States Deserve A Complete Picture In Evaluating FirstNet/AT&T Coverage Plans

FirstNet recently selected AT&T as its partner to build, operate and maintain the Nationwide Public Safety Broadband Network (“NPSBN”).  With AT&T leading the charge, network development appears to be on a fast track. In early June, the initial AT&T/FirstNet Radio Access Network (“RAN”) or coverage plans were made available electronically to all 50 states, the District of Columbia and territories of the United States (referred to as the “states” for purposes of this article). After a brief period for review, comment and consultations, the plans will be finalized and the Governor of each state must decide whether to accept the FirstNet plan or to seek an alternative coverage model through the state’s own Request For Proposal (“RFP”) process.

In evaluating its options, the goal of every state should be to obtain the best possible network coverage for its First Responders. The safety of First Responders and the public must be the primary concern in evaluating the AT&T/FirstNet plan. In order to conduct a reasonably thorough examination, the Governors and their teams must have access to the necessary financial, technical and legal information regarding AT&T’s commitments to deliver the NPSBN.

However, the states currently face a major obstacle in conducting their analysis. They do not have access to the underlying contract between AT&T and FirstNet. There have been numerous trade press reports and FirstNet/AT&T presentations about what the AT&T proposed roll-out will entail (e.g. access to the entire AT&T network, public safety usage targets, priority and preemption). However, no one from a state government is privy to the specific terms of the FirstNet/AT&T agreement. As with most agreements the “devil is in the details,” but the states cannot access the details.

There are countless issues involved in the review of state plans that turn on the conditions of the underlying FirstNet/AT&T contract. For example, how much of the statutory requirement for rural coverage can be satisfied through “deployables” as opposed to permanent hardened infrastructure under the terms of the contract? What is the specific long-term commitment to support discounted pricing for public safety use? Is there a mechanism in place to resolve any disputes that may arise between FirstNet and AT&T.

A fundamental question is whether there is an option for AT&T to “opt-out” of the contract with FirstNet if it fails to obtain a certain number of states “opting-in” or for any other reason. Another basic issue pertains to the penalties that AT&T may have to pay if it fails to meet certain levels of public safety use or “adoption” on the network. Without firsthand knowledge of the AT&T/FirstNet agreement, there is no way of knowing with certainty if there are caveats or conditions that could limit such a requirement?  What happens to the spectrum if there is zero public safety adoption in a given area or insufficient adoption on a nationwide basis? These are significant questions to which states are entitled to an answer.

For AT&T and FirstNet to simply address these and other critical questions an on ad hoc basis is not a prudent approach. The only way a full evaluation of whether the needs and objectives of public safety are being met is for FirstNet and AT&T to disclose the underlying contract to the states so that they can examine the specific terms of the agreement.

As things now stand, a Governor is being asked to accept a vendor to build and operate the public safety network within his or her state – impacting the lives of First Responders and the public – without firsthand knowledge of the terms under which AT&T will provide the service. FirstNet and AT&T should disclose the terms of their contract pursuant to an appropriately drafted non-disclosure agreement so the Governors and their teams will have a complete picture in reviewing the FirstNet/AT&T coverage plans.

This post was written by Albert J. Catalano of  Keller and Heckman LLP.

Using Phantom Equity to Grow Your Business: Pros and Cons

phantom equityThis is the second article in a series examining when an entrepreneur should consider granting equity or equity-like interests in his or her company, and if so, how to properly structure that equity or equity-like grant.  To view the first article in this series, please click here.  Today’s topic: Phantom Equity.

Phantom Equity Overview

Phantom equity is an equity-like grant that is tied to the underlying value of a unit (if the company is an LLC) or a share of stock (if the company is a corporation) in the company. More often than not, phantom equity is granted pursuant to a phantom equity plan, with individual phantom equity agreements for each of the applicable employees/executives.  The individual phantom equity agreements will likely have some customized terms for each particular employee (number of units, vesting schedule, etc.), while other terms are usually standard across each of the phantom equity agreements (rights to certain payments, forfeiture upon termination, rights to certain information, etc.).

An example may be helpful.  Let’s assume there are 100 units issued and outstanding to the members of an LLC prior to creating the phantom equity.  Then, 10 “phantom units” are granted to key employees pursuant to a phantom equity plan.  The end result is that the phantom unit holders would receive an amount equal to 9.09% (10 units out 110 units total) of certain payments made to the real unitholders (the holders of the 100 units) of the company.  The key fact to remember is that these phantom units are not actual units of equity in the company, but they are counted as if they are actual units for purposes of certain payment or events of the company.


Generally, phantom units or shares are not paid for by an employee, but instead vest over time in exchange for the employee continuing to work full-time at the company during such vesting period.  Typically, I see a one year cliff (from the first date of employment), then vesting in monthly or quarterly increments over the following two to four years.  The one year cliff (meaning, no vesting occurs during the first year of employment) is done to protect the company from granting phantom equity to employees that leave the company for whatever reason within their first year of employment.  Sometimes, an employee that is granted phantom equity will negotiate partial or accelerated vesting if the company terminates the employee “without cause.”  This is typically not granted by most companies, but every situation is unique and I have seen it negotiated and granted to a few individuals.

Eligible Payments

A phantom equity holder will be entitled to payments in connection with certain triggering events.  These triggering events will be set forth in either the phantom equity plan or in the phantom equity agreement.  There is great flexibility for a company in designing their own particular phantom equity plan and what payments the phantom equity holders participate in.

The most company-friendly plans only provide for a payment in the event of a change in control transaction (i.e. the sale of the company).  This means any dividends that flow to members or stockholders of the company (not otherwise in connection with a change of control transaction) will not be shared with the phantom equity holders.  For example, if a company has 100 shares issued and outstanding to its shareholders and 10 phantom shares issued to is phantom equity holders that do not have a right to participate in dividends, and the Company is going to dividend out $1,000,000, then the holder of each share of stock would receive $10,000 per share ($1,000,000 split amongst 100 shares), while the phantom shareholders (10 shares) would receive nothing.  If a phantom equity plan is structured this way, the clear message to the phantom equity holders is that they will only share in the success of the company if the company is ultimately sold.  Phantom equity holders should understand the risk that he or she may not work at the company when it is sold, and therefore it is likely that such phantom equity holder will not receive any benefit from the phantom equity.  This is because phantom equity is often contractually forfeited by the employee when he or she leaves the company.  This allows the company to issue new phantom equity to future hires without further diluting payments made to real equity holders.

Valuation Hurdle/Phantom Appreciation Rights

Another key feature typically found in phantom equity grants is the concept of a valuation hurdle, or what is sometimes referred to as a “phantom appreciation right.”  If a company has been in existence for a few months or longer, then the company likely has some ascertainable “fair market value” greater than zero.  Let’s assume that a company’s fair market value is determined to be $5,000,000, and this company now desires to grant phantom equity to certain employees.  If there is a valuation hurdle in the phantom equity plan or agreement, then the phantom equity holders only share in the value that is created (based on their phantom equity percentage) that is above $5,000,000.  Using this same example, let’s assume the company is sold three years later for $10,000,000 and there are 100 units of real equity issued and outstanding and 10 units of phantom equity.  In such example, the real equity holders (100 units) would receive all of the first $5,000,000 of proceeds from the sale, and then the next $5,000,000 would be split 90.91% to the real equity holders and 9.09% to the phantom equity holders (per the math at the beginning of this article).

No Ownership Rights/Control 

From the company’s perspective, it is important that the plan and/or phantom agreements very clearly spell out that phantom equity does not grant any rights to the holder that would be typically granted to a normal equity holder under law.  This provision should explicitly state that the phantom equity holder has no voting or decision making authority with respect to the company in connection with being granted phantom equity.  It should also limit the rights of the phantom equity holder to demand certain information (financial or otherwise) from the company.  Conversely, if you are the person being granted phantom equity, you should consider negotiating certain information rights into your phantom equity agreement.

Tax Implications

Whether phantom equity or phantom appreciation rights are being granted, the tax situation is generally the same for the company.  Generally, payments made by a company in connection with phantom equity or phantom appreciation rights are deductible by the company at the time the payment is made.  Regardless, always be sure to discuss the tax consequences with a tax advisor before granting phantom equity or phantom appreciation rights.

Conversely, and as a big disadvantage to the employee being granted phantom equity instead of real equity, payments received by phantom equity holders are taxed as ordinary income.  The difference between ordinary income and capital gains (which typically would apply to certain payments made to true equity owners) can add up to thousands (if not millions) of dollars of additional taxes paid by the employee if the company has a successful exit event.  However, in positive news for the recipient, no taxes should be due by the phantom equity holder upon his or her receipt of phantom equity.  With respect to true equity issuances, the recipient will likely owe tax on the fair market value of the equity received, unless such equity was actually purchased by the recipient for fair market value.

General Pros and Cons

There are a number of reasons phantom equity may make sense for a company as compared to other types of equity and equity-like plans.  Below are a few final points to think about as you decide whether or not phantom equity may be a viable option for your company:


  • It allows certain key employees to share in the growth and success of the company while existing equity owners are not explicitly diluted and do not give up any control.

  • May serve as a golden handcuff to keep key executives from looking at other job opportunities.

  • Employees do not need to actually purchase the phantom equity; in other equity plans, the employees will likely need to purchase the equity at fair market value or have to pay tax on the fair market value of the equity that they receive.

  • There is a great deal of flexibility that can go into the phantom equity structure.  The phantom equity can mirror true equity almost completely (participate in dividends, etc.), or it can be very limited (participates only in a change of control event, with a valuation hurdle).

  • If structured correctly, phantom equity can easily be forfeited without penalty to the employer or the employee if the employee leaves the company.


  • If structured poorly it can lead to extremely bad results, including the permanent dilution of existing shareholders or unit holders, and/or the forced disclosure of sensitive information to individuals no longer working at the company.

  • May require a valuation of the company by an outside accounting or valuation firm.

  • May not be as attractive to a key employee because it is not real equity, and the company usually has the ability to terminate the employee and consequently extinguish the phantom equity.

  • 409A (deferred compensation) issues can add complexity to structuring and achieving the intended objectives of the company and the employee recipients.


When structured correctly, phantom equity is an excellent option for both companies and key employees.  As I like to tell clients, granting phantom equity is somewhat akin to dating before getting married – there are clear benefits to both the employee and employer in putting a phantom equity plan in place, but if it does not work out, both sides can walk away with minimal, if any, strings attached.

© Horwood Marcus & Berk Chartered 2015. All Rights Reserved.

U.S. Sentencing Commission Weighing Recommendation to Increase Criminal Antitrust Penalties

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In June, the United States Sentencing Commission, which is appointed by the President to make recommendations to Congress on the criminal penalties for the violation of federal law, issued a request for comments regarding whether the guidelines for calculating antitrust fines should be modified. Currently, corporate fines for cartel price fixing are calculated on a sliding scale, tied to the amount of the “overcharge” imposed by the violators, with the standard maximum fine under the Guidelines for a corporation capped at $100 million and, for an individual, capped at $1 million. The deadline for such comments was July 29, and the views expressed on the issue varied considerably.

Contending that the current Guidelines do not provide an adequate deterrent to antitrust violations, the American Antitrust Institute urged the Commission to recommend an increase in the fines for cartel behavior. The AAI stated that the presumption in the Guidelines that antitrust cartels, on average, “overcharge” consumers for goods by 10% is greatly understated, and thus should be corrected to reflect more accurate levels. Pointing to economic studies and cartel verdicts, the AAI suggests that the median cartel “overcharge” is actually in excess of 20%, and therefore the presumption should be modified in the Guidelines. If adopted, the AAI’s proposal would double the recommended fines under the Guidelines for antitrust violations.

Perhaps surprisingly, the DOJ responded to the Commission’s Notice by stating that it believes that the current fines are sufficient, and that no increase in antitrust fines is warranted at this time. The DOJ indicated that the 10% overcharge presumption provides a “predictable, uniform methodology” for the calculation of fines in most cases, and noted that the Guidelines already permit the DOJ to exceed the fine levels calculated using the 10% overcharge presumption in some circumstances. Specifically, the DOJ noted that the alternative sentencing provisions of 18 USC 3571 already permit it to sidestep the standard guidelines and seek double the gain or loss from the violation where appropriate. Notably, the DOJ utilized this provision in seeking a $1 billion fine from AU Optronics in a 2012 action, although the court declined the request, characterizing it as “excessive”. The court did, however, impose a $500 million fine, an amount well in excess of the cap under the standard antitrust fine guidelines.

Finally, D.C. Circuit Court of Appeals Judge Douglas Ginsburg and FTC Commissioner Joshua Wright offered a completely different view on the issue in comments that they submitted to the Sentencing Commission. Suggesting that fines imposed on corporations seem to have little deterrent effect, regardless of amount, they encouraged the Commission to instead recommend an increase in the individual criminal penalty provisions for antitrust violations. Notably, they encouraged the Commission not only to consider recommending an increase in the fines to which an individual might be subjected (currently capped at $1 million), but also to recommend an increase in the prescribed range of jail sentences for such conduct (which currently permit for imprisonment of up to 10 years).

The Commission will now weigh these comments and ultimately submit its recommendations to Congress by next May. If any changes are adopted by Congress, they would likely go into effect later next year. Stay tuned.



The Real Tax Benefits of Inverting to Canada

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On August 26, Burger King announced that it entered into an agreement to acquire Tim Hortons, Inc., the Canadian coffee-and-doughnut chain, in a transaction that will be structured as an “inversion” (i.e., Burger King will become a subsidiary of a Canadian parent corporation).  The deal is expected to close in 2014 or 2015. The agreement values Tim Hortons at approximately $11 billion, which represents a 30 percent premium over Tim Hortons’ August 22 closing stock price.

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Under the terms of the deal, Tim Hortons shareholders will receive a combination of cash and common shares in the new company. Each common share of Burger King will be converted into 0.99 of a share of the new parent company and 0.01 of a unit of a newly formed, Ontario-based limited partnership controlled by the new parent company. Holders of shares of Burger King common stock, however, will be given the right to elect to receive only partnership units in lieu of common shares of the new parent company, subject to a limit on the maximum number of partnership units issued.  Burger King shareholders who make this election will be able to defer paying tax on the built-in gain in their Burger King shares until the partnership units are sold. 3G Capital, Burger King’s principal shareholder, has elected to receive only partnership units. 3G will own approximately 51 percent of the new Burger King-Tim Hortons company, with current public shareholders of Burger King and Tim Hortons receiving 27 percent and 22 percent, respectively.

Inversions have gotten plenty of negative publicity during the past few years.  Most of the reported deals involve U.S. companies that have acquired smaller foreign companies in low tax jurisdictions such as Ireland, Switzerland, and the U.K.  As with any inversion transaction, the U.S. company will continue to be subject to U.S. federal income tax on its worldwide income.  The U.S. company will benefit, however, from the ability to: (i) reorganize its controlled foreign subsidiaries under a new foreign parent corporation (thereby removing those subsidiaries from the U.S. “controlled foreign corporation” regime and also allowing for the future repatriation of non-U.S. source profits to the foreign parent corporation and avoid U.S. corporate income tax); and (ii) “base erode” the U.S. company with intercompany debt and/or license arrangements with the new foreign parent or its non-U.S. subsidiaries.

It has been reported that Burger King’s effective tax rate was 27.5 percent in 2013 and Tim Hortons was 26.8 percent (15 percent federal rate plus 11.8 percent provincial rate), so “base eroding” Burger King with deductible interest and/or royalty payments to Canada will not provide a significant tax benefit to Burger King.  Where the use of a Canadian parent corporation, however, will benefit Burger King (and other U.S. companies that have inverted into Canada) from a tax perspective is the ability to take advantage of Canada’s (i) “exempt surplus” regime, which allows for the repatriation of dividends from foreign subsidiaries into Canada on a tax-free basis; and (ii) income tax treaties that contain tax sparing provisions, granting foreign tax credits at rates higher than the actual foreign taxes paid.  The United States does not provide either of these tax benefits under its corporate income tax system or treaty network. 

Canadian Exempt Surplus Regime

In general, under Canadian law, dividends received by a Canadian corporation out of the “exempt surplus” of a foreign subsidiary are not subject to corporate income tax in Canada.  Exempt surplus includes earnings of a foreign subsidiary that is resident in, and carrying on an active business in, a country with which Canada has concluded an income tax treaty or, more recently, a tax information exchange agreement (TIEA).  A TIEA is an agreement between two jurisdictions pursuant to which the jurisdictions may request and share certain information that is relevant to the determination, assessment and collection of taxes, the recovery and enforcement of tax claims, and the investigation or prosecution of tax matters.  The extension of the exempt surplus regime to jurisdictions that have signed TIEAs (but not income tax treaties) with Canada is significant because Canada has signed such agreements with low-tax jurisdictions, such as the Cayman Islands, Bermuda, and the Bahamas. Historically, the use of a Barbados IBC, which has a maximum corporate income tax rate of 2.5 percent, was the preferred jurisdiction for a Canadian parent company operating in a low-tax jurisdiction because of the long standing Canada-Barbados income tax treaty.

On the other hand, dividends received by a Canadian corporation out of the “taxable surplus” of a foreign subsidiary will be taxable in Canada (subject to a grossed-up deduction for foreign taxes) at regular corporate income tax rates. Taxable surplus includes most types of passive income, such as royalties, interest, etc., and active business income of a foreign subsidiary that is resident in, or carrying on business in, a country with which Canada has neither an income tax treaty nor a TIEA.  Special rules may deem certain passive income (such as interest or royalties) to be included in exempt surplus if received by a foreign subsidiary resident in a tax treaty or TIEA jurisdiction, if those amounts are deductible in computing the exempt earnings of another foreign subsidiary.  For example, interest and royalties paid from an active business of a U.K. subsidiary of a Canadian parent corporation to a Cayman Islands subsidiary of such Canadian parent will be eligible to be repatriated to Canada from the Cayman Islands under the exempt surplus regime on a tax-free basis.

It is interesting to note, however, that Burger King will not be able to repatriate most of its foreign-source income to Canada on a tax-free basis under the exempt surplus rules.  The majority of Burger King’s foreign-source income consists of royalties and franchise fees, which will be considered passive income for Canadian income tax purposes.  (Burger King, which operates in about 14,000 locations in nearly 100 countries, has become a franchiser that collects royalty fees from its franchisees, not an operator of restaurants).

Canada’s Tax Sparing Provisions

Another tax benefit offered by a Canadian parent corporation is the ability to utilize the “tax sparing” provisions contained in many Canadian income tax treaties. Canada currently has income tax treaties that contain tax sparing provisions with more than 30 countries, including Argentina, Brazil, China, Israel, Singapore, and Spain. In general, the purpose of a tax spari
ng provision is to preserve certain tax incentives granted by a developing jurisdiction by requiring the other jurisdiction to give a foreign tax credit for the taxes that would have been paid to the developing country had the tax incentive not been granted.  For example, under Article 22 of the Canada-Brazil income tax treaty, dividends paid by a Brazilian company to a Canadian parent corporation are deemed to have been subject to a 25 percent withholding tax in Brazil and therefore, eligible for a 25 percent foreign tax credit in Canada, even though the treaty limits the withholding tax to 15 percent (and in actuality, Brazil does not even impose withholding taxes on dividends under its local law).  A similar benefit is available for interest and royalties paid from Brazil to Canada (e.g., a deemed withholding tax, and therefore foreign tax credit, of 20 percent, even though the treaty caps the withholding tax at 15 percent).  As noted above, the United States does not currently have any income tax treaties that contain tax sparing provisions.


With Burger King’s effective corporate tax rate of 27.5 percent in the United States in 2013 and Tim Hortons 26.8 percent in Canada, the tax benefits of Burger King inverting to Canada are not readily apparent.  Notwithstanding the lack of a significant disparity in these tax rates, Canada does offer the ability to exclude from its corporate income tax dividends received from the earnings of a foreign subsidiary that is resident in, and carrying on an active business in, a jurisdiction that has concluded an income tax treaty or TIEA with Canada.  This key benefit, along with the Canadian income tax treaties that contain tax sparing provisions, provides one more example of why U.S. multinationals are operating at a competitive disadvantage when compared to other OECD countries around the world. 


Why October 1, 2014 Is An Important Date For Management Persons Of Nevada Entities

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Two years ago, the Nevada Supreme Court in an en band decision held that a state district court may exercise jurisdiction over the nonresident officers and directors of a Nevada corporation with its principal place of business in Spain.  Consipio Holding, BV v. Carlberg, 282 P.3d 751 (Nev. 2012).  The Supreme Court reasoned

When officers or directors directly harm a Nevada corporation, they are harming a Nevada citizen. By purposefully directing harm towards a Nevada citizen, officers and directors establish contacts with Nevada and “affirmatively direct [] conduct” toward Nevada.

At the time, Nevada, unlike Delaware, had no implied consent statute.  Thus, the Nevada Supreme Court’s holding was based on Nevada’s long-arm statute, NRS 14.065(1).

In the ensuing session, the Nevada legislature decided to address the issue as well by enacting an implied consent statute:

Every nonresident of this State who, on or after October 1, 2013, accepts election or appointment, including reelection or reappointment, as a management person of an entity, or who, on or after October 1, 2014, serves in such capacity, and every resident of this State who accepts election or appointment or serves in such capacity and thereafter removes residence from this State shall be deemed, by the acceptance or by the service, to have consented to the appointment of the registered agent of the entity as an agent upon whom service of process may be made in all civil actions or proceedings brought in this State by, on behalf of or against the entity in which the management person is a necessary or proper party, or in any action or proceeding against the management person for a violation of a duty in such capacity, whether or not the person continues to serve as the management person at the time the action or proceeding is commenced. The acceptance or the service by the management person shall be deemed to be signification of the consent of the management person that any process so served has the same legal force and validity as if served upon the management person within this State.

NRS 75.160(1).  Under the statute, an “entity” means a corporation, whether or not for profit; limited-liability company; limited partnership; or a business trust.  NRS 78.160(10)(b).  A “management person” means a director, officer, manager, managing member, general partner or trustee of an entity.  NRS 75.160(10)(c).

Apparently, the Nevada legislature did not consult with Professor Eric Chiappinelli who last year published an article arguing that Delaware’s implied consent statute was unconstitutional.  The Myth of Director Consent: After Shaffer, Beyond Nicastro37 Del. J. Corp. L. 783 (2013).

Why does the statute refer to October 1?  Pursuant to NRS 218D.330(1), each law and joint resolution passed by the Legislature becomes effective on October 1 following its passage, unless the law or joint resolution specifically prescribes a different effective date.

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Tips for Success in the Current Mergers and Acquisitions Environment


If you have been waiting for a recovery in the Merger & Acquisition environment in the defense and government services industries, we have bad news: you will most likely have to wait until well into 2014. By almost all accounts, the M&A market has yet to snap out of the doldrums.

Back in 2008 and 2009, we could blame the problem on a dearth of available financing; however, today there is plenty of cash on corporate balance sheets. Lenders are more than willing to finance good deals. So, what gives? The reasons are diverse, including concerns over declining federal budgets, uncertain government programs, questions about the sustainability of global growth, and the increasing cost of business resulting from the vast array and complexity of government regulations, to name just a few.

With M&A volume meandering sideways, the fact that valuations are stagnant should also come as no surprise. Middle market M&A multiples continue to remain in the 4X to 6X EBITDA range, and sometimes higher in the case of acquisitions by strategic buyers.

While this all might sound depressing, it should not be. For companies with an interest in growing through M&A, conditions could not be much better. Between cash balances and available credit, there is plenty of financing available to fund good deals. Next, the Federal Reserve and other central banks have indicated a commitment to maintain low interest rate environments. Additionally, Baby Boomer retirements and generational transitions in family-owned businesses should continue to result in buying opportunities. Finally, the absence of frothy valuations typically present at this stage of a recovery have not yet materialized, increasing the likelihood of M&A success (when measured in terms of return on investment). This last point is particularly important, because M&A failure rates tend to increase dramatically as asset prices increase.  Additionally, many larger companies are opting to divest non-core business units.

Despite the favorable environment, it is important to remember that M&A is fraught with risk. To maximize your probability of success, keep the following points in mind:

  1. Make sure you have an M&A strategy. Clearly defining business objectives you intend to accomplish through M&A can help identify a broad pool of targets, sift through those targets to identify the best fit, and minimize merger premiums.
  2. Start small. Successful acquirers tend to grow through a large number of small acquisitions, rather than “betting the farm” on a single transaction.
  3. Set a walk-away price. The best acquirers set a maximum price early on and stick to it.
  4. No stone unturned.  Make sure you and your advisors do as much due diligence as possible before an acquisition, so you can make an informed investment decision and arrive at a proper valuation.  In addition to thoroughly understanding the business and the financial aspects of the transaction (the target’s assets, revenue streams, liabilities, cost analyses and projections), also make sure you have a firm grasp on the risks involved in the transaction, and mitigate them to the best of your ability.
  5. Do not fall in love with the deal. Negotiating a deal is exciting, but walking away is not. Call it what you want—pride, hubris, delirium—but the sheer desire to close the deal often leads incredibly brilliant people to do incredibly stupid things. Hit the pause button from time to time and ask the advice of those you trust.
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Call Waiting: Department of Justice (DOJ) to Maintain Scrutiny of Wireless Industry Consolidation



The wireless industry has seen steady consolidation since the late 1980s.  Recently, in late 2013, reports began circulating about a potential merger between Sprint and T-Mobile, the nation’s third and fourth-largest wireless carriers, respectively.  Last week, however, in an interview with the Wall Street Journal, William Baer, the assistant attorney general for the antitrust division at the Department of Justice (DOJ), cautioned that it would be difficult for the Agency to approve a merger between any of the nation’s top four wireless providers.

T-Mobile’s CEO, John Legere, stated that a merger between his company and Sprint “would provide significant scale and capability.”  Baer, on the other hand, warned that “It’s going to be hard for someone to make a persuasive case that reducing four firms to three is actually going to improve competition for the benefit of American consumers,”  As a result, any future consolidation in the wireless industry is likely to face a huge hurdle in the form of DOJ’s careful scrutiny of any proposed transaction.

Much of the DOJ’s interest in the wireless industry stems from the Agency’s successful challenge of a proposed merger between T-Mobile and AT&T in 2011.  Since then, Baer believes consumers have benefitted from “much more favorable competitive conditions.”  In fact, T-Mobile gained 4.4 million customers in 2013, bringing optimism to the company’s financial outlook after years of losses.  In the final two quarters of 2013, T-Mobile’s growth bested that of both Sprint and AT&T.  The low-cost carrier attracted customers and shook up the competition by upending many of the terms consumers had come to expect from wireless carriers, as well as investing in network modernization and spectrum acquisition.  This flurry of activity has pushed the competition to respond with its own deals, resulting in “tangible consumer benefits of antitrust enforcement,” according to Baer.

The DOJ’s antitrust division has kept careful watch over the wireless industry the past few years. That scrutiny will remain, as the Agency persists to advocate that four wireless carriers are required for healthy market competition.  The cards are beginning to play out from the Agency’s decision, and as Baer stated, “competition today is driving enormous benefits in the direction of the American consumer.”

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Lisa A. Peterson


McDermott Will & Emery