Legal aspects of M& 28E33000 Mergers and cquisitions, Session 9, Fall 2015 Topics for today Relation to course learning goals: 6. bility to identify legal [and accounting] issues in M& Structure Merger control M& contract law M& tax law 1
People of the same trade seldom meet together, even for merriment and diversion, but the conversation ends in a conspiracy against the public, or in some contrivance to raise prices. dam Smith (1776), The Wealth of Nations 3 Elements of competition law relevant to M& First antitrust law: Sherman ct (US, 1890) Ex-post competition law: - buse of dominant market position - Prohibition of cartels and other horizontal agreements Ex-ante competition law - Merger control Who decides? - Several countries can have have overlapping jurisdictions subject to their own minimum size rules (turnover, assets, employees) - But EU countries defer to European Commission as one-stop shop for transactions with a community dimension : judge and prosecutor, judicial appeals possible - In US, Federal Trade Commission + US Department of Justice ntitrust Division: only a court can prohibit, agencies need to litigate 4 2
EU merger control process Notification (filing) [1 Month] Phase I decision Possible outcomes: approval / conditional approval (e.g. divestments) / serious doubts [3 months] Phase II decision Possible outcomes: approval / conditional approval (e.g. divestments) / prohibition Generally no merger implementation measures before regulatory approvals 5 Decision criteria for merger control EU decision standard: Used to be creation of a dominant position Since 2004, looser looser SIEC-standard ( significantly impede effective competition ) Decision criteria: Market shares (market definition is the key): Herfindahl-Hirschman Index HHI Ease of entry in the market Substitutability of product Client / supplier hearings Political lobbying 6 3
HHI concentration limits Unconcentrated Markets: HHI below 1500 Mergers resulting in unconcentrated markets are unlikely to have adverse competitive effects. Moderately Concentrated Markets: HHI between 1500 and 2500 Mergers resulting in moderately concentrated markets that involve an increase in the HHI of more than 100 points potentially raise significant competitive concerns. Highly Concentrated Markets: HHI above 2500 Mergers resulting in highly concentrated markets that involve an increase in the HHI of between 100 points and 200 points potentially raise significant competitive concerns. Mergers resulting in highly concentrated markets that involve an increase in the HHI of more than 200 points will be presumed to be likely to enhance market power. Source: EU merger control horizontal guidelines 7 Notes about M& contract law LOI Letter of Intent ND Non-Disclosure greement SH Shareholders greement SP Share Purchase greement n expression of what the parties intend to agree upon an agreement to agree lso known as: Term sheet, MOU (Memorandum of Understanding), Proposal Letter n ND is a contract whereby the signers agree not to disclose certain information lso: Confidentiality greement Provides a basis for the resolution of disputes and sets out the limits and procedures for how the company is to be operated lso: BP Business Purchase greement n agreement for the sale and purchase of a company's shares (or assets) 8 4
Closing adjustments: classic method Valuation defined on an entity value basis before closing balance sheet is known. Substract net debt [add net cash] as of closing balance sheet. Substract proportion of net working capital that is lower [add if higher] than normal. Definition needs to be agreed upon, normally % of sales. Result is final purchase price as equity value. 9 Closing adjustments: lockbox method Lockbox / Locked Box: SP already defines fixed equity price based on a historical balance sheet (locked box balance sheet). No closing accounts required, subject to leakage review i.e. transfers to the sellers. No price-chipping accounting arguments in closing accounts phase, favored by sellers, particularly private equity. http://www.pwc.com/ca/en/transaction-service/publications/pwcintroduction-locked-box-closing-mechanism-2014-01-en.pdf 10 5
Tax-free transactions Most tax jurisdictions provide for some types of tax-free reorganizations (Note: rather a tax deferral than total tax freedom): no capital gain realized to seller no revaluation in buyer s books: tax continuity Most typical tax-free structures Merger Demerger Stock for stock exchange sset for stock exchange Note triangular transactions at least US recognizes these Key condition: consideration must be mostly (typically over 90% stock) 11 Tax-deferred transactions Merger (bsorption type) new shares in B all of B s assets and liabilities B 12 6
Tax-deferred transactions Demerger 1 2 13 Tax-deferred transactions Stock for stock exchange new shares in B old shares of B B - 14 7
Tax-deferred transactions Stock for assets exchange B new shares in all of B s assets and liabilities in a defined business area B 15 Post-merger integration 28E33000 Mergers and cquisitions, Session 10, Fall 2015 8
Topics for today Relation to course learning goals: 7. Key principles of post-merger integration management Case applications: Ben & Jerry s roleplay Structure Post-merger planning 4Ps of post-merger management Cultural and communication issues in M& What is post-merger planning? = developing a detailed plan for 1. normalizing and 2. integrating the business after the deal (100-day idea) 18 9
Post-merger planning parallel to deal Deal-making process Contacts Negotiations DD Closing Post-merger planning Purpose Power People Process Postmerger management Key components in post-merger plan Post-merger plan must be done prior to deal closing Overlapping and parallel with the deal-making process 19 4Ps of post-merger planning 1.Purpose 2. Power 3. People 4. Process management Why are we doing the deal? Value and expected outcomes? Identity and name for the new organization Objectives and benchmarks Topmanagement structure Leadership roles and styles Responsibilities Decisionmaking mechanisms Incentives Organization Top-level staffing HR policy (layoffs, compensation) Communications plan Morale Overall control Empowered task forces Key decisions to be made Deadlines Transition process Source: McKinsey & Co 20 10
Integration team structure Management integration team (Senior Management) Team 1 Team 2 Team N-1 Team N Finance function Sales and marketing.. Facilities mgmt Information Technology 21 The gossip mill Unlike most gossip around the water cooler, the conversation appeared to be unusually urgent... Do you think there will be substantial layoffs? one worried engineer asked, shaking his head in dismay Concern seemed to turn to anger as they discussed the windfall that some senior managers were likely to receive when they exercized their stock options Normally conscientious employees were increasingly oblivious to project deadlines when their only sources of information seemed to come from the gossip mill. No one really knew if the rumors that circulated were accurate, but the more often they were repeated the more they were believed. tide of paranoia swept throughout the office engulfing all but a few at the top who actually knew what was going to happen. 22 11
Some managerial experiences Plan carefully, act quickly: Fast change limits uncertainty and deteriorating productivity Initiate during the negotiation process (within competition law limitations) Communicate future direction, but do not exaggerate or overcommit (known as the read my lips trap) Generate early successes / visible financial returns Find out about and address the me-issues Make the tough decisions as soon as possible 23 Typology of M& integration approaches Need for strategic interdependence (Value creation from combination) Low High Need for organizational autonomy (Value creation within target) High Low Preservation (Nurturing) Holding Symbiosis (Best of both) bsorption Source: Haspeslagh-Jemison (1991) 24 12
Cultural issues size and maturity start-up vs. bureacracy Industry differences working and compensation cultures International considerations language customs and time differences ethical and legal issues Cultural issues or Me-issues? 25 13