1. Acquisition Finance Structuring Structuring The Deal
Joseph V. Rizzi
Amsterdam Institute of Finance
10-12 October, 2016
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2. Presentation for AIF - October 2006
Structuring
Joseph V. Rizzi
Amsterdam Institute of Finance
October, 2016

3. M&A Process M&A Strategy Deal Phase Integration/ Execution
Translate General Strategy into M&A Strategy
Determine Screening Criteria
Identify Targets
Screen/Prioritize
Output: Target with Investment Thesis (Business Case)
Outcome: Go forward decision
Next Step: Contact Target
Valuation (synergies, sensitivity analysis, walk-away price)
Due Diligence
Deal Structure
Negotiation
Pro forma business model
Integration Planning (degree/scope of integration, etc.)
Output: Due Dili Report; Full/Final Business case including Final Financials
Outcome: Go/No Go Decision; Close the Deal
Leadership
PMI Project Office/Team
100 Day Plan
Communication Plan
Operating Integration
Customer Integration
Cultural Integration
Performance & Synergy Tracking
Fix/Adjust Process
Post Closing Evaluation
Outcome: Accomplish Investment Thesis
Amsterdam Institute of Finance
October, 2016

4. Issues in Structuring a Deal
Presentation for AIF - October 2006
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
- Protect deal
Some Seller Shareholder Objectives:
- Maximize after-tax price received
- Minimize risk of the offer (for a given dollar value of the deal) e.g. termination and go shop
Amsterdam Institute of Finance October, 2016

5. Conflicting Agendas for Sellers and Buyers Taking a comprehensive view of the operational and market pressures faced by both parties in the transaction helps to balance conflicting agendas and improve the odds of successful deal execution
Seller
Maximize Value
Create competitive environment among bidders
Avoid surprises from bidders’ diligence
Control information release
Balance length of process against stakeholder expectations
Limit warranties and indemnifications
Common Goals
Preserve value
Reduce uncertainty
Create efficient tax structure
Minimize distractions
Maintain credibility
Enhance reputation
Separate smoothly
Minimize post-closing disputes
Buyer
Lower Price
Highlight liabilities and risks
Challenge run rates and forecasts
Understand sustainability
Develop advantage over other bidders
Analyze costs and synergies in detail
Maximize warranties and indemnifications
Balance exclusivity and break-frees
Seller
Buyer
Maximize Value
Lower Price
Common Goals
Amsterdam Institute of Finance October, 2016

6. Documents Financing Acquisition NDA LOI Offering Memorandum SPA
Bank Book
Term Sheet
Commitment Letter
Fee Letter
Credit Agreement(s)
Intercreditor Agreement(s)
Security Document
Amsterdam Institute of Finance October, 2016

7. Presentation for AIF - October 2006
Deal Terms
Price
Form of Transaction
Form of Payment
Control and Governance
Social Issues
Timing and Deadlines
Transaction Hedges
Amsterdam Institute of Finance October, 2016

8. Transaction and Structuring Overview
Transaction Environment
Creditors
Rights
Regulatory
and Antitrust
Contract
Structuring Environment
Business
Plan
Market
Conditions
Deal
Securities
Accounting
Transaction
Characteristics
Financial
Preferences
Tax
Corporate
Law
Competing
Bidders
Amsterdam Institute of Finance October, 2016

9. Summary of Complicating Factors
Presentation for AIF - October 2006
Summary of Complicating Factors
Competing Bids
Size
Financial Strength
Dilution Analysis
Strategic Fit
Contract
Form
Consideration
Pricing
Conditions
Repos and Warranties
Indemnities
Change of Control
Covenants
Corporate
Notice
Percent by Region/State
Lock-Up/Break Up Fee/No Shop
Pills/Defenses
Merger/Consolidation
Tax
Capital Gains to Seller
WHT on divs and int
Basis
NOL’s
Interest deductibility
Tax treaties
Consolidation
Exit planning
Antitrust
Hart/Scott/Rodino
Sherman Act
HHI
European Commission
Monopolies & Mergers
Commission
Securities
Notice
S/H Vote
Tenders
Preemption Rights
Triggers
Accounting
Goodwill
Fair Market Value
Net Worth
Consolidation
Rating Agencies
Regulatory
Bankruptcy Framework
(Inter-creditor Concerns)
Subordination
Guarantees
Amsterdam Institute of Finance October, 2016

10. How Do I Pay: Cash, Stock or Combination
Buyer Issues
Share Valuation: avoid using undervalued shares
Synergy Risk: use cash if synergy risk low to retain upside
Market Risk: who bears risk of shares charging price post offer/pre close
Fixed price: seller assumes risk
Fixed share: buyer assumes risk
Collars/caps: share
Dilution
Earnings
Book value
Ownership
Taxes
Asset write-up
Tax domicile
Credit Ratings
Seller Issues
Valuation: DD on buyer
Taxes: defer seller capital gains taxes
Liquidity: share float, lock-ups and Regulation Rights
Amsterdam Institute of Finance October, 2016

11. Forward/Reverse Triangular Mergers
Issues: tax, accounting Forward: Target merges into buyer’s wholly owned subsidiary with subsidiary as Continuing entity Pre transaction Post close Buyer Buyer Subsidiary Target Subsidiary (including old target) Reverse: Target merges into buyer’s wholly owned subsidiary with target as continuing entity. Subsidiary shares converted into target shares; shares converted into buyer shares Subsidiary Target Target (including subsidiary)
Amsterdam Institute of Finance October, 2016

12. Negotiated Cash Merger Timeline
Presentation for AIF - October 2006
Negotiated Cash Merger Timeline
HSR Review Period (30 Calendar Days)
Pre-Commencement
Day 1
Calendar
Calendar
Calendar
Calendar
Week 7
Period (1 Week)
Week 2
Day 10
Day 20
Day 30
Day 40
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
Are Available)
HSR
Waiting
Period
Expires,
Assuming
No Second
Request
Target
Stockholder
Meeting
Close
Merger
Amsterdam Institute of Finance October, 2016

13. Critical Path & Decision Framework
Bank Financing
Floating-
Rate
Credit
Rating
Asset Carveout
Securitization \ Prop Co
Determine
Capital
Structure
Acquisition
Bridge
Takedown
Fixed-
Fixed Income
Rate
Refinance
Bridge
Hedge
No Action
Target
Credit
Rating
Financial
Flexibility
Bank
Funding
Equity / Near Equity
Advisory / Origination
Underwriting
Product Execution
Amsterdam Institute of Finance October, 2016

14. Mechanics Purchase/Sale Nondisclosure Agreement Offering Memorandum
Data Room
Letter of Intent
Sale and Purchase Agreement
Financing
Commitment Letter(s)
Term Sheet
Credit Agreements
Intercreditor Agreements
Amsterdam Institute of Finance October, 2016

15. Structuring Perspectives
Business Legal Entity Basis Bankruptcy Payment Priorities Provisions Reps/Warranties: What are the facts? Operating Covenants: Pre Close Financial Covenants: Preserve deal Remedies Structures to reduce credit risk Guarantees Indemnities Pledges of Stock Subordination Deposits / Escrows
Amsterdam Institute of Finance
October, 2016

16. Acquisition Agreement (Sale & Purchase Agreement)
Parties Definitions Form: Merger, Tender, Asset Sale,… Consideration: Type, Payment, Mechanics, Calculation,… Reps/Warranties: Duration, Survival Target: MAC Buyer: Issue when stock used Ordinary Course Covenants: Target will operate as usual during signing/closing gap period Other Agreements: Filings, Meetings,… Closing Conditions: Regulatory, Shareholder Termination & Expenses: Drop Dead Fee, Drop Dead Date, Termination Fees Other Stuff: Choice of Law, Specific Performance
Amsterdam Institute of Finance October, 2016

17. Legal Issues Involved in Financing the Transaction
Commitment Letters
MAC
Due Diligence
Syndication
Flex
Marketing Periods
Fraudulent Conveyance
Loan Documentation
Intercreditor
Covenants
Conditions
See: lma.eu.com/documents for drafts
Amsterdam Institute of Finance October, 2016

18. Creating the Capital Structure
Rule of Thumb Measures
Balance Sheet Model
Cash Flow Model
Detailed Model
Matching markets to the need
Reverse inquiry
Projections (amortization capability)
Amsterdam Institute of Finance October, 2016

19. Deal Financial Arithmetic
Amsterdam Institute of Finance October, 2016

20. Financing Need As a Starting Point
Purchase Price + Expenses
Minimum/Maximum
Recapitalization Dividend
Debt Refinancing
Callability
Premiums
Tax Issues
Expenses
Other Uses
Amsterdam Institute of Finance October, 2016

21. Structuring Framework
Presentation for AIF - October 2006
Structuring Framework
Senior Secured
First Lien
Revolver
Tied to advance against current assets
Crossing liens
Term Loan A
Macro: Ratio of 3-4x EBITDA
Micro: Amortization analysis tied to cash flow in years 1-7
Term Loan B
Senior debt ratio less Term Loan A amortization
1% P.A./Balloon
Second Lien
Macro: 0.5-1x EBITDA
Limited amortization
Longer term
Senior/Subordinated Unsecured
Other Debt
Total Debt/EBITDA less Senior Debt/EBITDA
Equity
Funding need less Total Debt/EBITDA
Amsterdam Institute of Finance October, 2016

22. Presentation for AIF - October 2006
Sizing the Revolver
Current Asset approach
Use standard advance rates
Accounts Receivable 80%
Inventory %
PP&E/Net 40%
Consider the following factors
Seasonal Needs
Future Working Capital Growth
Unexpected Liquidity Needs
Amsterdam Institute of Finance October, 2016

23. Sizing the Term Loans Term Loans = Maximum Senior Debt - Revolver
Focus is on Free Operating Cash Flow
Market conditions also dictate the maximum tenor of the loan and the amount required to be amortized
Acceptable asset coverage is also a consideration in determining the size of the term loans
Amsterdam Institute of Finance October, 2016

24. Add-On Term Loans Typical bank financings as structured as follows:
Revolving Credit
Term Loan A (amortising)
Term Loans B & C (bullet/balloon)
T/LC Rare
Large unfunded revolvers are seldom used today due to the fact that it is capital unfriendly to banks and companies don’t like to pay for unused commitments.
In the interest of keeping flexibility for the long term, additional indebtedness baskets should be negotiated upfront. This allows companies to access either the bank or bond markets under their existing credit agreements and saves the costs of having to refinance.
Amsterdam Institute of Finance October, 2016

25. Junior Capital
Long Term Debt = Max Total Debt - Max Senior Secured Debt
Senior unsecured
Sub Debt
Other – unitranche, PIK, …
Equity:
Equity = Total Uses - Max Total Debt
Common
Hybrids
Convertibles
Preferred
Amsterdam Institute of Finance October, 2016

26. Dell – EMC: Study in Structuring
Largest LBO and Largest Tech M&A at $67B
Equity Provided by Michael Dell, Silver Lake and Temasek
PPX: 67B/6.3 = 10.6x
Financing
SOURCES USES
Tracking Stock B (Seller Finance?) Equity + Fees 67B
Debt – 50 B Refinance B
New Equity B
Excess Cash TBD (3-21B) _____
75B B
Debt: FD/EBITDA – 5.7x
Bank
Revolver
T/L
Investment Grade
HYB
Other
48B
Amsterdam Institute of Finance
October, 2016

27. Subordination
Senior lenders are concerned with the implications of having high yield investors at the table during a restructuring.
EURO High Yield investors to date have not been as vocal as senior bank lenders, viewing the issue as one of pricing rather than principle.
All other things being equal, sophisticated investors will probably price structural subordination at premium.
Amsterdam Institute of Finance October, 2016

28. Contractual Subordination U.S.
Holding Company
High Yield Bonds
Subordination
Agreement
100% Equity
Interest
Issues
To what
restructuring
Issues
Senior Secured
Loan
Intermediate Holding Company
Guarantees
Operating Company
Operating Company
Operating
Company
Cash
Assets
Amsterdam Institute of Finance October, 2016

29. Structural Subordination
Issues
Holding Company
High Yield Bonds
100% Equity
Interest
Issues
Senior Secured
Loan
Intermediate Holding Company
Support Package
Operating Company
Operating Company
Operating
Company
Amsterdam Institute of Finance October, 2016

30. Structuring Covenants – Preserving the deal or – I love you just the way you are!
There are no standard covenants.
They must be tailored to fit each deal and loan structure.
The steps in structuring the covenants are:
Identify the risks (business, financial and structural)
Select Covenants to monitor the risks
Need to prioritize the risks to monitor because it will be impossible to monitor every risk
The time and cost to monitor the covenants must be considered (i.e., sometimes one covenant can cover multiple risks)
Set Appropriate Levels
Want the covenants to trigger a warning before any principal or interest payments become delinquent. Need to factor in any seasonal needs to the covenant levels.
Amsterdam Institute of Finance
October, 2016

31. Excess Cash Flow Sweep
Definition: Portion (usually 50%) of surplus cash (defined term) used to prepay loan facilities
Use: 55% of Transactions
Amsterdam Institute of Finance October, 2016

32. Financial Covenants as Endangered Species Maintenance v Occurance
Major Covenants (financial maintenance) – Industry Variation
CAPEX
Debt Service
Fixed Charge
Funded Debt
Net Worth
Earnings
note – currently only one or two financial covenants (fD/EBITDA, EBITDA/I)
Reason for Decline
Institutional Loan Investors
High Yield Market
Competition
Amsterdam Institute of Finance
October, 2016

33. Integration Strategy Must Match Deal Thesis/Strategy
Most acquirers fail to consider how deal type impacts what you integrate and how you handle people issues
“Scale” deals “Scope” deals
Degree of
Integration:
Integrate comprehensively
Ensure Integration approach is coordinated across regions
Integrate selectively, only where there is overlap
Ensure business models align and cross-fertilize strengths
Organization
Structure:
Blend structures; assimilate where the target is small or under-performing
Make decisions early, but don’t sacrifice more informed decisions for speed
Keep organizations separate; blend structures where there is overlap
Define the role of the center and regional/ functional superstructure
Make decisions as early as possible
Executive
Selection:
Select a small proportion of the target’s executives; select more where the target is larger or better performing
Make decisions early; ideally before announcement
Retain a high proportion of the target’s executives
Make decisions before announcement
Make retention a priority and offer retention incentives
Employee
Retention:
Target early talent critical to the transition/integration
Target early talent critical to success of company
Cultural
Integrate the two cultures, typically by selecting the “best of both”
Win the hearts and minds of both companies’ employees
Preserve the two cultures
Harmonize at the leadership level (clarify “way of working” and how decisions are made)
Amsterdam Institute of Finance
October, 2016