As Jason and I close out our Letter of Intent series, we thought we’d cover one last item that has screwed many a seller – the case where a public company acquires a private company for unregistered stock.  Some buyers will try to ignore this – a good seller should work hard up front to get agreement on what type of stock and what kind of registration rights they will be receiving. Expectation setting is key in this situation.

One thing to consider here is the non-binding nature of a “promise” to register shares. The buyer will argue that they can’t guarantee to register the shares because they don’t control the SEC. The past history of the buyer with the SEC is crucial, including knowing the current status of SEC… Read more

While watching the Sopranos tonight, I saw the magic manilla envelope stuffed with cash get passed to Tony and thought “what would a good deal be without some fees?”  Remember – it is important to make sure that the lawyers and bankers can afford their fancy sports cars. 

A letter of intent will usually be explicit about who pays for which costs and what limits exist for the seller to run up transaction costs in the merger. The transaction cost associated with an agent or banker, the legal bill, and any other seller-side costs are typically included in the transaction fee section. While it’s conceivable that the buyer will punt on worrying about who covers transaction fees, in today’s M&A world most savvy buyers are very focused on making sure the… Read more

Since it’s a Saturday morning, I thought I’d cover a topic in our Letter of Intent series that my wife Amy would never agree to. Signing a letter of intent starts a serious and expensive process – for both the buyer and seller – as you both work to consumate a deal.  As a result, you should expect that a buyer will insist on a no shop provision similar to the one that we discussed in our term sheet series.  In the case of an acquisition, no shop provisions are almost always unilateral, especially if you are dealing with an acquisitive buyer. 

As the seller you should be able to negotiate the length of time into a reasonable zone (45 to 60 days). If the buyer is asking for more than 60 days, you should push… Read more

When you are asked “Hi – it’s been fun to date. Will you marry me?” you usually don’t expect the person asking the question to say “Oh – and it’ll only happen if my mother says it is ok.” (although I expect this happens occasionally, especially if the person asking hasn’t had enough therapy.)

Buyers are like this and will normally include certain conditions to closing in the LOI. These can be generic phrases such as “Subject to Board approval by Acquirer,” “Subject to the Company not having a material adverse change,” or “Subject to due diligence and agreement on definitive documents.” They can also be phrases that are specific to the situation of the seller such as “Subject to the Company settling outstanding copyright litigation,” or “Subject to Company liquidating… Read more

As my body recovers from my recent marathon, my brain turns back to Letters of Intent. Jason and I left you hanging for a while in our Letter of Intent series – we plan to tromp to the finish line in the next few weeks.

In an effort to mix metaphors, while Jack Bauer tries to always look out for other people at CTU (except for say – in Ryan Chappelle’s case), it’s not always true that management is playing the same role in an acquisition.  In public company acquisitions, you often hear about egregious cases of senior management looking out for themselves (and their board members helping them line their pockets) at the expense of shareholders. This can also happen in acquisitions of private companies, where the buyer knows he needs the… Read more

It’s been a while since Jason and I wrote an entry for our Letter of Intent series.  Yesterday, as I read through a confidentiality agreement that I had been asked to sign, I was inspired to address another typical part of an LOI – the dreaded confidentiality / non-disclosure agreement.

While venture capitalists will almost never sign these in the context of an investment, they are almost always mandatory in an M&A transaction. If the deal falls apart and ultimately doesn’t happen, both parties (the seller and the buyer) are left in a position where they have sensitive information regarding the other. Furthermore, it’s typically one of the only legally binding provisions in a LOI (along with choice of law and break up fees.) Everything else is dependent upon the deal closing… Read more

Jason and I continue our Letter of Intent series with one of our “favorite” clauses (sarcasm intended). The escrow is another hotly negotiated term that often is left ambiguous in the LOI. The escrow (also known as a “holdback”) is money that the buyer is going to hang on to for some period of time to satisfy any “issues” that come up post financing that are not disclosed in the purchase agreement. 

In some LOIs we’ve seen extensive details – with each provision of the escrow agreement spelled out – including the percentage of the holdback(s), length of time, and carve outs to the indemnity agreement.  In other cases, there is simply a declaration that “standard escrow and indemnity terms shall apply.” Since there really isn’t any such thing as “standard terms” this is… Read more

Well – the first business day of the year is officially over.  Apparently Yahoo just rejected an offer from Microsoft for $80 billion because it wasn’t enough.  My guess is that Microsoft forgot to include the “!” in Yahoo! and pissed someone off (the “!” has got to be worth at least $20 billion.)  I felt like shit all day today, but my cold (the first one I’ve had this year) at least had a side effect of getting me out of a trip.

Regarding our Letter of Intent series, we are starting to get into the sticky stuff (if you need a visual, think of when you were a kid and you superglued your fingers together.) Every LOI will have some mention of representations and warranties (if you want… Read more

In our previous post – which started to get long and unwieldy (ah – the need for an editor – where are those guys when you need them) – we didn’t cover two critical issues: (1) What happens if the acquisition is in cash vs. public stock vs. private stock, and (2) Who pays for the “basis” of the stock options?

The form of consideration of the acquisition can be a many spendored thing. We’re going to ignore tax considerations for this post (although you shouldn’t – we just don’t want this to be 12 pages long.) If I’m an employee of a seller, I’m going to value cash differently than public stock (restricted or unrestricted?) differently than public stock options differently than private stock (or options). If the buyer is… Read more

It’s been a little over a month since Jason and I wrote posts for our Letter of Intent series. We took a time out for our 409A series and for actually selling two companies (Commerce5 to Digital River and another that hasn’t been disclosed yet) rather than writing about selling companies. This is the first time in four years where I personally haven’t been actively trying to close the sale of a company over the holidays, so I thought I’d put some time in and finish up this series.  2005 was an awesome year for M&A and all the pundits think 2006 will be equally good (or better), especially after all the M&A bankers get their year end bonuses in January and receive a new dose of… Read more

I had the following conversation recently.

Entrepreneur: “Brad, I just got an offer for my company for $15 million from Company X.”Brad: “Awesome.  Who’s Company X – I’ve never heard of them.”Entrepreneur: “It’s a private company funded by Venture Firm Y.”Brad: “Cool – $15 million – is it a cash deal?”Entrepreneur: “No, it’s all stock.”Brad: “Hmmm – are you getting preferred or common stock?”Entrepreneur: “Common stock – why?”Brad: “How much money has the company raised?”Entrepreneur: “$110 million”Brad: “What’s the liquidation preference?  Is it a participating preferred?  What’s the valuation of the company?”Entrepreneur: “Oh – I’m not worried about that stuff - the valuation is $300m and they say they are going public soon.”

If you’ve read our term sheet series, you know where this one is going.  The entrepreneur just received an offer… Read more

My partner Heidi pointed out that the analogy (or is it a metaphor – I can never remember – another one of my brain quirks) that I used in my Letter of Intent: Structure – Asset vs. Stock post could have been better.  An asset (or “artichoke” deal) is actually like eating the artichoke heart and leaving the leaves untouched since the heart is the good part and the leaves have thorns. … Read more

While price is usually first issue on every seller’s mind, structure should be second. While there only two types of deals (asset deal vs. stock deal), there are numerous structural issues surrounding each deal. Rather than trying to address all the different issues, Jason and I decided to start by discussing the basics of an asset deal and a stock deal.

In general, all sellers want to do stock deals and all buyers want to do asset deals. Just to increase the confusion level, a stock deal can be done for cash and an asset deal can be done for stock – don’t confuse the type of deal with the actual consideration received (if you start getting confused, simply think of an asset deal as a “artichoke deal” and a… Read more

Jason and I have engaged in a little foreplay with you in our Letter of Intent series.  While you might think the length of time that has passed since my last post is excessive, it’s often the length of time that passes between the first overture and an actual LOI (although there are plenty of situations where the buyer and the seller hook up after 24 hours, just like in real life.) 

As with other “transactions”, there’s a time to get hot and heavy.  In most deals, there are two primary thing that the buyer should have on his mind – price and structure.  Since the first question anyone involved in a deal typically asks is “what is the price?” we’ll start there.

Unlike in a venture financing where price is… Read more

As Jason and I launch into our new series on the Letter of Intent (LOI), we thought we’d start out like most LOI’s do – with a little foreplay.  To keep it simple, assume there are two primary parties in an M&A transaction – the “buyer” and the “seller” (for the time being, let’s not worry about complex deals that have more than two parties – this is a family blog after all – well, not really.) 

By the time the buyer presents the seller with an LOI, there have been meetings, discussions, dinners, expensive bottles of wine, lots of conference calls, and an occasional argument.  However, the buyer and the seller are still courting so they tend to be on their best behavior.  The LOI is typically the… Read more