Teaser

The teaser is the first marketing document presented to prospective buyers. It is designed to inform buyers and generate sufficient interest for them to do further work and potentially submit a bid. The teaser is generally a brief one- or two-page synopsis of the target, including a company overview, investment highlights, and summary financial information. It also contains contact information for the bankers running the sell-side process so that interested parties may respond.

Teasers vary in terms of format and content in accordance with the target, sector, sale process, advisor, and potential seller sensitivities. For public companies, Regulation FD concerns govern the content of the teaser (i.e., no material non-public information) as well as the nature of the buyer contacts themselves.⁸ Exhibit 6.4 displays an illustrative teaser template as might be presented to prospective buyers.

Confidential Information Memorandum

The CIM is a detailed written description of the target (often 50+ pages) that serves as the primary marketing document for the target in an auction. The deal team, in collaboration with the target's management, spends significant time and resources drafting the CIM before it is deemed ready for distribution to prospective buyers. In the event the seller is a financial sponsor (e.g., selling a portfolio company), the sponsor's investment professionals typically also provide input.

Like teasers, CIMs vary in terms of format and content depending on situation-specific circumstances. There are, however, certain generally accepted guidelines for content, as reflected in Exhibit 6.5. The CIM typically contains an executive summary, investment considerations, and detailed information about the target, as well as its sector, customers and suppliers (often presented on an anonymous basis), operations, facilities, management, and employees. A modified version of the CIM may be prepared for designated strategic buyers, namely competitors with whom the seller may be concerned about sharing certain sensitive information.

Financial Information

The CIM contains a detailed financial section presenting historical and projected financial information with accompanying narrative explaining both past and expected future performance (MD&A). This data forms the basis for the preliminary valuation analysis performed by prospective buyers.

Consequently, the deal team spends a great deal of time working with the target's CFO, treasurer, and/or finance team (and division heads, as appropriate) on the CIM's financial section. This process involves normalizing the historical financials (e.g., for acquisitions, divestitures, and other one-time and/or extraordinary items) and crafting an accompanying MD&A. The sell-side advisor also helps develop a set of projections, typically five years in length, as well as supporting assumptions and narrative. Given the importance of the projections in framing valuation, prospective buyers subject them to intense scrutiny. Therefore, the sell-side advisor must gain sufficient comfort that the numbers are realistic and defensible in the face of potential buyer skepticism.

In some cases, the CIM provides additional financial information to help guide buyers toward potential growth/acquisition scenarios for the target. For example, the sell-side advisor may work with management to compile a list of potential acquisition opportunities for inclusion in the CIM (typically on an anonymous basis), including their incremental sales and EBITDA contributions. This information is designed to provide potential buyers with perspective on the potential upside represented by using the target as a growth platform so they can craft their bids accordingly.

Prepare Confidentiality Agreement

A confidentiality agreement (CA) is a legally binding contract between the target and prospective buyers that governs the sharing of confidential company information. The CA is typically drafted by the target's counsel and distributed to prospective buyers along with the teaser, with the understanding that the receipt of more detailed information is conditioned on execution of the CA.

A typical CA includes provisions governing the following:

• Use of information – states that all information furnished by the seller, whether oral or written, is considered proprietary information and should be treated as confidential and used solely to make a decision regarding the proposed transaction
• Term – designates the time period during which the confidentiality restrictions remain in effect⁹
• Permitted disclosures – outlines under what limited circumstances the prospective buyer is permitted to disclose the confidential information provided; also prohibits disclosure that the two parties are in negotiations
• Return of confidential information – mandates the return or destruction of all provided documents once the prospective buyer exits the process
• Non-solicitation/no hire – prevents prospective buyers from soliciting to hire (or hiring) target employees for a designated time period
• Standstill agreement¹⁰ – for public targets, precludes prospective buyers from making unsolicited offers or purchases of the target's shares, or seeking to control/influence the target's management, board of directors, or policies
• Restrictions on clubbing – prevents prospective buyers from collaborating with each other or with outside financial sponsors/equity providers without the prior consent of the target (in order to preserve a competitive environment)

Contact Prospective Buyers

The first round begins with the contacting of prospective buyers, which marks the formal launch of the auction process. This typically takes the form of a scripted phone call to each prospective buyer by a senior member of the sell-side advisory deal team (either an M&A banker or the coverage banker that maintains the relationship with the particular buyer), followed by the delivery of the teaser and CA.¹¹ The sell-side advisor generally keeps a detailed record of all interactions with prospective buyers, called a contact log, which is used as a tool to monitor a buyer's activity level and provide a record of the process.

Negotiate and Execute Confidentiality Agreement with Interested Parties

Upon receipt of the CA, a prospective buyer presents the document to its legal counsel for review. In the likely event there are comments, the buyer's counsel and seller's counsel negotiate the CA with input from their respective clients. Following execution of the CA, the sell-side advisor is legally able to distribute the CIM and initial bid procedures letter to a prospective buyer.¹²

Distribute Confidential Information Memorandum and Initial Bid
Procedures Letter

Prospective buyers are typically given several weeks to review the CIM,¹³ study the target and its sector, and conduct preliminary financial analysis prior to submitting their initial non-binding bids. During this period, the sell-side advisor maintains a dialogue with the prospective buyers, often providing additional color, guidance, and materials, as appropriate, on a case-by-case basis.

Depending on their level of interest, prospective buyers may also engage investment banks (as M&A buy-side advisors and/or financing providers), other external financing sources, and consultants at this stage. Buy-side advisors play an important role in helping their client, whether a strategic buyer or a financial sponsor, assess the target from a valuation perspective and determine a competitive initial bid price. Financing sources help assess both the buyer's and target's ability to support a given capital structure and provide their clients with data points on amounts, terms, and availability of financing. This financing data is used to help frame the valuation analysis performed by the buyer. Consultants provide perspective on key business and market opportunities, as well as potential risks and areas of operational improvement for the target.

Initial Bid Procedures Letter

The initial bid procedures letter, which is typically sent out to prospective buyers following distribution of the CIM, states the date and time by which interested parties must submit their written, non-binding preliminary indications of interest (“first round bids”). It also defines the exact information that should be included in the bid, such as:

• Indicative purchase price (typically presented as a range) and form of consideration (cash vs. stock mix)¹⁴
• Key assumptions to arrive at the stated purchase price
• Structural and other considerations
• Information on financing sources
• Treatment of management and employees
• Timing for completing a deal and diligence that must be performed
• Key conditions to signing and closing
• Required approvals
• Buyer contact information

Prepare Management Presentation

The management presentation is typically structured as a slideshow with accompanying hardcopy handout. The sell-side advisor takes the lead on preparing these materials with substantial input from management. In parallel, the sell-side advisor works with the management team to determine the speaker lineup for the presentation, as well as key messages, and the preparation of answers for likely questions. Depending on the management team, the rehearsal process for the presentations (“dry runs”) may be intense and time-consuming. The management presentation slideshow needs to be completed by the start of the second round when the actual meetings with buyers begin.

The presentation format generally maps to that of the CIM, but is more crisp and concise. It also tends to contain an additional level of detail, analysis, and insight more conducive to an interactive session with management and later-stage due diligence. A typical management presentation outline is shown in Exhibit 6.6.

Set up Data Room

The data room serves as the hub for the buyer due diligence that takes place in the second round of the process. It is a location, typically online, where comprehensive, detailed information about the target is stored, catalogued, and made available to pre-screened bidders.¹⁵ A well-organized data room facilitates buyer due diligence, helps keep the sale process on schedule, and inspires confidence in bidders. While most data rooms follow certain basic guidelines, they may vary greatly in terms of content and accessibility depending on the company and confidentiality concerns.

Data rooms, such as those provided by Intralinks, generally contain a broad base of essential company information, documentation, and analyses. In essence, the data room is designed to provide a comprehensive set of information relevant for buyers to make an informed investment decision about the target, such as detailed financial reports, industry reports, and consulting studies. It also contains detailed company-specific information such as customer and supplier lists, labor contracts, purchase contracts, description and terms of outstanding debt, lease and pension contracts, and environmental compliance certification (see Exhibit 6.7). At the same time, the content must reflect any concerns over sharing sensitive data for competitive reasons.¹⁶

The data room also allows the buyer (together with its legal counsel, accountants, and other advisors) to perform more detailed confirmatory due diligence prior to consummating a transaction. This due diligence includes reviewing charters/bylaws, outstanding litigation, regulatory information, environmental reports, and property deeds, for example. It is typically conducted only after a buyer has decided to seriously pursue the acquisition.

The sell-side bankers work closely with the target's legal counsel and selected employees to organize, populate, and manage the data room. While the data room is continuously updated and refreshed with new information throughout the auction, the aim is to have a basic data foundation in place by the start of the second round. Access to the data room is typically granted to those buyers that move forward after first round bids, prior to, or coinciding with, their attendance at the management presentation.

Prepare Stapled Financing Package

The investment bank running the auction process (or sometimes a “partner” bank) may prepare a “pre-packaged” financing structure in support of the target being sold. The staple is targeted toward financial sponsor buyers and is typically only provided for private companies.¹⁷ Although prospective buyers are not required to use the staple, historically it has positioned the sell-side advisor to play a role in the deal's financing. Often, however, buyers seek their own financing sources to match or “beat” the staple. Alternatively, certain buyers may choose to use less leverage than provided by the staple.

To avoid a potential conflict of interest, the investment bank running the M&A sell-side sets up a separate financing team distinct from the sell-side advisory team to run the staple process. This financing team is tasked with providing an objective assessment of the target's leverage capacity. They conduct due diligence and financial analysis separately from (but often in parallel with) the M&A team and craft a viable financing structure that is presented to the bank's internal credit committee for approval. This financing package is then presented to the seller for sign-off, after which it is offered to prospective buyers as part of the sale process.

The basic terms of the staple are typically communicated verbally to buyers in advance of the first round bid date so they can use that information to help frame their bids. Staple term sheets and/or actual financing commitments are not provided until later in the auction's second round, prior to submission of final bids. Those investment banks without debt underwriting capabilities (e.g., middle market or boutique investment banks) may pair up with a partner bank capable of providing a staple, if requested by the client.

While buyers are not obligated to use the staple, it is designed to send a strong signal of support from the sell-side bank and provide comfort that the necessary financing will be available to buyers for the acquisition. The staple may also compress the timing between the start of the auction's second round and signing of a definitive agreement by eliminating duplicate buyer financing due diligence. To some extent, the staple may serve to establish a valuation floor for the target by setting a leverage level that can be used as the basis for extrapolating a purchase price. For example, a staple offering debt financing equal to 5x LTM EBITDA with a 30% minimum equity contribution would imply a purchase price of approximately 7.25x LTM EBITDA.

Receive Initial Bids and Select Buyers to Proceed to Second Round

On the first round bid date, the sell-side advisor receives the initial indications of interest from prospective buyers. Over the next few days, the deal team conducts a thorough analysis of the bids received, assessing indicative purchase price as well as key deal terms and other stated conditions. There may also be dialogue with certain buyers at this point, typically focused on seeking clarification on key bid points.

An effective sell-side advisor is able to discern which bids are “real” (i.e., less likely to be re-traded). Furthermore, it may be apparent that certain bidders are simply trying to get a free look at the target without any serious intent to consummate a transaction. As previously discussed, the advisor's past deal experience, specific sector expertise, and knowledge of the given buyer universe is key in this respect.

Once this analysis is completed, the bid information is summarized and presented to the seller along with a recommendation on which buyers to invite to the second round (see Exhibit 6.8 for sample graphical presentation of purchase price ranges from bidders). The final decision regarding which buyers should advance, however, is made by the seller in consultation with its advisors.

Valuation Perspectives – Strategic Buyers vs. Financial Sponsors

As discussed in Chapters 4 and 5, financial sponsors use LBO analysis and the implied IRRs and cash returns, together with guidance from the other methodologies discussed in this book, to frame their purchase price range. The CIM financial projections and an initial assumed financing structure (e.g., a staple, if provided, or indicative terms from a financing provider) form the basis for the sponsor in formulating a first round bid. The sell-side advisor performs its own LBO analysis in parallel to assess the sponsor bids.

While strategic buyers also rely on the fundamental methodologies discussed in this book to establish a valuation range for a potential acquisition target, they typically employ additional techniques. For example, public strategics use accretion/(dilution) analysis to measure the pro forma effects of the transaction on EPS, assuming a given purchase price and financing structure. Therefore, the sell-side advisor performs similar analysis in parallel to determine the maximum price a given buyer may be willing to pay. This requires making assumptions regarding each specific acquirer's financing mix and cost, as well as synergies.

The second round of the auction centers on facilitating the prospective buyers' ability to conduct detailed due diligence and analysis so they can submit strong, final (and ideally) binding bids by the set due date. The diligence process is meant to be exhaustive, typically spanning several weeks, depending on the target's size, sector, geographies, and ownership. The length and nature of the diligence process often differs based on the buyer's profile. A strategic buyer that is a direct competitor of the target, for example, may already have in-depth knowledge of the business and therefore focus on a more limited scope of company-specific information.¹⁸ For a financial sponsor that is unfamiliar with the target and its sector, however, due diligence may take longer. As a result, sponsors often seek professional advice from hired consultants, operational advisors, and other industry experts to assist in their due diligence.

The sell-side advisor plays a central role during the second round by coordinating management presentations and facility site visits, monitoring the data room, and maintaining regular dialogue with prospective buyers. During this period, each prospective buyer is afforded time with senior management, a cornerstone of the due diligence process. The buyers also comb through the target's data room, visit key facilities, conduct follow-up diligence sessions with key company officers, and perform detailed financial and industry analyses. Prospective buyers are given sufficient time to complete their due diligence, secure financing, craft a final bid price and structure, and submit a markup of the draft definitive agreement. At the same time, the sell-side advisor seeks to maintain a competitive atmosphere and keep the process moving by limiting the time available for due diligence, access to management, and ensuring bidders move in accordance with the established schedule.

Conduct Management Presentations

The management presentation typically marks the formal kickoff of the second round, often spanning a full business day. At the presentation, the target's management team presents each prospective buyer with a detailed overview of the company. This involves an in-depth discussion of topics ranging from basic business, industry, and financial information to competitive positioning, future strategy, growth opportunities, synergies (if appropriate), and financial projections. The core team presenting typically consists of the target's CEO, CFO, and key division heads or other operational executives, as appropriate. The presentation is intended to be interactive with Q&A encouraged and expected. It is customary for prospective buyers to bring their investment banking advisors and financing sources, as well as industry and/or operational consultants, to the management presentation so they can conduct their due diligence in parallel and provide insight.

The management presentation is often the buyer's first meeting with management. Therefore, this forum represents a unique opportunity to gain a deeper understanding of the business and its future prospects directly from the individuals who know the company best. Furthermore, the management team itself typically represents a substantial portion of the target's value proposition and is therefore a core diligence item. The presentation is also a chance for prospective buyers to gain a sense of “fit” between themselves and management.

Facilitate Site Visits

Site visits are an essential component of buyer due diligence, providing a firsthand view of the target's operations. Often, the management presentation itself takes place at, or near, a key company facility and includes a site visit as part of the agenda. Prospective buyers may also request visits to multiple sites to better understand the target's business and assets. The typical site visit involves a guided tour of a key target facility, such as a manufacturing plant, distribution center, and/or sales office. The guided tours are generally led by the local manager of the given facility, often accompanied by a sub-set of senior management and a member of the sell-side advisory team. They tend to be highly interactive as key buyer representatives, together with their advisors and consultants, use this opportunity to ask detailed questions about the target's operations. In many cases, the seller does not reveal the true purpose of the site visit as employees outside a selected group of senior managers are often unaware a sale process is underway.

Provide Data Room Access

In conjunction with the management presentation and site visits, prospective buyers are provided access to the data room. As outlined in Exhibit 6.7, the data room contains detailed information about all aspects of the target (e.g., business, financial, accounting, tax, legal, insurance, environmental, information technology, and property). Serious bidders dedicate significant resources to ensure their due diligence is as thorough as possible. They often enlist a full team of accountants, attorneys, consultants, and other functional specialists to conduct a comprehensive investigation of company data. Through rigorous data analysis and interpretation, the buyer seeks to identify the key opportunities and risks presented by the target, thereby framing the acquisition rationale and investment thesis. This process also enables the buyer to identify those outstanding items and issues that should be satisfied prior to submitting a formal bid and/or specifically relating to the seller's proposed definitive agreement.

Some online data rooms allow users to download documents, while others only permit screenshots (that may or may not be printable). Similarly, for physical data rooms, some sellers allow photocopying of documents, while others may only permit transcription. Data room access may be tailored to individual bidders or even specific members of the bidder teams (e.g., limited to legal counsel only). For example, strategic buyers that compete directly with the target may be restricted from viewing sensitive competitive information (e.g., customer and supplier contracts), at least until the later stages when the preferred bidder is selected. The sell-side advisor monitors data room access throughout the process, including the viewing of specific items. This enables them to track buyer interest and activity, draw conclusions, and take action accordingly.

As prospective buyers pore through the data, they identify key issues, opportunities, and risks that require follow-up inquiry. The sell-side advisor plays an active role in this respect, channeling follow-up due diligence requests to the appropriate individuals at the target and facilitating an orderly and timely response.

Distribute Final Bid Procedures Letter and Draft Definitive Agreement

During the second round, the final bid procedures letter is distributed to the remaining prospective buyers often along with the draft definitive agreement. As part of their final bid package, prospective buyers submit a markup of the draft definitive agreement together with a cover letter detailing their proposal in response to the items outlined in the final bid procedures letter.

Final Bid Procedures Letter

Similar to the initial bid procedures letter in the first round, the final bid procedures letter outlines the exact date and guidelines for submitting a final, legally binding bid package. As would be expected, however, the requirements for the final bid are more stringent, including:

• Purchase price details, including the exact dollar amount of the offer and form of purchase consideration (e.g., cash versus stock)¹⁹
• Markup of the draft definitive agreement provided by the seller in a form that the buyer would be willing to sign
• Evidence of committed financing and information on financing sources
• Attestation to completion of due diligence (or very limited confirmatory due diligence required)
• Attestation that the offer is binding and will remain open for a designated period of time
• Required regulatory approvals and timeline for completion
• Board of directors approvals (if appropriate)
• Estimated time to sign and close the transaction
• Buyer contact information

Definitive Agreement

The definitive agreement is a legally binding contract between a buyer and seller detailing the terms and conditions of the sale transaction. In an auction, the first draft is prepared by the seller's legal counsel in collaboration with the seller and its bankers. It is distributed to prospective buyers (and their legal counsel) during the second round—often toward the end of the diligence process. The buyer's counsel then provides specific comments on the draft document (largely informed by the buyer's second round diligence efforts) and submits it as part of the final bid package.

Ideally, the buyer is required to submit a form of revised definitive agreement that it would be willing to sign immediately if the bid is accepted. Often, the buyer's and seller's legal counsel pre-negotiate certain terms in an effort to obtain the most definitive, least conditional revised definitive agreement possible prior to submission to the seller. This aids the seller in evaluating the competing contract terms. Sometimes, however, a prospective buyer refuses to devote legal resources to a specific markup of the definitive agreement until it is informed it has won the auction, instead simply providing an “issues list” in the interim. This can be risky for the seller because it may encourage re-trading on contract terms or tougher negotiations on the agreement after a prospective buyer is identified as the leading or “winning bidder.”

Definitive agreements involving public and private companies differ in terms of content, although the basic format of the document is the same, containing an overview of the transaction structure/deal mechanics, representations and warranties, pre-closing commitments (including covenants), closing conditions, termination provisions, and indemnities (if applicable),²⁰ as well as associated disclosure schedules and exhibits.²¹ Exhibit 6.9 provides an overview of some of the key sections of a definitive agreement.

Receive Final Bids

Upon conclusion of the second round, prospective buyers submit their final bid packages to the sell-side advisor by the date indicated in the final bid procedures letter. These bids are expected to be final with minimal conditionality, or “outs,” such as the need for additional due diligence or firming up of financing commitments. In practice, the sell-side advisor works with viable buyers throughout the second round to firm up their bids as much as possible before submission.

Evaluate Final Bids

The sell-side advisor works together with the seller and its legal counsel to conduct a thorough analysis of the price, structure, and conditionality of the final bids. Purchase price is assessed within the context of the first round bids and the target's recent financial performance, as well as the valuation work performed by the sell-side advisors. The deemed binding nature of each final bid, or lack thereof, is also carefully weighed in assessing its strength. For example, a bid with a superior headline offer price, but significant conditionality, may be deemed weaker than a firmer bid at a lower price. Once this analysis is completed, the seller selects a preferred party or parties with whom to negotiate a definitive agreement.

Negotiate with Preferred Buyer(s)

Often, the sell-side advisor recommends that the seller negotiates with two (or more) parties, especially if the bid packages are relatively close and/or there are issues with the higher bidder's markup of the definitive agreement. Skillful negotiation on the part of the sell-side advisor at this stage can meaningfully improve the final bid terms. While tactics vary broadly, the advisor seeks to maintain a level playing field so as not to advantage one bidder over another and maximize the competitiveness of the final stage of the process. During these final negotiations, the advisor works intensely with the bidders to clear away any remaining confirmatory diligence items (if any) while firming up key terms in the definitive agreement (including price), with the goal of driving one bidder to differentiate itself.

Select Winning Bidder

The sell-side advisor and legal counsel negotiate a final definitive agreement with the winning bidder, which is then presented to the target's board of directors for approval. Not all auctions result in a successful sale. The seller normally reserves the right to reject any and all bids as inadequate at every stage of the process. Similarly, each prospective buyer has the right to withdraw from the process at any time prior to the execution of a binding definitive agreement. An auction that fails to produce a sale is commonly referred to as a “busted” or “failed” process.

Render Fairness Opinion

In response to a proposed offer for a public company, the target's board of directors typically requires a fairness opinion to be rendered as one item for their consideration before making a recommendation on whether to accept the offer and approve the execution of a definitive agreement. For public companies selling divisions or subsidiaries, a fairness opinion may be requested by the board of directors depending on the size and scope of the business being sold. The board of directors of a private company may also require a fairness opinion to be rendered in certain circumstances, especially if the stock of the company is broadly held (i.e., there are a large number of shareholders).

As the name connotes, a fairness opinion is a letter opining on the “fairness” (from a financial point of view) of the consideration offered in a transaction. The opinion letter is supported by detailed analysis and documentation providing an overview of the sale process run (including number of parties contacted and range of bids received), as well as an objective valuation of the target. The valuation analysis typically includes comparable companies, precedent transactions, DCF analysis, and LBO analysis (if applicable), as well as other relevant industry and share price performance benchmarking analyses, including premiums paid (if the target is publicly traded). The supporting analysis also contains a summary of the target's financial performance, including both historical and projected financials, along with key drivers and assumptions on which the valuation is based. Relevant industry information and trends supporting the target's financial assumptions and projections may also be included.

Prior to the delivery of the fairness opinion to the board of directors, the sell-side advisory team must receive approval from its internal fairness opinion committee.²² In a public deal, the fairness opinion and supporting analysis is publicly disclosed and described in detail in the relevant SEC filings (see Chapter 2). Once rendered, the fairness opinion is one consideration for the target's board of directors as they exercise their broader business judgment seeking to fulfill their fiduciary duties with respect to the proposed transaction.

Receive Board Approval and Execute Definitive Agreement

Once the seller's board of directors votes to approve the deal, the definitive agreement is executed by the buyer and seller. A formal transaction announcement agreed to by both parties is made with key deal terms disclosed depending on the situation (see Chapter 2). The two parties then proceed to satisfy all of the closing conditions to the deal, including regulatory and shareholder approvals.

Obtain Necessary Approvals

Regulatory Approval

The primary regulatory approval requirement for the majority of U.S. M&A transactions is made in accordance with the Hart-Scott-Rodino Antitrust Improvements Act of 1976 (the “HSR Act”).²³ Depending on the size of the transaction, the HSR Act requires both parties to an M&A transaction to file respective notifications and report forms with the Federal Trade Commission (FTC) and Antitrust Division of the Department of Justice (DOJ). Companies with significant foreign operations may require approval from comparable foreign regulatory authorities such as the Competition Bureau (Canada) and European Commission (European Union).

The HSR filing is typically made directly following the execution of a definitive agreement. If there are minimal or no antitrust concerns, the parties can consummate the transaction after a 30-day (15-day in the case of tender offers) waiting period has been observed (unless the regulator agrees to shorten this period). Transactions with complex antitrust issues can take considerably longer to clear or may result in a deal not closing because one or more agencies challenge the deal or require undesirable conditions to be met (e.g., the divestiture of a line of business).

Shareholder Approval

One-Step Merger

In a “one-step” merger transaction for public companies, target shareholders vote on whether to approve or reject the proposed transaction at a formal shareholder meeting pursuant to relevant state law. Prior to this meeting, a proxy statement is distributed to shareholders describing the transaction, parties involved, and other important information.²⁴ U.S. public acquirers listed on a major exchange may also need to obtain shareholder approval if stock is being offered as a form of consideration and the new shares issued represent over 20% of the acquirer's pre-deal common shares outstanding. Shareholder approval is typically determined by a majority vote, or 50.1% of the voting stock. Some companies, however, may have corporate charters, or are incorporated in states, that require higher approval levels for certain events, including change of control transactions.

In a one-step merger, the timing from the signing of a definitive agreement to closing may take as little as six weeks, but often takes longer (perhaps three or four months) depending on the size and complexity of the transaction. Typically, the main driver of the timing is the SEC's decision on whether to comment on the public disclosure documents. If the SEC decides to comment on the public disclosure, it can often take six weeks or more to receive comments, respond, and obtain the SEC's approval of the disclosure (sometimes, several months). Additionally, regulatory approvals, such as antitrust, banking, or insurance, can impact the timing of the closing.²⁵

Following the SEC's approval, the documents are mailed to shareholders and a meeting is scheduled to approve the deal, which typically adds a month or more to the timetable. Certain transactions, such as a management buyout or a transaction in which the buyer's shares are being issued to the seller (and, therefore, registered with the SEC), increase the likelihood of an SEC review.

Two-Step Tender Process

Alternatively, a public acquisition can be structured as a “two-step” tender offer²⁶ on either a negotiated or unsolicited basis, followed by a merger. In Step I of the two-step process, the tender offer is made directly to the target's public shareholders with the target's approval pursuant to a definitive agreement.²⁷ The tender offer is conditioned, among other things, on sufficient acceptances to ensure that the buyer will acquire a majority (or supermajority, as appropriate) of the target's shares within 20 business days of launching the offer. If the buyer only succeeds in acquiring a majority (or supermajority, as appropriate) of the shares in the tender offer, it would then have to complete the shareholder meeting and approval mechanics in accordance with a “one-step” merger (with approval assured because of the buyer's majority ownership). However, if the requisite threshold of tendered shares is reached as designed (typically 90%), the acquirer can subsequently consummate a back-end “short form” merger (Step II) to squeeze out the remaining public shareholders without needing to obtain shareholder approval.

In a squeeze out scenario, the entire process can be completed much quicker than in a one-step merger. If the requisite level of shares are tendered, the merger becomes effective shortly afterward (e.g., the same day or within a couple of days). In total, the transaction can be completed in as few as five weeks. However, if the buyer needs to access the public capital markets to finance the transaction, the timing advantage of a tender offer would most likely be lost as such transactions typically take approximately 75 to 90 days to arrange post-signing.

Financing and Closing

In parallel with obtaining all necessary approvals and consents as defined in the definitive agreement, the buyer proceeds to source the necessary capital to fund and close the transaction. This financing process timing may range from relatively instantaneous (e.g., the buyer has necessary cash-on-hand or revolver availability) to several weeks or months for funding that requires access to the capital markets (e.g., bank, bond, and/or equity financing). In the latter scenario, the buyer begins the marketing process for the financing following the signing of the definitive agreement so as to be ready to fund expeditiously once all of the conditions to closing in the definitive agreement are satisfied. The acquirer may also use bridge financing to fund and close the transaction prior to raising permanent debt or equity capital. Once the financing is received and conditions to closing in the definitive agreement are met, the transaction is funded and closed.

Deal Toys

Upon closing of a deal, it is customary for the analyst or associate from the lead investment bank to design a “deal toy,” such as those provided by The Corporate Presence, Inc., the global leader in the custom design and manufacturing of deal toys. The deal toy is meant to commemorate the transaction and is typically presented to the client management team at a closing dinner event.