mergers & acquisitions - rli corp. · 4/18/2018 · mergers & acquisitions rli design...
TRANSCRIPT
Mergers & Acquisitions
RLI Design ProfessionalsDesign Professionals Learning Event
DPLE 169April 18, 2018
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.
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
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.
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:
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.
PART ONE – A HYPOTHETICAL
Departure Options
The Offer
MEGA FIRM
The Transaction
MEGA FIRM (“Parent”)
100%
Before After
STAR ARCHITECTS
2.0 (“Subsidiary”)
STAR ARCHITECTS
MEGA FIRM (“Parent”)
STAR ARCHITECTS
2.0 (“Subsidiary”)
The Agreement
M&A Activity in ReviewTwo 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
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
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
PART TWOBUILDING A FRAMEWORK
Relationship between transaction-related issues and claims-related issues
Likelihood that a claim will arise
Likelihood of a transaction-related issue
Relationship between transaction-related issues and claims-related issues
Merger takes place
Increased chance of key employee
departing
Decreased chance of successful M&A
transactionIncreased risk of
claims arising
When can things go wrong?
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
StructureMarketing
PART THREETOOLS FOR A SMOOTH TRANSITION
Problems on the horizon…
Mr. Badguy v…• Star Architects• Star Architects 2.0• Mega Firm• Mr. Goodguy
100%
MEGA FIRM (“Parent”)
STAR ARCHITECTS
2.0 (“Subsidiary”)
Tools for a “Smoother Transition”
Avoiding Potential Contract Issues
Integration Plan
Duty of Cooperation
Duty of Cooperation
Star Architects / Mr. Goodguy
CooperationMega Firm /Star Architects
2.0 Cooperation
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
Integration
Health PlansGeography
Vacation Policies
Employee Benefits
New MgmtStructure
Creativity Concerns
Integration
Health PlansGeography
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”
Integration
Successful Integration
Vision
Valuable Client
Relationships
Talent Retention
Integration
Mega FirmStar Architects
Mega Star
Figure 1
Mega Firm
Subsidiary
Mega Firm
Star Architects 2.0
Figure 2
Star Architects
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.
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.”
Additional Contract Issues
PART FOURALLOCATING RISK
Allocating Risk
Year 1Life 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
Allocating Risk: Insurance Coverage – the “Tail” Policy
Original Policy
Policy Termination
Tail PolicyYear 1 Year 5
Allocating Risk: Insurance Coverage – Prior Acts Coverage
Year 1 Year 5
Original Coverage Effective Date
Future ActsPrior Acts
Allocating Risk: Insurance Coverage – Who bears the cost?
Mega Firm
Star Architects
2.0
Subsidiary A
Subsidiary B
Allocating Risk: Asset-only purchases and indemnification
Indemnification = (1) Holding harmless, (2) paying on behalf of and (3) making whole.
Assets
Current AssetsCash…………………10Acc. Rec…………...50Prepaid Ins……….40
PropertyLand…………………..5Buildings…………..10Equipment…………7
Liabilities
CurrentNotes payable………2Accounts payable…3Unearned rev……….4
Stockholders’ Equity
Common stock………5Retained earnings…5
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
Consider important tools for promoting successful transactions
This concludes The American Institute of Architects Continuing Education Systems Program