Question
March 1, 2005
BY HAND DELIVERY
Michael B. Verne, Esq.
Federal Trade Commission
Premerger Notification Office
Bureau of Competition
600 Pennsylvania Avenue, N.W.
Washington, DC 20580
Re: Telephone Conversation on February 25, 2005
Dear Michael:
This letterconfirms the following conclusions from our telephone conversation on February 25, 2005 relating to reporting requirements underthe Hart-Scott-Rodino Antitrust Improvements Act of 1976 (the "HSR Act"), as amended, 15 U.S.C. 18a:
1. That a single buyer's acquisition of three separatecorporations in a single transaction should be analyzed as three separateacquisitions if each acquired corporation is its own ultimate parent entity,notwithstanding that the three corporations have identical shareholders, eachof which has identical percentage interests in each of the three corporations.
2. That the purchase price for the voting securities of each ofthe three corporations, which has not been allocated among the corporations bythe parties, is not "determined" under HSR rule801.10(a)(2)(ii).
3. That an acquiring person can rely in the manner described belowon offers and informal indications of interest by third parties as a basis fordetermining the fair market value of a company's voting securities.
4. That an acquiring person can account for the value ofoutstanding debt of a corporation to be acquired in determining the fair marketvalue of its voting securities (i.e., reducing the fair market value by theamount of the debt).
5. That internal valuation analyses used for purposes other than HSR fair market valuation are not determinative when an acquiringperson has in good faith used a different methodology for the HSR fair market valuation.
The facts we discussed are as follows:
Ourclient ("Buyer") has entered into a single non-binding letter ofintent ("LOI") to acquire 100% of the voting securities of threecorporations (X, Y, and Z) for $98.7 million. This amount could be increased byup to $6.3 million in the event that existing debt of X, Y, or Z is paid offprior to closing. The parties have not agreed, in the LOI or elsewhere, to anyparticular allocation of the proposed purchase price between X, Y, and Z.
Thevoting securities of X, Y, and Z are currently held by the same group ofshareholders ("Shareholders") and each Shareholder holds the samepercentage (below 50%) of X as it holds in Y and Z. X, Y, and Z each produce adistinct type of product, although they are operated as vertically integratedbusinesses. Our view is that each of X, Y, and Z is its own ultimate parententity because no single Shareholder (either individually or by attribution)holds 50% or more of its voting securities.
Basedupon these facts, we understand that you agree that, for purposes of the HSR Act, Buyer needs to analyze its acquisitions of voting securitiesof X, Y, and Z separately.
Wealso understand that you agree with our view that the purchase price for thevoting securities of any of X, Y, or Z is not determined. Buyer will thus needto determine separately the fair market value of the voting securities of X, Y,and Z to assess whether each acquisition may be reportable under the HSR Act. (The acquisitions will close after March 2, 2005, so the adjusted $53.1 million size-of-transactionthreshold will apply.)
Forpurposes of fair market valuation under the HSR Act,Buyer should make a good faith determination of what a third-party would payfor the voting securities of each corporation in an arm's length transactionbetween a willing buyer and a willing seller.
Indoing so, Buyer intends to rely on information from external sources regardingthe standalone fair market values of X and Y. Specifically, Buyer is aware thata third party in fact entered into a letter of intent only eight months ago toacquire 100% of the voting securities of X for approximately $23 million. Buyeris also aware of two informal but recent third-party indications of interest toacquire 100% of the voting securities of Y for $25 million. Additionally, arepresentative of Shareholders informed Buyer that they rejected a $25 millionoffer for Y because they believed they could obtain $30 million for the Ybusiness. Buyer believes that these offers are more informative than theresults of any financial analysis that could be performed by Buyer, in partbecause these offers incorporate the analyses of third parties regardingexpected synergies in each particular case - something that Buyer cannot easilyquantify. In fact, Buyer relied on some of this same information in theordinary course of business in internal documents supporting an increase in theproposed purchase price.
Usingthis information, Buyer (through the entity delegated by the Board of Directorsof its ultimate parent) has determined that the fair market value of X is $23million and the fair market value of Y is $28 million. Based on ourconversation, we understand that you agree with our view that this approach isan acceptable manner for Buyer to determine in good faith the fair market valueof X and Y.
Buyerhas also determined the fair market value of Z to be $47.7 million bysubtracting the fair market value of X ($23 million) and Y ($28 million) fromthe purchase price of $98.7 million, which buyer believes represents the fairmarket value of X, Y, and Z together. Buyer believes this is a conservativeapproach to the valuation of Z because it essentially allocates to Z all of thesynergies of the combined operation of X, Y, and Z. Based on our conversation,we understand that you agree with our view that this approach is an acceptablemanner for Buyer to determine in good faith the fair market value of Z.
Thefair market values of X, Y, and Z as determined by Buyer also account for thevalue of debt on the books of X, Y, and Z because such debt obviously reducesthe price any party would be willing to pay for the relevant company's votingsecurities. We understand that the staff of the Premerger Notification Officehas long taken the position that the value of an acquired company's debt isalready incorporated into the purchase price of voting securities (and thereforeshould not be added to the purchase price). Buyer's approach to the fair marketvalue of voting securities is consistent with that position. Based on ourconversation, we understand that you agree with our view that this approach isacceptable.
Finally,we explained that some of the preliminary internal valuations prepared by Buyerfor purposes other than the HSR fair market valuation indicate a valueof more than $53.1 million of the purchase price for Z, in part because theyincorporate certain tax and accounting assumptions. However, these valuationswere not intended to determine what a third-party would pay to acquire thevoting securities of Z on a standalone basis in an arm's length transaction.Based on our conversation, we understand that you agree with our view thatthese other valuations are not determinative.
We would greatlyappreciate if you could call (redacted) to confirm that this letter accuratelysummarizes our conversation and your views on the issues described. Thank youfor your attention to this matter.