0505003 Informal Interpretation

us-ftc-hsr-informal-interpretations-314600f41165272be8c3f6de254d86170505003 Informal InterpretationGuidance

Date
Rule
801.10
Staff
Michael Verne
Response/Comments
Agree

Question

From: (redacted)
Sent: Tuesday, May 17, 2005 10:51 AM
To: Verne, B. Michael
Cc: : (redacted).
Subject: Pre-Merger Valuation Question

Mr. Verne,

Thanks for all of your assistance in the past. Can you please confirm thefollowing asset valuation question in this hypothetical?

Company A has a wholly-owned subsidiary, Company X, that intends to acquiresubstantially all of the assets/liabilities of Company B for $35M. Many of theowners of Company B may become employees of Company X post-closing (Note: Thevalue of bona-fide employment contracts are not included in the valuationbecause they are not consideration being paid to the seller). Company X willcontinue as a wholly-owned subsidiary of Company A after the closing.

As part of the Purchase Agreement, Company A will covenant to invest anadditional $20M in its subsidiary, Company X, for the development of theinfrastructure of Company X (ie, acquisition of equipment and build-out offacilities, not earmarked toward salaries) over a certain time periodpost-closing. While neither Company B, nor its owners, will directly benefitfrom the future $20M investment by Company A in its subsidiary, Company X, theywill have a covenant/right that they could seek to enforce under the PurchaseAgreement if Company A does not make such future investment.

Because neither Company B directly, nor its owners, will "receive"any consideration because of the $20M future investment in Company X, thisamount is not considered when determining the fair market value of thetransaction. (Note: I have assumed that the value of the "right"received to enforce this future covenant is worth significantly less than theproposed investment amount in Company X.) Consequently, the transaction valueis only $35M and no HSR filing is required.

Please do not hesitate to call me at the number below if I can provideadditional information or if you have any questions. Thanks for yourassistance.

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