M&A: Growth Strategy for International Companies in 2010

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Strategic Use of Mergers & Acquisitions and Joint Ventures

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February 2009

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February 2009

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June 2010

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M&A Considerations 1. Why Buy? Why Now?

2. Defining Your Acquisition Strategy

3. Valuation Issues

4. Due Diligence, Negotiations and Closing the Deal

5. Financing the M&A Deal

6. Cross-Cultural Issues

7. Post-Acquisition Operations/Risk Management

8. The Joint Venture Alternative

9. Special Issues: IP, Antitrust, Buying Government Contractors

10. Reducing Taxes

11. U.S. Immigration: recruiting/retaining global talent post-acquisition.

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M&A Considerations

1. Why Buy? Why Now?

– Stimulus Act spending in 2010-2011.

– Economic rebound expected in 2010.

– Availability of middle market acquisition opportunities; flexibility of deal terms.

– Benefits of acquisitions or joint ventures. Case studies and examples.

– M&A activity, beginning to rebound from 2009.

– Favorable legal/regulatory considerations: antitrust; unions; immigration policies; attitudes of US administration and Congress.

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M&A Considerations

2. Defining Your Acquisition Strategy

– Your internal business strategy review process

– Understanding and applying your business goals

– Defining acquisition parameters

– Selecting your M&A advisors and legal team

– Financing: how best to present the deal to your investors

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M&A Considerations 3. Acquisition Process and Valuation:

– Identifying your target companies

– Approaching targets

– Valuation techniques and approaches

– Tax Issues

– Stimulus Act impact on valuations

– Special considerations for U.S. targets: environmental issues, employment policies, non-competes and confidentiality agreements, goodwill/intangible assets. Is seller publicly traded corporation?

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Make initial contacts with identified targets to explore potential strategies for partnership

Monitor websites that list businesses for sale, and reach out to investment banks and business brokers to learn about their existing sell-side clients– Be prepared to execute the seller’s form of

Confidentiality Agreement prior to receiving any detailed information

Review available information on the target, and request additional data, as needed

Prepare financial models reflecting the effects of the acquisition and quantify any available synergies. Sellers may request preliminary valuation feedback before proceeding to in-person meetings

If interest exists to move forward, visit the target’s headquarters to meet the management team and tour the facility. More detailed information is typically made available at this stage

Based on information obtained to-date and with support of shareholders and financing sources, prepare a formal, non-binding letter of intent to make the acquisition

Identifying TargetsAnd Initial Due Diligence

Internal Preparation

Define high-level acquisition strategy, including rationale(s) for acquisition, characteristics and deal size of ideal target, etc.

As possible, develop a list of potential targets, such as high-quality competitors, joint venture partners, other members of industry trade groups, etc.

Coordinate the assembly of a professional deal team, including experienced transaction attorneys, investment bankers/buy-side brokers, an accounting diligence firm, and other advisors

Begin assessing long-term capital needs, including meeting with bankers and expanding financial flexibility as needed

Closing the Transaction(8-10 weeks)

If agreement on transaction price and structure is reached, proceed to closing through multiple and simultaneous “work streams” (1):

1. Conduct confirmatory due diligence

–Financial/Accounting and Tax

–Operations

–Sales & Marketing

–Human Resources

– Legal and Risk Management

–Environmental

2. Negotiate Purchase & Sale agreement and disclosure schedules

3. Secure transaction funding (as needed)

Execute P&S agreement and close

Post-closing true-ups

Buy-Side M&A Process

(1) See next slide for a diagram of a coordinated buy-side due diligence and closing process.

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Target Company

Operations /

Manufacturing

Sales & Marketing

Environmental

Legal & Intellectual

Property

Acquiring Company

Real Estate

Risk Manageme

nt

Accounting

Finance & Treasury

Human Resources & Benefits

Buy-Side Financial Advisor

HR and Benefits consultants, if appropriate

3rd party insurance

providers, if appropriate

Appraisal firms, if

necessary

Transaction services team,

if desired

Banks & Financial institution discussions

Outside Counsel

Consultant for market study, if appropriate

Environmental consultants, if appropriate

Tax work and review with

Auditor

Coordinated Buy-Side Due Diligence and Closing Process

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Investment bankers contact the potential buyers and/or investors– All parties execute a Confidentiality Agreement

prior to receiving a CIM

Potential buyers submit initial indications of interest (“IOI”)

Qualifying buyers visit the Company's headquarters for management presentations and are given access to an electronic data site to begin diligence

Investment bankers respond to follow-up due diligence requests from interested potential buyers

Potential buyers submit Letters of Intent (“LOIs”), often including a mark-up of the Purchase & Sale Agreement

Marketing the Company(10-12 weeks)

Internal Preparation(6-8 weeks)

Investment bankers conduct due diligence

Investment bankers work with the Company to complete the Confidential Information Memorandum (“CIM”)

Investment bankers work with the Company to complete the list of potential buyers

CIM and buyers list reviewed and approved by the Company

Closing the Transaction(8-10 weeks)

Buyer chosen

Buyer conducts confirmatory due diligence

Purchase & Sale Agreement is negotiated, finalized, and executed

Closing

Post-closing true-ups

Month 1 Month 2 Month 3 Month 4 Month 5 Month 6S M T W T F S S M T W T F S S M T W T F S S M T W T F S S M T W T F S S M T W T F S

1 2 3 4 5 6 1 2 3 1 2 3 1 2 3 4 5 6 7 1 2 3 4 5 1 27 8 9 10 11 12 13 4 5 6 7 8 9 10 4 5 6 7 8 9 10 8 9 10 11 12 13 14 6 7 8 9 10 11 12 3 4 5 6 7 8 914 15 16 17 18 19 20 11 12 13 14 15 16 17 11 12 13 14 15 16 17 15 16 17 18 19 20 21 13 14 15 16 17 18 19 10 11 12 13 14 15 1621 22 23 24 25 26 27 18 19 20 21 22 23 24 18 19 20 21 22 23 24 22 23 24 25 26 27 28 20 21 22 23 24 25 26 17 18 19 20 21 22 2328 29 30 31 25 26 27 28 25 26 27 28 29 30 31 29 30 27 28 29 30 31 24 25 26 27 28 29 30

Traditional Sell-Side M&A Process

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M&A Considerations 4. Due Diligence, Negotiations and Closing the Deal

– U.S. negotiation tactics

– Due diligence checklists

– Legal and fiscal issues: Stock versus asset purchase; LLC or C corporation; tax considerations under U.S. and foreign law

– Stimulus Act tax incentives

– Financing issues at closing

– Special issues: buying divisions/subsidiaries of U.S. publicly held companies

– How to protect against post-transaction risks

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M&A Considerations 5. Financing the M&A Transaction:

– Private equity, mezzanine, and venture capital; seller and bank financing.

– International tax issues. – Sources of capital overseas and in the United States.

6. Bridging the Gap between Foreign and U.S. Corporate Cultures

Cross-cultural issues and questions :– The importance of communication and leadership. Who manages

and controls?– Which culture(s) predominant? – How culture clashes can undo the merger– Human resources: why human capital may be your most important

asset– Case examples

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M&A Considerations

7. Successful Post-Acquisition Operations

– Employment and immigration

– Intellectual property

– Marketing to customers

– Legal and tax considerations: minimizing risks

– Contracts and licensing

– Other operational considerations

– Supply chain logistics

– Status as government contractor or subcontractor

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Joint Ventures: Alternate Strategy?

• Often an excellent alternative to the M&A deal

• Factors for success

• When and why does it not work?

• How to structure: tax, legal issues

• Use in Government Contracting?

• Use in private sector projects

• Case examples

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Special Issues

• Purchasing Government Contractors

• Buying Divisions of Public Companies

• Insuring against Risks arising out of Transactions

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Other Inbound Investment Considerations:

Tax and Treaty Eligibility

Corporate vs. LLC form: Corporations do not have "flow through" tax treatment and hence are required to file tax returns. Limited liability companies, on the other hand, have "flow-through" tax treatment and are not required to file income tax returns; rather their parent companies must file income tax returns in the United States. Since most foreign companies do not want to file tax returns in the United States, the preferred form of entity for U.S. operations of foreign companies most often is the corporation.

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Taxes

• Worldwide Income Taxation (subject to foreign tax credit regime)

– Income Tax. The revenue generated by the U.S. subsidiary or U.S. operations of a foreign business will be subject to taxation in the U.S. This tax is assessed at the federal and state levels.

– Federal Tax. Federal income tax rates are set depending upon many factors. Federal corporate tax rates range between 15% and 39%; the average tax rate is typically 35%.

– State Tax. State income tax rates are set forth on a state by state basis. The current rate for corporate income tax in North Carolina is 6.9%. This is lower than many other states, including California (8.84%) and New York (7.5%-9%).

• Accounting considerations (FIN 48; permanent establishment, etc.)

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International Tax Planning

Permanent establishment: initial assessment of taxable presence;

• Transfer pricing:

– Where to direct profit:

• Profit Drivers:

– Capital;

– Function;

– Know how (and other intangibles);

– Risk

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International Tax Planning

• Financing: debt-to-equity considerations (including section 163(j) restrictions);

• Treasury Management – repatriation planning

– Where a treaty is absent

• LOB provisions and treaty “shopping”

• Holding company planning techniques

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Level Playing Field forForeign Companies?

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The Level Playing Field

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Thank YouThank YouQuestions? Questions?

Margaret Piret CEONewbury Piret Companiesmpiret@newburypiret.com933.2013.617.

Eliot Norman, Warren NowlinWilliams Mullen 8300 Greensboro DriveSuite 1100 McLean, VA 22102

T 703.760.5200

enorman@williamsmullen.com

804.783.6482.

wnowlin@williamsmullen.com

301.775.9876www.williamsmullen.com

Philippe de DreuzyRutherfoord philippe.dedreuzy@rutherfoord.co703.813.6502