M & ERGERS A CQUISITIONS F A Z ROM TO T H I R D E D I T I O N This page intentionally left blank M & ERGERS A CQUISITIONS F A Z ROM TO T H I R D E D I T I O N Andrew J. Sherman American Management Association New York • Atlanta • Brussels • Chicago • Mexico City • San Francisco Shanghai • Tokyo • Toronto • Washington, D.C. Bulkdiscountsavailable.Fordetailsvisit: www.amacombooks.org/go/specialsales Orcontactspecialsales: Phone:800-250-5308 Email:[email protected] ViewalltheAMACOMtitlesat:www.amacombooks.org Thispublicationisdesignedtoprovideaccurateandauthoritative informationinregardtothesubjectmattercovered.Itissoldwith theunderstandingthatthepublisherisnotengagedinrendering legal,accounting,orotherprofessionalservice.Iflegaladviceor otherexpertassistanceisrequired,theservicesofacompetent professionalpersonshouldbesought. LibraryofCongressCataloging-in-PublicationData Sherman,AndrewJ. MergersandacquisitionsfromAtoZ/AndrewJ.Sherman.—3rded. p. cm. Rev.ed.of:Mergers&acquisitionsfromAtoZ.2nded.2006. Includesindex. ISBN-13:978-0-8144-1383-8 ISBN-10:0-8144-1383-8 1.Consolidationandmergerofcorporations. 2.Smallbusiness— Mergers. I.Sherman,AndrewJ.MergersandacquisitionsfromAtoZ. II.Title. HD58.8.S484 2010 658.1(cid:2)62—dc22 2010002290 (cid:2)2011AndrewJ.Sherman. Allrightsreserved. PrintedintheUnitedStatesofAmerica. 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Printingnumber 10 9 8 7 6 5 4 3 2 1 Contents ACKNOWLEDGMENTS ix INTRODUCTION TO THE THIRD EDITION xi CHAPTER 1 TheBasicsofMergersandAcquisitions 1 UnderstandingKeyTerms 1 What’sAlltheFussAbout? 3 WhyBadDealsHappentoGoodPeople 8 WhyDoBuyersBuy,andWhyDoSellersSell? 9 CHAPTER 2 PreparingfortheDance:TheSeller’sPerspective 13 ConductingaThoroughEOTBAnalysis 17 PreparingfortheSaleoftheCompany 17 CommonPreparationMistakes 29 OtherConsiderationsfortheSeller 31 CHAPTER 3 InitiatingtheDeal:TheBuyer’sPerspective 34 AssemblingtheTeam 34 DevelopinganAcquisitionPlan 35 v vi CONTENTS ApplyingtheCriteria:HowtoNarrowtheField 43 ApproachingaCompanyThatIsNotforSale 44 DealingwiththeSeller’sManagementTeam 45 DirectoryofM&AResourcesforProspectiveBuyers(andSellers) 46 CHAPTER 4 TheLetterofIntentandOtherPreliminaryMatters 51 ProposedTerms 52 BindingTerms 52 CommonReasonsWhyDealsDieatanEarlyStage 59 PreparationoftheWorkSchedule 60 AnotherPredealTask:TheGrowingDebateAbouttheRoleand UsefulnessofFairnessOpinions 61 CHAPTER 5 DueDiligence 65 BestPracticesinDueDiligenceintheEraofAccountability2.0 66 LegalDueDiligence 74 BusinessandStrategicDueDiligence 83 Conclusion 91 AppendixtoChapter5:Post-Sarbanes-OxleyDueDiligence Checklist 92 TheDisclosureRequirements 93 ChecklistofItemsPost-Sarbox 97 CHAPTER 6 AnOverviewofRegulatoryConsiderations 101 Introduction 101 EnvironmentalLaws 102 FederalSecuritiesLaws 103 FederalAntitrustLaws 106 WaitingPeriods 109 LaborandEmploymentLaw 113 CHAPTER 7 StructuringtheDeal 120 Stockvs.AssetPurchases 122 TaxandAccountingIssuesAffectingtheStructureofthe Transaction 126 CONTENTS vii One-Stepvs.StagedTransactions 130 MethodofPayment 132 NontraditionalStructuresandStrategies 135 CHAPTER 8 ValuationandPricingoftheSeller’sCompany 144 AQuickIntroductiontoPricing 146 ValuationOverview 147 CHAPTER 9 FinancingtheAcquisition 155 AnOverviewofFinancingSources 156 UnderstandingtheLender’sPerspective 159 FinancingDealsinTimesofTurmoil 160 StepsintheLoanProcess 164 EquityFinancing 168 CHAPTER 10 ThePurchaseAgreementandRelatedLegalDocuments 189 CaseStudy:GCCAcquiresTCI 191 SampleScheduleofDocumentstoBeExchangedataTypical Closing 209 CHAPTER 11 KeepingM&ADealsonTrack:ManagingtheDealKillers 252 CommunicationandLeadership 253 DiagnosingtheSourceoftheProblem 254 UnderstandingtheTypesofDealKillers 254 CuringtheTransactionalPatient 256 MaintainingOrderintheM&AProcess:SimplePrinciplesfor KeepingDealsonTrack 257 Conclusion 258 CHAPTER 12 PostclosingChallenges 259 ATimeofTransition 260 StaffingLevelsandRelatedHumanResourcesChallenges 264 viii CONTENTS Customers 267 Vendors 268 PhysicalFacilities 268 ProblemsInvolvingAttitudesandCorporateCulture 269 BenefitandCompensationPlans 271 CorporateIdentity 272 LegalIssues 272 MinimizingtheBarrierstotheTransition 273 PostmergerIntegrationKeyLessonsandBestPractices 277 Conclusion 280 CHAPTER 13 AlternativestoMergersandAcquisitions 281 GrowthStrategyAlternative1:JointVentures 282 GrowthStrategyAlternative2:Franchising 287 GrowthStrategyAlternative3:TechnologyandMerchandise Licensing 299 GrowthStrategyAlternative4:DistributorshipsandDealerships 306 INDEX 309 Acknowledgments The author would like to thank the team at AMACOM Books, namely Robert Nirkind, Jim Bessent, and Alice Manning, for all of their hard workontheeditingandorganizationofthemanuscript. I would like to thank my partners worldwide at Jones Day for their unconditional support andencouragement, including our fortieth-con- secutive-quarter-leading global M&A department, Robert Profusek, John Hyland, and John Welch, as well as our overall firm leaders, Ste- phenBrogan,AndrewKramer,TimCullen,andWashington,DC,office leader Mary Ellen Powers. For general research support, I am very grateful for the efforts of Kartikeya Tanna and Kevin Bale. As always, JoLynchwasakeyplayerinpullingeverythingtogetherandhelpingto produceanorganizedmanuscript. And in perpetuity, I gratefully acknowledge my wife, Judy, my son, Matthew, and my daughter, Jennifer, for tolerating my writing at the diningroomtablewhenwecouldhaveallbeentogether havingfun. ix