David Snyder, partner at Pillsbury Winthrop Shaw Pittman, says sellers of private firms have more leeway in their mergers and acquisitions thinking than public companies. (photo/alandeckerphoto.com)

Around the year 2000, many companies with imaginative business plans, impressive press kits and little else were showered with millions of venture capital and IPO dollars on Wall Street. The poster child of the era was Kozmo.com, which burned through $250 million in venture capital promoting a business built around bicycle-powered messengers speeding Junior Mints to yuppies.

The $150 million IPO never happened, but the Kozmo story was turned into the 2002 documentary “E-Dreams” that encapsulated both the era’s Internet sugar rush and the bubble that popped, bringing the IPO on demand era to a grinding halt.

The Internet bubble also meant big trouble for the market in mergers and acquisitions (M&A) that continued through the turnaround year of 2004. Since then, M&A has been on a roll, and experts like Kurt Kunert, publisher of Santa Monica-based FactSet Mergerstat — mergerstat.com — are now wondering how long the good times can last.

“People are always wondering when the up trend will end and what could cause it,” says Kunert. “Is it going to be more restrictive financing, or maybe private equity won’t make the return it needs to stay in the game — where is the shoe going to drop? — so they’re trying to do as many deals as they can now.”

For the record, Mergerstat counted 10,938 deals in 2005 in the United States worth $1.03 trillion, which outpaced 2004 results of 10,433 deals worth $760.4 billion. In 2000, the all-time high for deals and dollars, 13,000 deals were struck worth $1.3 trillion. By comparison, in 2002, only 7,874 deals were struck worth $461 billion.

The first quarter of 2006 continued the upward trend with 2,549 deals worth $281.7 billion. “It’s pretty much in line with last year, but the dollar value is higher,” Kunert says.

In 2005, San Diego contributed 171 deals worth $9.9 billion, a marked improvement over 2004 totals of 135 worth $6.5 billion.

Kunert says the big driver over the last two years is money coming into the market from private equity groups and hedge funds which can either 1) put together deals for themselves; 2) invest in a company with an eye to putting it in play; or 3) put together a “club deal,” in which several equity firms join together over a target, like last year’s $10 billion acquisition of Albertsons supermarkets.

Attorneys often write the pre-nups for M&A deals and set their strategies based on the market, whether they represent the buyer or seller, whether the party they represent is private or public and whether the client has any interest — financial or emotional — after the deal closes.

“Sellers of private companies want immediate equity,” says Fred Muto, managing partner at Cooley Godward.

One way a corporate marriage may differ from the flesh-and-blood variety is that the parties will continue to jockey for position after the transaction closes. ”Sellers want to place limits on what recourse buyers will have, says Muto.

The reasons buyers want recourse after the sales are many and potentially troublesome. Say the seller has accounting irregularities that are discovered only after the sale, so the revenue the sale was based on isn’t really all that much. Perhaps a seller’s technology billed at turning straw into gold produces only straw hats.

“What if the buyer has been sold a bill of goods?” Muto says. “The buyer wants a large amount in escrow that gets held in reserve, and the seller wants to put as little as possible in escrow, wants to limit representations and warranties, and wants to have the escrow be the only place the buyer has recourse.”

If the heirs of a local brewery sell to Coors, they might be happy to walk away with a big check. They’re not looking for a job, and don’t care if Coors fires everyone who worked for dear old dad.

Frequently, however, the M&A deal contemplates the two parties getting along in the future. “Often the success of the merger can be judged by how well the two businesses eventually integrate,” Muto says. “Too often the parties don’t spend enough time on that part of the deal.”

In the hypothetical deal where the buyer and seller are of equal financial strength, want the deal equally as much, and where neither side is entertaining offers from other buyers or sellers, equality of influence may exist. Or if a large company is buying a much smaller firm, it’s easy to see that the buyer is going to dictate the terms.

“But if it’s 70-30 or 60-40,” Muto explains, “there are issues of who will be on the management team, who will sit on the board, where are the redundant functions, and these can be terribly difficult. The closer in size the parties are, the more challenging those issues can become.”

Buyer Motivation

Eddie Rodriguez, partner at Fish & Richardson, says companies today have a lot of cash in reserve for possible acquisitions. ‘The question is whether it’s better for the company to build it themselves or buy it?’ he says. (photo/alandeckerphoto.com)

Just as firms with problems are frequently in need of employees, they may also look to be acquired. What motivates buyers is more complex.

Companies today have a lot of cash in reserve," says Eddie Rodriguez, partner at Fish & Richardson. “The question is whether it’s better for the company to build it themselves or buy it? Buying it is the faster way to realize growth, or sometimes they buy for a certain technology.

Rodriguez says who has the influence in a deal “always comes down to leverage.” Say the buyer has made its intentions known, but is willing to walk away if the seller balks. “If the seller passes on the offer, they have to spend more money to get a deal somewhere else,” Rodriguez says.

In one deal he’s working, “the buyer has chased the seller so hard that (the seller) realizes they have the leverage and now they want to test the limits,” he adds.

“Every deal has a different dynamic,” says Scott Stanton, partner at Morrison Foerster. “Generally, it’s the buyer calling the shots. But sometimes the target can manage the process well. For example, they can have competing bidders, and play one off against the other. The best target is one that has a viable independent path, and two or more suitors coming after it. Then the seller can call the tune.”

David Snyder, partner at Pillsbury Winthrop Shaw Pittman, says sellers of private firms have more leeway in their M&A thinking than public companies. “The board of the public company owes its duties to the stockholders,” he says. “This may lead the board to make a strategic transaction, which could be based on synergy or just looking to generate top dollar.

“In private companies, the owner might be the founding family and the business is the baby that their grandfather nurtured and they are stewards, who might be looking to maximize the buck or want to find the right home for the company,” Snyder says. “That’s a luxury the public company doesn’t have, because it can’t have concern for other constituencies like the community or the employee base.”

‘Sellers of private companies want immediate equity,’ says Fred Muto, managing partner at Cooley Godward. ‘Sellers want to place limits on what recourse buyers will have.’ (photo/alandeckerphoto.com)

For a private company with a choice of going public or being acquired, Sarbanes-Oxley — the public firm disclosure law passed by Congress in the wake of the Enron and other corporate scandals — is another, and in some cases persuasive, overlay.

“The cost of going public is feeding into the M&A trend," says Muto.

“Sarbanes-Oxley is driving these decisions, because going public is much harder and expensive, and doesn’t seem like it’s as much fun," Stanton says. ”If a company has the alternative to be acquired while they’re private, a lot more will choose the sale instead of the IPO because the IPO is a long and uncertain path. Sarbanes may be something that leads them to sell because being public is too much of a hassle.”