eSignature Negotiation Made Easy

E signature negotiation

this next session I think we've been looking forward to for some time now Rick and I met many months ago and had planned out this concept and I'm so pleased to see it now coming together because both Rick and Keith are going to walk through a mock negotiation they're going to endeavor to cover three different issues in an M&A transaction and this really hits to the spirit of what we're doing with transaction advisors is to understand and uncover the best practice in putting deals together and collectively I think we can advance the practice of a better more strategic more thoughtful negotiations better deals and certainly this will hit right on the right home in terms of that ambition so with that let me turn it over to Rick and Keith we're going to lead this next session thanks okay well thank you William can everybody hear me okay good so my name is Rick Klieman I'm joined this afternoon by my Hogan Lovells colleague Keith Lau I'm somewhat embarrassed to admit on behalf of both of us that between the two of us we have more than six decades of collective M&A experience and advise yeah it's depressing to even say that but our focus today as Williams suggested is going to be on negotiating M&A deals and in particular negotiating certain purchase price formulations that I'm guessing many of you in the audience have dealt with before and also time permitting excuse me we're going to address a growing and at times annoying trend that has emerged in the negotiation of key provisions in the acquisition agreement and that is the reliance and I would almost say blind reliance on these now widely proliferated deal point studies that many of you have seen these are statistical surveys that purport to tell practitioners what's so-called market terms are in a deal and we'll close with that because we have some interesting and somewhat caustic observations on on that but today we're going to illustrate for you some of the give-and-take that goes on in the the purchase price formulations that we're going to be talking about today and to do that we're going to slip into character with me on the buy side and keep on the sell side I'm going to play the role of the lawyer for a publicly traded buyer I know many of you are affiliated with publicly traded companies in this case a serial Technic flyer and that has its sights set on a target company a technology company represented by Keith and for most purposes today we can assume that the target company Keith's client is a privately held company and again this is a scenario that should be familiar to many of you you should all have in front of you the materials for today's presentation there's a little stack here at the front of the room if you haven't received one but they should have been passed out please keep them close at hand because we're going to refer to them periodically and of course feel free to interrupt at any time with questions if you have any during this session so we're going to begin by talking about acquisition currency and the type of deal consideration that's used by the buyer to pay for the deal and as most of you know the basic choices here are both cold hard cash number one and number two shares of the buyer stock or some combination of those two now the first chart in the materials behind you know a little hold virtual tab one because they're not really tabs but just sheets of paper mark tab one you know identifies some of the factors and considerations you have to take into account in determining what type of acquisition currency to use and let's assume as we move into character that the buyer and the target company have already reached some sort of basic agreement on valuation so let's have at it Keith you know we've agreed that the company you're representing the target company is worth a cool three hundred million dollars and your client the target company has 10 million shares outstanding that comes out to a price of $30 a share right that's right Rick what our clients have decided is a price of $30 a share that's exactly what we want yeah now does your client actually have a preference as to whether it would want to receive that $30 a share in stock or cash what would it prefer yeah so it prefers stock our founders have a very low basis in their shares and they really don't want to pay tax this year they want to decide when they pay tax so they'd prefer stock so they can get a tax-free deal right recognize that one of the key advantages of a stock swap over pure cash acquisition is the ability to do the acquisition on a tax-free actually a tax-deferred basis but I'll tell you Keith that we understand your desire for four stock consideration in this case and I will tell you that our bankers and our corporate development folks are not wild about us using our stock as acquisition currency because the stock deal is simply going to be much less accretive to our earnings per share than a cash deal and the investment bankers in the audience will tell you that that's because the cost of equity capital in the current market and generally almost in all markets is materially higher than the cost of debt capital in the marketplace and so as we show on the chart here a stock or stock meal is going to be less accretive for the buyers EPS than a than a cash deal but on the other hand I will say that my client is not sitting on a ton of domestic cash right now my client has a lot of cash on its consolidated balance sheet but it's all tied up in Europe and I might feel differently if President Trump would actually come through on that repatriation tax holiday that he's been talking about but we're a little cash starved domestically now and given our capital structure and our current debt load we're not really interested in borrowing money to find to finance this deal so thanks for all that background so I guess you're okay then issuing stock yeah we're going to we're going to do a straight stock swap here what we refer to was just doctor stop deal will the deal price will be paid entirely in shares of my clients stock but I need you to bear in mind that to issue those shares to your clients shareholders my client the buyer is going to have to rely on an exemption from the securities laws because shares of stock or securities afterall we all know that securities have to be registered with the SEC unless there's an exemption available and exactly that we're probably going to rely on is going to require those shares to be locked up for a little while and your shareholder within your shareholders hands they going to be okay with that well well they will but really it depends on what exemption you think about for regulation to your right there's a six-month lockup and the clients fine with that but there are other exemptions that we should talk about that don't require a lock-up like a three eight ten fairness hearing which would get us liquid shares but for the time being we'll accept these shares that are that are locked up for six months we might want to talk about registration rights but let's leave that to the side for now now because my client shareholders will be getting a big chunk of your clients equity will want to do some type of due diligence on your client just like your client is doing due diligence on mine will want to get the same types of representations and warranties from your client that you're getting from us because after all we're making an investment in your client we're getting your shares and as a general matter we'll want some pretty good symmetry in the acquisition agreement so again we'll want similar symmetry and rap symmetry and covenants and the like yeah well I mean I just have to tell you now that's just not going to happen this is not a merger of equals your client is a much smaller company than my client is by my calculation your clients shareholders are going to end up owning maybe ten percent maybe approaching fifteen percent of the outstanding stock of the combined company when this whole transaction comes down so forget about symmetry well I don't know ten to fifteen percent is pretty big chunk will certainly want to start with talking about due diligence and will at least want to talk about your forecast to see what's coming down the pike since we will be locked okay well that kind of constraint do diligence maybe okay but remember we're going to be doing you know the mother of all due diligence investigations on your company we're going to look at all of your IP we're going to look at you know you know all of your employment arrangements all of your licenses all of your contracts your disputes your litigation we're going to be combing through everything I hope that's making you a little on deer's it is making me uncomfortable but you know but if you want to do some high-level due diligence and you know under a mutual confidentiality agreement of course we're happy to tell you about the quality of our consideration and what our earnings are going well we'll talk about the level of due diligence and we'll get into that let's talk about the elephant in the room let's talk about the exchange ratio well you know you know why is that the elephant in the room it's it's it's pretty simple really the way I look at it the price we've agreed on is $30 a share correct and you know that my clients the buyers stock price has been hovering around $15 per share so we're going to agree on an exchange ratio on a fixed exchange ratio of two shares of my clients stock it's $15 a share for every outstanding share of your clients stock that's a two to one exchange ratio two times 15 equals 30 right it's a simple stuff you don't need a PhD in higher mathematics to figure this out it's a two for one exchange ratio yeah that is that is simple math Rick but you miss sort of a major issue there's going to be a long period of time or potentially a long period of time between the signing of the deal and the closing of the deal and the stocks going to fluctuate in that time period if you use a two-for-one the value then is going to fluctuate we don't want to be subject to that huge value fluctuation we want 300 million dollars we don't want to shares for stock so again above my head here in your exchange ratio if your stock is here at 15 shirts three hundred million but if your stock goes down here guess what it's only a hundred million dollar deal and that's not going to work you're actually worried about our stock going down from $15 to $5 a share and the relatively short time between signing and closing we don't know how long it's going to be could do that again my clients are focused on the three hundred million dollars so we'd like a fixed value deal a floating exchange ratio deal yeah those of you who are mathematically inclined and familiar with asymptotes will be will be comfortable with this so what you're saying is you want a deal where the exchange ratio actually changes so that if we are fifteen dollars a share yes well what I was talking about everyone is three hundred million dollars right the deal that I want so so in fact if our stock price did go down to five dollars a share you would be saying you want the exchange ratio to adjust automatically to six to one from two to one that's a that's a pretty extreme ask III would say and I would also tell you a heat that I think you're looking at the wrong end of these diagrams no you know we've talked about that the tremendous revenue and cost synergies and that this deal is going to generate tremendous I mean we're both elated about this deal and how this is going to be a great deal for all parties and I think we all know that my client stock the buyer stock is going to rise well above $15 a share maybe up to 20 or $25 a share because of this deal because of this energy is generated by this deal and the street is going to think it's a wonderful deal here okay so you should another stock is is going to be you know worth like 400 or 500 million I love hearing that then you shouldn't be worried about a floating exchange ratio because you're so sure the stock is going to go up you'll see more shares my client be happy because it'll get over a million dollars yeah well as your left shares and and your client will be happy yeah but but look here's the problem with the floating exchange ratio and this is why you'll rarely see a floating exchange ratio other than in the elephant in the flea situation and you know if GE is is buying some you know tiny little publicly traded company maybe it can you know do a pure floating exchange ratio but the problem with a floating exchange ratio is that if I stock does go down a little bit the number of shares that you know that I have to issue you know goes up significantly and if it goes up high enough it may actually you know in other words if instead of owning only ten fifteen percent of the outstanding combined company shares you know your former shareholders ending end up owning 17% or 18% will actually have to have a shareholder vote on our end and nobody wants that that's going to create uncertainty for the deal you're not you're going to want an even higher price because of the uncertainty that my shareholders might vote this deal down it opens up a can of worms that none of us wants now I can see doing a floating exchange ratio like this if we collar it and we've shown in the diagrams what a collared floating exchange ratio would look like again for those mathematically inclined at least it will cap you know there will be some maximum level of dilution I'll know that under no circumstances will my client have to issue more than a certain number of shares and I commend to you particularly those of you that are in part of the number-crunching game if you've never gone through this exercise before you know the numbers are up there the charts are up there you know but but this is a you know this is a real issue for us now let's step out of character very very briefly keep this is a major fight in in a lot of deals there's no question about the fact that fixed exchange ratios are a little more common things get a little more complicated if Keith's client is a publicly traded client rather than a privately held client why is that so because if Keith's client is publicly traded all of a sudden the arbitrage or step into the act and one of the things that the investment bankers in the room will tell you that particularly when you use some of these exotic exchange ratio formulations the right move for the object Rocklin for the arbitrage yours is to take a long position in the target company stock and then short the buyer stock is a hedge putting downward pressure on the on the buyer stock price snapping the collar and creating problems for everyone so I guess we'll land by saying as we negotiate this yet a good lawyer and get a good banker to help negotiate the purchase price formulation the exchange ratio formulation anything else in the way of just out of the sort of out of character commentary on this key well you started with keep it simple it definitely could get complicated when you start to think about the exchange ratios right well speaking of not keeping things simple we're going to move to our second topic which is another type of pricing formulation and that's the earn out I think most of you in the audience know what an earn out pricing formula is a by show of hands how many of you have actually dealt with earn outs before and so most of you simple may have yet a good experience with it yeah I do exactly that's a that what's wrong my really like to hear from you I think afterwards and to provide some testimonials because most advisors hey turnouts because of their complexity or love them because of their complexity and all the extra input they get to provide but simply put for the few of you that may not know what a turnout is it's a mechanism that allows all or part of the purchase price to be paid after the closing of the acquisition based on the post closing performance of the business that's actually being sold and you'll find a helpful discussion of burnouts behind Tab 3 of our materials and slipping back into character let's assume that Keith and I unlike the previous vignette have not agreed on the valuation of his client the target company and in fact we vehement ly disagree on valuation so the decision to utilize and earn out formulation can play out I guess something like this so Keith you really think your client this target company this technology company that you're representing is worth 300 million dollars I do just look at the two-year cash flow and earnings projections the company is easily worth 300 million dollars well I got to tell you Keith we've studied your clients projections and we're well let's just say we're a little bit skeptical about the numbers you've shown us and the underlying assumptions that went into generating those numbers so we've given your numbers a reasonable haircut to bring them back into the zone of reality and when we look at the adjusted numbers we can only get to a valuation of 200 million not even close to the 300 million dollars that your client is insisting on well I guess we're going to have to find a buyer that feels better about our projections and we'll we'll see you later we'll find one that likes the 300 million good luck with that because every buyer is going to take a look at them with the same skeptical eye that we will and they're going to get there that you're gonna have to take a haircut on those numbers but I will tell you what we're going to do because you seem so passionate and you know so intent on getting that three hundred million dollars so confident in these numbers we're going to ask you to put your money where your mouth is that's what it or now it is it's the classic put your money where your mouth is formulation we're going to use and earn out pricing formulation will pay your client stockholders 200 million dollars at the closing of the deal but if the performance of the target company's business after the closing warrants it your clients shareholders can receive up to an additional 100 million dollars bringing the total price up to the 300 million dollars you're so stubbornly insisting on and specifically if the business hits your one-year EBIT da bogey your net cash flow target of 10 million dollars in the first year after the closing we will pay your clients former shareholders then former shareholders obviously on additional 50 million and same arrangement for year 2 if the business hits your year to a bit da bogey which is 12 million and the projections you showed us the very aggressive projections you showed us but you seem to believe them you know we'll pay your former shareholders yet fifty million dollars in other words make your numbers and you will hit your 300 million dollar purchase price target I only ask one thing and you alluded to it just earlier keep it simple just as I described it you keep talking about keeping things simple and then you add just a ton of complexities you want an E bit da based earn out a cash flow based or not that's way too complex Rick because then you have to start thinking about the charges and the expenses and I'd rather use something that's measurable and that doesn't have the potential from the manipulation like the expenses do so let's maybe talk about a revenue base turnout and then maybe my client will agree to it yeah see well the problem with that is that's a little too simple key you know I do agree that a top-line metric like revenues is simpler to measure and implement than a bottom-line metric like earnings or eBay da or straight cash flow etc but the problem with using revenues as a metric is that it doesn't really align incentives and the management team for the business going forward which are your you know your clients former stockholders are going to be incentive to deliver a lot of flimsy revenues a lot of unprofitable revenues a lot of slim margin revenues you know to the company in order to meet whatever revenue bogey is set that's the way people act that's human nature they respond to incentives that's not what we want we want a healthy bottom line so yeah I agree it would be simpler but it would be stupid from our standpoint well again if you want to keep it simple we need to talk about revenue if you want to make it more complex we can talk about doing a cash flow base turn out but there going to be a host of issues that we talked about in fact I put together a whole slide presentation on just those very issues so if you look at the next slide the first question at the bottom of the slide is what revenues count before we even get to the expense side what revenues count is it going to be limited to specific products that were that my plan is currently selling if so I worry about that because what if you take our technology and you put it into a new product and you call it something else you can design around so what revenue counts is going to be could suppose we take a little tiny bit of your technology and drop it in there should you get full or an hour credit for that I mean we should but we're going to negotiate that so it's not going to be simple if you go to the next slide how should revenues be allocated if the products sold in a bundle it's super nice if you have a product you sell it one way there's a list price and everybody knows what if you sell it in a bundle who's going to allocate the price in that bundle and then what happens if your client uses my clients that has two product as a loss leader it gives it away so it could sell some of your existing products I need to get credit for all of those things that is going to be complicated because that would be a problem even if we had a top line based earner right we're only on slide whatever keep flipping a couple more slides forward so what cost count there you go now we got to talk about we've got the revenue side what costs are deducted in order to sort of measure the metric it's easy when I'm a standalone company and I can control my cost once I'm a part of GE or whatever large company how are costs going to be allocated and so we're going to have to spend a lot of time negotiating that point keep flipping two more slides so let's get the measurement period we'll talk about that operational issues there's a whole host of issues here if you look at one question I'm going to have is go back one go back one just from the beginning the second bullet will the key employees that have been running this company that know how to sell these products and generate revenue are they going to remain in control of the target and if so for how long and by the way I want to put that in the agreements and make sure that this team continues to run it and what happens wait a second you mean we can't you know someone is just really screwing up we can't terminate them we can't fire them you can terminate them after the earn-out period but you're not going to terminate them early and if you do we'll talk about what happens in a minute let's go to the next slide I can't wait now what general level of efforts is your client going to a we - I want language in agreement that says your clients going to make sure that our business is run in a way to maximize the revenue maximize the EBIT done so you're not that way right that isn't that the tail wagging the dog I mean knowing that you're going to you're going to tell us how to operate one of our units absolutely because I've got a hundred million dollars riding on that for sure you could pay me 300 million now we'll be done but if you want to do this two hundred and fifty and fifty then I want to know not only generally I want specific promises from your client could your client has told my client that we're going to be independent that we're going to be such a great part of this big global company you're going to invest mightily in our product let's just put a specific covenants - how much you're going to invest what you're going to invest in and we're going to be able to use your great distribution channel without cost by the way keep living - more one more accelaration events what happens if I'm successful in negotiating all these covenants and your client breaches them I know they'll never do that but what if they did what if they sell the company they find out it's so great it's worth five hundred million they sell it the next day I want to make sure my client gets paid in two hundred million dollars I want these acceleration events so if your client sells the company it sells its assets you said earlier you want to be able to fire my client well if you do fine then just pay one hundred million dollars so if you fire them then the full hundred million accelerates right but I mean and we're going to have to distinguish making it even more complex between firing for cause you know if your clients embezzling you know if one of these former shareholders is embezzling you know we should be able to fire them without without accelerating the earning I'm glad you agree on the concept we'll talk about the definition of cause and I also want to make sure that we talk about the definition of good reason because it's not just if you fire us but my client is a very passionate engineer he doesn't want to be cleaning the restrooms so if you assign responsibilities that aren't consistent with that we get to quit and get that so so under below he saw should I keep going no I we're not going to be able to keep this simple are we no so I'm not step out of character here and this is why I'm interested in hearing from the experience of some of you it looks like if we do in turnout we will have the hundred million dollar tail wagging the two hundred million dollar dog the earn out section of the acquisition agreement is going to be twice as long as the rest of the agreement we'll see 70 dense pages of accounting definitions and Covenants and acceleration events and other complicated and cumbersome provisions it's going to take years not months it can take years to negotiate this and you know and by the way out of character Keith and I had the privilege of negotiating what I think maybe the biggest earn out in history it was eBay's acquisition of skype talk about it so that was that was crazy right so ebay paid three point nine billion dollars for Skype that might have been crazy too but that's the whole separate question because they ultimately got it back on the back of one when it was sold for Microsoft but 2.5 billion up front and a one point four billion dollar earn out use anyone knows of an earn out of more than one point four billion tell us because I telling people if this is the largest turnout of all time anybody told us we'd still say it so together and say it anyway but the the definitions section went on for two and a half alphabets we got to like Triple R of defined terms it was twenty seven pages of definitions there were three metrics it was a revenue metric a profit metric and an active user metric who knows what active users are in nor did we so we had to sort of figure that out and negotiate that and put language in that you know then we had all kinds of control issues and there's a saying or now it's never earned all was paid well at the end of the day he way did decide to pay one of the metrics out of three different metrics and we kind of went on our land then sold a company but that's one of the reasons that buyers are sometimes a little wary of earn outs never earned always paid because if you get to the end of the earn out period and you're looking you're still valued employees in the eye and saying oh sorry you missed you know that hundred million dollars you were counting on you know you knew the rules you're going to have some pretty upset employees on it so very often they get settled out and paid out in in any event and I would definitely say that because of the complexity more deals get proposed as earn outs than actually end up getting done as earn outs because if the target company has a lawyer as skilled as Keith is at this it becomes a very convoluted process particularly where the earn out is relatively small relative to the base purchase price it's just not worth it and earn outs in our experience like to hear your experience at some point maybe we'll stick around for the break afterwards and would like to to hear from from some of you about this but they almost always it seems end up in disputes and commonly end up in litigation and there's a lot of litigation out there about or announce is that what you really want to be there proposed as a creative way for the business folks to bridge evaluation gap but usually there's a reason that there's a valuation gap and the earn-out doesn't really bridge it at the end and you end up with a fight on your hands I will say that if some of our biocide clients do go in with it with their eyes open and they know they're going to have to pay either all of it or some of it but they want to drive a particular behavior they want to retain people for a certain amount of time and this arguably gives them an opportunity to do that right so so that's the negotiation that goes on over earn-out formulations their common in the tech sector certainly common in the life sciences sector where you have milestone base turnouts based on regulatory milestones and and and and the like but they are challenging and as common as they are be aware of the challenges before you before you go into them so to conclude our segment today and in an effort to get things back on track we won't spend too much time on this let's talk about a negotiating vignette that's become all too familiar in the current ma marketplace one that may bring back painful memories I would think for at least some of you in the in the audience so Keith we've hammered out the price terms now you know we've agreed on the earn out or the exchange rate of whatever but at this point why don't we just go through the rest of the draft definitive acquisition agreement and deal with the non price terms you know as you know is buyers council I've sent you our eminently reasonable buyers first draft so hopefully we're not going to have a lot to talk about here and we'll be able to slide through this sale through it fairly easily yeah unfortunately Rick we do have a lot to talk about and why is that well I've compared your draft agreement this reasonable buyers draft agreement to a recent American Bar Association private target deal point study and compared to the ABA study you are way way off market okay so there it is that's it the biggest insult that can be delivered in the current ma marketplace you're off market no way you know he you know please tell me I mean please tell me I'm incompetent tell me I'm clumsy but whatever you do please don't say I'm off market because that is how many of you have you know I've heard of not a market deal off market how many of you have been confronted by people that are citing deal point studies in one way or another just by show of hands I'd be interesting it is something that is becoming not only commonplace but almost ubiquitous in the current negotiating scene so keep any an example of where we're off market according to this ABA study yes so I will give you an example we've negotiated 28 pages of representations and warranties covering the waterfront litigation employees taxes and then at the very end you've added what's called a full disclosure rep that says in addition to those 28 pages of reps and warranties there's nothing else that Tyrael that you forgot to tell me you rarely see that according to my ABA study well it's in all of our deals I mean we get that all the time but but all right you know I'll even have to tell me about this this ABA study you know that purports to measure what's market and that says you never get a full disclosure or so-called 10 B 5 representation it's just one example of you know one of the deal points the tracking to know it's great study the American Bar Association put together a bunch of lawyers from a lot of different firms looked at a number of deal points reps and warranties closing conditions indemnification provisions how long the IP rep lasts and the like and they put together a study that told my client what's market it's phenomenal and and just what is the sample set for this well the sample set is unassailable because we're not talking about deals that I just pulled from the cabinet these are publicly filed deals these are deals that are filed with the Securities and Exchange Commission so all of us can go and look at them and see how these statistics come out so so let me follow up on that for a second doesn't that mean that all the deals that my client does and all the deals that are done by companies similar in size to my client you know my client you know has a market cap well above 100 billion dollars think Oracle Intel Google Amazon GE whatever you know doesn't it mean that all the companies done by my client aren't going to be in this study well you know I guess that's right but it's the best study that we have you know it's the ABA study a little bit let me follow up on that for when my client does a 300 million dollar deal it's a rounding error that's not a material deal for my client standpoint because it's not a material deal my client doesn't even have to publicly announce it but it certainly doesn't have to file the deal documents with the SEC on an 8k so this study only covers deals you've just said that get filed with the SEC therefore the results of this study that you're citing and that have being cited so often in negotiations today is a flawed study the results are skewed it only includes the deals done by smaller buyers where the SEC materiality standard is satisfied because a 300 million dollar deal for example is always going to be material to a buyer with a 1 billion dollar market cap just won't be material to a buyer with a hundred billion dollar market cap so so I so I guess you're right some of those deals aren't filed but it's still none of those deals are filed yeah it still tracks publicly filed deals yeah well it directs publicly filed deals but the fact of the matter is that the deals that are excluded from that study that's the market my client is playing and it's not playing in this market you know it's playing in the market where she really choirs with big market caps or going out and buying companies and you would expect that serial acquirers with big market caps I have a little bit more negotiating leverage than these small tiny publicly traded companies that you know that by the companies in the deals that are covered by that study when you agree well so I get the point deals done by bigger buyers aren't included in the survey but how do we even know what the terms are that those bigger buyers get I'm certainly not going to go ask those bigger buyers about that well I know I know anecdotally do the bigger buyers get oh so I should try to mute then the smaller buyers surveyed in the in the ad I guess I take your word on it yeah because I've seen them but but you really don't have to take my word for it because I've included in the materials some excerpts from a brand new study called this the antidote to this nonsense that's been going on and proliferating throughout the negotiating you know so new in fact that it hasn't even been officially issued yet it's marked draft and you should respect it as a draft that way it's behind the tab for just this one expert so what I've included is a very advanced draft of the study good enough to circulate it to circulate to all of you here it's a joint effort by the ABA and SRS aqueon there are some SRS aqueon representatives in the in the audience here and this audience has the honor of seeing a preview in this study is really done for those of you who are affiliated with or who regularly advise in the case of the advisors in the room large cap buyers and this is a tool that you can actually use a godsend really something to throw in the face of the obnoxious sell-side lawyers who robotic lee site these skewed the market statistics to support their distorted negotiating positions that are incredibly frustrating so let's look at the at the excerpt that we've included because it happens to address this full disclosure representation that you know that you cited key and if you look at by the way here are all the deal points covered in the study but we've only included this one excerpt the study is keyed around a new metric that you should all be aware of i called it we called it buyer power ratio or BPR but it is very simple it's simply the buyer's market cap divided by the size of the deal and if you have a huge buyer doing a relatively saw a small deal buying a relatively small company you would expect to get highly buyer favorable terms there because of the negotiating leverage involved so you know if you have a buyer with a hundred fifty billion dollar market cap buying a 300 million dollar you know company you know you can do the math and find that it's a buyer power ratio of 500 which is very different than a six hundred million dollar market cap company buying a three hundred million dollar company which is a buyer power ratio of just two it's very simple and if you look at the 10b fiber full-disclosure rep and you know he boldly said that in only a small percentage of the cases according to a VA study which is which is based on publicly filed documents a skewed sample set do you see this 10 B 5 rap you find out that he's right this is the ABA study here to the left the pie chart to the left that you end up with the buyer favorable outcome which is yes including a 10 B 5 rep only about 30% of the time and about 70% of the time there is no 10 B 5 rep at all but if you look at the data from this new study you see that when the buyer power ratio is greater than 200 in our hypothetical acquisition it's 500 all of a sudden the statistics skew in the other direction and you see that an overwhelming majority of the time there is an mg 5 rep in there this is just one deal point that that we're using for illustration here and this bar chart you know shows it even more clearly there's a clear correlation between increases in the higher power ratio and increases in the incidence of buyer favorable terms now our advice to you is not necessarily to use this study because when people throw studies in your face in one direction or the other that's not negotiation or that's what we call negotiating by the numbers it's becoming very common here and it's obnoxious it's annoying and it's wrong we all know that every acquisition is unique that you can't look at provisions in a vacuum and you know we yearn for the days of people negotiating by logic and not by statistics and you know part of the fault here is some of the investment bankers who say well once we've negotiated the price we want a market deal as if there is such a thing as a market deal but there isn't and if you are going to talk about a market deal then at least talk about the market that you're playing and in this case with the serial acquirers that we tend to represent it's a very different market than the sample set shown by the ABA study some concluding comments keep on it and by the way I should mention for those of you that are interested in this many of you may not be but if you you know if you find if you find yourself interested in these statistics and you'd like a copy of the entire study when it comes out it's going to be released formally in about three or four weeks it's going to have some impact and some changes in the way the non-price provisions are negotiated and even some of the price provisions like or some of the economic provisions how big is the escrow what reps go beyond the escrow all the stuff that you've negotiated in the past just give me your business card unfortunately we're so new at Hogan Lovells that we don't even have business cards yet but but but just write on the back of your business card a new deal point study and we'll make sure you're on the list and get the full study out to you keep any concluding comments now just that I'm usually on the buy side so I'm very happy about this study notwithstanding I play the south side on TV so we have a break now and we'll hang around if there are any questions and I'm thinking we can take a couple questions down okay sure if there are any people that have any observations or questions on anything we've talked about on any aspect of negotiating M&A deals we spend our lives doing that you know we're M&A lawyers 24/7 so there's probably not much we haven't seen in the marketplace public or private hi have you ever negotiated and are now dealing a public too public case I know we know if a couple of presidents but if you want to comment on yeah there are there are studies of what happens in the public the public eight the ABA does one as well it's the called the public party was that announced I think yeah those are a lot contingent yet we have in there's a lot in a life scientist space called contingent value rights and sometimes those those cvrs trade separately and sometimes they don't that's where you see it most often yeah and you see other in the life science of space royalty trust etc it's very difficult because you have to you know sort of hire a monitor of you know the right you know have you met the the bogies and the contingent value and they tend to be much simpler than the types of complicated or now it's you see in the private company space and as a practical matter you just don't see you know a lot of earn-out type arrangements in the public company space because they're flaky and a competing bid that's all cash or all stock and that doesn't have a contingent component is usually going to be able to prevail in the competitive bidding situation that by definition almost always exists in the public space because unlike in the private space even when you've signed and announced a deal in the public space someone can always come in over the top and lob in a topping bid but again in the life sciences area if you have a product that's not yet to market or you've got a new product among others you need to get value yeah I think Santa Fe genzyme for example is one of the prototypical examples of you know the equivalent of a relatively simple urn out in that space other questions or other observations great we'll stick around for the for the break and thank you for your patience you