Question
From:(redacted)
Sent:Wednesday, May 23, 2007 3:22 PM
To:Verne, B. Michael
Cc:(redacted)
Subject:HSR question
Mike,
Thanksagain for taking the time to review the below scenario with us. As we discussed,the purchase price for the transaction is determined and below the statutorysize-of-transaction test, so no filing is required. Please let us know if ourunderstanding is incorrect.
The particular facts are as follows:
Throughan investment banking firm, the target solicited and received multipleproposals for an acquisition of voting securities via a reverse triangularmerger. The request for proposals provided that the tax benefits from thetarget's activities prior to closing were to be retained by the sellingshareholders and option holders and that these tax benefits would not beavailable to the acquirer.
Thetarget selected a successful candidate from among the bidders. The acquirerwill pay a purchase price of $59.5 million in cash for the voting securities ofthe target. The agreement includes some additional features that we wish toconfirm will not constitute part of the acquisition price.
First,to ensure that the tax benefits for pre-closing activities will be retained bythe selling shareholders and option holders, the target will declare a dividendprior to closing that assigns to the selling shareholders the value of thosetax benefits. The purchase price allocation formula will be calculated so thatoption holders, whose options will be canceled at closing, also share in theamount of those pre-closing tax benefits. By this means, the tax benefits willno longer be assets of the target as of the closing. The tax benefits consistprimarily of tax refunds that have been claimed for research tax credits andloss carrybacks arising from the deduction of employee stock option benefits.The total value of the tax benefits to be distributed is approximately $2.4million.
Second,the merger agreement contains an adjustment based on a comparison of thetarget's actual working capital as of closing against the parties' currentforecast of the working capital as of closing. The $59.5 million purchase priceis based on an assumed working capital balance at closing of $5 million, anamount that is consistent with the target's recent history. The target plans todividend or retain cash as necessary to minimize the amount of any workingcapital adjustment. If working capital is below $5 million at closing, theseller owes the difference to the acquirer. If working capital is above $5million, the acquirer owes the difference to the seller. The parties reasonablybelieve that the adjustment will be zero, a belief that is reinforced by theability to control the adjustment by managing cash through dividends oraccumulation. Also, the transaction will close on or before June 30, so we donot expect any material changes in company operations in the short pre-closingperiod.