M&A: Sell-Side Transactions

The whole unit on one sheet: how the banker hires out, structures, markets, bids, evaluates, and hands off a company sale, plus the tax and antitrust triggers layered on top.

The One-Liners That Win Points

• The tail provision survives termination. A seller that fires the banker and then closes with an introduced buyer inside the tail window (often 12-24 months) still owes the success fee.
• Indemnification flows ONE way: seller indemnifies the bank, not the reverse (the bank's product is advice).
• Spinoff is pro rata to ALL shareholders; split-off lets shareholders choose (split-off shrinks the parent's share count like a tax-free buyback; spinoff does not).
• Teaser = NO name, NO NDA. CIM = name plus projections, AFTER NDA. A teaser that identifies the seller defeats the staged-disclosure design.
• An IOI is a non-binding VALUATION RANGE; an LOI is a firm single price that is binding on exclusivity, expense reimbursement, and confidentiality.
• Stapled financing is a SELL-SIDE workstream, distributed WITH the CIM and bid materials; the structural conflict (one bank advises seller and finances buyer) is the tested concept.
• Change-of-control puts on bonds are at 101% of par, not 100%.
• The Worker Adjustment and Retraining Notification Act (WARN Act) notice is 60 days, not 30 or 90.
• All-stock deal (no premium, no synergies) is accretive if the acquirer's price/earnings (P/E) ratio is HIGHER than the target's P/E.

Numbers to Lock In

Top Gotchas

• The 3x base amount is the golden-parachute TRIGGER; the 1x base amount is the haircut. Once you cross 3x, everything over 1x is taxed at 20% and non-deductible. Two different numbers, two different jobs.
• The deemed-asset-sale election is JOINT and only available when the seller is a consolidated subsidiary or an S-corporation. A freestanding C-corporation target cannot make it; a seller that opposes it can block it.
• HSR waiting periods are CALENDAR days, not business days (30 standard, 15 cash tender). The filing fee is paid by the ACQUIRER, not the target.
• The size-of-person test is WAIVED at $535.5 million and above; a $600 million deal between two small parties is still reportable.
• HSR is antitrust review; CFIUS is national-security review. Separate tracks, filings, and timelines. A deal can trigger both.
• The CIM is a MARKETING document, not a securities registration statement (no registration-statement strict liability), but material misstatements can still trigger common-law fraud and the general anti-fraud provision. Projections are the SELLER's representations, not the banker's.
• A stock deal at the same valuation is LESS accretive than a cash deal because of share dilution. The simple all-stock accretion rule ignores synergies and premium.
• "Once covered, always covered" survives the change in control; the performance-based-comp exception is gone (repealed by the 2017 tax reform).
• Revlon applies only when a sale of control is INEVITABLE, and the standard is "best price reasonably available," NOT "highest possible price."

Engagement and Strategic Alternatives

• Engagement letter = fee entitlement foundation: scope, success fee (flat or Lehman-formula tiers of 5%/4%/3%/2%/1% on successive first-through-fourth-and-above million-dollar bands), retainer, expense reimbursement, one-way indemnification, exclusivity, tail provision, separate fairness-opinion fee.
• Banker's first board deliverable is a MENU of strategic options, not a single recommendation.
• Sale variants: sale of entire company, divestiture (parent keeps the rest), spinoff (pro-rata distribution), split-off (exchange for parent shares, shrinks share count), reverse Morris Trust (spin then merge, tax-free if 50.1% retention test met), equity carve-out (IPO a minority stake, parent keeps control).
• Spinoff/split-off can be tax-free under the corporate-separations provision; a divestiture is generally taxable at the parent.

Transaction Structures: Stock vs Asset, Merger vs Tender

• Stock sale: transfers equity plus ALL liabilities (known and unknown); no basis step-up; seller-preferred (single-level capital gain).
• Asset sale: cherry-picked assets, buyer gets a fair-market-value step-up plus a liability shield, but a C-corp seller faces double tax; contract assignment (anti-assignment clauses) is the headache.
• Merger = board-approved, requires target shareholder vote; clean single-step path to 100%.
• Tender offer = direct solicitation of shareholders, can be friendly or hostile, FASTER (especially a cash tender with the shorter HSR window); Williams Act mechanics live in the Tender Offer Regulations unit.
• Most tender offers are cash; stock-for-stock tenders are rare (registration mechanics complicate the timeline).

Tax Coordination

• Seven reorganization types: A (statutory merger, up to ~60% boot), B (stock-for-stock, solely voting stock, no cash), C (stock-for-assets, substantially all), D (divisive: spin/split), E (recapitalization), F (mere change in form), G (bankruptcy).
• Forward triangular = target merges into acquirer's subsidiary (subsidiary survives); reverse triangular = subsidiary merges into target (target survives). Both ringfence liabilities and stay tax-free.
• Golden-parachute excise-tax provision: trigger at 3x base amount, tax the excess over 1x base amount at 20%, non-deductible; private-company cleansing vote needs 75% of disinterested shareholders.
• Executive compensation deduction limit: $1 million cap per covered employee (CEO, CFO, next three, plus five more after the American Rescue Plan Act for tax years beginning after 2026).

Antitrust and Hart-Scott-Rodino (HSR)

• Hart-Scott-Rodino Antitrust Improvements Act of 1976 (HSR Act): both parties file a Notification and Report Form with the Federal Trade Commission (FTC) and the Department of Justice (DOJ) Antitrust Division, then observe a mandatory waiting period.
• 2026 thresholds: below $133.9 million = no filing; between $133.9 million and $535.5 million = filing only if both size-of-person tests met; at or above $535.5 million = always reportable.
• A Second Request extends the waiting period until 30 days after both parties substantially comply (10 days for cash tenders).
• CFIUS = national-security review, broadened by the Foreign Investment Risk Review Modernization Act of 2018 (FIRRMA) to certain non-controlling investments in critical-technology, critical-infrastructure, or sensitive-personal-data businesses; most filings voluntary (buys safe harbor), some mandatory.

Marketing the Transaction: Teaser, NDA, CIM, Bidding Procedures

• Staircase of four documents, each disclosing more and demanding a higher commitment: teaser (anonymous, 1-3 pages, no name) → NDA (standstill, non-solicit, return/destroy, 2-3 year term) → CIM (name plus projections, after NDA) → bidding procedures letter (auction rules, often two-stage: round-1 IOI, round-2 LOI).
• NDA drafted by seller's legal counsel; banker quarterbacks distribution; the standstill is the controversial provision (blocks a hostile bid).
• A mutual NDA is used when the buyer offers stock and the seller must evaluate the buyer's business.
• Management presentations (deeper than the CIM) go to round-2 finalists only.

Managing the Bidding Process

• Round 1 = non-binding IOIs: valuation RANGE, structural preferences, financing sources, conditions. Banker builds a summary matrix, sends regret letters, invites the top 3-7 to round 2.
• Round 2 = virtual data room (VDR), management presentations, site visits, and additional-information-request (Q&A) coordination.
• Bidder isolation and consistent answers across bidders are the auction-integrity rules; data-room activity tracking is a signal of a bidder's key diligence concern.

Buyer Proposal Evaluation: Currency, Accretion/Dilution, Synergies

• Evaluate each bid across ability to pay, currency strength (quality of acquirer stock as consideration), accretion/dilution, synergies, social issues, and regulatory sensitivity.
• Weak currency (thinly traded, recent IPO, high leverage) forces a higher exchange ratio, more dilution, and a push toward a dilutive deal or a cash demand.
• Pro forma EPS = pro forma net income (acquirer plus target plus after-tax synergies, less after-tax incremental interest expense, less foregone interest income, less incremental depreciation/amortization) divided by pro forma shares (acquirer plus newly issued).
• Quick rules: cash deal accretive if the target's earnings yield (earnings/price) exceeds the after-tax financing cost; all-stock deal accretive if acquirer P/E is higher than target P/E (at no premium, no synergies).
• Social issues (board seats, CEO role, headquarters, brand) can be deal-breakers even when price is acceptable.

Valuation, Buyer Analysis, and Stapled Financing

• Valuation toolkit: comparable company analysis, precedent transactions (higher, they include the control premium of ~20-40%), discounted cash flow (DCF), leveraged buyout (LBO) analysis (sets a FLOOR), and the 52-week trading range; presented as a football-field chart.
• Buyer universe blends strategic acquirers AND financial sponsors; "capacity to pay" includes cash, leverage capacity, and equity-issuance capability.
• Stapled financing = pre-arranged debt package attached to the CIM/bid materials: speeds the auction, widens the pool, floors the valuation, removes financing certainty as a deal-breaker; mitigate the conflict with separate teams, an independent fairness opinion, board oversight, and advance disclosure/approval.

Other Corporate Issues

• Debt side: change-of-control covenants, put rights at 101% of par, lender consents, conversion features.
• Equity side: preferred liquidation preferences (paid before common), warrants and options (single-trigger vs double-trigger vesting), the venture-financing waterfall.
• Workforce: WARN Act 60-day notice for plant closings and mass layoffs; union/collective-bargaining change-of-control terms; shareholder objectives (cash vs stock) can drive structure.

Final Round, Execution, and Fairness Opinion

• Final round procedure letter sets the deadline, format, and a markup of the seller's draft definitive agreement (fewer markups = more deal certainty); banker tabulates bids on price, structure, financing certainty, markup severity, and antitrust risk, then presents the risk-adjusted bid to the board.
• HSR risk allocation is an explicit final-round consideration: a "hell-or-high-water" bidder beats a low divestiture-cap bidder at the same price.
• Hand-off: banker stays on material financial terms (working-capital peg, net-debt definition, earnouts, escrow/indemnification, representations and warranties insurance (RWI)); legal counsel leads the definitive agreement.
• Fairness opinion = written letter stating the consideration is "fair, from a financial point of view," presented at the board meeting that approves the merger; the opinion bank may NOT be the M&A advisor, especially with stapled financing.

Revlon Backdrop (Background Only)

• Once a sale of control is inevitable, the board's duty shifts to obtaining the best price reasonably available (not the highest possible price).
• Process supports: independent fairness opinion, fiduciary-out clause, no-shop with fiduciary out, window-shop rights, modest termination fee (2-4% of equity value), go-shop period.
• Series 79 does not test Delaware case law at the case-law level, but the auction design IS a built-in Revlon defense.

One-Breath Recap

Sell-side is a timeline: sign the engagement letter (tail provision survives, indemnification flows one way), put a menu of alternatives on the board's table, value the company on a football-field chart, then market it up the staircase (anonymous teaser, then NDA, then CIM with name and projections, then bidding procedures). Bidders send non-binding IOI ranges in round 1 and firm LOIs binding on exclusivity in round 2, while the banker layers on tax coordination (reorg types, the joint deemed-asset-sale election, the 3x-trigger/1x-haircut golden parachute, the $1 million comp cap) and antitrust (HSR at $133.9 million/$535.5 million, 30 calendar days or 15 for a cash tender, CFIUS on the national-security track). Evaluate each bid on currency strength and accretion/dilution (acquirer P/E over target P/E wins an all-stock no-premium deal) plus social issues, watch for 101%-of-par change-of-control puts and the WARN Act 60-day notice, then hand off to a legal-led definitive agreement and a "fair, from a financial point of view" fairness opinion, all designed as a Revlon-compliant process from the start.

Need more than the recap? This is a condensed summary. If it is not enough, read the full M&A: Sell-Side Transactions unit for the complete lesson.