Mergers & Acquisitions - Personal Insurancefor a merger or acquisition in the next five years. This...
Transcript of Mergers & Acquisitions - Personal Insurancefor a merger or acquisition in the next five years. This...
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Mergers & Acquisitions
RLI Design Professionals
Design Professionals Learning Event
DPLE 169
March 16, 2016
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RLI Design Professionals is a Registered Provider with The
American Institute of Architects Continuing Education
Systems. Credit earned on completion of this program will be
reported to CES Records for AIA members. Certificates of
Completion for non-AIA members are available on request.
This program is registered with the AIA/CES for continuing
professional education. As such, it does not include content
that may be deemed or construed to be an approval or
endorsement by the AIA of any material of construction or
any method or manner of handling, using, distributing, or
dealing in any material or product. Questions related to
specific materials, methods, and services will be addressed
at the conclusion of this presentation.
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Copyright Materials
This presentation is protected by US and International
Copyright laws. Reproduction, distribution, display and
use of the presentation without written permission of
the speakers is prohibited.
© RLI Design Professionals
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Course Description
A recent major study found that 68% of
design firms have strategic plans
for a merger or acquisition
in the next five years.
This presentation will cover
important considerations for firms
undertaking merger or acquisition activity.
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Learning Objectives
PART ONE:
Understand how
M&A transactions
are impacting the
A&E space
PART TWO:
Develop a
framework for
understanding
common
transactional
issues
PART THREE:
Evaluate and
discuss important
tools and concepts
to promote a
successful
transaction
PART FOUR:
Evaluate risk
allocation in the
context of M&A
transactions
Participants in this session will:
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Underlying Theme
M&A = Transition of ownership in an entity throughsome sort of transaction structure.
Underlying Theme: How professional service firms can manage transitions in management and ownership through a merger or acquisition.
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PART ONE – A HYPOTHETICAL
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Departure Options
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The Offer
MEGA FIRM
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The Transaction
MEGA FIRM (“Parent”)
100%
Before After
STAR
ARCHITECTS
2.0
(“Subsidiary”)
STAR
ARCHITECTS
MEGA FIRM (“Parent”)
STAR
ARCHITECTS
2.0
(“Subsidiary”)
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The Agreement
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M&A Activity in Review
Two major reasons for increase in M&A transactions
(1) Disconnect between “Generation Xers” and “Baby Boomers”
(2) Larger firms seeking to advance presence in specialized areas
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M&A Activity in Review
Source: http://www.morrisseygoodale.com/2015-Mid-Year-Review.html
Asset Only Purchase
• Only the valuable assets of the acquireeare purchased.
• No past liabilities are acquired.
• Avoids uncertainty and risk associated with past liabilities of the acquiree.
Purchase of all stock/partnership
interest
• Includes purchase of all assets and liabilities.
• Allows perpetuation of ongoing work, retention of staff, and rights to predecessor firms’ entire portfolio of work.
Preferred in A&E space
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M&A Activity in Review
Source: http://www.morrisseygoodale.com/2015-Mid-Year-Review.html
Median Sized Buyer (like “Mega Firm”)
• Average $53.3 million in revenue
• Approximately 450 employees
Median Sized Seller (like “Star Architects”)
• Average $2.7 million in revenue
• Approximately 22 employees
Median Buyer
Median Seller
*Median revenue of buyer and seller drawn to scale
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PART TWO
BUILDING A FRAMEWORK
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Relationship between transaction-related issues and
claims-related issues
Likelihood that a claim will arise
Likelihood of a
transaction-related
issue
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Relationship between transaction-related issues and
claims-related issues
Merger takes
place
Increased chance
of key employee
departing
Decreased chance
of successful M&A
transaction
Increased risk of
claims arising
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When can things go wrong?
See http://www.mergerkit.com/downloads/mergertimeline.pdf
Relationship Building Period
Buyer
develops
M&A strategy
Merger Period
Integration Period
Buyer
approaches
candidate
Tentative
agreement –
letters of
intent signed
Formal
Agreement
with Board
Final
Approval
Due Diligence
Period
Information
integration
Finance &
accounting
Employee
Management
Structure
Marketing
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PART THREE
TOOLS FOR A SMOOTH TRANSITION
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Problems on the horizon…
Mr. Badguy v…• Star Architects
• Star Architects 2.0
• Mega Firm
• Mr. Goodguy100%
MEGA FIRM (“Parent”)
STAR
ARCHITECTS
2.0
(“Subsidiary”)
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Tools for a “Smoother Transition”
Avoiding Potential Contract Issues
Integration Plan
Duty of Cooperation
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Duty of Cooperation
Star Architects /
Mr. Goodguy
CooperationMega Firm /
Star Architects
2.0 Cooperation
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Duty of Cooperation
Star Architects
Mr. Goodguy
Where Mr. Goodguy has
ownership in Star Architects
and/or is an employee of Star
Architects, Star Architects will
defend and indemnify him against
lawsuits.
Star Architects 2.0
Mr. Badguy
V.
Where Mr. Goodguy has NO
ownership in Star Architects 2.0
and/or is NO LONGER an
employee of Star Architects, Star
Architects 2.0 has no reason to
defend and indemnify him against
lawsuits.
V.
Mr. Goodguy Mr. Badguy
No protection!Protected
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Integration
Health Plans
Geography
Vacation Policies
Employee Benefits
New MgmtStructure
Creativity Concerns
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Integration
Health Plans
Geography
Vacation Policies
Employee Benefits
New MgmtStructure
Creativity Concerns
STAR ARCHITECTS: 25 employees prides itself on“creative and innovative work”
v.
MEGA FIRM: 450 employees and considered “one of the largest firms in the land”
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Integration
Successful Integration
Vision
Valuable Client
Relationships
Talent Retention
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Integration
Mega FirmStar
ArchitectsMega Star
Figure 1
Mega Firm
Subsidiary
Mega Firm
Star Architects
2.0
Figure 2
Star
Architects
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Assignment of Contracts
“Freely Assignable” = one party to the contract can assign, or
“transfer,” the contract to a third party without obtaining the
express consent of the other original party to the contract.
General Rule Regarding Assignability: Contracts are freely
assignable unless the contract itself, a statute, or public policy
dictates otherwise.
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Assignment of Contracts
Example of a “Simple Anti-Assignment Clause”
(AIA 101)
• “The owner and architect, respectively, bind themselves, their agents, successors, assigns and legal representatives to this agreement. Neither the Owner nor the Architect shall assignthis Agreement without the written consent of the other, except that the Owner may assign this Agreement to a lender providing financing for the Project if the lender agrees to assume the Owner’s rights and obligations under this Agreement.”
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Additional Contract Issues
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PART FOUR
ALLOCATING RISK
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Allocating Risk
Year 1
Life of Star Architects Life of Star Architects 2.0
Negligent Act Occurs
Negligent Act Occurs
Life of Star Architects Life of Star Architects 2.0
Duration of Project
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Allocating Risk: Insurance Coverage – the “Tail” Policy
Original Policy
Policy Termination
Tail PolicyYear 1 Year 5
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Allocating Risk: Insurance Coverage – Prior Acts Coverage
Year 1 Year 5
Original Coverage Effective Date
Future ActsPrior Acts
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Allocating Risk: Insurance Coverage – Who bears the cost?
Mega Firm
Star
Architects
2.0
Subsidiary
A
Subsidiary
B
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Allocating Risk: Asset-only purchases and indemnification
Indemnification = (1) Holding harmless, (2) paying on behalf
of and (3) making whole.
Assets
Current Assets
Cash…………………10
Acc. Rec…………...50
Prepaid Ins……….40
Property
Land…………………..5
Buildings…………..10
Equipment…………7
Liabilities
Current
Notes payable………2
Accounts payable…3
Unearned rev……….4
Stockholders’ Equity
Common stock………5
Retained earnings…5
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Allocating Risk: Indemnity and Financial Guarantees
Consider important tools for promoting successful transactions
Understand how M&A
transactions are impacting the A&E space
Develop a framework for understanding
common transactional
issues
Consider important tools for
promoting successful
transactions
Evaluate risk allocation in
the context of M&A
transactions
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Consider important tools for promoting successful transactions
This concludes The American Institute of Architects
Continuing Education Systems Program