Positioning the Company for an Exit - Chapman - Mar 14
1. POSITIONING THE
COMPANY FOR AN EXIT:
A Primer on IPOs and
Mergers and Acquisitions
SANTA CLARA UNIVERSITY SCHOOL OF LAW
March 18, 2014
James C. Chapman
Partner, Bingham McCutchen LLP
2. Outlook for 2014
• Deal activity expected to be solid in
2014 —
63 percent of respondents in KPMG
study expect to make an acquisition in
2014
• Companies hold large amounts of
cash
• Interest rates remain at historic lows
— Availability of cheap credit
• Pent up demand — 2012 and 2013
were disappointing years
• Opportunities in emerging markets
• Strong equity markets
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3. Factors Motivating Today’s Deals
• Being opportunistic
• Expand customer base
• Expand geographic reach
• Enter new markets
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4. Important Factors for Success
• Well-executed integration plan
• Correct valuation/deal price
• Effective due diligence
• Positive economic conditions
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5. Most Active Industries
• Technology
• Telecom and Media
• Healthcare
• Pharmaceuticals and Life Sciences
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6. Advising the Client
Who is the client?
How do you advise an early stage company
regarding an M&A or IPO strategy?
• Build to sell
• Build a good company and they will come
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7. The M&A Process:
Preparing the Business for Sale
• Remove assets which seller wishes to retain or which
may be objectionable to the buyer including
condominiums or vacation homes, automobiles, or other
company owned items
• Ensure that the financial and corporate records are in
good order
• Seller should have up-to-date minutes of the meetings of
the board of directors and a validly-elected board of
directors
• Settle lawsuits or terminate unfavorable contracts before
the seller's adversaries see the potential sale as added
leverage
• Thoroughly clean and organize the premises
• Ensure that all shares of stock required to be issued
have been issued and that all verbal agreements
regarding future ownership are either honored or
terminated in writing
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8. • Develop a comprehensive list of all of the seller's
assets
• Create a list of all necessary governmental permits
• Document all loans to or from shareholders and
employees
• Review the development of the company's
technology to determine that no others have any
ownership rights
• Compiling a list of the company's patents,
trademarks and copyrights
• Compile information regarding the company's
product and/or service warranties and warranty
claims
• Compile information regarding the presence, use,
storage and disposal of hazardous materials
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The M&A Process:
Preparing the Business for Sale
9. Letters of Intent
Determine if the parties can agree on the
structure and business points of a transaction
prior to spending substantial amounts of time,
energy and money conducting due diligence and
preparing formal documentation.
• Provide a summary of the proposed business
arrangement
• Fix a timetable for completing the transaction (which
can be particularly helpful in complex transactions)
• Identify the various contracts included in the
transaction such as employment or consulting
agreements, license agreements or severance
arrangements
• Identify conditions to closing the transaction such as
obtaining financing and buyers due diligence review
• Measure of commitment
• Psychological effect on future negotiations
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10. Under California law, the parties are bound by a
letter of intent if they intend to be bound.
Texaco Inc. v. Pennzoil — The court upheld a jury
verdict of $10 billion against Texaco. A short
description of this case illustrates the pitfall of
neglecting this issue.
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Letters of Intent ‒ Enforceability
14. Challenging Issues
• Consideration
• Cash
• Notes — Seller financing
• Stock
• Earnout — Appear in
38 percent of deals
• Representations
• 23 percent — Actual Knowledge
• 73 percent — Constructive Knowledge
(68 percent in 2008 / 61 percent in 2006)
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15. • Indemnification
• Triggering events — Breach of
representations, failure of
performance
• Basket
• Basket as a percentage of the
deal value
• Cap on Indemnity — Cap
amounts as a percentage of
deal value
• Survival
• Escrow — Holdbacks
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Challenging Issues
16. Common Mistakes by Sellers
• Sellers fail to prepare themselves
for the time and emotional
commitment required.
• Sellers fail to adequately prepare
the business for sale.
• Sellers treat buyers as friends.
• Sellers convince themselves that
the transaction is completed when
it has only just begun.
• Sellers fail to develop a
negotiation strategy prior to
beginning negotiations.
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17. • Sellers believe that buyer’s
attorneys are acting
independently
• Sellers are not prepared for
due diligence and respond
poorly
• Sellers work on joint projects
with the buyer prior to closing
• Sellers run out of cash during
the negotiations
• Sellers cut corners
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Common Mistakes by Sellers
18. What is an IPO?
The process of offering the securities of a private
company, generally common stock, for sale to the
general public for the first time.
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19. Advising the Client — IPO
• How do you advise an early stage
company regarding an IPO strategy?
• The decision to conduct an IPO is
monumental.
• Early in the company’s life, no corner may be
cut
• It forever changes the way a company does
business — before and after the IPO
• It may give the company access to deeper
sources of capital than a private company
• The IPO process is expensive and time
consuming
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20. “Going public is like standing in front of an X-Ray
machine forever. You are completely exposed.
Everything about the business is in the public domain
and in front of the competition.”
— Anonymous CEO
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21. Trends in IPOs
• 2013 was a banner year — 82 VC-
backed companies raised $11.25
billion
• 2013 biggest year for internet IPOs
since 2000 (Twitter raised $1.82
billion)
• Institutional investors are more
receptive — IPOs as a class traded up
64 percent through the end of the year
• 2012 IPOs — Average tech IPO is up
170 percent from the offering price
• Pipeline is robust
• Companies are preparing earlier
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22. Factors Affecting the IPO Market
• Economic conditions — Economic growth is a key
determinant of strength of the capital markets
• Capital market conditions — Need stable robust
capital markets
• Geopolitical factors — European debt crisis; Iran/Arab
spring
• Regulatory environment — Favorable vs. hostile
• Venture capital pipeline — Pool of IPO candidates
impacted by trends in venture capital
• Private equity impact — PE firms seek to
divest companies through the IPO process
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23. Profile of Successful IPO Candidates
• Outstanding management — Every company going IPO needs
experienced and talented management with high integrity, a vision
for the future, tremendous energy and courage and proven ability
to execute
• Market differentiation — A superior product, technology or service
in a large growing market
• Substantial revenues — At least $50–$75 million in annual revenue
• Revenue growth — Consistent and strong revenue growth of 25
percent or more annually
• Profitability — Track record of earnings and ability to grow or
protect profit margins
• Market capitalization — Potential market capitalization of $500
million to facilitate the development of a robust trading market
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24. IPO Process
• Prepare the company for the process — 6–12
months before IPO
• Interview and select underwriter — Quiet
period begins
• Clean-up financial statements — Resolve
any accounting issues
• Audit prior years’ financial statements
• Prepare for due diligence process
• Fill any holes in the management team
• Conduct due diligence — Led by the underwriter
and its legal counsel
• Prepare registration statement — Usually on
Form S-1 Company legal counsel
• Prepare FINRA filing — UW legal counsel
• Prepare Blue Sky filings — Company legal
counsel 24
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IPO Process
• File Registration Statement with the SEC
• SEC and FINRA will comment on registration
statement
• Respond to comments
• Road Show — 20 days before effective date
of registration statement
• Respond to final SEC comments and get them
resolved
• Update financial statements to respond to SEC
comments
• File pricing amendment 1–10 days before
effective date
• Auditor delivers audit opinion/comfort letter
• Underwriting syndicate is formed
26. • Due diligence completed
• Execute underwriting agreement — On offering
day
• Print final registration statement and
prospectus
• SEC declares offering effective
• FINRA declares no objection
• Provide stock certificates 5–7 days after launch
• Collect proceeds
• Deliver documents and legal opinions —
Company counsel
• Auditor delivers bring-down comfort letter
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IPO Process
27. Key Players in an IPO
• Company — Management, especially CEO and CFO
• Legal counsel for the company
• Lead underwriter
• Underwriter’s legal counsel
• Company independent auditor
• Advisory accountant
• Financial printer
• SEC
• FINRA
• State securities regulators
• Stock exchange — NYSE, NASDAQ
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James C. Chapman, Partner
Bingham McCutchen LLP
Jim is a corporate and securities lawyer focusing on start-up and emerging
publicly traded and privately held companies looking to expand domestically and
internationally and the venture capitalists, private equity groups and angels that
invest in them.
He has been involved in approximately 250 mergers, acquisitions and finance
transactions and is the author of approximately 50 articles on issues related to
raising venture capital, mergers and acquisitions, start-ups, doing business in
China and other topics.
Jim has been recognized by Legal 500 as one of the best lawyers in the U.S. for
mergers and acquisitions, and was named one of the Top 25 Clean Tech Lawyers
in California by the Daily Journal.
james.chapman@bingham.com
