On the Wrong End:
Planning for Mergers & Acquisitions Pays Dividends
by Neil Aronson
O’Connor, Broude & Aronson
The wave of mergers, acquisitions, and strategic partnerships sweeping the software industry today reflect the broad range of situations in which a company may be sold after achieving technical and financial success, or auctioned prior to or after bankruptcy.Buyers and sellers in this never-ending cycle need to know how best to position their companies to maximize the potential from such sales.To accomplish these goals, a company desiring to be sold needs to strategize well in advance to ensure that it will be highly attractive to a corporate suitor.Similarly, a cautious suitor needs to verify with care that the business it is acquiring will deliver all that is promised with no unpleasant surprises.
A number of issues can jump out in the acquisition process and stop a deal dead in its tracks.Sometimes, a relatively minor problem can overwhelm the process, creating fear and distrust among the parties, or causing a significant (and sometimes disproportionate) change to the economics of a deal.In particular, larger risk-averse corporations may delay or cancel a planned acquisition.What causes potential buyers and sellers to tangle?And when and how should you address these issues?There isn’t one simple solution.Each company is unique and requires a comprehensive and thorough approach to preparing itself for an acquisition.The following are just a few areas on which buyers and seller should focus.
Litigation–Real and Threatened – Any buyer automatically imagines the worst possible result when an acquisition target is sued or a lawsuit is threatened ($3 million awards over a spilled cup of coffee help promote this fear).To present a clean slate to the buyer, sellers should carefully consider resolving litigation when it is commercially reasonable.Patent or other intellectual property rights litigation affecting the seller’s right to its core technology or business is almost certain to create an absolute impediment (whether real or in terms of a significant reduction in purchase price) to closing the deal.Patents and Intellectual Property.Buyers place tremendous reliance (perhaps to a fault) on patents, patent applications, and license rights.Sellers should guarantee that an iron fence encircles their intellectual property rights.Buyers need to examine cautiously any intellectual property rights not owned outright by the seller.Employees should have already signed comprehensive agreements relating to the ownership of intellectual property by their employer.
Employment Agreements – In these days, when the most valuable assets often go home at the end of the day, sound employment agreements are of critical importance.Ask Hoffman LaRoche, which, must to its chagrin, acquired San Francisco-based Genentech only to learn that California does not enforce most standard non-compete agreements.Similarly, don’t wait to ask a key employee to sign a non-compete agreement after announcing that you are in the process of selling your company.Plan early.
Major Contracts – Don’t expect your friendly landlord to offer less expensive terms to a Fortune 500 company after it acquires your company.Instead, try to strike favorable economic terms early, when the “other side” does not have leverage over a transaction.View each contract as a potential economic jewel to be included in the acquisition, adding to the value of the company being sold.And check significant agreements to see if a major contract is freely assignable or whether a major customer can walk away if a company is sold.
Technology Advances – A buyer is often attracted by something it doesn’t have, which is typically a widely respected product or recently announced technology advance.Be careful that you can deliver all that you are promising in your press releases (Is Version 99.0 truly compatible with the newest microprocessor chip or are there numerous bug fixes in process?).How will customers respond to inquiries from the buyer?Financial Statements.How sound are the seller’s financial statements.Are they audited, or at least reviewed by a respected accounting firm?Are there undisclosed tax problems which the buyer might inherit (“Were those employees or independent consultants anyway…”).What type of amortization of research and development expenses is reasonable?A seller’s financial statements should appear as a fortress of truth and sound accounting principles.Also, delays and the added cost of auditing a company ten months after the end of the fiscal year can delay an acquisition or add significant costs.
Deals can often be structured imaginatively when both the buyer and seller agree that an acquisition makes sense, but can’t agree on a price.Complex “earn out” provisions, which give the seller additional upside if the company performs well after the acquisition, provide latitude for both parties.And use of tax-free reorganizations can delay the inevitable tax bite.However, to reach a successful conclusion the seller needs to ensure that it is presenting a clean story and the buyer needs to feel comfortable that it is not inheriting unknown problems.
And if the buyer is proposing to pay for the acquisition with its own stock?Well, then the seller needs to think of itself as a buyer as well.