© 2006 Morrison & Foerster LLP All Rights Reserved

AN OVERVIEW OF CROSS BORDER MERGERS AND ACQUISITIONS

Bruce MannOctober 17, 2006

An Overview Of Cross Border Mergers And Acquisitions

The Choice Between IPO and a Merger for a Private Company

Weighing alternatives

Are You A Candidate For An IPO?

Do you have a company, or just a product?

Can you demonstrate real earnings?• Revenue alone isn’t enough• Technology alone won’t attract investors

Is your market large and expanding, and not a niche too small for a public company?

Do you have a management team that investors will want to own?

Are you prepared to live with corporate governance and disclosure rules and to be second-guessed by analysts, reporters, stockholders and plaintiff’s lawyers?

Are You A Candidate For An IPO? (Continued)

Will your operating margin still be attractive after you add public company reporting costs?

Are you free of relationships with founders or stockholders that you wouldn’t want to disclose?

Are you invested for the long term and willing to watch the value of your stock go down or up?

Is keeping your team together important to you?

Is A Merger A Better Choice?

Even if the answers to these questions is “Yes” – you may still be better off with a merger than an IPO

IPO Sale

Is A Merger A Better Choice?

The advantages of a merger over an IPO• Instant liquidity at a known valuation• Flexibility of getting diversification in a non-taxable transaction• Potential higher valuation from buyers less focused on earnings

than on “build or buy” decision• Greater speed and certainty of the end result• Freedom to move to another venture

Preparing For A Merger

• Put together a strong M&A team of legal, accounting and investment banking advisors

• Analyze your potential buyers and decide how to maximize your value

• Be prepared to negotiate• Decide how to approach potential buyers

• Prepare your own confidentiality and stand-still agreements

• Set up diligence room for potential buyers

If you are interested in a merger, what steps should you take first?

Preparing For A Merger (Continued)

• Should you enter a MOU or go directly to an acquisition agreement?

• What, when and to whom do you disclose the deal?• What should the merger agreement cover?

• Economic terms

• Representations by both parties

• Conduct of the business before the closing

• Conditions to closing

• Earn-outs, contingent consideration, escrows and post-closing liability for breaches

• Governing law and resolving conflicts

How Does SOX Impact M&A Transactions?

SOX doesn’t change the way deals are done• A good deal is still a good deal• A bad deal is still a bad deal• Due diligence is still the key

But SOX does –• Create new reporting and disclosure obligations for the public

suitor• Require potential sellers to take action before negotiations start• Call for expanded due diligence by potential buyers• Increase the costs of getting a deal done

What Should A Private Seller Do Because Of SOX?

Make sure you comply with the SOX requirements that apply to private companies. A public suitor won’t want to inherit exposure for criminal offenses

• Retaliation against “whistleblowers”• Destruction or falsification of records

Review your internal controls over financial reporting to make sure they are adequate for auditor attestation

What Should A Private Seller Do Because Of SOX? (Continued)

Be aware of SEC hot buttons that may impact your financials

• Revenue recognition issues – side agreements, distributor sales and channel stuffing

• Accrued pension liability assumptions• Contingent liabilities• Off-balance sheet arrangements• Segment reporting

What Should A Private Seller Do Because Of SOX? (Continued)

The Bottom Line –• Even SOX provisions that don’t apply to private

companies or to Israeli companies with no activities in the U.S. can impact your marketability.

Be prepared!

What Should A Public Buyer Do Because Of SOX?

SOX has increased the amount of due diligence required

• Focus on the same issues private sellers should focus on, whether the target is private or public

• The fact that a company was recently acquired is no excuse for a weakness in internal controls

• Don’t rely on a materiality test for due diligence. Side agreements don’t need to impact revenue to result in a material weakness

• The SEC hot buttons apply to consolidated subsidiaries, even if they’ve just been acquired

• The acquired business can trigger segment reporting

The Impact Of SOX On M&A Transactions For Both Sellers And Buyers

Be aware that the accountants have become more active since SOX

• Don’t assume they will accept prior auditors’ determinations

• Don’t assume a minor error won’t become a major problem

Make sure your pro-forma projections reflect• Added compliance costs

• Increased stock compensation expense

Expect negotiation over expansion of representations and warranties

Recognize that the cost and time to completion will be longer

An Overview Of Cross-Border Mergers And Acquisitions

Thank You Bruce Mann

The International Law Firm for Israeli Companies

Visit us at www.mofo.com/israel (English) or www.mofo.co.il (Hebrew)