Top-Up Option Math

Just going over some older posts, and I ran across The Deal Professor’s excellent post on top up options.  I think it’s worth adding that if you’re going to counsel your clients that a top up option is “standard” in tender offers that you ask a junior associate for the cap table, first.  It’s important to make sure the target has enough authorized stock so that it’s possible to grant the option.  Although it doesn’t sound like a lot, in actuality the target will have to issue a lot of stock to move from say 88% to 90% and thus be in a position to conduct a short form merger. 

I was surprised how far short of the statutory 80% Apax fell in its tender for Bankrate. If it’s true that they got just over 50%, then Bankrate had to have the printing presses working overtime to issue all the new stock required to get Apax over the 80% line (I know, I know, no stock certificates were actually printed…).

In Bankrate’s case that turned out not to be a problem.  It had 100 million shares authorized, of which only 19,148,003 were issued and outstanding (see the cap rep).  Assuming the tender closed with 50% tendering their shares (957,400 shares), then Bankrate would have to issue an additional 28.7 million shares to increase the buyer’s holdings from 50% to the 80% required (in Maryland) to conduct a short-form merger.*  That’s a lot of stock.  Prior to the tender, Bankrate only had 19 million shares outstanding.  In order to get Apax in a position to conduct a short form merger, it would have to issue something like 150% of its outstanding shares.  In Bankrate’s case they had plenty of authorized but unissued stock, but that may not always be the case, so it’s worth pulling out a calculator and checking.

Of course, in issuing such a large block of stock you’ll blow through listing standards that require stockholder votes (on issuances equal to >20% of outstanding shares). But, I suppose if you are taking a company private such things as listing standards don’t prevent much of an obstacle.  I mean, what is the NYSE going to do?  Delist you?

-bjmq

* Assuming that Apax received 50% of the outstanding shares in the tender, the math goes something like this:  

(9,574,003 Apax tendered shares + 28,722,005 Apax option shares)/(19,148.003 old shares outstanding + 28,722,005 option shares) = 80.0%