M&A

Our review and advice on M&A deals is structured around our four-point program that involves:

Our Four-Point Program

1. Early Detection and Evaluation

In our view, putting off a serious analysis of risks and opportunities until end of deal “due diligence” can be a costly mistake.  For example, we have seen incidents in which the late revelation of environmental risks has required the complete restructuring of a deal, which wastes time and money.  Norm Bernstein had occasion to review a transaction in which the stock of a group of affiliated companies was being purchased as part of a single deal.  One of the companies was identified late in the transaction as having potentially serious environmental risks due to historical contamination. The deal had to be restructured to convey the stock of only the other companies and the purchase of certain selected assets of the vulnerable company, whose operations had to be restarted at a greenfield site in another jurisdiction.  In another deal, the waste handling practices of a company considering going public made good business sense, but were found late in the process to be potentially inconsistent with certain environmental laws, posing a personal risk to some of management involved and an unanticipated disclosure problem for the company. The sooner problems of these types are uncovered, the sooner they can be dealt with.

2. Deal Structuring

Apart from the issue of asset purchase versus stock purchase, there are collateral issues that can jeopardize the benefits of an asset purchase deal.  These include continuity of equity ownership, management, location, and operations. All need to be reviewed. Some deals (such as acquisition of landfills) inherently carry significant environmental risk but offer the potential for very large returns.  In those contexts, particularly in deals of ten million or more, consideration needs to be given to Norm Bernstein’s two-tier structure – a limited partnership or LLC on top of an operating corporation, and the LLC or limited partnership would hold notes and warrants but no or very little stock in the operating corporation and avoid any direct involvement with environmental issues.  This may provide the limited partners (or the LLC members) with a substantial liability shield, combined with potential tax efficiency in passing note repayments through the LLC or LP and the upside of stock ownership through the timed exercise of the warrants.

3. Covenants, Indemnities and Financial Focus

We can, of course, write, review and revise complex interlocking covenants and indemnities.  However, covenants and indemnities may not provide the value.  The seller’s representations, warranties and indemnities may turn out to be unenforceable (unless all of the potentially needed funds are placed in a third-party escrow) without expensive, time consuming litigation or can be cut off entirely through bankruptcy.  Therefore, a better solution may be to understand and monetize the risk (or opportunity) up front. Additionally, impending changes in regulations may adversely (or favorably) effect business valuation models based on projected earnings that do not take into account changing regulations that will, but have not yet, impacted the business or the business of competitors. 

If you are an acquirer that is buying or investing in a business, you (or your M&A counsel) might benefit from talking to us early on. That may avoid overpaying for assets or having to try to renegotiate late in a deal.  Similarly, if you are selling a business, we may be able to inoculate your buyer against exaggerated claims by its attorneys (while they seek better deal terms), or point out unrecognized benefits and offer a deal structure that helps the buyer minimize its risk. Thus, whether you are a buyer or a seller, you (or your M&A counsel) might well benefit from talking to us early in the process.