February 26, 2013
Earnouts gone bad
File this under another reason to counsel your clients against taking an earnout. GeekWire describes the issue:
Nearly three years ago, Reston, Virginia-based TNS acquired Cequint in a deal that valued the Seattle caller ID startup for as much as $112.5 million.
At the time, everyone appeared happy. Cequint CEO Rick Hennessey said the acquisition “would accelerate our opportunities and improve the offering to our carrier customers,” while TNS CEO Henry H. Graham Jr. noted in the press release that the combination would create “a very powerful offering.”
But not everything is happy-go-lucky in this post merger world.
TNS’ acquisition of Cequint consisted of about $50 million in upfront cash and stock, with another $62.5 million to be delivered “for the achievement of future performance-based targets.”
$62 million, that's more than half of the total consideration in the transaction. You can bet the acquiror is facing some moral hazard. No surprise that the subsequent lawsuit is claiming that the acquiror intentionally gummed up the works to ensure that Cequint couldn't hit the benchmarks in the deal. From the notice of removal to federal court:
I'm not at all surprised that this kind of dispute pops up in the context of an earnout. What I am surprised about is that it's in court at all! Usually, disputes over enforcement of an earnout are taken care via arbitration baked into the merger agreement. It's a little surprising therefore to see it in court. Of course, I'll take back all of my surprise if the TNS files a motion to dismiss in federal court because of an arbitration provision.
February 26, 2013 | Permalink
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Agreement is publicly available - http://www.sec.gov/Archives/edgar/data/1268671/000110465910048501/a10-17820_1ex2d1.htm. There is a neutral accountant construct re any calculations (as is normal), but don't think it applies to an alleged breach of the covenant to act in good faith (as is also normal).
Posted by: dk | Feb 26, 2013 8:41:33 AM