acquisitions: quarterbacking the deal
looking to merger and acquisition (M&A) deals as an exit strategy
need to keep their eye on the ball and choose the right quarterback.
That’s the collective wisdom of Northern New England brokers,
investment counselors and veterans of acquisitions.
“If you just focus
on the exit, you’re dead,” said Rich Napolitano, former CEO of
Acton, Mass.-based Pirus Networks and now vice president of Sun
Microsystems’ Data Services Products. “An effective strategy is not
about running down the field staring at the goalpost; it’s about
blocking and tackling.”
employees, and acquirer Sun Microsystems welcomed the recent $165
million sale of Pirus Networks, said Napolitano, who advised, “The
way you sell something is not to sell it. Companies are not sold;
they’re bought.” Achieving a mutually rewarding merger or
acquisition is the result of a mature relationship nurtured over
In the current
environment, tech companies need to develop an exit strategy that
makes sense and maximizes product value to accomplish a transaction
that satisfies company goals. Chris Dahl, partner in the Boston,
Mass.-based firm of Lucash, Gesmer & Updegrove LLP, urged companies
to identify their value proposition, be it their technology, cash
from VCs attractive to someone else, or something else. Sellers can
prevent buyers from driving up a purchase price adjustment by
honestly acknowledging what they’re selling, said Michael Droof,
shareholder, Sheehan Phinney Bass & Green, P.A., Concord, N.H.
How information is
exchanged between the parties in a deal is “a very important
procedural dance,” said Tony Perkins, shareholder with Bernstein,
Shur, Sawyer, & Nelson P.A. in Portland, Maine. “Start stepping on
people’s toes and they don’t want to dance anymore.” Jesse Devitte,
managing director of Borealis Ventures in Hanover, N.H., stressed
beginning the integration phrase during the acquisition phase —
especially people and their respective company cultures — as key to
a successful acquisition. Droof advised companies to realistically
assess their chances of making a deal close before signing a letter
of intent. If they can’t, they emerge as damaged goods.
recommended knowing what to say before the buyer asks. For example,
intellectual property never signed over to the company may be the
only unfinished business but the buyer will see it as the tip of the
“The two most
likely culprits” that cause a merger or acquisition to stall or
fail, said Dahl, are “bad surprises unearthed by the buyer, usually
in the due diligence process, and tax and other economic issues
ignored or misunderstood when settling upon a price, and that change
the value proposition when discovered.” Other factors include
creditor, customer, or vendor problems, reductions in volume,
pricing changes, litigation, contractual arrangements with a third
party requiring consent to assignment or consent to change and
letting business advisors drive the deal.
surprises are out of the seller’s control, such as when Autodesk had
a CEO change that had nothing to do with seller Softdesk or the
deal, but which put off the deal. However, “when Autodesk bought us
later on, we went public and our valuation was much higher,” said
Drew Ogden, legal counsel at Softdesk and now a partner in Concord,
N.H.-based Henniker River Group. Ogden characterized his firm as a
business development firm that works in exchange for a success fee
or equity during what usually amounts to a three-year period of
helping companies prepare their exit strategy.
The seller has to
understand how the deal must be put together for it to work, and get
lawyers involved before rather than after settling on a price, only
to learn too late that the tax effect will reduce the perceived net
value. Like a good quarterback, the M&A lawyer develops strategy and
executes the plan to dramatically affect the outcome of the deal.
Droof cited four
primary responsibilities of the M&A lawyer: 1) structuring the
transaction and advising the client as to the most advantageous tax
and liability structure for the deal; 2) helping the client
negotiate the terms of a preliminary agreement such as a letter of
intent and definitive purchase and sale agreement; 3) bringing that
agreement to closure by ensuring its language and obtaining the
certifications, signatures and consents of key employees and
third-party and/or regulators; and 4) dealing with indemnity claims
Legal expertise is
especially necessary for acquirers who accept stock as payment.
Securities laws dictate that stock in small or medium-sized
companies be issued as private placement rather than as a public
offering, and generally restrict its resale for a period of two
years unless the Securities and Exchange Commission (SEC) allows a
resale exemption under Rule 144.
traded shares, buyers can’t liquidate private company shares to
lessen risk, according to Martin Eisenstein, partner, Brann &
Isaacson, Lewiston, Maine.
However, if the
deal is structured properly, he added, buyers can defer the tax into
the future when shares are actually sold. Sellers need to consider
whether shares will be restricted by vesting, whether they’re
getting shares fully earned and not subject to forfeiture in the
future, and that shares will be taxed as capital gains and not
Eisenstein cited earnings before interest, taxes, depreciation and
amortization (EBITDA) as a big factor behind the decrease in M&A
deals, and at the end of the third week of November 2002
www.mergerstat.com showed deal flow value down from $615,971.3 in
2001 to $407,414.6 in 2002, Jesse Devitte thinks the market for
software company M&A is about to heat up.
that bigger software companies who have had to drastically cut their
R&D budgets still need new and updated products and technology for
their customers, so they buy smaller software companies feeling the
pinch of a slow economy and more flexible than ever before on price.
Tech companies would do well to prepare themselves.
Preparing the playing field
A tech company
looking to be acquired needs to:
Stay one step ahead of underwriters by performing due diligence on
itself as well as its clients, collecting, managing and updating
information in advance of acquisition.
Thoroughly examine company assets to understand the true balance
sheet and income statement.
Resolve outstanding legal issues and blemishes like back taxes.
Tie together representations and warranties regarding the accuracy
of financial records as stated in the purchase contract.
Assess and make current the articles of incorporation, operating
agreements, annual reports, votes of officers authorizing action
items, list of shareholders and shares subject to vesting.
Clear the stock ledger and any related shareholders’ agreements.
Get key employee agreements with independent or subcontractors in
clear and concise writing as to the impact of the relationship on
Safeguard the potent bargaining tool of intellectual property with
appropriate trademark, copyright, or patent filings; and
nondisclosure, nonsolicitation, noncompetition and assignment of
Know the legality of transferring outside licensed intellectual
property to assets or company stock in a sale.
Have business-specific (not boilerplate) license agreements in
Document key customer and supplier relationships in writing.
Provide incentive packages to maintain loyalty among key employees
whose departure could affect the value of the purchase price.
Talk to investment counselors and bankers, business brokers,
industry godfathers, and people involved in tech industry purchase
and sales to get the word out to the right audience.
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