http://exemplarlaw.ehclients.com/index.php/author/greg_murrer/ en emelia@exemplarcompanies.com Copyright 2012 2012-02-22T15:22:07+00:00 http://www.exemplarcompanies.com/site/the_changing_world_of_venture_capital/ http://www.exemplarcompanies.com/site/the_changing_world_of_venture_capital/#When:14:36:52Z Recently, the Carlyle Group decided to yield to investor requests to allow litigation in court rather than restricting them to arbitration. Why would the Carlyle Group launch an IPO and why are they willing to make this “concession” to investors?Recently, the Carlyle Group decided to yield to investor requests to allow litigation in court rather than restricting them to arbitration. Why would the Carlyle Group launch an IPO and why are they willing to make this “concession” to investors? Prior to the Great Recession the formula for venture capital success was straightforward: Identify underperforming businesses; acquire them with borrowed funds; restructure; then sell the business within 3 to 5 years at a considerable profit. While this frequently left businesses mired in debt, in the absence of a venture capital “rescue,” many of these businesses might continue to underperform or even fail. The venture capital landscape changed with the credit crunch brought on by the Great Recession. Today credit risk tolerance in the lending community is not what it once was, and venture capital firms are hard-pressed to find lenders to provide the borrowing necessary to fuel their acquisitions. Worse yet, many venture firms found themselves strapped with portfolios of businesses rocked by the Recession and servicing high interest, pre-Recession debt. Turning these business over within the desired 3 to 5 year window has become a significant challenge. Although interest rates have plummeted, now-conservative lenders do not find comfort in extending further credit to the venture capital community with their weakened balance sheets. Venture capital returns have suffered as their management sought alternatives. The wave of venture capital IPOs is at least a partial response to this new reality. Equity investment by the public in venture capital firms is a new resource that may jumpstart the venture capital engine. The infusion of investment capital is at least a partial substitute for debt financing, allowing renewed support for the cost of acquisitions, business restructuring and other associated costs. This is an enormous concession by the venture capital universe which historically have been closed to the public and closely guard their operations and finances from public scrutiny. Will the investing in public put its trust in venture capital management? Time will tell, but Carlyle’s concession on the issue of arbitration clauses may be either an indication of their strong desire to attract investment or a clever ruse to discourage investor claims. General 2012-02-17T14:36:52+00:00 http://www.exemplarcompanies.com/site/suffering_through_the_pain_of_ma_due_diligence/ http://www.exemplarcompanies.com/site/suffering_through_the_pain_of_ma_due_diligence/#When:22:51:22Z Your inviting an expensive headache if your don’t take the Due Diligence process seriously when a Buyer for your business comes calling. The Buyer’s demands for information may seem onerous and distracting, but the consequence of a halfhearted response can be significantly more painful. You’re ecstatic! You’ve just signed a Letter of Intent to sell your business at a price that far exceeded your expectations. Soon you’ll be able to kick back and enjoy life. But wait, what’s this? A “Due Diligence List” from your Buyer that goes on for ten pages. Do you really need to dredge up all of this information, all of these documents? As painful and distracting as it might be, yes you do, and here’s why. Terms set out in a Letter of Intent reflect the Buyer’s current understanding of value and risk. Once the LOI is signed, the parties move on to contract preparation, negotiation and closing. A proper LOI will provide that the deal cannot go forward unless and until the Buyer completes a Due Diligence examination of your business. This exercise affords the Buyer a closer look at your business, refines risk, and influences contract drafting and final negotiations. Due Diligence can be a painfully detailed process and Sellers are sometimes tempted to look for shortcuts, providing partial or incomplete responses to the Buyer’s inquiries. After all, until it’s sold, you have a business to run. However, a halfhearted attempt by the Seller during Due Diligence can have severe consequences. First, a savvy Buyer can tell when you are short-arming your responses. The Buyer may attempt to insulate itself against unknown, undisclosed risks by taking harder positions in contract negotiations or seeking a purchase price reduction. Worst case, the Buyer might be spooked by your intransigence and walk away from the deal. Second, contemporary buy/sell agreements contain representations and warranties of the Seller, affording the Seller an opportunity to call out exceptions (e.g. “The Seller represents that is not subject to any claims or litigation except as described in the attached Schedule.”) Should a representation or warranty prove to be untrue, the Buyer is likely to have a post-Closing claim against the Seller. Without the proper effort required to complete Due Diligence, the Seller may miss a risk that should be disclosed in the buy/sell agreement, leaving the Seller exposed to recourse by the Buyer. Third, assuming your deal does close, the Buyer is likely to have reserved the right to press indemnity claims against the Seller for violations of representation and warranties. A weak Due Diligence effort and correspondingly porous representations and warranties make you particularly vulnerable to indemnity claims.  Depending upon how the buy/sell agreement is drafted, your exposure may be a significant percentage of the consideration paid by the Buyer. Moreover, a nervous Buyer may have required that a portion of the purchase consideration be placed in escrow in anticipation of future indemnity claims. Finally, closing of the deal turns out not to be a closing at all. You’re left with an adversarial process with an unhappy Buyer who wants a chunk of its purchase price back by pursuing indemnity claims. You won’t be kicking back any time soon. Next time, take the Due Diligence process seriously. Business 2010-06-03T22:51:22+00:00 http://www.exemplarcompanies.com/site/lean_six_sigma_its_not_just_for_manufacturing_businesses_anymore/ http://www.exemplarcompanies.com/site/lean_six_sigma_its_not_just_for_manufacturing_businesses_anymore/#When:16:23:45Z The lessons learned by the Manufacturing Community through the application of Lean Manufacturing and Six Sigma principles readily translate to the Service Industry. Businesses including banks, hospitals, municipalities, school systems, accounting and law firms are now employing these tools to identify and eliminate inefficiencies, increasing customer satisfaction and profitability. “Lean Six Sigma” represents the marriage of two complementary principles: Lean Manufacturing and Six Sigma problem solving analytics. The principal of Lean Manufacturing found its origin in the Toyota Production System first developed for the automotive industry in the 1970s. Toyota’s objective was to produce high quality products utilizing a manufacturing model that eliminates inefficiency. On its most fundamental level, Lean theory recognizes that inefficiencies are embedded in any manufacturing process. These inefficiencies typically include delays, unnecessary movements, incorrect processing, defects, over-production and excess inventory.  Once identified, elimination of inefficiencies results in an increase in production rates, a reduction in errors and defects and ultimately, enhanced profitability. Corrective action may be as simple as realigning work flow, creating manufacturing cells, eliminating steps or ordering raw materials on a just-in-time basis. The symbolic expression of this approach is “Work Better, Not Harder”. The identification of process inefficiencies is the first step in Lean theory. This is frequently approached by “mapping” every element of an existing process and characterizing the elements as value added or value subtracting ( described as “Value Stream Mapping” or “Process Mapping”). Time delays or nonproductive loops for example are inefficiencies that need to be designed out of a process, if possible. This may be easier said than done if the root cause of the inefficiency isn’t readily identifiable. This is where the diagnostic tools of Six Sigma come into play. “Six Sigma” is an expression of production excellence. It literally translates into 3.4 defective parts per million of parts produced. It is a standard that many businesses strive to achieve but few accomplish. Most businesses would be happy to achieve Five Sigma (233 defects/million) or even Four Sigma (6200 defects/million). The birthplace of Six Sigma was the U.S. semi-conductor industry where extraordinary efforts were made in the 1980s to dramatically reduce the frequency of product defects. An entire industry has been built around Six Sigma consulting, designed to guide corporations through a maze of analytical tools and methods all aimed at pinpointing the root causes of manufacturing defects. Six Sigma is all about the graphic demonstration of collected data (e.g. Linegraphs, Pareto Charts, Ishakawa (Fishbone) Diagrams) employed to ferret out those root causes. Applying these tools to inefficiencies revealed through Lean Manufacturing process analysis can quickly solve the riddle of the whys and wherefores of an unprofitable process. As every industry strives to increase profits in challenging times, a rebirth of Lean Six Sigma is occurring in of all places the Services Industry. Service businesses including banks, hospitals, schools, municipal governments and even law firms are embracing these techniques, challenging time honored methods of procuring and delivering services.  By committing key members of their staffs to Value Process Mapping and dissecting all core service processes, they hope to wring out inefficiencies resulting in superior service delivery to their customers.  If you operate a service business, don’t dismiss the application of Lean Six Sigma to improve your processes and enhance your bottom line. Expertise abounds in the consulting community, but a word to the wise: Start small with a pilot project and build the visibility and credibility of Lean Six Sigma from within your organization. Business 2010-05-20T16:23:45+00:00 http://www.exemplarcompanies.com/site/avoiding_potential_violations_of_the_foreign_corrupt_practices_act/ http://www.exemplarcompanies.com/site/avoiding_potential_violations_of_the_foreign_corrupt_practices_act/#When:04:13:40Z Your sales agent in Sao Paulo just called with good news: You’ve won that government contract. You just need to wire $15,000 this afternoon for a “license fee” in order to close the deal. Sounds simple enough, but be careful: You might just be walking into a violation of the Foreign Corrupt Practices Act. Your sales agent in Sao Paulo just called with good news: You’ve won that government contract. You just need to wire $15,000 this afternoon for a “license fee” in order to close the deal. Sounds simple enough, but be careful: You might just be walking into a violation of the Foreign Corrupt Practices Act.   Background: The Foreign Corrupt Practices Act (FCPA) was enacted in 1977 to curb the competitive abuse of influence payments to foreign officials in order to secure or retain business. In the prototypical case, a bidder seeking the award of a government contract for goods or services uses a covert payment or gift in order to curry the favor of an official who has influence over the award. Being sensitive to this legal exposure and responding appropriately are keys in avoiding a costly violation. Elements of the Act: The FCPA applies to all U.S. persons and any foreign national that issues securities in the United States or files periodic reports with the SEC. In addition, any foreign national that commits an act within the U.S. in furtherance of an improper payment is subject to the Act. Acts which violate the FCPA include the delivery of anything of value to a foreign official with the intent to induce the official to act favorably in support of the securing or retention of business.  This need not be business with the foreign government and the attempt to induce action need not be successful. Although “corrupt intent” is an element of a violation, conscious disregard or deliberate ignorance of the acts of your representatives will in most cases satisfy this element as well. The concept of “foreign official” includes a foreign political party, a party official and even a candidate for public office. Routine payments to obtain licenses, permits or other official documents, or for the processing of government documents are regarded as “facilitating payments” and do not violate the Act. However, the nature and purpose of any requested payments should be fully understood before proceeding. Enforcement & Penalties: The SEC and DOJ have concurrent authority to enforce the FCPA. Violations may be treated as civil or criminal (or both). Criminal penalties imposed against business entities are up to $2 million and against individuals of up to $100,000 with imprisonment of up to 5 years. The Alternate Fines Act can increase these fines to twice the benefit the violator sought to obtain. Civil penalties may be up to $10,000; however, in civil actions by the SEC, significantly greater fines can be imposed based on the gain received. Injunctions may be imposed against violators a well as loss of export licenses and the ability to do business with the U.S. government. Improper acts may trip additional violations such as mail fraud, wire fraud and state commercial bribery statutes. Because the failure to record such payments is a separate violation of the Act, “off book” and “slush fund” accounting can involve a violation of the Sarbanes-Oxley Act.   Foreign Legislation: U.S.-based enterprises and individuals are not the only ones subject to legal action for the kinds of acts prohibited by the FCPA. In 1997 the Organization for Economic Cooperation and Development adopted a convention to combat the bribery of foreign officials. Thirty-eight (38) countries have ratified this convention. Examples: Some recent, very blatant violations of the FCPA have gotten the attention of regulators. In March 2010 BAE Systems plc, one of the world’s largest defense contractors, plead guilty to alleged violations of U.S. trade and export laws including FCPA in a criminal proceeding initiated by the Department of Justice. Using offshore companies and “market advisors”, BAE issued payments to officials in order to secure government defense contracts in Saudi Arabia, The Czech Republic and Hungary. BAE was required to pay $400 million in fines. In the largest case of its kind, the SEC and DOJ brought companion civil and criminal proceedings against Siemens for an alleged systemic practice of paying bribes to foreign officials to secure business in Venezuela, Mexico, Israel, Bangladesh, Argentina, Vietnam, China and Russia during the period 2001-2007. Products and services involved included medical devices, identity cards, power plants, refineries and a mobile telephone network. The combined sanctions imposed against Siemens were $1.6 billion. Fines and prosecutions under FCPA in the last 10 years exceeded those occurring over the prior 20 years, suggesting that the authorities are becoming more vigilant in their enforcement efforts. For more information, contact Greg Murrer, Esq.   General 2010-05-02T04:13:40+00:00 http://www.exemplarcompanies.com/site/100-day_integration_planning_starts_during_pre-acquisition_due_diligence/ http://www.exemplarcompanies.com/site/100-day_integration_planning_starts_during_pre-acquisition_due_diligence/#When:18:01:42Z M&A transactions require a great deal of energy and focus by all parties and their counsel. However, ineffective Business Integration can spoil even the best of negotiated deals. Don’t let poor Integration planning or weak execution ruin your profit expectations for an acquired business. BACKGROUND: Post-acquisition business integration should be considered from two aspects: (1) the integration of human capital; and (2) the integration of operations and systems. Although both are interrelated, Human Capital Integration has an emotional component which if not addressed with a reasonable degree of forethought and compassion, can quickly poison the relationship between the employees of the target and the acquirer’s management.  Operations & Systems Integration should run in parallel with Human Capital Integration and includes the more mechanical melding the target’s internal business practices with those of the acquirer so that functions such as communications, financial reporting, ordering, invoicing, manufacturing/service processes, security, policies and practices operate in the manner that the acquirer intends. This “melding” may range from maintaining the target’s status quo to a complete replacement of O&S, extinguishing this aspect of the target’s corporate identity though the wholesale installation of the acquirer’s O&S. ADVANCE PLANNING: Effective business integration does not begin on the day the target is acquired. It must begin at the earliest possible stage of pre-sale due diligence. When the likelihood of deal completion becomes reasonably certain, this is the time to move integration planning forward. Granted this timing is more art than science and may be for naught should the transaction not close; however, to wait any longer enhances the likelihood of an unhappy marriage of the businesses. Select an Integration Manager – Skills: Planning, Credibility, Integrity, and Communications. The “IM” must be involved with due diligence at a very early stage – to learn the target business and its culture. Reporting should be at a very high level (CEO, Executive Sr. Management, Board) to ensure respect and gravity. Select an Integration Team – The “IT” needs to have the correct disciplines represented: Accounting, Finance, HR, IT, Legal, Payroll, Sales and Manufacturing. It’s important to have members from BOTH SIDES of the transaction as soon as that is feasible. Decisions to be Taken Prior to Acquisition – Need to consider how the target’s employees are going to be impacted from a job, reporting and compensation/benefits standpoint: 1. Determine new business organizational structure 2. Determine new leadership and other human infrastructure issues, including reporting relationships 3. Assess if all or any part of the target operate independently 4. Determine compensation and benefits structure and how this will change for target’s employees 5. Identify stayers and goers to the extent possible 6. Determine employee exit arrangements Not all employee-related decisions can be determined prior to closing. Often employee performance and compatibility can only be evaluated through post-acquisition observation. Hasty human capital decisions can breed contempt. At the same time, dissent and incompatibility cannot be allowed to fester. The human capital component of the Integration Team should therefore move in an expedient and even handed manner. Need to consider the extent to which the target’s Systems & Operations will be retained and conversely, the extent to which the acquirer’s Systems & Operations will be installed: 1. Assess the adequacy and compatibility of target’s S&O with the acquirer’s 2. Identify which of target’s S&O will be retained 3. Identify which of target’s S&O will be replaced or absorbed into acquirer’s S&O 4. Consider implications of these changes to staffing and reporting 5. Set out a preliminary timeline for each change Processes to be Developed Immediately Prior to Acquisition – These must be ready for launch upon the day of acquisition: 1. Communications Plan: Q&A Forum; Point of Contact, Communication Channel, Q&A vetting process that is expedient yet accurate and consistent 2. Anticipate Q&A and vet matters in advance – brainstorm with all disciplines 3. Overall Integration Plan by discipline, line of business, grouping or other as applicable 4. Integration Time Line by functional area 5. Consistent, transparent process for making employment-related decisions (retention, promotion, open positions, compensation) 6. Handling of layoffs resulting from business consolidation, redundancy   IMMEDIATELY AFTER CLOSING – START OF THE 100-DAY INTEGRATION PERIOD Communication, Communication, Communication – Implement your pre-ordained Communications Plan, which should include the following: 1. All-Hands Meeting – Announce the known, definitive decisions now; disclose the lines of communication for unresolved, open or unanticipated questions and Integration Time Line. 2. Written communication affirming what was disclosed at the All-Hands Meeting. This will avert confusion and dispute and reach those who did not attend. 3. Mind Reader’s Communication – Set out anticipated Q’s with definitive A’s in writing. 4. Regularly announce decisions as they are finalized through a consistent communication channel and/or updates. Regular written communication builds confidence and community. Questions that Absolutely Need to be Answered Quickly & Consistently – Timing of responses will be dictated by need and certainty: 1. Am I going to have a job? 2. How will my benefits be changed? 3. Who will I be reporting to? 4. What are the culture, expectations, and objectives of the new owner? 5. What are the positives of this acquisition for me? 6. If I’m going, what help (severance, outplacement assistance, etc.) will I get? Not all news delivered after the acquisition closing date will be good news for employees. It is best however to deliver bad news as early in this process as possible so employees can adjust to it. In addition, indecision, decision reversals or inconsistent messages damage credibility at a time when the need for credibility is paramount. Employees appreciate directness and honesty, even if the message is adverse. If a mistake is made, it is best to admit it, apologize and move on. Clear, concise communications will serve to squelch rumors and innuendo. ONGOING MAINTENANCE: Business integration is a continuous process throughout the 100-day period. Members of the Integration Team should meet regularly to assess progress and readjust go-forward activities. These meetings may be among particular disciplines; however, to retain a solid perspective, the whole Team should assemble periodically for collective updates. A periodic Integration Newsletter (or other means of formal communication) should be distributed among employees addressing submitted questions, clarifying any prior communications, dealing with misinformation, encouraging dialogue and documenting successes. This might be done weekly and later monthly as the process winds down. As previously noted, this communication needs to be controlled by a single point of contact to avoid inconsistency or mixed messaging. CONCLUSION: Ultimately it will be important to announce the formal end of the Integration Plan. This announcement tells the employees that changes are complete, allowing them to focus solely on the future of the business. Be sure to thank your employees for supporting a successful integration program. The Integration Team needs to be formally disbanded at this time. Rewards for their good work should be considered. Remember, they have been implementing the Integration Plan in addition to doing their normal jobs. General 2010-04-30T18:01:42+00:00