M&A Deals - Entrepreneurs

Versailles Group is pleased to announce the publication of its newest Ebook - Five Common Fears That Entrepreneurs Have When Selling Their Business." This Ebook is designed to help entrepreneurs complete M&A deals, in particular, the sale of their company.

Entrepreneurs, after spending a lot of time and effort to build a company, always have many uncertainties regarding the possible sale of their "baby." This eBook addresses several points including:

How value concerns can be mitigated with deal structure

Buyer motivation

What happens to employees and customers after a sale

What happens to employees and customers after a sale

How confidential information is kept safe throughout the sales process

M&A Deals - Leveraged Buyouts

M&A deals can take many different forms; however, leveraged buyouts (also known as an LBO), especially now with easy credit and low interest rates, have been a good way to help buyers purchase companies. Of course, the endgame for any buyer of a company is to make exceptional returns.

A leveraged buyout is the acquisition of another company using a significant amount of debt in order to finance the acquisition. In most cases, both the assets being acquired and the assets of the acquiring company are used as collateral to back the large loans required to finance the deal. The amount of capital contributed by the acquiring firm is usually minimal and it is not uncommon to see debt to equity ratios of greater than ten to one. The goal of the investors in a leveraged buyout is either to resell the acquired company for a substantial return or bring the company public after all or some of the debt is paid down or once it has become more profitable. Due to the limited equity contributed to the acquisition, these leveraged transactions can generate very large returns for the investors.

The reason companies like leveraged buyouts is that it allows them to make large acquisitions without having to commit a significant amount of their own capital. Leveraged buyouts in recent years have been far more common among two main groups; corporations and LBO funds, many of which are financial buyers. Corporations oftentimes find it easier to buy a company than to build one; an LBO can be an efficient way to acquire an existing company without tying up large amounts of equity. In contrast, LBO funds generally take companies private and sell off divisions in hope of yielding high returns, in many cases 40 percent or more.

M&A Deals

2015 Update

For the first two months of 2015, M&A deals have maintained similar volumes to the first two months of last year (2014).

In terms of the number of transactions, 10,465 transactions were completed in the first two months of this year versus 10, 915 deals n the first two months of last year. The reduction is statistically insignificant. Interestingly, as you'll note in the charts below, the number of transactions by region was nearly identical between the two time periods. With transaction count, the number of transactions in Europe was two percent lower while the number of transactions in Asia was two percent higher.

M&A Deals - 2015

M&A Deals - 2014

With regard to transaction values, approximately US$490.6 billion of transactions were completed in the first two months of 2015. In comparison, the transaction value for the first two months of 2014 was US$511.5 Billion. This was a slight decrease and because the number of transactions between the two relevant time periods actually decreased in the same period, it portrays a scenario where the average deal size increased from 2014 to 2015.

M&A Deals - 2015

M&A Deals - 2014

With regard to value in the first two months of 2015, M&A deals in Asia increased by approximately 82 percent compared to the first two months of 2014. This offsets a decrease in the value of transactions in the US, Europe, and Africa/Middle East. As you will note in the chart above, the percentage of US deals dropped from 54 percent in 2014 to 43 percent in 2015.

M&A Deals - Conclusion

Data is data and is always subject to revision, errors, and manipulation. That being said, M&A activity has been quite strong and is expected to stay that way for some time. There are always economic or political events that can have sudden impacts. No one knows exactly what will happen when the US Federal Reserve Bank starts to raise interest rates in the US. Buyers and sellers of companies both agree that they're hoping it won't have an impact.

Please click this button to view Versailles Group's Ebooks:

M&A Deals

Purchase and Sale Agreement

A Purchase and Sale Agreement is the contract that documents all of the terms agreed upon between the buyer and the seller in an M&A transaction. Sometimes, this document is referred to as the Definitive Agreement. In M&A deals, this is THE document as it controls the actual closing and any open or unresolved issues part-time.

A purchase and sale agreement can take the form of a merger agreement, tender offer document, or a stock or asset purchase agreement. All of these forms of purchase and sale agreements contain a number of important clauses and terms relating to the transaction. Therefore, it’s important for both the buyer and seller to have an experienced lawyer and a good M&A team to make sure the agreement is fair for both parties. Obviously, some of the terms are more important than others.

There are several key sections of a purchase and sale agreement including the following: valuation/consideration, execution provisions, representations and warranties, covenants, conditions to closing, termination provision, break-up fees, etc.

• Execution provisions detail the way in which the deal is structured and the form of consideration. For example, an asset purchase and an all cash consideration.

• Representations and warranties outline exactly what is being sold and that the seller is delivering a clean title which is proof of ownership.

• Covenants are the agreements made between the buyer and seller. For example, a seller could be required by the buyer to keep certain employees.

• Conditions to closing are conditions that must be met such as regulatory approval prior to the closing of the transaction.

• Termination provisions are conditions in which the transaction could be terminated. For example, if the buyer cannot finance the acquisition.

• Break-up fees are the fees that must be paid in the event that one party backs out of the transaction.

These are only some of the many topics covered in a purchase and sale agreement. These agreements are comprehensive documents that are legally binding to all parties involved in the transaction. An experienced M&A advisor knows, from experience, when and where to compromise on certain issues. Furthermore, a good M&A advisor will work closely with their client's lawyer to make sure that whether the client is on the buy-side or the sell-side that they receive a fair document for closing.

M&A Deals - Confidentiality

A confidentiality agreement or Non-Disclosure Agreement (“NDA”) is a legally binding contract between the company interested in selling and the potential buyer. The NDA governs the sharing of confidential company information and prohibits certain other activities. Typically the confidentiality agreement is drafted by the selling company’s M&A advisor or the company’s attorney. It is distributed to potential interested buyers along with a teaser of the target company, which provides some details on the acquisition opportunity, but not enough so that the company for sale can be identified. Upon execution of the confidentiality agreement or NDA, a detailed confidential information memorandum (“CIM”) of the selling company is released to the potential acquirer. It also paves the way for the buyer and seller to have frank conversations about the selling company’s business.

Typically, the NDA will include the following governing provisions: how the information may be used, the term, permitted disclosures, non-solicitation of employees, no contact provisions for customers, suppliers, etc., and return of confidential information when negotiations cease. In some cases, the buyer is allowed to destroy the confidential information and may be required to supply a certificate indicating that the information was, in fact, destroyed.

The use of information provision states that any disclosed information is confidential and can be used only to make a decision with regard to a proposed transaction. There is usually a term of one or two years for which the information must remain confidential. The permitted disclosures outline what confidential information a potential buyer can disclose and prohibits the disclosure of negotiations for a possible transaction between the buyer and seller. The non-solicitation provision prohibits the hire of the selling company’s employees by the potential buyer for a particular period of time. Many times, the buyer will “carve out” certain hiring, like general solicitations that do not target the selling company or the permitted hiring of people that have been terminated or have left the selling company.

A good M&A advisor should be able to advise you as to what provisions are important and how to negotiate this very important document. The M&A advisor does not replace your attorney or good common sense; however, they do know what is reasonable and what buyers are willing to accept as they work with hundreds or thousands of buyers each year. The key is to obtain as much protection as possible, but also not to make it so impossible that buyers won’t give your potential transaction the attention it deserves.

M&A Factoid - LLC and C Corporation

Limited Liability Company (LLC)

A Limited Liability Company is a type of corporate structure designed to limit the founders’ losses to the amount of their investment. It is a hybrid structure that combines the characteristics of a corporation and sole proprietorship. An LLC does not pay taxes like a traditional corporation; instead, its owners pay taxes on their proportion of the LLC profits at their individual tax rates. Unlike a corporation, an LLC must be terminated upon the death or bankruptcy of a member. An LLC is not an appropriate corporate structure if the company hopes to go public in the future. It should also be noted that the limits on liability could be exceeded if there is fraud.

C Corporation

A C Corporation or C-Corp is a type of ownership structure that allows any number of individuals or companies to own shares. It is a stand-alone entity that limits its owner’s legal and financial liabilities that may arise due to the actions of the company. In this type of corporation, income is taxed at the corporate level and is taxed again in the form of income taxes when it is distributed to its shareholders. While double taxation is a drawback of this corporate structure, the limited liability it provides to owners as well as the ability to reinvest profits in the company at a lower corporate tax rate are advantages of C Corporations. Once again, it should be noted that the limitation on liability could be exceeded if there is fraud.

M&A Deals - 2014

M&A deal volume in 2014 was quite robust – almost US$4 trillion of transactions were completed worldwide, which was an increase of over 50 percent from 2013.
43,613 transactions were completed across the globe in 2014. The Americas and Europe experienced approximately the same M&A volume with Asia Pacific trailing by a few points.

2014 M&A Deals By Region

 
By sector, excluding financials, high tech was the most active followed by industrials, consumer products and services, and materials. Although telecom had the lowest number of transactions completed in 2014, deals in this sector were very large, resulting in over US$260 billion of deal value.

2014 M&A Deals by Sector

About Versailles Group, Ltd.

For over 28 years, Versailles Group's skill, flexibility, and experience have enabled it to successfully close M&A transactions for companies with revenues between US$2 million and US$250 million. Versailles Group has closed transactions in all economic environments, literally around the world.

Versailles Group provides clients with both buy-side and sell-side M&A services, and has been completing cross-border transactions since its founding in 1987.

Advantages of a Reverse Triangular Merger

During an M&A transaction, a possible purchasing tactic that can be used by an acquiring company is a reverse triangular merger. A reverse triangular merger is when the buyer forms a wholly-owned subsidiary which in turn works as a purchasing vehicle to acquire the target firm. To execute the deal, the target firm and wholly-owned subsidiary will merge giving the acquiring firm control of the target company. This newly merged company will function as a wholly-owned subsidiary of the acquiring firm so it will own all of its assets (tangible and intangible), liabilities, contracts, etc.

The advantages and disadvantages are the same as a direct merger; however, this type of acquisition is easier to execute since the only shareholder of the acquisition subsidiary is the purchasing firm which provides certain advantages, e.g., shareholder approval easy to obtain.

A reverse triangular merger allows the acquiring firm to gain control of the target company’s non-transferable assets and contracts which is not always possible with other acquisition techniques. Typically, acquirers have difficulty transferring contacts, particularly contracts with the government or governmental agencies when it is an asset transaction. This technique, i.e., utilizing a reverse triangular merger, while not perfect, does help. The downside is that the acquiring company does acquire all of the liabilities of the company as it is essentially a stock transaction.

M&A Factoid

Asset Purchase Agreement

In an M&A transaction, the asset purchase agreement or “APA” is a definitive agreement between the buyer and seller that identifies, among other things, the assets (and usually selected liabilities) being acquired from the seller and the total consideration paid for these assets. The assets and selected liabilities being acquired are detailed in a schedule in the APA. Similarly, any assets excluded from the purchase are also itemized in a separate schedule. The APA will include many important provisions such as representations and warranties, restrictive covenants, financing, solicitation, etc. Unlike a Letter of Intent, the APA is binding on both parties and clearly defines the final deal terms of the transaction. It is important to note that in an APA no shares of the company are being acquired - only the assets (and selected liabilities) of the company for sale are purchased by the buyer. Therefore, the buyer does not acquire any of the seller’s other liabilities, including past obligations that might not even be known on the day of closing.

Stock Purchase Agreement

In an M&A transaction, the stock purchase agreement or “SPA” is a definitive agreement between the buyer and seller that finalizes all terms and conditions related to the acquisition of the seller’s shares. In a SPA, unlike an asset purchase agreement, title to both the seller’s assets and all liabilities are conveyed as a result of the acquisition of the seller’s shares. It is extremely important for the seller to review the representations and warranties section of the SPA to ensure there are no statements that are believed to be untrue. False representations and warranties could result in legal action even after the deal is closed.

What is M&A

Mergers and acquisitions or “M&A” involves the sale of a company, business division, or assets to another company in an attempt to enhance shareholder value. M&A is a critical part of many corporate strategies as it is used to increase growth or can be used to reduce risk and protect shareholder value. In order to complete successful M&A transactions, companies usually enlist the help of investment banks on both the sell-side and buy-side of the deal.

Sell-Side M&A Advisory

A sell-side M&A advisor will work closely with the selling company in order to effectively market its sale. One of the main responsibilities of the sell-side M&A advisor is to produce a Confidential Information Memorandum (“CIM”) or Offering Memorandum, which describes the company in detail, highlighting the firm’s strengths, growth opportunities, and why it would make a good acquisition. The sell-side advisor will also play a critical role in identifying qualified buyers and contacting these buyers in order to complete a sale. The sell-side M&A advisor’s objective is to maximize the consideration paid for the company and to meet the seller’s additional goals. These additional goals may include retaining an equity stake in the acquired company, having a continued role in the company such as a consulting arrangement, retaining a board seat in the company, etc. Sell-side advisors also help facilitate the transaction in many ways, including helping the seller and buyer navigate due diligence, structuring and negotiating the transaction, etc.

Buy-Side M&A Advisory

A buy-side M&A advisor will assist a company in identifying appropriate targets to acquire and complete the purchase in an efficient and orderly manner. The main objective of the buy-side M&A advisor is not only to make sure its client does not overpay for a target, but to ensure the target fits within the acquirers overall corporate strategy and growth objectives. The M&A advisor seeks to complete a transaction that will build shareholder value for its client long after the transaction is closed. The buy-side advisor will also help the buyer navigate due diligence, structure and negotiate the transaction, among other tasks towards the completion of a successful transaction.