Bullshit reaches limit - AFF and Iporn scuttlebutt

[Fausty]

Originally Posted by RawAlex

Fausty, normally the idea is that the companies "merge" and stock is issued to the winners. It seems this time instead that AFF was sold on notes (which appear by the report to not have been respected / late / in default). If Andrew and Lars are lucky, they didn't finance the notes themselves and rather actually got paid out. I somehow manage to doubt it, but you never know.

Technically, there's not a pre-defined "winner" in a merger and, though it's somewhat different from everyday assumptions, the distinction between a "merger" and an "acquisition" is not as bright-line as it seems. I don't know if this deal was structured as a 368(b) all-stock merger, or an asset acquisition, or what (too lazy to dig deeper, sorry) - there's as many potential deal structures as there are creative minds to design them. Still, the issuing company is almost by definition the "acquirer" and the company (shareholders, actually) receiving that payment (whether it is cash, stock, or debt) is the "acquired entity." Mergers are sort of the middle ground and can go either way - as they say.

Indeed, the "acquiring company" in technical M&A topics is primarily chosen on the basis of tax and jurisdictional variables - it is not uncommon for the "acquiring" company's shareholders to end up with a minority position in the resulting combination. Twenty years ago, there was a sense that deals like that were inherently "shady" - say "reverse merger" to an old-school finance player and the wince. However, the structure itself is now commonplace and this AFF deal is, in a sense, a form of that.

You do bring up a good point - I'd need to look closer at the EDGAR docs to see if they debt carried from the acquisition is held by the sellers or a third party. If it's the latter, then the sellers did in fact "cash out" on close (apart from any equity they may have received - either stock or warrants/options).

I pretty much agree with you that these "go public and pay off debt" deals just seem uninspiring. As you say, there's really no cash left, post-IPO, to invest in the business or help it to grow (though paying down debt can free up extra operational cashflow in the process - depending on whether the notes accrued to a balloon or required regular paydowns). Similar concerns apply to deals where most of the IPO stock is being sold by outside investors - not the company itself - so the proceeds don't end up in the corporate treasury.

Basically, if the market is hot all sort of deals like that go right through. In today's dead market, I can't imagine floating an offering like this - I was involved in a de-leveraging, post-LBO IPO in 2000 that got scuttled at the last minute when the market got jumpy. So much is at the winds of fate, in deals like this.

In any case, raising money via the debt markets to fund acquisitions isn't, ceteris paribus, improper - in fact, given the US tax treatment of corporate debt interest payments, companies "lever up" as part of sound tax management all the time. Much of the volume of the commercial paper markets in recent years has been composed of debt placements to fund purchase activity - the hedge funds placed many billions of such debt in the markets for just such deals, with nobody calling foul. Many buyout funds specialized in doing deals like that, and nothing else.

Basically, I'm trying to say that, if this deal had been done in 2006, it would have looked an awful lot like everything else - with the "adult" side the only difference. You look at some of the private equity IPOs that went out in 05/06 and it's just shocking - these deals were entirely to pour cash into the hedge fund profit column and many of the companies that did them are now defunct as a result. In the nonexistent current IPO market, ANY weakness or symptom of deal weakness is going to bring out the knives - and once that happens it is sort of a self-fulfilling failure.

Q.E.D.

Fausty (MBA, University of Chicago - minor in finance )

ps: some acquisition agreements will specify a "best efforts" requirement to float an IPO after a certain period of time - this AFF deal could, in theory, just be the company going through the motions of that so it doesn't end up in some sort of trouble under a separate agreement - just pointing out something I've seen before, where "hopeless" deals got proposed for that reason alone, and not because anyone really thought the'd price and trade.