foley’s m&a briefing series · 2019. 4. 17. · – ada amended effective january 2009 –...

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©2009 Foley & Lardner LLP • Attorney Advertising • Prior results do not guarantee a similar outcome • Models used are not clients but may be representative of clients • 321 N. Clark Street, Suite 2800, Chicago, IL 60654 • 312.832.4500

Foley’s M&A Briefing SeriesAn Exchange to Power Your M&A Deals

For Audio Participation Dial: 1.866.283.8243 – Passcode: *1349975*

Greenhill©2009 Foley & Lardner LLP

Due Diligence After the Recent Financial Crisis

6.23.09

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©2009 Foley & Lardner LLPGreenhill

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Due Diligence After the Recent Financial Crisis

Outline of Topics– Market Trends

– Distressed M&A

– Hot Topics

– Considerations for Practitioners

– Q&A

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Market TrendsPre Crisis: Liquidity/Leverage Bubble Drove Transactions

Leverage Bubble

Liquidity Bubble

Global Monthly LBO Activity

Historical Levels of M&A Activity

$0

$50

$100

$150

$200

1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 $0

$20

$40

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May-06 Jul-06 Sep-06 Nov-06 Jan-07 Mar-07 May-07LBO Volume Trailing 4-Month Average

$0

$100

$200

$300

$400

$500

$600

Q10

3Q

203

Q30

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Q30

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($ billions)

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2002 2003 2004 2005 2006 2007

(Option Adjusted Spread, bps)

($ billions) ($ billions)

Total Leveraged Loan Volume

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Market TrendsPost Crisis: Lack of Liquidity / Increased Volatility

Constrains Deal Flow

Severe Volatility

Increased Borrowing Costs

Global Monthly LBO Activity

Historical Levels of M&A Activity

$0

$20

$40

$60

$80

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$120

$140

May-06 Nov-06 May-07 Nov-07 May-08 Nov-08 May-09LBO Volume Trailing 4-Month Average

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0

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1950 - 2000 2000 - 2006 1Q08 - 3Q08 4Q08 1Q09 - 2Q09

Day

s

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Q10

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($ billions)

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Oct-06 Feb-07 Jun-07 Oct-07 Feb-08 Jun-08 Oct-080

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LIBOR-OIS Spread (LHS) CBOE Volatility Index (RHS)

(Basis Points) (CBOE Volatility Index)

Days S&P 500 has moved up or down 5% intraday

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Market TrendsSigns of Improvement

Spreads Tightening Investment Grade Markets Thawing

Equity Market Bounce-Back (Indexed to 100)

May-07 Oct-07 Feb-08 Jul-08 Dec-08 May-090

500

1,000

1,500

2,000

2,500

Opt

ion

Adj

uste

d Sp

read

(bps

)

2.0%

2.5%

3.0%

3.5%

4.0%

4.5%

5.0%

5.5%

Yiel

d to

Wor

st (%

)

US 10 Year Treasury Investment Grade SpreadHigh Yield Spread

$0

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Jun-07 Oct-07 Feb-08 Jun-08 Oct-08 Feb-09Tr

ansa

ctio

n Vo

lum

e ($

bn)

40.050.060.070.080.090.0

100.0110.0120.0

Jan-07 Apr-07 Jul-07 Oct-07 Jan-08 Apr-08 Jul-08 Oct-08 Jan-09 Apr-09

S&P 500 FTSE 100 Nikkei 250

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Market TrendsFewer Traditional M&A Processes

Potential sellers unwilling to initiate sale processes absent distress– Severely impacted operational results– Low equity market valuations– Lack of liquidity / refinancing alternatives

Potential acquirers also facing market challenges– Strategic buyers focused on managing core business / conserving cash

Will be opportunistic where possible without sacrificing the health of the balance sheet“Poison Puts” / CofC can present challenges to all but the healthiest buyers

– Financial buyers sidelinedUnable to initiate processes due to credibility gaps with potential sellers

Some strategic M&A being driven by perception of growing out of challenges

– Stock for stock deals, where both parties benefit in upside fromdepressed values

– Private buyers at disadvantage absent seller earnouts to bridge valuation gap

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Market TrendsActive Processes Taking Longer to Accomplish

Buyers seeking absolute assurance on asset quality prior to signing

– Risk aversion driven by market uncertainty– Additional clarity from Delaware courts on ability to claim

MACs post-signing

Each side hopes to benefit from additional time– Sellers hoping for a market upturn– Buyers looking for continued value declines

Financing process extended by potential lenders– Lender due diligence– Negotiating commitments

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Market TrendsStandard M&A Processes

Increased focus by principals on due diligence– No room for error

Unlikely to mask missed synergies with revenue growthReturns through execution, not financial engineering

– Focus on historical results, including through previous recessions

Determining “run rate” business performance

– Projections focused on near-term, post-announcement results

– Synergies limited to realistic, defensible cost-cutting initiatives

E.g., operating expenses, capital expenditures

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Market TrendsIncreased Lender Scrutiny

Financing sources further complicate transaction processesRegulators being tougher on banksShift from cash-flow to asset-based loansLender due diligence– Vendor/Customer solvency issues– Counterparty on-site review/asset verification– Valuation concerns– Timing considerations

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Distressed M&AInitial Considerations

Increased due diligence process speed– Cash-flow dynamics

– Court imposed deadlines

– Deterioration risk for seller’s business and relationships

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Distressed M&AInitial Considerations (cont’d)

Identifying a distressed seller– Ratings downgrades

– Near term expiry of credit

– Complex capital structure

– Pendency of significant regulatory investigations or decisions

– Discord with auditors

– Changes in senior management

– “Borrowing” from 401(k) contribution and/or trust fund employment taxes

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Distressed M&ANon-Bankruptcy

Determination of level of seller distress

Challenges to sale– Risk of seller bankruptcy

– Fairness opinions

Indemnity concerns and heightened due diligence

Increased risk in connection with successor liability issues

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Distressed M&AChapter 11 Sales

Assets taken free and clear of liens

Termination of reps and warranties at closing

Use of due diligence to define scope– Assumption/rejection of contracts

– Cure costs

– Identification of assets/liabilities

– Indemnity escrows

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Distressed M&AKey Due Diligence Items

Which contracts are critical and what are the associated cure costs?

Which vendors/customers are crucial to seller’s business?

Identification of key employees

Identification of seller’s creditors and committee representation

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Hot TopicsRecent Accounting Pronouncements

FAS 141R effective as of December 15, 2008Previously, transaction expenses, including fees paid to investment banks, attorneys and consultants, were included in goodwill and capitalizedUnder new accounting guidelines, all transaction costs expensed when incurredMay cause indirect disclosure or rumors of possible acquisition activity as financial statements indicate a spike in expenses

– Likely a transitional issue for most active market participants

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Hot TopicsPension Liabilities

Historical contribution numbers no longer relevant– Pension Protection Act of 2006 tightened

funding requirements.

– Significant decrease in market value of plan assets

– Future funding requirements likely to be significantly increased

– Actuarial analysis crucial

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Hot TopicsPension Liabilities (cont’d)

Multi-Employer Plans– Traditional focus on seller withdrawal liability

and contracted funding obligations

– Pension Protection Act of 2006 can require adoption of a Funding Improvement Plan (FIP)

– FIP requires negotiation between company and unions

– Actuarial analysis crucial

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Hot TopicsOther Employee Issues

RIFs and other restructuring issues– WARN Act/state WARN Acts notification and obligations– Many states have more stringent WARN Acts

– WARN Act is likely to be amended to capture more layoffs involving fewer employees

– Collective bargaining agreements– Severance/stay bonus liabilities

– Potential EEOC and related claims

Union and unionization issues – the rules and labor environment may be changing

– Employee Free Choice Act may pass Congress this year in some version, which could establish “card check” unionization without NLRB election

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Hot TopicsOther Employee Issues (cont’d)

EEOC claims going forward– Reviewing past and present claims may – or may not – predict

future claims– Lilly Ledbetter Fair Pay Act of 2009 makes past compensation

and benefit discrimination decisions actionable– Scrutiny of compliance efforts need to intensify– ADA amended effective January 2009 – expands disability

definitions

Department of Labor will become more active– Increased emphasis on wage and hour compliance (exempt

classifications, overtime, independent contractors)– OSHA will become more active in both enforcement and new

rulemaking– New FMLA regulations went into effect January 2009– Immigration compliance is likely to become more important

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Hot TopicsEnvironmental Issues

New and heightened regulation and enforcement by Obama EPA

– New greenhouse gas regulations and resulting costs– Stricter enforcement of existing environmental regulations– Vapor Intrusion -- A new environmental risk even at "closed" sites

Greater scrutiny from lenders/other third parties regarding regulatory compliancePhase 1 reviews, without more, may be inadequate for many companies going forwardEnsure that up-to-date environmental advisors are members of the due diligence team

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Hot TopicsAntitrust

Change of tone / policy with the Obama Administration

Affects pre-deal due diligence by parties to accurately measure potential regulatory risks / interloper analyses

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Considerations for PractitionersSell Side – Process to Maximize Value

Recognize trends to more detailed due diligence without sacrificing competitive tension

– Structure – Select potential bidders and include lead financing sources early to ensure bids reflect financeability

– Preparation – Include all relevant materials in the data room at the outset to minimize time consuming information requests

– Execution – Retain / enforce reasonable timeframes to maximize competitive tension

Advisor Focus– Maintaining confidentiality – Protecting the process

Transactions subject to greater scrutiny

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Considerations for PractitionersBuy Side – Risk / Reward Assessment

Tailor diligence to the situation at hand– Assess Strategic Value

“Must Have” – Competitive advantage leveraging familiarity with the asset to minimize diligence needs“Bolt on” / “Adjacency” – Balance need for meaningful diligence with perceived competitive dynamics“Value Driven” – Invest necessary resources / time to ensure ability to capture value

– Size / Financing RequirementsSmall-to-Moderate – Ability to move faster given lower risk profile and absence of third party financing needModerate-to-Large – Diligence level increases with materiality; third party diligence requirements

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Considerations for PractitionersBuy Side – Risk / Reward Assessment (cont’d)

Advisor Focus– Design approach based on client’s

competitive advantageMove swiftly based on familiarity with the asset and relative size

Delay process if competitive tension lacking, and if leverage provides ability to extract greater value

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Thank You

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Foley Presenters

[email protected]

[email protected]

Edwin D. MasonPartner

Ed is a partner and co-chair of Foley's Chicago office Business Law Department. A member of the Transactional & Securities and Private Equity & Venture Capital Practices, he has over 25 years of experience representing clients in complex business transactions.

Steven M. GerenraichPartner

Steve is a partner with Foley & Lardner LLP. He is a member of the firm's Transactional & Securities, Commercial Transactions & Business Counseling, Finance & Financial Institutions, and International Practices. He represents and counsels business owners and entrepreneurs in all areas of commercial activity and corporate operations.

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About Foley

Foley is a highly regarded, national law firm providing client-focused, interdisciplinary services that result in high-value legal counsel for our clients. Our practice areas encompass the full range of corporate legal services, including corporate governance and compliance, securities, mergers and acquisitions, litigation, labor and employment, intellectual property and IP litigation, and tax. Our attorneys are recognized as insightful thought leaders on these and many other of today's most complex business issues.

Foley’s Transactional & Securities practice regularly represents a wide variety of clients, including public and private companies,investment banks, private equity and venture capital funds, special board committees, and lenders, in transactions ranging from small product-line acquisitions to complex multibillion-dollar mergers.

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Greenhill Presenters

[email protected]

Doug JacksonManaging Director

Mr. Jackson joined Greenhill in 2009. Prior to joining Greenhill, Doug was a Managing Director at Lehman Brothers where he spent nine years in the Global Mergers & Acquisitions Group focusing primarily on the Industrial sector. Previously, Doug spent threeyears in the Mergers & Acquisitions Group at Banc of America. Doug began his career as a corporate and securities attorney, most recently at Jenner & Block in Chicago.

[email protected]

Kevin CostantinoVice President

Mr. Costantino joined Greenhill in 2005. Prior to joining Greenhill, he practiced corporate and securities law at Wachtell, Lipton, Rosen & Katz. Kevin received a B.B.A. with high distinction fromthe University of Michigan as well as a J.D., magna cum laude, in 2000 from the University of Michigan Law School, where he was an editor of the Michigan Law Review and member of the Order of the Coif.

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About GreenhillGreenhill is fully-focused on the advisory business, providing merger, acquisition and restructuring advice to leading businesses around the world

– We provide our clients with completely objective advice, without conflicts of interest

Greenhill has among the most experienced group of managing directors in the industry

– Our business model allows us to dedicate the necessary senior-level attention to clients– Over 60 managing directors worldwide

Greenhill has advised on many of the most important M&A and restructuring transactions

Acquisition of

$1.6 billionMarch 2009

Landmark Healthcare Transaction

Acquisition of the Outstanding Public Interest in

$47 billionMarch 2009

Landmark Chemical Transaction

Largest US Airline Merger

Merger with

$18 billionOctober 2008

Landmark Foodservice Transaction

Acquisition by

$3 billionSeptember 2008

foley’s m&a briefing series · 2019. 4. 17. · – ada amended effective january 2009 –...

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