They Get Paid Well, And Deserve It

Ever wonder what your expensive lawyer does for you in a deal? Until you’ve had a deal blow up because of bad lawyering (usually over-lawyering) many entrepreneurs may not believe that an experienced deal lawyer is worth every cent of the exhorbitant fees they charge. They have the access and influence to make or break a deal, and often do.

The Committee on Mergers & Acquisitions of the American Bar Association recently released its 2008 Strategic Buyer/Public Target M&A Deal Points Study. There are a number of significant limitations of the Study in relation to Intangible Insight’s audience, but this is an excellent overview of the many issues that a good lawyer will negotiate in a transaction. It also shows where the relative favorability of terms stacks up between buyers and sellers. It’s certainly not bed time reading, but it is a good document to familiarize yourself with so you can speak intelligently with your lawyer on some very important issues when going into an M&A negotiation. We offer a few insights into this 80 page presentation below.

First, the limitations. The Study analyzes 152 publicly-available acquisition agreements for acquisitions of U.S. publicly traded-traded targets by publicly-traded and other strategic acquirers transactions announced in 2007. All of the transactions studied involved transactions values in excess of $100M. This does not represent our readers, which are mostly lower middle market (revenue < $100M), private, internet-reliant companies. More importantly, the deal environment now is dramatically different than in 2007 when the subject matter of the Study takes place. What was largely an environment favorable to sellers has shifted giving buyers an upper hand. Notwithstanding, public transactions – both in legal deal points and valuation — bear upon private, middle market transactions. For our readers, the Study should be used as a jumping off point for discussions with your lawyer, if you care to get involved at this level of the legal details.

Some interesting insights:

• Consideration: Of the 152 deals studied, consideration was all cash for 74%, all stock for 10%, and mixed stock and cash for 16% of the deals.  

• MAC and MAC Carveouts: 98% of the transactions included a Buyer’s right to terminate the transaction without liability (a “walk right”) for “Material Adverse Change.” More importantly, however, many of the provisions had a “target-favorable” definition of “material adverse change” that limited the targets exposure (also known as MAC Carveouts). 99% of the transaction included a MAC carveout for adverse changes caused by the United States economy, and 96% included a carveout for adverse changes affecting the industry in which the Target operates. In light of the current economic environment and the likely potential leverage shift between in favor of buyers in M&A transaction, these provisions could be seriously curtailed for the foreseeable future.

• Availability of Financing. 100% of the transactions contained a provision with “no conditions” as to the Buyer’s availability of financing. In light of the current economic climate and its particular affect on middle market companies, we believe that this provision should not only be included in the agreement but proper due diligence should done to confirm the buyer’s ability to finance the deal at the commitment stage.

• Fair Presentation of the Financial Statements: “Fair presentation” of the financial statements were “prepared in accordance with GAAP applied on a consistent basis throughout the period covered 73% of the time. In other words, seller’s represented that their financial statements were prepared “all in accordance with GAAP” 27% of the time.

• Employee Retention. 97% of the transactions contained a provision retaining specified employees of target with no conditions.

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Filed Under Merger & Acquisitions