Transaction Framework Joseph V. Rizzi March, 2013

2 Transaction Framework Strategic Issues Do I make the acquisition? Valuation How much do I pay? Financing How do I pay? Integration Implementation of acquisition Tactics How do I make the offer?

3 Transaction and Structuring Overview Accounting Tax Corporate Law Securities Regulatory and Antitrust Contract Business Plan Transaction Characteristics Financial Preferences Market Conditions Deal Competing Bidders Creditors Rights

4 Transaction and Structuring Overview Accounting Tax Corporate Law Securities Regulatory and Antitrust Contract Business Plan Transaction Characteristics Financial Preferences Market Conditions Deal Competing Bidders Creditors Rights

5 Summary of Complicating Factors Contract Form Consideration Pricing Conditions Repos and Warranties Indemnities Change of Control Covenants Tax Capital Gains to Seller WHT on divs and int Basis NOL’s Interest deductibility Tax treaties Consolidation Exit planning Rating Agencies Regulatory Competing Bids Size Financial Strength Dilution Analysis Strategic Fit Securities Notice S/H Vote Tenders Preemption Rights Triggers Bankruptcy Framework (Inter-creditor Concerns) Subordination Guarantees Corporate Notice Percent by Region/State Lock-Up/Break Up Fee/No Shop Pills/Defenses Merger/Consolidation Antitrust Hart/Scott/Rodino Sherman Act HHI European Commission Monopolies & Mergers Commission Accounting Goodwill Fair Market Value Net Worth Consolidation

6 Complex Corporate Structure Equity #1 Equity #2 European Holding Company United States Holding Company NEWCO United States Target Foreign Operating Subsidiary* Domestic Operating Subsidiary Domestic Operating Subsidiary Domestic Operating Subsidiary Collapsed After Closing Equity Preferred Stock High Yield/Sub Notes Due to the structural nature of Subordination in Europe, bank Debt would be placed at the Operating subsidiary level. Bank Deal with Upstream Guarantee * Tax limitations surrounding guarantees from foreign subs. Guarantee

7 Structure of an LBO Transaction 100% = 30 (equity) + 70 (debt financing) Players LBO financing package Target company (2) Equity 30% LBO funds (1) Banks Hedge funds CLO Senior debt 60% Debt financing 70% Second lien loans 5% Subordinated debt 5% Debt financing 70% Leverage effect =debt/EBITDA =70/12 =5.8 (EBITDA 12%) Mezzanine funds Public Markets High Yield, PIK

8 LBO Fund Fund I (1) LBO fund General Partner Investment A Investment B Investment C Target Holdco I Holdco II OPCO US Investors Exempt US Investors Non US Investors LP A B C (2) Target

9 Negotiated Cash Merger Timeline HSR Review Period (30 Calendar Days) Engage Investment Bankers Prepare Merger Agreement, Stockholders Agreement & HSR Premerger Notification Due Diligence Fairness Opinion Issued and Boards Approve Merger Agreement Arrange Financing Determine Structure (Tax, Accounting, Form, Consideration) Sign Merger Agreement & Stockholders Agreement File HSR Premerger Notification Commence Preparation of Preliminary Proxy Materials (Schedule 14A) Issue Press Release File 8Ks and Schedules 13D File Preliminary Proxy Materials (Schedule 14D) with SEC Print and Mail Proxy Materials To Target Stockholders (Assumes Definitive Proxy Materials Are Available) HSR Waiting Period Expires, Assuming No Second Request Target Stockholder Meeting Close Merger Pre-Commencement Day 1Calendar Week 7 Period (1 Week) Week 2 Day 10 Day 20 Day 30 Day 40

10 Auctions and negotiations differ on five dimensions NegotiationAuction Competition Low or no competition unless target and buyer can convince each other that they have strategic alternatives to a negotiated transaction (e.g., LBO, liquidation, etc.) Highly competitive Structure Few rules and deadlines. Some uncertainty about whether target will be sold at all. Clear rules and deadlines. Strong probability that the target will be sold. Goals and control Controlled by target management. Social issues important. Independent directors control. Price important. FlexibilityHighLow SpeedSlowFast Robert F. Bruner, Copyright © 2007, Used by Permission

11 Due Diligence – Legal –Contingencies: ABB – Accounting: McKesson/HBOC – Business –Licenses –Employment –Leases –EPA – Etc. Earnings Revisions Study (Messod D. Beneish) Typical violations of U.S. GAAP include: – Recording revenues that are fictitious, unearned, or uncertain – Recording fictitious inventory – Improperly capitalizing costs Violators tend to be smaller (by sales and assets), more leveraged, and faster growing. Warning signs include: – Increase in days receivables – Decrease in gross margin – Increase in percentage of total assets represented by assets other the PP&E. – Comparatively hgh rate of sales growth – Increase in percentage of total assets represented by accruals. Making sure you get what you thought you were getting

12 Issues in Structuring a Deal Goal of deal structure should be to maximize value – but different parties have different objectives. Some Buyer Shareholder Objectives: – Minimize after-tax price paid for the acquisition – Minimize the dilution of their pre-merger ownership stake Some Seller Shareholder Objectives: – Maximize after-tax price received – Minimize risk of the offer (for a given dollar value of the deal)

13 Issues in Structuring a Deal Goal of deal structure should be to maximize value – but different parties have different objectives. Some Buyer Shareholder Objectives: – Minimize after-tax price paid for the acquisition – Minimize the dilution of their pre-merger ownership stake Some Seller Shareholder Objectives: – Maximize after-tax price received – Minimize risk of the offer (for a given dollar value of the deal)

14 Deal Terms Price Form of Transaction Form of Payment Control and Governance Social Issues Timing and Deadlines Transaction Hedges

15 Deal Terms - Price Price – Tends to be the focus, but is linked to virtually all other deal terms as well as a number of external influences – Influenced by –Economic cycle –Premiums are higher in buoyant stock market conditions –Current target stock price –Comparable deal premiums

16 Interplay of Price and Range Financial Terms Non-Financial Terms Seller’s Min Terms Buyer’s Max Terms

17 Price/Premium Paid Does the price/premium paid really matter if the acquirer is offering its own stock to pay for the deal? Time Warner – AOL

18 Deal Terms – Form of Transaction Form of Transaction – Influencing Factors – Taxable or Tax Deferred –What are the tax consequences for buyer and seller? Is seller subject to double taxation? – Risk Exposure –Does the structure isolate the hidden liabilities of the target? – Control –Will it require a vote of S/Hs of the target and/or buyer? How will voting control be affected? – Continuity –Which, if either firm will survive? What are the implications for ability to assign leases & licenses, for corporate identity, and for stat of incorporation – Strongly linked to Form of Payment

19 Deal Structure: Stock vs. Asset Purchase AdvantagesDisadvantages Stock Purchases Avoids double taxation Higher net proceeds to seller shareholders Less documentation Risk fo unknown liabilities No future tax savings Asset Purchases Buyer avoids unknown liabilities Possible step-up of asset tax basis Seller keeps identity Buyer loses seller’s NOLs and tax credits Rights to licenses, franchises, patents are not transferred Double taxation

20 Deal Structure: Stock vs. Asset Purchase AdvantagesDisadvantages Stock Purchases Avoids double taxation Higher net proceeds to seller shareholders Less documentation Risk fo unknown liabilities No future tax savings Asset Purchases Buyer avoids unknown liabilities Possible step-up of asset tax basis Seller keeps identity Buyer loses seller’s NOLs and tax credits Rights to licenses, franchises, patents are not transferred Double taxation

21 A Note About Taxes Tax factors are significant in some mergers (<10% of mergers) Tax effects not the main motivation for mergers Tax effects that are seen in mergers could generally be replicated by a stand-alone firm changing its own leverage or engaging in an asset sale/leaseback transaction

22 A Note About Taxes Tax factors are significant in some mergers (<10% of mergers) Tax effects not the main motivation for mergers Tax effects that are seen in mergers could generally be replicated by a stand-alone firm changing its own leverage or engaging in an asset sale/leaseback transaction

23 A Note About Taxes Form of Transaction Price, & Form of Payment Tax Consequences (after-tax proceeds) Ownership Claims (dilution) Riskiness Of Future Cash Flows (creditworthiness) EPS Consequences (manager/investor perceptions)

24 Deal Terms – Form of Payment Payments to Target Shareholders – Fixed payments (cash or senior debt) – resolves target S/H uncertainty about deal value – Contingent payments (mezzanine or “junk” debt, preferred, or common equity, earn-outs, convertibles, caps, floors & collars) – allows target S/Hs to participate in upside potential, resolve strong disagreements about target value, and limit post announcement adverse stock price movements Side Payments – Payments to other stakeholders that may influence the success of the post-merger firm (golden parachutes, buyouts of employments contracts, consulting commitments to target management)

25 Method of Payment TypeCharacteristics of deal Cash Target shareholders exchange for cash Typically taxable transactions Stock Firms negotiate a ratio of acquirer shares to exchange for target Market risk high – target shareholders lose when acquirer stock fails Stock with collar 25% of stock deals use collars to lower risk Many types of collars: – Specify dollar amount of stock exchanged – Fixed dollar amount within a max and min – Fixed stock ratio within a max and min

26 Contingent Payments Earnouts and contingent payments in mergers (used in 2.5% of deals) – Payment based on future performance of target – Provides incentive for owner-managers to stay with acquirer – Mostly used to buy small firms with key employees (high tech, service, etc.) – Problem: hard to measure in post-merger performance (high frequency of lawsuits)

27 Other Deal Terms Control & Governance – Relative proportions of share ownership and voting rights, composition of the new board Social Issues – Identity of executive management team, corporate name, headquarters location Timing and Deadlines –Time value of money impact on valuation and ability to structure post- merger integration efforts Transaction Hedges – Walk-away fees

28 Documentation Confidentiality Agreement Letter of Intent –Exclusive –Nonexclusive Acquisition Agreement –Reps and Warranties –Conditions