Deal structure in M&A

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LinkedIn will retain its distinct brand, culture and independence. Jeff Weiner will remain CEO of LinkedIn, reporting to Satya Nadella, CEO of Microsoft. Reid Hoffman, chairman of the board, co-founder and controlling shareholder of LinkedIn, and Weiner both fully support this transaction. The transaction is expected to close this calendar year.

It looks like LinkedIn’s CEO Jeff Weiner will stay on. Here are the two CEOs talking about the strategic rationale:

As is usually the case in a friendly deal (a deal in which the buyer and seller management teams jointly announce the deal, as opposed to a hostile takeover in which the buyer doesn’t have the support of seller management), you’ll get some language in the announcement like this:

The Board of Directors of the Company (Linkedin) unanimously determined that the transactions contemplated by the Merger Agreement, including the Merger, are in the best interests of the Company and its stockholders and approved the Merger Agreement and the transactions contemplated thereby, and unanimously resolved to recommend that the Company’s stockholders vote in favor of adoption of the Merger Agreement

Interpretation: Linkedin’s board of directors approved the deal and recommend that all the shareholders vote in favor of it.

Shareholder approval

Target shareholder approval is required

For a decision as significant as a sale of an entire company, it isn’t enough for management and board to simply approve the deal. It can only go through if more than 50% of a company’s shareholders vote to approve it. (In some rare cases, a supermajority is required: Learn more.)

In Linkedin’s case, co-founder and chairman Reid Hoffman owned more than 50% of the shares. As we will see shortly, he committed to voting for the deal ahead of the announcement, so the vote was a foregone conclusion. That’s not always the case. In hostile takeovers or in proxy fights, there’s risk that shareholders will not vote to support a transaction.

Is buyer shareholder approval required? For transactions in which the acquirer issues more than 20% of its own stock, acquirer shareholders may also be required to approve the acquisition. This is the case in the CVS/AETNA deal.

The definitive agreement (merger agreement)

The press release announcing the deal is usually distributed to media outlets and is on both companies’ websites. When a public company is acquired, it will immediately file to the SEC an 8-K that contains the press release. In addition, it will typically file the full merger agreement (usually found as an exhibit in the same 8-K that contained the announcement press release).

In practice

The merger agreement is usually filed as an exhibit to the announcement press release 8-K or sometimes as a separate 8-K. Just search EDGAR for filings made on or around the announcement date.

The merger proxy

Because LinkedIn must get shareholder approval for this transaction, it must file a proxy statement with the SEC. When the vote concerns a merger, the proxy is called a merger proxy and is filed as a DEFM14A. If the proceeds include stock, the proxy is called a merger prospectus.

Both the merger agreement and proxy lay out in more detail the terms described in the press release. Specifically, the Microsoft-LinkedIn merger agreement details:

Conditions that would trigger the break-up fee

Whether the seller can solicit other bids (go-shop” or no-shop)

Conditions that would allow a buyer to walk away (material adverse effects)

How shares will be converted to acquirer shares (when buyers pay with stock)

What happens to LinkedIn option and restricted stock holders

In addition, the proxy will go on to disclose a lot of details around deal negotiations, company projections, treatment of dilutive securities and other details that are more thorough and more clearly laid out than those in the legal jargon-heavy merger agreement.

In practice

The merger proxy (or merger prospectus) is much easier to navigate than the merger agreement and is the primary data source used to understand key terms in the transactions.

When analyzing M&A transactions, finding the relevant documents is often the hardest part of the job. In an acquisition of a public target, the type of publicly available documents depends on whether the deal is structured as a merger or a tender offer.

M&A documents in deals structured as mergers

Deal announcement press release

When two companies merge, they will jointly issue a press release announcing the merger. The press release, which will be filed with the SEC as an 8K (likely on the same day), will usually include detail about the purchase price, form of consideration (cash vs stock), the expected accretion/dilution to the acquirer and expected synergies, if any. For example, when LinkedIn was acquired by Microsoft in June 13, 2016, they first broke the news to the public via this press release.

Definitive agreement

Along with the press release, the public target will also file the definitive agreement (usually as an exhibit to the press release 8-K or sometimes as a separate 8-K). In a stock sale, the agreement is often called the merger agreement, while in an asset sale, it’s often called an asset purchase agreement. The agreement lays out the terms of the deal in more detail. For example, the LinkedIn merger agreement details:

Conditions that would trigger the break-up fee

Whether the seller can solicit other bids (“go-shop” or “no-shop”)

Conditions that would allow a buyer to walk away (“material adverse effects”)

How shares will be converted to acquirer shares (when buyer pays with stock)

What happens to the seller’s options and restricted stock

Merger proxy (DEFM14A/PREM14A)

A proxy is an SEC filing (called the 14A) that is required when a public company does something that its shareholders have to vote on, such as getting acquired. For a vote on a proposed merger, the proxy is called a merger proxy (or a merger prospectus if the proceeds include acquirer stock) and is filed as a DEFM14A.

A public seller will file the merger proxy with the SEC usually several weeks after a deal announcement. You’ll first see something called a PREM14A, followed by a DEFM14A several days later. The first is the preliminary proxy, the second is the definitive proxy (or final proxy). The specific number of shares that are eligible to vote and the actual date of the proxy vote are left blank as placeholders in the preliminary proxy. Otherwise, the two generally contain the same material.

What’s included

Various elements of the merger agreement (deal terms and consideration, treatment of dilutive securities, breakup fees, MAC clause) are summarized and are more clearly laid out in the merger proxy than in the legal jargon-heavy merger agreement. The proxy also includes critical detail on the background of the merger, the fairness opinion, the seller’s financial projections, and the compensation and post-deal treatment of seller’s management.

Here is LinkedIn’s merger proxy, filed July 22, 2016, 6 weeks after deal announcement.

Information statement (PREM14C and DEFM14C)

Targets in certain mergers will file the PREM14C and the DEFM14C instead of the DEFM14A/PREM14A. This happens when one or more shareholders hold a majority of the shares and are able to provide approval without a full shareholder vote through written consent. The documents will contain similar information to the regular merger proxy.

Top of Form

Bottom of Form

M&A documents in deals structured as tender offers and exchange offers

The buyer’s tender offer: Schedule TO

To initiate a tender offer, the buyer will send an “Offer to Purchase” to each shareholder. The target must file a Schedule TO with the SEC, with the tender offer or exchange offer attached as an exhibit. The Schedule TO will contain key deal terms.

In May 2012, GlaxoSmithKline sought to acquire Human Genome Sciences for $13.00 in cash per share in a hostile takeover bid via this tender offer.

The target board’s response to a tender offer: Schedule 14D-9

The target’s board must file their recommendation (in a schedule 14D-9) in response to the tender offer within 10 days. In a hostile takeover attempt, the target will recommend against the tender offer. Here is Human Genome’s 14D-9 recommending against the tender offer.

In practice

the Schedule 14D-9’s response to unsolicited hostile tender offers is where you’ll see the rare fairness opinion that claims a transaction isn’t fair.


When new shares are issued as part of a merger or exchange offer, a registration statement (S-4) will be filed by the acquirer, requesting that the acquirer’s own shareholders approve the issuance of shares. Sometimes, a registration statement will also include the target merger proxy and will be filed as a joint proxy statement/prospectus. The S-4 usually contains the same detailed information as the merger proxy. Like the merger proxy, it is usually filed several weeks after the transaction is announced.

Prospectus vs merger proxy

As an example, 3 months after Procter & Gamble announced it was acquiring Gillette, it filed an S-4 with the SEC. It included both the preliminary joint proxy statement and prospectus. The definitive merger proxy was filed by Gillette 2 months later. In this case, since the proxy was filed later, it contained more updated detail, including projections. Otherwise, the material was largely identical.

Generally, you want to go with the most recently filed document, as it contains the most updated information.

Summary of key M&A documents for finding deal terms of public targets

Acquisition typeDocumentDate filedBest place to find it
MergersPress releaseAnnouncement dateTarget (likely also acquirer) will file SEC form 8K (could be in an 8K exhibit) Target (likely also acquirer) website Financial data providers
MergersDefinitive agreementAnnouncement dateTarget 8K (often the same 8K that contains press release) Financial data providers
MergersMerger proxySeveral weeks after the announcement dateTarget PREM14A and DEFM14A Financial data providers
Tender/exchange offersTender offer (or exchange offer)Upon initiation of tender offerTarget Schedule TO (attached as exhibit) Financial data providers
Tender/exchange offersSchedule 14D-9Within 10 days of filing of Schedule TOTarget Schedule 14D-9 Financial data providers
Mergers and exchange offersRegistration statement/prospectusSeveral weeks after the announcement dateAcquirer Form S-4 Financial data providers

Gap period between announcement date and close

The period between deal announcement (i.e. when the merger agreement is signed) and deal completion (i.e. when the two companies legally merge) can last anywhere from a few weeks to several months. There are several common deal terms negotiated between buyer and seller that specifically address what should happen in case of unforeseen circumstances during this period.

Perhaps the most well-known deal term that addresses risk during this “gap period” is the breakup fee the buyer will get if the seller backs out of the deal. In addition to the breakup fee there are several, often highly negotiated deal terms that M&A professionals can utilize in the deal process.

Breakup fee

The Microsoft-LinkedIn press release outlines a $725 million breakup fee should LinkedIn back out of the deal for the following reasons:

Upon termination of the Merger Agreement under specified circumstances, the Company will be required to pay Parent a termination fee of $725 million. Specifically, if the Merger Agreement is terminated by (1) Parent if the Company’s Board of Directors withdraws its recommendation of the Merger; (2) Parent or the Company in connection with the Company accepting a superior proposal; or (3) Parent or the Company if the Company fails to obtain the necessary approval from the Company’s stockholders, then the termination fee will be payable by the Company to Parent upon termination. The termination fee will also be payable in certain circumstances if the Merger Agreement is terminated and prior to such termination (but after the date of the Merger Agreement) an acquisition proposal is publicly announced or otherwise received by the Company and the Company consummates, or enters into a definitive agreement providing for, an acquisition transaction within one year of the termination.

In plain English, LinkedIn will pay Microsoft $725 million if:

LinkedIn’s board of directors change their minds

More than 50% of LinkedIn’s shareholders don’t approve the deal

LinkedIn chooses a competing bidder (called an “interloper”)

There’s good reason for buyers to insist on a breakup fee: The target board is legally obligated to maximize value for their shareholders. That’s part of their fiduciary obligation. That means that if a better offer comes along (after a deal is announced but before it’s completed), the board may be inclined to reverse its recommendation and support the new higher bid.

The breakup fee seeks to neutralize this and protect the buyer for the time, resources and cost already poured into the process.

Notice that buyer protection via a breakup fee is one-directional: No breakup fee was owed to LinkedIn should Microsoft walk away.

However, that doesn’t mean Microsoft can just walk away unscathed. At deal announcement, the buyer and seller have both signed the merger agreement — a binding contract for the buyer. If the buyer walks away, the seller will sue.

Deep Dive: Learn more about the breakup fee

Reverse termination fee

A sellers also faces the risk of being left at the alter by the buyer, most notably the risk that the buyer will be unable to secure the financing required to get the deal done. As the name suggests, a reverse termination fee allows the seller to collect a fee should the buyer walk away from a deal.

To address this, the merger agreement (which we’ll review shortly) might identify conditions that would lead to the seller collecting a reverse termination fee. There was no reverse termination fee in the Microsoft-LinkedIn deal. (This is more of an issue when the buyer is a private equity investor.)

Deep Dive: Learn more about reverse termination fees

No-shop provisions

Recall how the press release disclosed that a breakup fee would take effect if LinkedIn ultimately consummates a deal with another buyer. The merger agreement has a section called “No Solicitation,” commonly known as a no-shop, that prohibits LinkedIn from seeking other bids. Microsoft, like most acquirers, was weary of other suitors (particularly of Salesforce) and sought to protect itself. Ultimately the no-shop held, but as we shall see later, it did not prevent Salesforce from entering a higher unsolicited proposal bid for LinkedIn after the deal, which forced Microsoft to up the ante.

While most deals contain a no-shop, a small-but-growing number of deals contain a go-shop. The go-shop explicitly allows the seller to explore competing bids after the merger agreement. This is most common in go-private transactions in which the seller is a public company and the buyer is a private equity firm (as is the case in a traditional LBO).

Deep Dive: Learn more about no-shops and go-shops

Material adverse change (MAC)

Another protection for the buyer is material adverse change (MAC)which gives the buyer recourse should the seller’s business go completely off the rails prior to the deal closing. Microsoft included a MAC (as do virtually all buyers) in the merger agreement. The MAC gives the buyer the right to terminate the agreement if the target experiences a material adverse change to the business.

Deep Dive: Learn more about material adverse change

Exchange ratios

While Microsoft paid for LinkedIn in cash, recall that sometimes companies will use their own stock as currency. When a buyer pays for a target with its own stock, there’s another consideration: What if the acquirer share price drops between the announcement and closing date?

To address this, deals are usually structured with a fixed exchange ratio with the ratio fixed until the closing date. Alternatively, deals can be structured with a floating exchange ratio. Here, the ratio floats such that the target receives a fixed value no matter what happens to either acquirer or target shares.

Deep Dive: Fixed and floating exchange ratios

Purchase price working capital adjustments

The amount of working capital that a seller has on the balance sheet at the announcement date may be materially different from the amount it has at closing. In an effort to protect itself from deterioration of the company’s working capital position, buyers may structure an adjustment for working capital into the transaction that reflects changes between announcement and closing. For example, if at announcement a seller had net working capital of $5 million but only $4 million at closing, the purchase price would be adjusted down by $1 million. (There was no working capital purchase price adjustment in the Linkedin Microsoft deal.)

In practice

Working capital price adjustments are exceedingly rare in public deals. However, they are a common feature in private transactions.

A real life example

When Lifecare Hospitals acquired several of Healthsouth’s hospitals (read more here), it included a working capital purchase price adjustment. Per their merger agreement:

The purchase price to be paid by Buyers … for the sale and purchase of the Purchased Assets as herein contemplated (the “Purchase Price”) shall be an amount equal to (i) $108,974,481, plus (or minus), (ii) an amount equal to the difference between the Final Net Working Capital and a deficit of $954,698.71, minus (iii) the Indebtedness Adjustment Amount. The adjustments described in clauses (ii) and (iii) above collectively are referred to as the “Purchase Price Adjustments.”

Contingent consideration and earn-outs

As you might guess, the most significant hurdle in M&A negotiation is an agreement on price. One way to bridge the valuation gap between what a target thinks it’s worth and what a buyer is willing to pay is to structure contingent consideration (called an “earn-out”).

When an earn-out is negotiated, the buyer will explicitly spell out milestones that would trigger additional consideration. Commonly, an earn-out payment will be contingent upon the target hitting EBITDA and revenue goals, or specific milestones such as a pharma target securing FDA approval of a drug.

Deep Dive: Learn more about earn-outs

Treatment of dilutive securities: Stock options and restricted stock

In a transaction, several things can happen to stock options and restricted stock. The merger proxy clearly lays out how option and restricted stock holders will be affected.

Treatment of unvested options and stock based awards (i.e. restricted stock)

The LinkedIn merger proxy lays out what happens to these securities — namely, unvested LinkedIn securities will convert to unvested Microsoft securities with the same terms:

… At the effective time of the merger, each company option and company stock-based award that is outstanding immediately prior to the effective time of the merger that is unvested will be assumed or substituted for by Microsoft and automatically converted into a corresponding equity award representing the right to acquire, on the same material terms and conditions, an adjusted number of shares of Microsoft common stock, subject to certain exceptions.

The merger agreement also specifies the conversion mechanism. Because Microsoft traded at around $60 per share and LinkedIn shares were worth $196 around the time of the acquisition, an unvested LinkedIn option would convert to ~3.3x MSFT options ($196/$60). (The $60 is an approximation. As the merger proxy explains, the exact denominator will be determined as the volume weight 5-day average of MSFT stock prior to closing.) Converted options will also get a new exercise price – namely 3.3x the LNKD option exercise price:

The number of shares of Microsoft common stock subject to the new equity awards will be determined by a stock award exchange ratio based on the relative value of the per share merger consideration ($196.00) and the volume weighted average price per share of Microsoft common stock for the five consecutive trading days ending with the complete trading day ending immediately prior to the closing date of the merger, with a corresponding adjustment to be made to the exercise prices of company options.

Treatment of vested options and stock based awards (i.e. restricted stock)

In this deal, all vested in-the-money options and all restricted stock is cashed out:

Any outstanding company options or company stock-based awards that are vested, will become vested in connection with the merger, or that are designated by Microsoft as cancelled awards instead will be cancelled and converted into the right to receive an amount in cash (less any amounts required to be deducted or withheld by law) determined by multiplying $196.00 by the number of outstanding shares of LinkedIn common stock subject to the award (and in the case of company options, less applicable exercise prices).

In the case of vested options that are out of the money, the option holder gets nothing at all:

If the per share exercise price of any surrendered company option is equal to or greater than $196.00, such surrendered company option will be cancelled as of the effective time of the merger for no payment and will have no further effect.

Accelerated vesting for executives

Unlike other LinkedIn employees who hold unvested options and restricted stock (their unvested securities will simply convert to unvested MSFT securities as detailed above), LNKD executives benefit from accelerated vesting. Specifically, executives will get accelerated vesting (50% or 100% based on their agreements) should they be terminated.

Also, each executive officer is eligible to receive immediate vesting of 100% or 50%, as applicable, of his or her outstanding company options or company stock-based awards under his or her offer letter (or change of control agreement) if, within 12 months following the merger, there is an involuntary termination of employment without cause, or a constructive termination as defined in the applicable offer letter (or change of control agreement). This is covered more fully below.

Key target shareholders

The merger proxy includes a list of all the entities and individuals that hold significant amounts of target shares.


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Source: LinkedIn Merger Proxy

Notice that LinkedIn has dual class shares (Class A and B) — a feature you’ll see when insiders want to raise capital in an IPO while retaining voting control (for moments like this). This enabled LinkedIn co-founder and chairman Reid Hoffman (and other insiders) to retain voting control post-LinkedIn IPO. Google, Facebook, Groupon and Zynga are other companies with this type of arrangement.

Compensation for LinkedIn management that stay on or are terminated (“golden parachute”)

As the press release suggested, LinkedIn CEO Jeffrey Weiner will stay on. While no other executives had made a formal arrangement at the proxy date, most stayed on and negotiated contracts after the proxy. Page 68 of the proxy outlines Weiner’s compensation for staying on. Page 71 also outlines which payments pertain to key executives that leave (though as of December 2017, they’re all still at LinkedIn):


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Background of the merger

As we’ve seen, M&A transactions can be complex, with many legal, tax and accounting issues to sort out. But the decision to consummate a deal remains a very human negotiation process. While there have been great books written on the behind-the-scenes drama of major deals, information on how things played out for public deals is readily available in the surprisingly engaging “Background of the Merger” section of the merger proxy.

It’s there that we learned the form of consideration (cash vs. stock) Reid Hoffman favored, the number of bidders involved, details on LinkedIn’s management of it’s sell-side process. The merger proxy even tells us how, after the deal with Microsoft was signed, one bidder came back in and offered significantly more!

Deep Dive: Read the behind-the-scenes events chronicled in the “Background of the Merger” section of the LinkedIn merger proxy.

Fairness opinion

As the “background of the merger” section of the proxy chronicles, on June 11, 2016, after management, Reid Hoffman, and the board-appointed Transaction Committee recommended the approval of the merger, Qatalyst Partners submitted its fairness opinion to LinkdIn’s board:

The representatives of Qatalyst Partners then rendered Qatalyst Partners’ oral opinion to the LinkedIn Board, subsequently confirmed by delivery of a written opinion dated June 11, 2016, that, as of June 11, 2016, and based upon and subject to the various assumptions, considerations, limitations and other matters set forth therein, the per share merger consideration to be received … was fair from a financial point of view

The fairness opinion is included in Linkedin’s merger proxy. Simply put, it says Qatalyst believes the deal is fair.

The merger proxy not only includes the fairness opinion letter, but a summary of backup assumptions, inputs and specific valuation conclusions: Qatalyst’s DCF and trading/transaction comps analyses yielded values for LinkedIn ranging from $110.46 on the low end to $257.96 on the high end. (Recall that the actual purchase price was $196.00.)  The fairness opinion is a controversial document since the financial advisor (in this case Qatalyst) is highly incentivized to align its opinion with management’s.