CREATIVE DEAL STRUCTURING

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CREATIVE DEAL STRUCTURING Alternatives for
Distressed Target Companies November 16, 2002
Todd A. Bauman Stoel Rives LLP
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Down Acquisitions
EXAMPLE Merger Consideration 20
million Merger Liquidation Consideration
Preference Allocation Series A 15
million 15 million Series B 10 million 5
million Common N/A 0
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Cash Bonus Pool
Pool of cash set aside to be paid to designated
individuals as bonus or transaction fee at
closing.
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Cash Bonus Pool

• Pros
• Simple
• No shareholder approval
• Flexible
• Cash
• Cons
• Cash
• Taxable
• No post-closing incentive

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Option Program
Establish a new class of common stock with a
liquidation preference and grant options to
purchase those shares to designated individuals.
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Option Program

• Pros
• No accounting charge
• Tax efficient
• No cash required
• Form of incentive compensation
• Cons
• Shareholder approval usually required
• Federal and state securities law compliance
• Tax/accounting issues
• 280G
• Accounting charge
• withholding

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Other Alternatives

• Stock bonus pool
• Convert preferred to common or surrender a
  portion
• Amend liquidation preferences
• Reprice/extend existing options
• N.B. All of these alternatives require careful
  analysis of tax, accounting and securities law
  issues.

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Use of Bankruptcy

• Pros
• Resolves contingent liabilities
• Buyer gets clean assets
• Simplifies approval process
• Cons
• Timing
• Cost
• Effect on employees/customers/business

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Earnouts
Tying a portion of the merger consideration to
the achievement of specified financial or
nonfinancial goals post-closing.
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Earnouts
Pros Can help resolve a significant
dispute/uncertainty about the value of the
business being acquired. Cons 1. Difficult to
structure 2. Difficult to negotiate 3. Can
create perverse incentives