater emphasis on what drives value and how to measure it will improve the way practitioners conduct financial analysis and, ultimately, make strategic decisions.

International Mergers and Acquisitions , recorded in London , in which a panel of U. Skip to content. And what drives the success of those deals that are consummated? He directs the Darden School's executive education course on mergers and acquisitions, and teaches the popular MBA elective on that topic. Useful review questions as well as problems and answers are provided for both professionals and students.

The year could in fact top the record year of Although, the first half of was remarkably successful, the subprime crisis of the credit markets led to a slow-down in the second half. Mega-deals will not make the headlines as often as in , because banks became more careful in granting credits for such deals due to the subprime crisis. Various companies have also taken advantage of the weak U. When a buyer purchases a company target , the assets of the company cannot be held in stasis until the transaction is settled.

The company is in a constant flow and its value changes constantly. This makes it hard to determine a precise purchase price that remains valid from the beginning until the end of the transaction process. Stock Purchase. Employment Agreements. Closing and Documentation. The Parties intend that a closing of the agreements shall occur on or before , , at a time and place that is mutually acceptable to the Parties.

BCI or its representatives will prepare and revise the initial and subsequent drafts of the necessary agreements. Refundable Deposit. All sums paid hereunder shall be deductible from the purchase price to be continues In the event that BCI does not complete the purchase of the Shares, the sums payable hereunder shall be re- ferred to BCI less to be retained by the Seller for its expenses, with interest at the rate of 1.

Due Diligence. No Material Changes. No-Shop Provision. The Company agrees that, from and after the execution of this Letter Agreement until the termination of the Binding Terms in accor- dance with Paragraph 12 below, the Company will not initiate or conclude, through its Representatives or otherwise, any negotiations with any corporation, person or other entity regarding the sale of all or substantially all of the assets or the Shares of the Company.

The Company will immediately notify the other Parties regarding any such contact described above. Lock-Up Provision.

The Company agrees that, from and after the execution of this Letter Agreement until a the consummation of the transactions contem- plated in Section I and the execution of definitive agreements thereby, or b in the event that definitive agreements are not executed, until the repayment of all amounts advanced hereunder, plus accrued interest, that without the prior writ- ten approval of BCI and subject to any anti-dilution provisions imposed hereun- der, x no shares of any currently issued Common Stock of the Company shall be issued, sold, transferred or assigned to any party; y no such shares of Com- mon Stock shall be pledged as security, hypothecated, or in any other way en- cumbered; and z the Company shall issue no additional shares of capital stock of any class, whether now or hereafter authorized.

Prior to Closing, neither Party nor any of their Representa- tives shall make any public statement or issue any press releases regarding the agreements, the proposed transactions described herein or this Letter Agreement without the prior written consent of the other Party, except as such disclosure may be required by law.

If the law requires such disclosure, the disclosing party shall notify the other Party in advance and furnish to the other Party a copy of the proposed disclosure. Notwithstanding the foregoing, the Parties acknowl- edge that certain disclosures regarding the agreements, the proposed transac BCI and its employees, affiliates and associates will a treat all information re- ceived from the Company confidentially, b not disclose such information to third parties without the prior written consent of the Company, except as such disclosure may be required by law, d not use such information for any purpose other than the consideration of the matters contemplated by this Letter of Intent, including related due diligence, and d return to the Company any such infor- mation if this Letter Agreement terminates pursuant to Paragraph 12 below.

Break-Up Fee. Effective Date. The foregoing obligations of the Parties under Section II of this Letter Agreement shall be effective as of the date of execution by the Com- pany, and shall terminate upon the completion of the transactions contemplated in Section I above or, if such transactions are not completed, then at such time as all of the obligations under this Section II have been satisfied, unless otherwise extended by all of the Parties or specifically extended by the terms of the forego- ing provisions; provided, however, that such termination shall not relieve the Parties of liability for the breach of any obligation occurring prior to such termi- nation.

Please indicate your agreement to the Binding Terms set forth in Section II above by executing and returning a copy of this letter to the undersigned no later than close of business on , Following receipt, we will instruct legal counsel to prepare the agreements contemplated herein.

The Binding Terms shall become binding on the Company upon the advance of deposit pur- suant to Paragraph 4 and the execution of Promissory Note in consideration therefore. By: Prospective Seller, President Dated The buyer will want to ensure that the seller and its advisors will fully cooperate in the due dili- gence process.

The seller may want a reciprocal clause to protect against its own expenses if the buyer walks away or defaults on a preliminary obligation or condition to closing, such as an inability to raise acquisition capital. The buyer may want a period of exclusivity where it has the confidence of knowing that the seller is not entertaining any other offers. In some cases the seller will request a deposit or option fee and the parties must determine to what extent, if at all, this deposit will be refund- able and under what conditions.

There are often timing problems with this provision which can be difficult to resolve. For example, the buyer will want the deposit to remain percent refundable if the seller is being uncooperative, or at least until the buyer and its team complete the initial round of due diligence to ensure that there are no major problems discovered which might cause them to walk away from the deal.

The seller will want to set a limit on the due diligence and review period at which point the buyer forfeits all or a part of its deposit. The end result is often a progressive downward scale of refundability as the due diligence and the deal overall reach various checkpoints towards closing. To the extent that the buyer forfeits some or all of the deposit, and the deal never closes, the buyer may want to negotiate an eventual full or partial refundability if the seller finds an alternative buyer within a certain period of time, such as days.

Perhaps among the most challenging issue faced by sellers is the decision as to who is told what, when From a human capital management perspective, if team members are told too soon then it may be hard to keep them from running out the door due to uncertainty , and if they are told too late it may lead to resentment and frustration.

If the communication of the possible sale is mishandled, then the employees may get the message that their jobs are unimportant or in jeopardy, or both. Supervisory personnel should be briefed first, and all of their questions should be answered so that they can in- form their subordinates.

After the closing, it is imperative that the top management of the acquiring company meet with the employees of the target company to discuss their post-closing roles, compen- sation and benefits. If there will be job cuts, discuss the methods as to how this will be determined and whether any training, resume writing skills or outplacement services will be offered.

It is often the case that the Letter of Intent will provide that it is subject to the definitive documents, such as the Purchase Agreement, and that those defini- tive documents will address certain key matters or include certain key sections, such as covenants, indemnification, representations and warranties, and key conditions for closing. Both parties will want to articulate a set of conditions or circumstances stating that they will not be bound to proceed with the transaction if certain contingencies are not met, or if events subsequently happen after the execution of the Letter of Intent such as third party approvals, regulatory permission or re- lated potential barriers to closing.

Be sure to articulate these condi- tions clearly so that there are no surprises down the road. The buyer usually wants some protection that the general state of the company that he or she sees today will be there tomorrow. Thus, the seller will be obligated to operate its business in the ordinary course and that assets, customers and employees will not start disappearing from the premises, equipment left in disrepair, new customers not pur- sued, bonuses magically declared, personal expenses paid the night before and other steps which will deplete the value of the company If these things do occur, then the parties should anticipate a mechanism for adjusting the price based on the relating valuation of the lost contracts, relationships or human resources.

The parties may want to place certain restrictions on the content and timing of any press releases or public announcements of the transaction and in some cases may need to follow SEC guidelines.

If either are or both of the parties to the transaction are publicly traded, then the general rule is that once the essential terms of the transaction are agreed to in principle, such as through the execution a Letter of Intent, there must be a public announcement.

The timing and content of this announcement must be weighed carefully by the parties, including an analysis as to how the announcement will affect the price of the stock. This task should be accomplished well before the due diligence discussed in Chapter 5 begins. The primary purpose of the schedule is to outline all of the events that must occur and documents that must be prepared prior to the closing date and beyond.

Once all tasks have been identified and assigned, along with a realis- tic timetable established for completion, then a firm closing time and date can be preliminarily determined. A sample Work Schedule for an asset purchase transaction, which is not intended to be overly complex or comprehensive, is shown in Exhibit Naturally, the board of the seller wants to be able to represent that it is being paid a fair price, and the board of the buyer wants to represent to its shareholders that it is not using company resources to overpay for a transaction.

If the buyer intends to pay a price that is well above current market conditions, then it better be prepared to justify and defend the reasons for the higher valuation.

But fairness opinion practices have come under scrutiny as poor analysis, conflicts of interest, and a lack of due diligence to support the opinions began to surface. The process for selecting the firm to draft the fairness opin- ion should be competitive and well-documented and all potential conflicts avoided. Due diligence is not just a process, it is also a reality test—a test of whether the factors driving the deal and making it look attractive to the parties are real or illusory.

Due diligence is not a quest to find the deal breakers but a test of the value proposition underlying the transaction to make sure that the inside of the house is as attractive as the outside. It is also important to understand that in a post-Sarbanes-Oxley world, due diligence is typically wider and deeper in its scope than ever before, especially if the prospective buyer is a public company or a company with plans to go public within the next 18 months.

To the Throughout the process, both teams compare notes on open issues and potential risks and prob- lems. The legal due diligence focuses on the potential legal issues and problems that may serve as impediments to the transaction, as well as sheds light on how the transaction documents should be structured. The business due diligence focuses on the strategic and financial issues in the transaction, such as confirmation of the past financial performance of the seller; integration of the human and financial resources of the two companies; confirmation of the op- erating, production, and distribution synergies and economies of scale to be achieved by the acquisition; and the gathering of infor- mation necessary for financing the transaction.

Overall, the due diligence process, when done properly, can be tedious, frustrating, time consuming, and expensive. Yet it is a nec- essary prerequisite to a well-planned acquisition, and it can be quite informative and revealing in its analysis of the target company and its measures of the costs and risks associated with the transaction.

Buyers should expect sellers to become defensive, evasive, and im- patient during the due diligence phase of the transaction. Like any audit, a diligence process is designed to answer the important Information will slip through the cracks, which is precisely why broad representations, warranties, liability holdbacks, and indemni- fication provisions should be structured into the final purchase agreement. These provisions protect the buyer, while the seller negotiates for carve-outs e.

The nature and scope of these provisions are likely to be hotly contested in the negotiations. The specific issues and problems will vary based on the size of the seller, the nature of its business and the number of years that the seller or its predecessors have been in business. Questions designed to uncover If the seller has recently made a substantial workforce reduction or if you as the buyer are planning post-closing layoffs , then the requirements of the Worker Adjustment and Retraining Notification Act WARN must have been met.

The requirements of WARN include mini- mum notice requirements of 60 days prior to wide scale terminations. Effective due diligence is both an art and a science. The art is the style and experience to know which questions to ask and how and when to ask them. The science of due diligence is in the preparation of comprehen- sive and customized checklists of the specific questions to be pre- sented to the seller, in maintaining a methodical system for organizing and analyzing the documents and data provided by the seller, and in quantitatively assessing the risks raised by those prob- lems discovered in the process.

The due diligence process is designed first to detect the existence of the obligation and second to identify any defaults or problems in connection with these obligations that will affect the buyer after closing.

The best way for the buyer to ensure that virtually no stone re- mains unturned is with effective due diligence preparation and plan- ning. Make sure there is a capability fit. Poor communication and misunderstandings. The com- munications should be open and clear between the teams of the buyer and the seller. The process must be well- orchestrated. The focus must be on asking the right questions, not just a lot of questions. Inadequate time devoted to tax and financial matters.

The buyer must insist that its team will be treated like welcome guests, not enemies from the IRS! Ignoring the real story behind the numbers. The buyer and its team must dig deep into the financial data and test and retest the value proposition as to whether the deal truly makes sense.

The checklist should be a guideline, not a crutch. These questions will set the pace for the level of detail and adequacy of the review. For example, I recently worked on a deal that involved the purchase of a hockey league in the Midwest. It was easy to prepare the standard due diligence list and draw up questions regarding corporate struc- ture and history, the status of the stadium leases, team tax returns and to question the steps that had been taken to protect the team trademarks.

The more difficult task was developing a customized list. The list for this client included player and coaching con When done properly, due diligence is performed in multiple stages. First, all the basic data are gathered and specific topics are identified. Corporate Matters A. Corporate records of the seller. Certificate of incorporation and all amendments. By-laws as amended.

Minute books, including resolutions and minutes of all director and shareholder meetings. Current shareholders list certified by the corporate secretary , annual reports to shareholders, and stock transfer books. List of all states, countries and other jurisdictions in which the seller transacts business or is qualified to do business. Applications or other filings in each state listed in 5 , above, for qualification as foreign corporation and evidence of qualification.

Locations of business offices including overseas. Financial Matters A. List of and copies of management and similar reports or memoranda relating to the material aspects of the business operations or products. Reports of independent accountants to the board of di- rectors for the preceding five 5 years. Revolving credit and term loan agreements, indentures and other debt instruments, including, without limita- tion, all documents relating to shareholder loans.

Correspondence with principal lenders to the seller. Agreements by the seller where it has served as a guar- antor for the obligations of third parties. Federal, state and local tax returns and correspondence with federal, state and local tax officials. Federal filings regarding the Subchapter S status where applicable of the seller. Financial statements, which should be prepared in ac- cordance with Generally Accepted Accounting Princi- ples GAAP , for the past five 5 years of the seller, including: 1.

Annual audited balance sheets. Monthly or other available balance sheet. Annual audited and monthly or other available earnings statements. Any recently prepared projections for the seller. Notes and material assumptions for all statements described in K 1 - 5 , above. Any information or documentation relating to tax as- sessments, deficiency notices, investigations, audits or settlement proposals. Informal schedule of key management compensation listing information for at least the ten most highly compensated management employees or consultants.

Projected budgets, accounts receivable reports includ- ing detailed aging report, turnover, bad debt experi- ence, and reserves and related information. Management and Employment Matters A. All employment agreements. Agreements relating to consulting, management, fi- nancial advisory services and other professional en- gagements. Copies of all union contracts and collective bargaining agreements. Employee benefit plans and copies of literature issued to employees describing such plans , including the fol- lowing Pension and retirement plans, including union pen- sion or retirement plans.

Annual reports for pension plans, if any. Profit sharing plans. Stock option plans, including information concern- ing all options, stock appreciation rights and other stock-related benefits granted by the company.

Medical and dental plans. Insurance plans and policies, including the fol- lowing: a. Errors and omissions policies. Severance pay plans or programs. All other benefit or incentive plans or arrangements not covered by the foregoing, including welfare benefit plans. All current contracts agreements with or pertaining to the seller and to which directors, officers or sharehold- ers of the seller are parties, and any documents relating to any other transactions between the seller and any director, officer or shareholders, including receivables from or payables to directors, officers or shareholders.

All policy and procedures manuals of the seller con- cerning personnel; hiring and promotional practices; compliance with the Family Leave Act, etc.

The name, address, phone number and personnel file of any officer or key employee who has left the seller within the past three years. Tangible and Intangible Assets of the Seller A. List of all commitments for rented or leased real and personal property, including location and address, de- scription, terms, options, termination and renewal List of all real property owned, including location and address, description of general character, easements, rights of way, encumbrances, zoning restrictions, sur- veys, mineral rights, title insurance, pending and threatened condemnation, hazardous waste pollution, etc.

List of all tangible assets. List of all liens on all real properties and material tangi- ble assets. Mortgages, deeds, title insurance policies, leases, and other agreements relating to the properties of the seller. Real estate tax bills for the real estate of the seller. List of patents, patents pending, trademarks, trade names, copyrights, registered and proprietary Internet addresses, franchises, licenses and all other intangible assets, including registration numbers, expiration dates, employee invention agreements and policies, actual or threatened infringement actions, licensing agreements, and copies of all correspondence relating to this intel- lectual property.

Copies of any survey, appraisal, engineering or other reports as to the properties of the seller. List of assets which may be on a consignment basis or which may be the property of a given customer, such as machine dies, molds, etc. Material Contracts and Obligations of the Seller A. Material purchase, supply and sale agreements cur- rently outstanding or projected to come to fruition within 12 months, including the following: 1.

List of all unperformed sales contracts. Consignment agreements. Research agreements. Franchise, licensing, distribution and agency agree- ments. Joint venture agreements. Agreements for the payment of receipt of license fees or royalties and royalty-free licenses. Documentation relating to all property, liability and ca- sualty insurance policies owned by the seller, including for each policy a summary description of: 1.

Coverage 2. Policy type and number 3. Premium 5. Expiration date 6. Deductible 7. Any material changes in any of the foregoing since the inception of the seller 8.

Claims made under such policies I. Contracts for the purchase, sale, or removal of electric- ity, gas, water, telephone, sewage, power, or any other utility service.

List of waste dumps, disposal, treatment, and storage sites. Agreements with any railroad, trucking, or any other transportation company or courier service. Letters of credit. Copies of any special benefits under contracts or gov- ernment programs which might be in jeopardy as a re- sult of the proposed transaction e.

Copies of licenses, permits and governmental approv- als applied for or issued to the seller which are required in order to operate the businesses of the seller, such Note: This section is critical and will be one key area of the nego- tiations as discussed in Chapter Sample Responses: Sample Responses: A.

Current Not Required B. Litigation and Claims—Actual and Contingent A. Opinion letter from each lawyer or law firm prosecut- ing or defending significant litigation to which the seller is a party describing such litigation. List of settlement agreements, releases, decrees, orders or arbitration awards affecting the seller.

Description of labor relations history. Documentation regarding correspondence or proceed- ings with federal, state or local regulatory agencies. Note: Be sure to obtain specific representations and warranties from the seller and its advisors regarding any knowledge pertaining to potential or contingent claims or litigation! Miscellaneous A. Press releases past two years B.

Resumes of all key management team members C. Press clippings past two years D. Financial analyst reports, industry, surveys, etc. Schedule of all outside advisors, consultants, etc. Schedule of long-term investments made by the seller. Standard forms purchase orders, sales orders, service agreements, etc. What legal steps will need to be taken to effectuate the trans- action e. Has the appropriate corporate authority been obtained to proceed with the agreement?

What key e. What antitrust problems, if any, are raised by the transac- tion? What are the significant legal problems or issues now affect- ing the seller or that are likely to affect the seller in the foreseeable future? What potential adverse tax consequences to the buyer, seller, and their respective shareholders may be triggered by the transaction?

What are the potential post-closing risks and obligations of the buyer? To what extent should the seller be held liable for such potential liability? What steps, if any, can be taken to reduce these potential risks or liabilities? What will it cost to implement these steps? What are the impediments to the assignability of key tangible and intangible assets of the seller company that are desired by the buyer, such as real estate, intellectual property, favorable contracts or leases, human resources, or plant and equipment?

What are the obligations and responsibilities of the buyer and seller to the creditors of the seller e. What are the obligations and responsibilities of the buyer and seller under applicable federal and state labor and employment laws e.

To what extent will employment, consulting, confidentiality, or non-competition agreements need to be created or modified in connection with the proposed transaction? In con- trast, a management buyout by a group of industry veterans who have been with the seller over an extended period of time will proba- bly need to conduct only a minimum amount of business or stra- tegic due diligence; in this case, the focus will be on legal due diligence and assessment and assumption of risk.

These typically in- clude an undervaluation of inventory; overdue tax liabilities; inadequate management information systems; related-party trans- actions especially in small, closely held companies ; an unhealthy reliance on a few key customers or suppliers; aging accounts receiv- able; unrecorded liabilities e.

Each of these problems poses different risks and costs for the acquiring company, and these risks must be weighed against the benefits to be gained from the transaction. How would you define the market or markets in which the seller operates? What steps will you take to expedite your learning curve of trends within these markets?

What third-party advisors are qualified to advise you on key trends affecting this industry? What are the factors that determine success or failure within this industry? How does the seller stack up? What are the image Does it have a niche? What steps can be taken to enhance or reverse these trends? Virtual Data Rooms use existing computer software and Internet technology to provide a secure and on- line format for reviewing and organizing due diligence infor- mation.

The VDR also better facilitates the review of certain types of data which are easier to review online and in elec- tronic form, such as CAD drawings, video files, patent fil- ings, architectural drawings, etc. It appears so. Intra Links www. The following checklists are designed to provide the acquisition team with a starting point for analysis of the seller.

They help to level the playing field in the negotiations, since the seller usually starts with greater expertise regarding its industry and its business. How are management functions and responsibilities dele Are job descriptions and employ- ment manuals, among other things, current and available? Are employees with the necessary skills generally available? What is the reputation of this manage- ment team within the industry? Why or why not? What are the strengths and weaknesses of the management team?

To what extent are these methods protected either by contract or proprietary rights? What are the significant risk factors e. To what extent are the production and output of the seller dependent on economic cycles or seasonal When will these assets need to be re- placed? What are the annual maintenance and service costs for these key assets?

What are the break-even production efficiency and in- ventory turnover rates for the seller company and how do these compare with industry norms? Have copies been obtained and analyzed by the buyer? What long-term post-closing obligations or commitments have been made on the purchase of raw materi- als or other supplies or resources?

What is the condition of the inventory? To what extent is it obsolete? Note: Be sure to get a breakdown and an analysis of all ex- penses e.

What strategies are in place to ex- pand this market share? What are the current trends affecting either the growth or the shrinkage of these particular mar- kets? How are these markets segmented and reached by the seller?

What are the respective strengths and weaknesses of each competi What demographic data have been assembled and analyzed? Where are these customers principally located?

What contracts are in place in relation to these channels? How could these channels or contracts be modi- fied or improved? How will these channels overlap or conflict with the existing distribution channels of the buyer? To what extent have these programs been effec- tively monitored and evaluated? In what ways can these costs be reduced or eliminated?

What steps have been or can be taken to expedite the collection procedures and systems? What are the key fi- nancial liabilities and debt obligations of the seller? A way for the buyer to ensure that the seller has been forthright in disclosing all material obligations and liabilities whether actual or contingent is to prepare an affidavit. An affidavit like the one shown in Exhibit provides additional protection against misrep- resentation or material omissions by the seller, its lawyers, and its auditors.

The affidavit can be customized to a particular transaction and include the specific concerns that may arise during the transac- tion and afterwards.

Those assets are free and clear of all security interests, liabilities, obligations, and encumbrances of any sort. There are no creditors of SellerCo, or me, or persons known to me who are asserting claims against me or the assets being sold, which in any way affect the transfer to Prospective Buyer of the trade name SellerCo, its goodwill, and its assets, including the equipment as set forth in the Bill of Sale dated. I agree to pay all gross receipt and sales taxes and all employment taxes of any sort due through closing.

I am current in regard to these taxes and all other taxes, and there are no pending disputes as to any of my taxes or the taxes of SellerCo. There are no judgments against SellerCo or me in any federal or state court in the United States of America. There are also no replevins, attachments, executions, or other writs or processes issued against SellerCo or me.

I have never sought protection under any bankruptcy law nor has any petition in bank- ruptcy been filed against me.