Determining Deal Structuring Components

question 81

Essay

Determining Deal Structuring Components
BigCo has decided to acquire Upstart Corporation, a leading supplier of a new technology believed to be crucial to the successful implementation of BigCo's business strategy. Upstart is a relatively recent start-up firm, consisting of about 200 employees averaging about 24 years of age. HiTech has a reputation for developing highly practical solutions to complex technical problems and getting the resulting products to market very rapidly. HiTech employees are accustomed to a very informal work environment with highly flexible hours and compensation schemes. Decision-making tends to be fast and casual, without the rigorous review process often found in larger firms. This culture is quite different from BigCo's more highly structured and disciplined environment. Moreover, BigCo's decision making tends to be highly centralized.
While Upstart's stock is publicly traded, its six co-founders and senior managers jointly own about 60 percent of the outstanding stock. In the four years since the firm went public, Upstart stock has appreciated from $5 per share to its current price of $100 per share. Although they desire to sell the firm, the co-founders are interested in remaining with the firm in important management positions after the transaction has closed. They also expect to continue to have substantial input in both daily operating as well as strategic decisions.
Upstart competes in an industry that is only tangentially related to BigCo's core business. Because BigCo's senior management believes they are somewhat unfamiliar with the competitive dynamics of Upstart's industry, BigCo has decided to create a new corporation, New Horizons Inc., which is jointly owed by BigCo and HiTech Corporation, a firm whose core technical competencies are more related to Upstart's than those of BigCo. Both BigCo and HiTech are interested in preserving Upstart's highly innovative culture. Therefore, they agreed during negotiations to operate Upstart as an independent operating unit of New Horizons. During negotiations, both parties agreed to divest one of Upstart's product lines not considered critical to New Horizon's long-term strategy immediately following closing.
New Horizons issued stock through an initial public offering. While the co-founders are interested in exchanging their stock for New Horizon's shares, the remaining Upstart shareholders are leery about the long-term growth potential of New Horizons and demand cash in exchange for their shares. Consequently, New Horizons agreed to exchange its stock for the co-founders' shares and to purchase the remaining shares for cash. Once the tender offer was completed, New Horizons owned 100 percent of Upstart's outstanding shares.
-How would you characterize the post-closing organization? Why was this organizational structure used?

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Definitions:

Instrument

A legal document formally evidencing a right or obligation, such as contracts, wills, or promissory notes.

Good Faith

A principle that emphasizes honesty, fairness, and integrity in the fulfillment of contractual obligations or in negotiations.

Reasonable Commercial Standards

A legal concept referring to the standard practices and methods used by reasonably prudent and competent parties in a particular industry.

Honesty

The quality of being truthful and free from deceit or fraud.