Innovate Capital Expert Comments

Innovate Capital Law’s founders have been called upon by the media to provide expert commentary for more than 100 news articles about legal, technology and business subjects.

Yay! We Closed the Merger: What Do we do Now?

WRAL Techwire

Everyone is watching to see whether sparks fly when people from the two different cultures start working together on a day to day basis.

Culture is both an outlook about the world and a set of rules.  Together, they define what is acceptable and what is not.  What are reasonable expectations?  When do you have a right to get mad at someone? How should you deal with “violators?”  Eventually it’s about raw power.  Who defines what the new rules are?  Who has the power to make someone conform to the culture?

Some mergers create synergies by cutting jobs, which improves the bottom line.  Other mergers create synergies by making people more productive, which increases top line revenue.

Everyone prefers increasing productivity, but the problem is that takes longer to achieve than cost cutting.  So, the temptation is to show Wall Street the synergies quickly by cutting jobs, which sometimes makes it more difficult to make people more productive.

What Happens Behind Closed Doors in a Big Merger

WRAL Techwire

It makes no sense to wait to bring the combined product line to the market.  Also, if the closing is delayed, factors like stock market prices, trade wars, law suits and similar events could potentially interfere with the closing.

So why wait?

There are lots of things the two companies need to do to realize the commercial benefits of the merger.  They have a lot more flexibility you do these things after the merger than they do while they remain separate companies.

Product pricing, bundling, distribution  and joint sales are all limited by anti-trust laws until the merger closes.

Undoubtedly, these issues have been discussed at high management levels, but real implementation at the mid to lower levels of both companies can’t occur until the merger closes.

Although you never know from the outside how long it will take to close, the companies have a lot of incentive to close this merger in July rather than later.

Playing Hardball on International Antitrust Issues in Merger

WRAL Techwire

“These approval processes are often like a toll bridges. You have to pay to cross,” veteran Triangle M&A attorney Jim Verdonik told WRAL TechWire on Friday.
“This is likely to slow down a closing until Red Hat and IBM develop a strategy for dealing with the Brazil market,” Verdonik, who recently launched Innovate Capital Law in Raleigh along with Benji Jones, noted.

“I expect there will be a negotiation in which Brazil will negotiate some benefits for Brazilian companies,” Verdonik said.

Can Brazil stop the deal? Verdonik says no.
“Brazil can’t stop the merger, because IBM and Red Hat are not incorporated in Brazil,” he explained. “It is, however, within Brazil’s power to make it difficult for Red Hat and IBM to do business in Brazil.”
So what happens if Brazil doesn’t endorse the deal?
“If Brazil tries to impose too high a price for approval Red Hat and IBM may decide to close the merger without approval and negotiate concessions after the merger,” Verdonik said.

Achieving Merger Synergies Requires Motivating Red Hat Employees

WRAL Techwire

That price ($190 in cash for each share) only makes sense if IBM sees a lot of synergies between the two businesses,” Verdonik added. “It’s difficult to reap the benefits of synergies if the two businesses really do operate separately.

Verdonik doesn’t expect layoffs at Red Hat – but what about the other way around?
IBM recently acknowledged cutting 1,700 jobs and also has sold off some smaller business operations.
“I don’t know how this may affect IBM employees,” Verdonik notes. “I would be a little more worried about layoffs if I worked for IBM. IBM recently borrowed $20 Billion to pay for Red Hat. That debt service might cause IBM to do some cost cutting.”

As for Red Hat, Verdonik says the problem may be keeping employees from cashing out stock and leaving – as well as being recruited.
“For a company like Red Hat, a big part of their value is their employees,” Verdonik explains. “Most businesses in the software industry are scrambling to recruit people.
“I wouldn’t be worried about layoffs if I was a Red Hat employee.”

Community Impact of Red Hat Employees’ Merger Wealth

WRAL Techwire

“A big infusion of cash into the local economy like this will definitely be positive for the local economy in the short term,” Verdonik says

“Whether that impact lasts, depends on what Red Hat people decide to do.

“Are they rooted locally?  Or will they move away?

“Will they start new companies?  Or will they be passive investors?

“If they become investors, will they be angels who invest in local companies?  Or will they invest in national and international markets?

“I suspect the answer is all of the above will occur.  It will take awhile to find out what the mix is.”

Chase for Capital is Evolving Rapidly with Democratization of Capitalism

Triangle Business Journal

Some people ask me: Are venture and angel capital dead or dying?

No. Both are evolving to adapt to a changing capital-raising environment – like dinosaurs that evolved into birds. New types of financings (like crowdfunding and Coins) are a natural part of venture capital’s evolution.

Then there is the democratization of venture capital, which includes:

VC funds that raise $10 million or less can now have up to 250 investors.

Venture managers are organizing online syndicates for followers who invest in special-purpose vehicles.

Software platforms allow angels to spend less time at in-person meetings.

A younger generation of investors is learning how to invest, because non-accredited investors invest online.

Social impact investing is increasing.

Old Rules Face New Challenges as Technology Evolves

Triangle Business Journal

So, here we find ourselves at the beginning of the blockchain, coin and token Renaissance where:
balance and reason are replacing darkness and fear;
everything is possible and nothing is guaranteed;
if it were easy, everyone would be rich; and
knowledge and guts are your tools.
What will the future bring? Stay tuned – you’ll hear it here first.

Time Lawsuit Against Competitor to Create Problems for Important Deal

Triangle Business Journal

“The best time to sue a competitor is when they’re trying to get a deal done, because you can screw up both Cree and the potential buyer by throwing a big ugly piece of mud in the middle of their beautiful deal,” said Verdonik, who has no direct knowledge of the situation. “Cree and the buyer have a much higher motivation to get this lawsuit settled than if a deal was not going on.”

Precision Biosciences prices IPO, looks to raise upwards of $135 million

According to Jim Verdonik, founder of Innovate Capital Law, the two-pronged approach to fundraising could be motivated by several factors, including a desire to extend their runway and protect against unforeseen events through the IPO process, during which he says companies’ burn rates often increase due to anticipation of the coming funding.
The other possibility, said Verdonik, is that the company wanted to raise as much cash as possible with minimal dilution.
“They may have also been contemplating doing this debt deal for the purpose of minimizing the amount of dilution.” he said. “If you can do it partially through debt and partially through equity you can minimize dilution.”
If that was the case, he speculated that the company might have chosen to take advantage of a strong economy rather than wait until the end of the process – which could drag on for months or years – when the markets could be different.
“They could have been afraid that the S-1 process was going to drag on, and interest rates were going to rise, so they didn’t want to wait to raise debt offering until their equity offering was done, so why not lock in their interest rate now,” he said.
Verdonik also speculated that it is advantageous for companies to make their balance books as attractive as possible when pursuing a public offering, suggesting the company could have been interested in the increased funding prior to their IPO in order to raise the value of their equity.
“The debt gives them some cash so they have a better position to bargain for a better price for their equity because they’re not desperate for cash,” he said referring to companies in general, not specifically Precision. “The saying is: ‘the easiest way to raise money is if you don’t need it.’”

Delisting from Nasdaq

Jim Verdonik, founder of Innovate Capital Law, says these notices tend to work against companies, because it comes across as bad news to investors. “When a company announces it might have its trading market lowered, then it’s harder for the company to convince the marketplace it won’t happen,” he said. “It’s kind of hard to raise your market capitalization on your own unless you have good news sitting there that the market is waiting for.”

Should the company fail to meet the threshold, Verdonik said most companies choose to trade on the Capital Market but face several negative ramifications for doing so.

He said many investors – especially institutional investors – use the market and corresponding thresholds to evaluate whether they want to invest in a company and evaluate their risk for doing so.