The deal made sense from its inception.
In February 2002, two software companies decided to partner at the suggestion of their shared big-name clients — and ended up merging nine months later, closing the fifth largest private software transaction worldwide for 2002.
The seller was Cambridge-based eRoom Technologies, which provides a digital workplace known as an “eRoom” — a sort of online conference room that can be accessed via a web browser through a secure connection for the duration of a client’s project, allowing a company to connect with customers, suppliers and other company members.
The buyer, California-based Documentum, Inc., does business in enterprise content management — or ECM. ECM allows companies to create, capture, manage and archive web content, digital asset management, records management or any other type of content.
Before the merger, both companies served Hewlett-Packard, Ford Motor Co., Johnson & Johnson and Pfizer. eRoom alone served such heavy hitters as Airbus, Aventis Pharmaceuticals, BIC, EDS, Deloitte Consulting, Solectron and Sony, while Documentum worked with Cisco, Delta Airlines, Dow Chemical, McDonald’s, Nokia, PepsiCo and Yahoo!.
Elliot J. Mark, eRoom’s in-house counsel who had prior experience in M&A work, played a key role in the merger.
“This is what we would consider a classic strategic acquisition, or a strategic merger — two companies who are leaders in their space with complementary technologies,” Mark says.
Mark credits the customers with getting the wheels in motion for the deal. “There was actually a lot of impetus for this on the customers’ side, where customers using eRoom were looking for content management, and companies with Documentum [were] looking for collaboration.”
But the partnership, it turns out, was just the tip of the iceberg.
“As Documentum and eRoom started to work together, to partner, we started to realize the synergies of a closer relationship between the two companies,” Mark explains.
Partnership discussions started in February 2002; merger talks began two months later when Documentum approached eRoom. The deal was signed by October and closed in December 2002.
Outside counsel Brian D. Goldstein led the Testa, Hurwitz & Thibeault team that included Kristin S. Caplice and Frank V. Castellucci from the firm’s business practice group, and Arnold P. May and Scott S. Jones from the firm’s tax practice group. Testa, Hurwitz has represented eRoom in employment, intellectual property and other corporate matters since the company’s inception in 1996.
‘How Much Are They Going To Pay?’
Goldstein and Mark say it was smooth sailing for most of the merger process — except in the beginning.
“To get to a point where we could sign a document, the question was all about value — how much are they going to pay for” eRoom? Goldstein remarks. “eRoom was successful in negotiating up on the price, because when [Documentum] started [discussions], it wasn’t worth talking.”
To increase the deal’s value, eRoom suggested the amount be paid in stock. But the amount of stock from Documentum would have been more than 20 percent, something that would have to be discussed with Documentum’s stockholders under NASDAQ rules, and something that would lengthen the process.
To avoid a potentially longer timeline while maintaining the deal’s value, the transaction was a combination of cash and stock — $12.6 million in cash of a total closing value of $168 million — with just enough cash to make the stock worth approximately 18 percent of Documentum’s total.
But Goldstein doesn’t advise that scenario for all deals.
“It’s generally not something I would recommend unless you’re trying for a certain purpose, and our purpose was to keep it under 20 percent,” Goldstein says.
Though stock deals may involve more legal maneuvering than all-cash deals, both attorneys sing the praises of the former.
“From the seller’s perspective, you want stock for a couple reasons,” Mark explains. “One is that you can set it up tax-free. Two, if you think there is an upside to the company, you want to be able to participate in that upside.”
Adds Goldstein: “eRoom wanted to make sure that management would come over and they’d have incentive to stick around. So they were able to put restrictions on the stock where management couldn’t just sell it right away, and it gives them incentive to help grow the company for the next year.”
Further, says Mark, the companies’ stock was in relatively good shape, compared to other markets in the current economy.
“Documentum thinks their stock is fairly valued at this point and it’s starting to come back, which is what they were expecting,” he observes. “But they also saw the combination was going to be of value to both companies on a combined basis — both from a company-technology point of view, but also from a stock point of view. In that respect, they were interested in doing a stock deal as well.”
“In terms of deals, the one thing you have to keep in mind is the relative strength or leverage. Even though eRoom is a small company, it had almost $40 million a year in revenue, was profitable and didn’t need more cash. They didn’t have to sell the company. As a result, we were able to negotiate certain things a lot more favorably than maybe some other companies can in this market.”
More ‘Face Time’?
Goldstein says he’s noticed some trends taking shape in the M&A field over the past few years.
“We had a lot more board meetings than I’ve typically had, and they were long board meetings with a lot of discussion about the transaction,” he notes, “which is great from a lawyer’s perspective. From a board consideration process, to make the decision, this is probably longer than what I’m used to from a couple years ago.”
According to Mark, the level of diligence on the e-Room-Documentum transaction “was nothing like I’d ever seen in 13 years of M&A practice. I think a lot of it is a combination of the economy and the Sarbanes-Oxley Act. People are very, very sensitive to those types of issues on the business side, on the accounting side, on the technical side.”
Down the road, Goldstein predicts an increase in “face time” after the recent increase in the use of the Internet for transactions. While the Net remains an efficient way to do business — indeed, an eRoom was used for board meetings and the due diligence process in this deal — there is no substitute for getting people together in a real room, he says.
Meanwhile, Goldstein credits Mark for his involvement in the M&A process — something that’s unusual for in-house counsel.
“We certainly appreciated his commenting on all of the documents, although we don’t usually expect that from in-house counsel,” Goldstein notes. “In this case, it was good to have someone commenting on it.”
Mark cites the work of the Testa, Hurwitz team as a good example of what he looks for in outside counsel.
“It’s very helpful when you’ve got outside counsel who you’ve worked with in the past, certainly that you have a good working relationship with, but [who] understands the company and the company’s business,” adds Mark.
“Here it was particularly helpful that Testa, Hurwitz has gone through four rounds of financing with us. Also, we had begun the IPO process. Sort of the same diligence and understanding of the company work that goes into that is what you need for successful counsel in a major acquisition,” Mark says.
While there’s been a decline in M&A activity over the past few years, Goldstein has encouraging news.
“Our firm has seen the M&A activity pick up. I think it’s too early to tell if this is a trend at this point, but what I’ve seen at our firm and reading about, there seems to be more activity.”
According to Goldstein, the fact that software giants like CISCO and IBM are involved in acquisitions is a sign that other companies will soon follow.
In the meantime, his advice for those about to embark on a deal is: Be patient when working with the board, let the business objectives come before the legal objectives “and get creative” when trying to shorten the process.
As in-house counsel, Mark emphasizes the importance of being organized.
“Nothing puts things under a microscope more closely than an acquisition or an IPO process,” Mark stresses. “All your little ducks have to be in a row for that kind of process.”[A version of this article first appeared in the Feb. 24, 2003 issue of Massachusetts Lawyers Weekly.]
Purchase Of Window Co. ‘Quintessential Example’ Of Deals In Current Economy
With last year’s dramatic drop in merger-and-acquisition activity, deals of any nature are noteworthy these days. So when Copenhagen-based VELUX acquired Sun Tunnel Systems, Inc. of California in a recent cash deal, those in the M&A business sat up and took notice.
The transaction was initiated last summer when VELUX, a worldwide manufacturer of skylights and roof windows, began talks with Sun Tunnel Systems, which makes “flexible-tube” skylights. (Through a system of mirrors and flexible tubes, the skylights bring natural light into rooms that normally wouldn’t have any, such as in bathrooms or closets.)
Discussions between the two companies continued into the fall and the deal was inked in December — a feat VELUX attorney Mark S. LaConte of Boston calls a “small miracle” due to the short deadline.
The cash deal for an undisclosed amount between the two privately held companies sounds less common than it actually is, LaConte claims.
Though “a lot less” cash is being put into deals nowadays, LaConte says “there is a misimpression that cash is rare these days. For those few deals that are being done, cash is the medium of payment for roughly half of those deals.”
LaConte predicts there will be an uptick in the percentage of cash deals compared to the percentage of stock deals in 2002. “It’s hard to find any deals, but if you look at the few number of deals, there will be a slightly higher percentage of cash deals this year because buyers are not willing to part with their stock when it is undervalued.”
According to LaConte, deals that are successful — like the VELUX transaction — are strategic and not “growth for growth’s sake.”
The main ingredient is a buyer who is in the industry, “looking to make the purchase for a valid, sensible, well-thought-out business strategy,” LaConte says. “VELUX wanted to get into the business of developing and selling flexible-tube sky lighting.”
According to LaConte, many investors who weren’t strategic buyers paid for their mistakes over the last couple of years.
“Companies that had these non-strategic acquisitions found themselves burned by the companies they now owned,” LaConte explains. “These companies may have had some warts on them that didn’t look so bad during the boom economy. All of a sudden those warts looked larger when the market went flat. They acquired companies they weren’t able to integrate into their [own] companies, into their corporate cultures, and companies that didn’t make sense for strategic reasons.”
But that’s all changed, says LaConte.
“They learned their lesson that bigger isn’t necessarily better,” the Boston corporate lawyer says. “What you’ll see being done are high-quality deals with strategic business planning.”
The all-cash purchase of VELUX’s stock was “nothing unique,” LaConte says. “I’m sure there are still stock deals being done, but we’ll see more and more of these cash deals because stock prices have not returned to a level where they can be printed as overvalued currency.”
LaConte, a partner in the Boston office of Robins, Kaplan, Miller & Ciresi, disagrees with the notion that there have been fewer acquisitions because of low demand.
“It’s a misconception to believe there have not been many deals because there is no demand,” LaConte says. “There is strong demand, but there has been a real lack of attractive opportunities. The definition of attractive has been changed.”
VELUX’s in-house counsel, based in Denmark, worked on the initial structuring but left the rest up to LaConte. Although the various parties involved in the deal were literally all over the map, there was virtually no travel involved as most of the work was done over the Internet.
While he still makes it a priority to talk to clients on the phone or in person as much as possible, LaConte says e-mail is a more efficient and a quicker means of communicating one’s stance, especially in acquisitions.
One drawback to this instant communication, however, is that the client tends to expect the job to be done faster.
“Because you can do something instantaneously, the clients expect it,” LaConte says.[A version of this article first appeared in the Jan. 27, 2003 issue of Massachusetts Lawyers Weekly.]
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