21 April 2010
The reported demise of stapled financing may have been premature. Though once popular, these transactions (which received their name because the details of a proposed financing are “stapled” to the back of sell-side acquisition materials) became less common after 2006, and virtually ceased to exist in the wake of the credit crunch. That, however, appears to be changing, as stapled financing appears poised for a return.
The media has recently reported that stapled finance transactions have played a role in several recent company auctions and, whereas there was previously little interest in the product, interest appears to be increasing.
In stapled financing, an investment bank that is advising a seller in an acquisition also offers financing to the would-be purchasers. The terms of the proposed financing are already established and signal the bank’s views as to the quality of the acquisition and how much leverage the target can support. Because the need for potential purchasers to establish their own financing is eliminated, such transactions can permit an expedited bidding process and are generally expected to attract more potential purchasers.
Stapled finance transactions are not, however, without controversy and risk. Because the advising bank stands to collect M&A advisory fees from the seller or target as well as financing fees from the buyer, potential conflicts of interest arise. Such conflicts of interest have historically been a source of criticism in the media, and some commentators have asserted that these arrangements are not favorable for the target companies. In addition, these arrangements have attracted legal scrutiny and have been, in at least one case involving a similar arrangement, criticized by a court. (See In re Toys “R” Us, Inc. Shareholder Litigation, 877 A.2d 975 (Del. Ch. 2005).)
In many cases, however, stapled financing can be successfully accomplished as long as important protections related to the target, the bank and the potential purchasers (e.g., information walls and deal teams to manage confidentiality issues) are in place and adhered to by all parties.
Therefore, so long as the transactions are structured correctly and the banks participating in such transactions are aware of, and appropriately mitigate, the risks of such transactions, the issues involved in stapled financing are manageable. Thus, it appears as if stapled financing may have an increasing role in the future of acquisition financing.
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