- The Washington Times - Monday, September 11, 2000

15 minutes with Larry Yanowitch

Mega-mergers are clearly in vogue: America Online wants to wed Time Warner, United Airlines seeks to adopt US Airways, and federal regulators just turned down MCIWorldCom's abid to merge with Sprint.

These are the deals that make the news, and yet smaller mergers and acquisitions are daily occurrences in the business world.

Larry Yanowitch, an M&A; attorney at the law firm ShawPittman, concentrates on technology deals. Having done this for 14 years, he has seen his fair share of mergers and acquisitions.

Question: Has there been a lot of merger and acquisition activity this year?

Answer: There is a tremendous amount of M&A; activity going on this year. Having done this for a long time, I can tell you that it's never been like this, ever. Much of the M&A; activity in this area is being generated by the concentration of entrepreneurial activity here.

It's often begins with just two or three people who worked together, and they say, 'Hey, we should leave and do this thing.' The next ingredient is money, and there is a lot of seed money out there for start-ups. After obtaining the initial seed financing, they are ready to begin hiring employees and focusing on product development. The product or technology is usually a niche thing, something that appears too small to develop at a mature company.

Next they are ready to execute on their business plan, but they need more money to go to the next level typically $5 million to $10 million. This is usually supplied by venture capitalists. The venture financing allows the company to hire more people, roll out their technology or products, start obtaining customers and attracting interest from other companies to form partnerships.

At some point, one of these customers or strategic partners, typically a larger public company, often says, 'Hey, we work really great together, you should become part of our corporate family. We'll pay you today more than you could obtain in a year when you become public.' In the past year, we have seen companies like this sold for over a $1 billion.

The interesting part is that soon after the acquisition the cycle starts again. While most of the acquired company employees will stay with the new company, some will say, 'Hey, we have this other idea. Let's start over.' And so the cycle keeps going.

Q: Are there other alternatives non-M&A; alternatives for these companies?

A: Going public is another alternative. In an IPO (initial public offering) you are raising $50 million to $100 million. But sometimes the IPO avenue is shut down because of instability in the capital markets, like this summer. If this opportunity is closed off, you may be running out of alternatives. So it's either just keep going and attract more venture money or pursue the M&A; route.

Q: What about the big merger transactions in the market?

A: The other trend going in the market is the massive strategic merger transactions. Companies with huge, huge market caps like AOL and Time Warner combining their widespread businesses in stock-for-stock merger transactions.

With AOL/Time Warner, for example, AOL needed Time Warner's media content. And Time Warner needed a way to deliver media content over the Internet. The merger solves each others' problems. So they decide to combine.

Q: What is a merger of equals?

A: There have been a handful of these transaction this year. Unlike the acquisition scenario, in a merger of equals there is no buyer or seller. The companies are combining on a shared control basis.

Another interesting thing about a merger of equals is, typically, unlike the acquisition scenario, there is not a premium paid for the shares of either company.

Q: Are there more mergers or acquisitions going on?

A: There is a lot of both.

Q: It seems that a lot of the acquisitions are of old-economy companies buying new-economy businesses. Is that an accurate assessment?

A: Yes. We are seeing old-economy companies leveraging themselves into the new economy through acquisitions. An example of this is the Knight Ridder and Tribune acquisition of [Reston-based] CareerBuilder.com.

CareerBuilder, a Web recruiting service and successful IPO faced stiff competition as a public company against companies operating similar services. A number of these competitors were larger and better financed, including HotJobs.com and Monster.com.

Knight Ridder and Tribune are expanding their business into new media outside of newspaper publishing. CareerBuilder determined that it was better off combining with an acquirer with deeper resources than continuing on alone. Knight Ridder and Tribune determined that it would be better to buy into new media than attempt to build it themselves.

Q: What was the last transaction that you worked on?

A: In the spring, I represented WebMethods in its $1.5 billion acquisition of Active Software. The transaction closed last month. That transaction was an example of two companies combining to offer a more potent technology solution to their customers.

Q: Do you think M&A; activity will continue at this pace?

A: Yes, I do. All the elements that promote M&A; activity are in place. Once started, there is a snowball effect and it has its own momentum. We have also seen this year that instability in the capital markets does not seem to slow down M&A; activity. It appears that this level of activity is now built into the economy.

Q: Are there differences in the M&A; field today, with the large number of technology companies?

A: It's a little different because the assets are mostly technology and people, rather than hard assets. In the 1980s, acquisitions were often about eliminating layers of employees to promote cost savings. M&A; activity today is often about hiring people and a lot of companies are acquired just to get access to talented employees.

Q: What are hostile acquisitions?

A: In most transactions there is a willing buyer and a willing seller. In a hostile transaction there is a willing buyer and an unwilling seller.

An acquirer desires to acquire a company and is willing to pay a premium for the shares of the target company. The target company believes that it is in the best interests of its shareholders to remain an independent company.

When the acquirer takes the issue directly to the shareholders of the target company, the transaction becomes hostile. The idea is putting pressure on the board of directors of the target company so they'll come back and negotiate a transaction.

Q: Are hostile takeovers usually successful?

A: More often than not they are.

Q: What are classic misconceptions about M&A; deals?

A: One misconception is that when transactions are first announced to the public that the transaction has already occurred and the companies are one. Usually this is not the case. When the transaction is first announced the parties have only agreed to combine. The actual combination will usually take place 30 to 90 days after the first announcement.

It is also possible that the transaction will fail and not close for any number of reasons. An example of this is the recent failure of the proposed WorldCom/ Sprint transaction.

Larry Yanowitch, a mergers and acquisitions attorney at ShawPittman in McLean.

Age: 38

Education: Georgetown University, B.A.; Georgetown Law, J.D.

Experience: Practices M&A; at ShawPittman; Led security practice at Tucker, Flyer & Lewis; Practiced M&A; and corporate finance at Skadden, Arps.

Last deal done: WebMethods acquisition of Active Software for $1.5 billion. The deal was completed in August.

What I drive: Old BMW

My family: Recently married.

How to contact me: 703/790-7900


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