By BENJAMIN MARK COLE
Think you work long hours? Try putting together a deal.
"I spent nine straight days in the office, working on a health care-industry deal," said Brian McCarthy, partner and mergers-and-acquisitions expert in the downtown offices of law firm Skadden Arps Slate Meagher & Flom. "When I slept, it was on the couch. That's when you go to Brooks Brothers and buy new socks and shirts." On-site showers also kept McCarthy in action.
Why the manic pace and long hours? Once the fundamentals of a deal are agreed upon, it behooves everybody lawyers, investment bankers, proxy solicitors, accountants and the principals themselves to finish the transaction speedily.
"There is always something that can go wrong; things can get leaked prematurely, the breaking of confidentiality," said David Dennis, managing director and co-head of Donaldson, Lufkin & Jenrette Securities Corp.'s Century City offices. "It's better not to waste time."
The longer a deal is floating around undone, the greater chance that an unforeseen event, or another buyer, will happen along and upset the apple cart.
"Dealmaking is pretty much a round-the-clock activity," said John Hartigan, managing partner in the Los Angeles office of Morgan Lewis & Bockius, and an M & A; expert. "If clients agree to some of the fundamentals of a deal, the general attitude is to move as quickly as possible, to get as much buttoned down as soon as possible."
Also, economic conditions can change, lowering a target company's value, or even the value of the acquiring company's stock, which is often used to make an acquisition.
"Sometimes a buyer will wait for another quarter's financials; if they don't come in as expected, it can cause the buyer to take a hard second look at the transaction," said Mark Vidergauz, managing partner in the Los Angeles offices of ING Barings, an international investment banking firm.
For investment bankers, of course, there is the incentive of the "contingent fee." They don't get paid until or unless the deal is done.
"That's why investment bankers will run through brick walls to get the deal done," said John Mavredakis, managing director for Houlihan Lokey Howard & Zukin in Century City, an investment banking shop. "We are not just running up hourly bills."
A merger transaction usually starts with an idea, an inkling in the mind of a chief executive or an investment banker, that a certain business combination or transaction would make financial sense.
"In my case, it's about equal. About half the time I have the idea, and about half the time I'll get a call from a client who says something like, 'Here's a list of a half-dozen companies, one of which we want to buy. Make it happen.' The idea for a deal can start almost anywhere," said Mavredakis.
Often times, the investment banker is virtually entrepreneurial in creating a deal.
For example, banker Vidergauz recently determined that a major public company appeared to be preparing to sell off non-core divisions.
Privately, he perused the company's assets, and determined which divisions would likely be for sale. Then he approached an East Coast equity fund, and told it of the potential for buying one of the non-core divisions. The equity fund looked over Vidergauz's recommendations and is now willing to buy the division, he said.
As of last week, Vidergauz had prepared a "letter of intent" to fax, and then send by hand carrier, to the target company.
The letter of intent informs the target company of the interest in buying the division, and reveals the identities of the buyers and bankers.
Frequently, the letter of intent is the first news many publicly held target companies get that a buyer is interested.
Sometimes, common acquaintances or professional advisers serve as informal conduits, or one executive might simply pick up the phone and call another executive to broach the topic of a corporate marriage. Board members also serve as messengers, at least informally, before an actual letter is sent.
"Board members can be very helpful in the process, because of their senior position," said Vidergauz.
Once the target company is notified, much of how a deal unfolds depends on whether the business is publicly held in which case, proper disclosure to the Securities and Exchange Commission is a key concern.
When Charles Rinehart, chief executive of Irwindale-based H.F. Ahmanson & Co. (a publicly held thrift) last year wanted to buy Chatsworth-based Great Western Financial Corp. (another publicly held thrift), no feelers went out to mutual acquaintances.
Rinehart constructed a proposal with the help of Ahmanson's lawyers and investment bankers, and launched a buyout bid. John Maher, chief executive of Great Western, learned of the offer at an airport, where Rinehart had reached him by telephone.
Maher and Great Western successfully fought off that hostile bid by agreeing to a friendly takeover by Washington Mutual Inc.
Such hostile deals are less common now than in the 1980s. Today, most deals are friendly, although negotiations to "get the best deal" still put players at opposite ends of a table.
In general, after an acquiring party has learned that management of a target company is at least receptive to the idea, an initial "letter of intent" is sent, indicating buyer interest, and usually seeking a period for exclusive negotiations.
Generally, the letter of intent also asks for access to financial, legal and other detailed information to assist the buyer in formulating a more precise bid, in terms of price and structure.
The seller usually will grant a period of exclusivity several weeks or months, depending on the size and complexity of a deal before a second, more concrete offer has to be put on the table.
At this stage, accurately determining a company's worth always an art is the task at hand.
Accountants and other experts are brought in to perform "due diligence" on the target company. They will scour books and records looking for any pitfalls in the enterprise, to figure out if receivables are real, or if the customer list is as diverse as stated, or if toxic waste lurks on target properties.
Buyouts of similar companies "comparables" are scrutinized, and various computer models are run.
A big task is to evaluate "the quality of earnings," said Bob Partridge, partner in the M & A; due diligence/advisory group of Ernst & Young LLP in Century City. Many companies use different accounting standards, and sometimes earnings can be bloated by one-time events, inadequate reserving against future expenses, or many other accounting gimmicks.
Determining how to minimize taxes during and after the transaction is also a key role for accountants and tax lawyers, said Partridge.
Investment bankers weigh in with what the market will bear can debt or equity be issued to finance the transaction Once against the risk.
After the due diligence is performed, the hard part of negotiating a deal comes into play.
The advantage, which originally rests with the seller who perhaps had more than one suitor sometimes may swing to the buyer, said Vidergauz.
"Toward the end of a deal, which has been enormously time-consuming, the fact that a company is for sale may have leaked. There has been the investment in legal fees and other costs and there is the emotional impact (on the owner contemplating the sale)," said Vidergauz. "Where there were many bidders, now there is one. Employees may know that the company has been for sale, and may suspect if the deal falls through, it will be put up for sale again, (lessening loyalty)."
The fact that a "buyer backed out" might raise doubts about a seller's quality.
If, at last, a price and structure are agreed upon, the final phase is the drafting of documents transferring ownership, and informing of relevant regulatory and tax agencies of the change.
Fortunately for all involved, the brisk pace of dealmaking has created "templates" for action, said Hartigan of Morgan Lewis & Bockius.
"To the extent you can point to other, similar transactions, and note how they were done, the process is faster," said Hartigan. "You may have templates in place that you did not have 20 years ago. But you can still find yourself in the office all night."
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