Law Office Management
Jan. 2, 2010
Tech Deals Thaw M&A
Thanks to the high-tech sector, deals are starting to heat up in California.
After a big chill, California's merger-and-acquisition scene is starting to heat up, particularly with creative deals in the high-tech sector. Since 2007, the credit crunch has cast a heavy frost over the state's M&A activity. Even as recently as April, 90 percent of California mid-market M&A professionals responding to the Mid-Year 2009 DealMakers Survey said the market was "fair or poor"?marking the gloomiest outlook in the survey's five-year history. But a few high-profile California deals that closed last year point to a thaw: Oracle bought Sun Microsystems, Cisco purchased Pure Digital Technologies (the maker of the Flip Video camcorder), and a group of investors bought Skype from eBay. "There's been an uptick in deals since midsummer, mainly in the technology space, and cash is the currency of choice," reports Kyle Krpata, a partner at Weil, Gotshal & Manges in Redwood Shores. Because IPOs and debt financings remain scarce, many early-stage companies are looking to be acquired. "Even private-equity investors who've been sitting on their money in the recession are now looking for financial acquisitions," says Chelsea Grayson, a Jones Day partner in Los Angeles. "They're beginning to dip their toes in the water, showing interest in bids." All of this means more work for M&A attorneys, although the tentative nature of the recovery means that creativity is often an essential element of these deals. For example, one deal structure that has been popular is the "earn-out," when full payment of a purchase price is delayed until specific post-closing goals are met. Jennifer Fonner DiNucci, a partner at Cooley Godward Kronish in Palo Alto, advised Evalve in a recent deal that used this approach. The sale of Menlo Park?based Evalve to Abbott Laboratories for $320 million includes a $90 million additional earn-out that hinges on the Food and Drug Administration's approval of Evalve's system for repairing the heart's mitral valve. Another popular option is to sell a company through a section 363 sale under Chapter 3 of the Bankruptcy Code, which has the effect of clearing liens and encumbrances. In such a sale, the seller negotiates an auction starting price in advance with one bidder, who is known as the auction's "stalking horse." A stalking horse usually wins the auction, but the seller may arrange in advance to compensate the bidder with a deal fee if the stalking horse is outbid. For example, in a recent $42.5 million deal, Cooley Godward partner DiNucci advised stalking horse Rackable Systems of Fremont?now called Silicon Graphics International?in its purchase of the bankrupt Silicon Graphics of Sunnyvale (certain liabilities were assumed). Says Weil Gotshal's Krpata, "Once lawyers new to bankruptcy court overcome [their] fear of the unknown, they find a lot of opportunities in distressed assets." Forty percent of M&A professionals expect distressed sales to equal one-quarter to one-half of all deals through the first half of 2010, according to the DealMakers survey by Thomson Reuters and the Association for Corporate Growth (ACG). Co-purchase arrangements are also proving useful. Jones Day's Grayson, for example, guided such an agreement to help Cypress-based Universal Electronics acquire San Josebased Zilog's universal-remote-control business?but none of its other assets. The deal also involved the simultaneous purchase of other Zilog assets by Sunnyvale's Maxim Integrated Products. "The buyers each wanted only certain operations of Zilog," she explains. Grayson expects such deal structures to remain popular as the M&A market rebounds more fully this year. Indeed, Grayson, DiNucci, and Krpata all echo the opinion voiced by nearly 40 percent of California M&A professionals in ACG's survey: They have "renewed optimism" that, starting this year, M&As will rise again.
Kari Santos
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