Question
From: (redacted)
Sent: Thursday, March 17, 2005 1:01 PM
To: Verne, B. Michael
Subject: HSR Question re Size of Transaction
Dear Mr. Verne:
Thisrelates to our telephone conversation this morning concerning the size oftransaction issues in the transaction described below.
Ais the buyer. The members of B, an LLC, are selling 100% of the equityinterests in B to A. B has a sister LLC, C, which owns certain intellectualproperty. D owns a majority of both B & C and is the UPE on the sellerside. Both A and D have revenues and/or assets in excess of $10M but below$100M. Thus, the size of person test is not satisfied here and the deal is notreportable unless the size of transaction exceeds $200M, or $212M under the newregs.
Awill purchase all of the equity interests of B for approximately $140M, halfcash and half stock of A. Prior to closing, C will give B a 15 year exclusivelicense on its on the intellectual property with royalties to be paid C basedon future sales of products developed with the licensed intellectual property.Thus, A will get this license when it buys B and in fact it is central to thepurchase transaction. A will then pay royalties to C based on future sales ofthe products developed with the licnesed intellectual property.
Theissue I raised was whether, in determining size of transaction, the presentvalue of the future royalty payments from A to C had to be added to the $140Mpurchase price which is also the FMV of the assets purchased. It did not seemto me that it should be added since the value of the intellectual propertylicense was factored in to determine the purchase price, and thus the size ofthe transaction is the FMV of the assets purchased from B excluding the futureroyalty payments based on sales of the patented product.
Youconfirmed that the future royalty payments did not needed to be added to theFMV (or the enterprise value you mentioned under the new LLC regs) to determinethe size of transaction. Since that makes the size of the transaction wellbelow $200M, the transaction is not reportable under the HSR if the size of person test is not met, as appears to be the casehere. Please confirm that the foregoing correctly reflects your conclusions andanalysis.
Sincethe transaction is time sensitive, we would appreciate an early response. Anemail to me is fine. Thank you very much.