Lessons Learned from Week 8 of Fall Quarter

12/02/2011

Ethics

Doing Deals

Warren Buffett never negotiates or lowers price he pays
He wants CEO who cares about business and sticking around after purchased (not looking for payday)
He never reads analyst reports
Reps & warranties much lighter in public M&A than private; don't survive after closing
Value prop of Berkshire to CEO: permanent home
Warren almost never pays in equity; never gives CEOs equity in BH
Material adverse effect: material and adverse but excludes general economic conditions, industry conditions, and other carve-outs
Break-up fees
Operating covenants: after seller signs and until closing, will operate the biz in accordance with covenants (restrictions on dividends, etc.)
Regulatory risk (antitrust): horizontal concentration (effects on competitors) in US vs. vertical relationships (effects on suppliers, customers) in EU
Indemnifications and insurance: when selling public company, board wants protection from lawsuits that may come in relation to the deal and other lawsuits (D&O insurance with high limits); buyer indemnifies you and agrees to maintain D&O insurance at same limits for 3-5 years
Employee benefit matters: single and double trigger option policies; need to examine which triggered by M&A transaction (part of due diligence)
Negotiable: compensation of management, termination fees, mechanics of termination provisions, what will happen to management in general (not issue in Berkshire transactions)

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