Intellectual Property Concerns In Tech M&A

What is intellectual property in technology?

Intellectual property (IP) is the lifeblood of the technology industry and an essential component in technology law. Intellectual property includes patents, trademarks, and copyrights. When tech companies engage in merger and acquisition activities, they gain ownership of the intellectual property associated with the target company. This is a primary benefit of m&a to tech companies because it allows immediate access to new technologies, without having to build from scratch. Therefore, the value of the target company is directly affected by the value of it’s IP.

Intellectual Property Due Diligence

When conducting IP due diligence, it is essential to consider how you will protect the IP value, so that you can get the highest value out of the deal. To protect the value of IP tech companies, consider these two things:

1) The credibility of the company’s IP

2) The branding of the company’s IP

No one will complete a transaction with a company they cannot trust. Therefore, it is important to have a full understanding of the intellectual property held by the target company, in order to remain credible. There is no place for embellishments in IP-heavy transaction. For example, claims of “patented” status when the IP is only “patent pending,” may make the deal more enticing to buyers on the front end of the deal. However, the deal will be placed in jeopardy when the potential buyer learns of the true patent pending status. This will cause the buyer to either view the target company as untrustworthy, for making false claims, or as unprofessional for failing to uncover the patent status during the due diligence process.

It is essential to focus on the branding of IP to drive up perceived market value. With the rise of silicone value, public awareness has also risen for tech companies. Making brand awareness is an important practice because it can restrain or increase the value of IP. For a positive example of brand awareness driving up value, we can look to Facebook’s attempted acquisition of SnapChat in 2013, for $3 billion. Snapchat had no revenue at this point, and the value was based on its positive social media perception as well as its technologies. Conversely, Facebook itself felt the adverse effect of public opinion on value when their stock value dropped 7% during a highly publicized data privacy scandal in 2018. [1]


[1] https://www.cnbc.com/2018/11/20/facebooks-scandals-in-2018-effect-on-stock.html

Intellectual Property Considerations In Healthcare M&A

Intellectual property (IP) due diligence is the process by which the IP of a target company is analyzed for accuracy and completeness. Healthcare M&A transactions require extensive intellectual property validation and verification. Healthcare intellectual property concerns consist of 1) patents on chemical compounds for pharmaceuticals, 2) trademarks on brand name drugs, and 3) trade secret protected and privacy rights in the patient list.[1]

Healthcare sector participants such as pharmaceutical companies and biotechnologies are driven primarily on the value of their IP. The purpose of IP due diligence is to uncover fraud, copyright infringements, and verify proper filing of ownership rights in IP. If any issues with the target company’s IP are uncovered, then the deal may be terminated.[2]

When engaged in Healthcare transactions, considerations must be given to how the rights of IP transfer. The structure of a deal may dictate how IP rights are transferred post-transaction. In asset deals, it may not be required to indicate the transfer of the IP in the purchase agreement. The transfer of rights is presumed when the business is sold.

In a Stock sale, the IP ownership rights remain with the acquired company. However, All IP rights must be recorded when there is a change in ownership. Any delay in recording may result in the loss of royalties. [3]


[1] http://sbca.net/intellectual-property-health-law/

[2] https://www.nutter.com/ip-law-bulletin/5-must-ask-ip-due-diligence-questions-in-corporate-transactions

[3] https://www.wipo.int/export/sites/www/sme/en/documents/pdf/mergers.pdf

Tax Considerations For A Tech M&A

The Tax Cuts and Jobs Act saw the most changes to U.S Tax policy in recent history. Tax matters are a driving force of mergers and acquisitions (M&A) when determining the value of the transaction. In order for Technology (Tech) companies engaged in M&A to assess the impact of the TCJA, they must take into consideration the changes in the rules for 1) Net Operating Losses (NOLs), 2) Research and Experiment tax deduction, 3) fringe benefits, 4) the Global Intangible Low Tax Income (GILTI), and 5) the new limitations interest deductions.

Deferred tax benefits such as NOLs add value to the transaction because it allows the acquiring company to benefit from the target’s prior losses. Prior to the TCJL NOLs were allowed to be carried back provision where the taxpayer could apply its NOLS to previous years. The TCJL eliminates the ability to carry back NOLs. Tech company with volatile cash and operating capital may use NOLs as an incentive to facilitate the sale. The new restrictions on NOLs may decrease the purchase price.

Tech companies are heavily invested in research and experimentation (RE) activities by nature. Expenses incurred from these activities are deductible. Under the TCJA these expenses will eventually no longer be allowed to be deducted immediately and will only be allowed to be capitalized and amortized between 5 and 15 years. This will have a high impact on the tax position of Tech companies with significant capital invested in RE actives.

The TCJA disallows the deduction of fringe benefits or perks given to employees. These activities considered to be entertainment, amusement or recreation, and transportation benefits. In the current employee friendly climate, Tech companies are at the front of the line in terms of providing work friendly environments and employee amenities. Tech companies now must weigh the option ceasing to provide these benefits or incur the tax cost of the activities.

The Global Intangible Low Tax Income (GILTI) is an entirely new provision. This provision requires shareholders of Controlled Foreign Corporations to include GILTI into their gross income. The provision allows for 80% foreign tax credits and an incremental GILTI tax levy on corporations whose taxes are below a certain threshold. U.S. Tech companies routinely establish foreign-owned subsidiaries in counties with no taxes on income. As such they are subject to GILTI tax provision which can frustrate the tax implications of a transaction.

Section 163(J) places a cap on deduction of interest expenses to interest income plus 30% if adjusted taxable income. The limitation is without regard to allowable deductions for depreciation amortization and depletion. The TCJA revises and expands section163(j) to apply to all businesses including partnerships. These new limitations decrease the amount of cash flow a Tech company has to include in the valuation of the transaction. [1]


[1] Unless otherwise indicated, all IRC section references are to the Internal Revenue Code.

Federal And State Tax Considerations In Healthcare M&A

Healthcare facilities are subject to both Federal and state taxes. The current tax climate makes taxation uncertain which may have some positive and negative effects on M&A transaction in the Healthcare space. Tax due diligence in a health care transaction must be extremely thorough and comprehensive to best be prepared for the upcoming tax season.

The repeal of the Affordable Care Act’s individual mandate[1] (the requirement that all citizens have health or pay a fine) is projected to increase the number of uninsured individuals substantially. The increase of insured individuals may negatively affect the finances of healthcare facilities treating more uninsured patients.

According to the Tax Policy Center, the implementation of the Tax Cuts and Jobs Act (TCJA) would result in fewer taxable donations which will be given.[2] Charitable donations are provided by individuals looking to offset their taxable income. The TCJA doubles the standard deductions and limits state and local deductions to $10,000.[3] As a result, less charitable donation will be given, negatively affecting the finances of healthcare facilities which rely on charitable donations.

However, the TCJA also increases the charitable contribution deduction to 60% of income at the federal level. This might induce high net worth individuals to donate more to charity as they claim more of their donation as charitable donations.

State governments are allowed to impose a “provider tax” on health care facilities with a limited assessment of up to a quarter of the state’s Medicaid Expenses. It is essential to review the tax laws of every state in which the target healthcare facility is subject.


[1] https://www.irs.gov/affordable-care-act/individuals-and-families/aca-individual-shared-responsibility-provision-exemptions

[2] https://www.taxpolicycenter.org/taxvox/21-million-taxpayers-will-stop-taking-charitable-deduction-under-tcja

[3] IRS Publication 5302, https://www.irs.gov/pub/irs-pdf/p5307.pdf

 

Tech Blogs

  1. How to conduct a Tech IPO/ICO

The SEC defines an Initial Public Offering (IPO) as when a company first sells its shares to the public. [1] Technology (Tech) companies distribute IPOs to raise the funding necessary for growth. Tech companies have raised approximately $4.3 billion in funding via IPOs by the third quarter of 2018.[2]

The process of starting an IPO is a long exhaustive process which involves several layers of intense diligence by investment banks and lengthy filings with the SEC. The SEC requires certain corporate information to become open to the public.[3] During the initial phase of going public, the company and its financials must be prepared to withstand public scrutiny. Extensive due diligence is performed (by an investment banker) to prepare the company books to go public, underwrite the potential IPO, and determine the potential IPO’s value.

The Securities Act of 1933 requires companies to register securities sold on the U.S. market with the SEC. [4] These companies must file a registration statement (From S-1) with the SEC prior to going public.[5] A Preliminary Prospectus is filed as the first draft of the registration statement which includes the pertinent information found in the due diligence process. Once the preliminary prospectus becomes effective, the company will then file a final prospectus to include the IPO’s price range and amount of stock issued.

When conducting an IPO, a tech company must consider that sensitive information might be made public. The value of Intellectual Property is part of the analysis used to determine the price of the company’s IPO. This information may consist of trade secret information and/or expiration dates of patents. By releasing this information, the company is now open to varies IP related issues which can put a strain on the IPO. Tech companies with considerable IP investments must take the necessary steps to prevent IP issues from arising, pre and post IPO.

Tech companies may also place Initial Coin Offerings (ICO) on the market to raise capital. Similar to IPOs, the ICO process involves registering with the SEC. However, ICO generally does not fall under the SEC’s jurisdiction over securities.[6] Therefore, filing a registration statement with the SEC is not required. Companies issuing ICO’s file a Regulation D exception which will allow them to trade their ICO without registering as a security.

The first steps to issue an ICO is to create a product and a token. The token/coin will be used to purchase interests in the product.[7] The token and product are then described in detail on a “White Paper” which is published to inform the market of the ICO.

  1. How to resolve Tax basis concerns with multiple levels of investors for Tech M&A

Tech companies rely greatly on investors to fund their companies’ activities. Generally, there are three levels of investors in a company, the 1) Founders, 2) Employees, and 3) outside investors. When engaged in an M&A transaction an investor will pay taxes on the sale according to their basis in the company stock. The proposed transaction may require shareholder’s approval to complete the transaction. To maximize returns and prevent shareholder disapproval, their individual basis should be established at the onset of investment.

It is common that founders and key employees to own restricted stock in the tech company in exchange for stock. Restricted stock is equity stock which interest does not fully vest until certain conditions are met. When the shareholder’s interest vest, the value of the stock is taxed as ordinary income. When an M&A transaction is complete the stock will be taxed at capital gains rate. Their basis will be valued at the FMV of the time their interest vest.

Under Sections 83 of the Internal Revenue Code, Section 83(b) election allows founders and employees to determine whether to have their basis be valued at the time of issue or the time interest vest. The election must be made within 30 days of the initial issue of stock.[8] By the use of section 83(b) election, a founder or employee shareholder, whose approval is necessary for an M&A taxation, may determine a tax basis at the date of issue which will provide him or her with the greatest tax benefit at the time of sale.

The IRS gives the following example for guidance.

“Company A is a privately held corporation and no stock in Company A is traded on an established securities market. On April 1, 2012, in connection with the performance of services, Company A transfers to E, its employee, 25,000 shares of substantially non-vested stock in Company A. In exchange for the stock, E pays Company A $25,000, representing the fair market value of the shares at the time of the transfer. The restricted stock agreement provides that if E ceases to provide services to Company A as an employee prior to April 1, 2014, Company A will repurchase the stock from E for the lesser of the then current fair market value or the original purchase price of $25,000. E’s ownership of the 25,000 shares of stock will not be treated as substantially vested until April 1, 2014 and will only be treated as substantially vested if E continues to provide services to Company A as an employee until April 1, 2014. On April 1, 2012, E makes a valid election under § 83(b) with respect to the 25,000 shares of Company A stock. Because the excess of the fair market value of the property ($25,000) over the amount E paid for the property ($25,000) is $0, E includes $0 in gross income for 2012 as a result of the stock transfer and related § 83(b) election. The 25,000 shares of stock become substantially vested on April 1, 2014 when the fair market value of the shares is $40,000. No compensation is includible in E’s gross income when the shares become substantially vested on April 1, 2014. In 2015, E sells the stock for $60,000. As a result of the sale, E realizes $35,000 ($60,000 sale price – $25,000 basis) of gain, which is a capital gain.”[9]

  1. Important tax considerations for a Tech M&A

The Tax Cuts and Jobs Act saw the most changes to U.S Tax policy in recent history. Tax matters are a driving force of mergers and acquisitions (M&A) when determining the value of the transaction. In order for Technology (Tech) companies engaged in M&A to assess the impact of the TCJA, they must take into consideration the changes in the rules for 1) Net Operating Losses (NOLs), 2) Research and Experiment tax deduction, 3) fringe benefits, 4) the Global Intangible Low Tax Income (GILTI), and 5) the new limitations interest deductions.

Deferred tax benefits such as NOLs add value to the transaction because it allows the acquiring company to benefit from the target’s prior losses. Prior to the TCJL NOLs were allowed to be carried back provision where the taxpayer could apply its NOLS to previous years. The TCJL eliminates the ability to carry back NOLs. Tech company with volatile cash and operating capital may use NOLs as an incentive to facilitate the sale. The new restrictions on NOLs may decrease the purchase price.

Tech companies are heavily invested in research and experimentation (RE) activities by nature. Expenses incurred from these activities are deductible. Under the TCJA these expenses will eventually no longer be allowed to be deducted immediately and will only be allowed to be capitalized and amortized between 5 and 15 years. This will have a great impact on the tax position of Tech companies with significant capital invested in RE actives.

The TCJA disallows the deduction of fringe benefits or perks given to employees. These activities considered to be entertainment, amusement or recreation, and transportation benefits. In the current employee friendly climate, Tech companies are at the front of the line in terms of providing work friendly environments and employee amenities. Tech companies now must weigh the option ceasing to provide these benefits or incur the tax cost of the activities.

The Global Intangible Low Tax Income (GILTI) is an entirely new provision. This provision requires shareholders of Controlled Foreign Corporations to include GILTI into their gross income. The provision allows for 80% foreign tax credits and an incremental GILTI tax levy on corporations whose taxes are below a certain threshold. U.S. Tech companies routinely establish foreign own subsidiaries in counties with no taxes on income. As such they are subject to GILTI tax provision which can frustrate the tax implications of a transaction.

Section 163(J) places a cap on deduction of interest expenses to interest income plus 30% if adjusted taxable income. The limitation is without regard to allowable deductions for depreciation amortization and depletion. The TCJA revises and expands section163(j) to apply to all businesses including partnerships. These new limitations decrease the amount of cash flow a Tech company has to include in the valuation of the transaction. [10]

  1. What intellectual property considerations must be made in Tech M&A?

Intellectual property is the lifeblood of the Tech industry. Intellectual property includes patents, trademarks, and copyrights. The major benefit of M&A to tech companies is that it allows immediate access to new technologies without having to build from scratch. More specifically, Tech companies engage in M&A activities to gain ownership of the intellectual property associated with the target company. Therefore, the value of the target company is directly affected by the value of it’s IP.

When conducting IP due diligence, it is important to consider how to protect the IP value in order to get the greatest value of the deal. To protect the value of their IP tech companies, consider 1) the credibility of their IP and 2) branding of their IP.

No one will complete a transaction with a company they cannot trust. It is important to have a full understanding of the IP held by the target in order to remain credible. There is no place for embellishments in IP heavy transaction. Claims of “patented” status when the IP is only “patent pending,” may make the deal more enticing to buyers on the front end of the deal. However, the deal will be placed in jeopardy when the potential buyer learns of the true patent pending status. The buyer may either view the target company as untrusty worthy for making false claims or as unprofessional for failing to uncover the patent status during the due diligence process.

It is important to focus on the branding of IP to drive up perceived market value. With the rise of silicone value, public awareness has also risen for tech companies. Making brand awareness is an important practice because it can restrain or increase the value of IP. For a positive example of brand awareness driving up value, we can look to Facebook’s attempted acquisition of SnapChat in 2013, for $3 billion. Snapchat had no revenue at this point and the value was based on its positive social media perception as well as its technologies. Conversely, Facebook itself felt the negative effect of public opinion on value when their stock value dropped 7% during a high publicized data privacy scandal in 2018. [11]

  1. What considerations are made when insuring a tech M&A

The growth of the tech industry is driven by expansion of the mobile platform. However, the rise of the mobile platform places the tech industry at a distant disadvantage in the fight against cybercrime. In 2017, cybercrime was a leading risk to businesses worldwide.[12]   Cybercrime cost U.S companies $21M with damages expected to reach $6 trillion by 2021.[13]

The nature of technology places the tech industry as a perpetual target for cybercrimes. Data breaches and the extent of damage they cause have a huge impact on a company’s bottom line. Cyber Security insurance provides a buffer which will protect the company from the cost of cyber-attacks. Insurers consider a company’s security score when determining to underwrite an M&A deal.

To determine a company’s security score, insures will analyze the companies 1) construction of security program and crisis management, 2) Occupancy of data management and access management, 3) Protection of their operations and responses, and 4) exposure to security breaches.[14] Adequate cyber security measures can decrease a company’s risk exposure. Therefore, the acquisition of cyber insurance mitigates the risk associated with cybercrimes in the tech industry and help protect the deal value.


[1] https://www.sec.gov/fast-answers/answersipohtm.html

[2] https://www.pwc.com/us/en/services/deals/q3-2018-capital-markets-watch.html

[3] https://www.investopedia.com/articles/investing/080613/road-creating-ipo.asp

[4] https://www.sec.gov/answers/about-lawsshtml.html#secact1933

[5] https://www.sec.gov/files/forms-1.pdf

[6] https://www.sec.gov/ICO

[7] https://medium.com/swlh/how-to-launch-an-initial-coin-offering-7fa000ba3f59

[8] https://www.law.cornell.edu/uscode/text/26/83

[9] Rev. Proc 2012-29, https://www.irs.gov/pub/irs-drop/rp-12-29.pdf

[10] Unless otherwise indicated, all IRC section refence are to the Internal Revenue Code.

[11] https://www.cnbc.com/2018/11/20/facebooks-scandals-in-2018-effect-on-stock.html

[12] https://www.statista.com/statistics/422203/leading-business-risks-usa/

[13] https://cybersecurityventures.com/hackerpocalypse-cybercrime-report-2016/

[14] https://www.fireeye.com/services/cyber-insurance-risk-assessment.html

Healthcare Blogs

  1. What federal and state Governing bodies approvals are needed in a Healthcare M &A
  1. What federal and state Governing bodies approvals are needed in a Healthcare M &A

Under the Under the Hart-Scott-Rodino Antitrust Improvements Act, the Department of Justice (DOJ) and Federal Trade Commission (FTC) have jurisdiction over M&A activity of a certain size which may affect commerce.[1] Transactions which may trigger an anticompetitive effect are reviewed by the (DOJ) and the (FTC) for approval. Healthcare M&A transactions regularly consist of multibillion-dollar deals and are formed with the purpose of consolidating the market and are regulated by the DOJ and FTC.

When reviewing a potential transaction, the DOJ analyzes the proposed deal to determine if the transaction would “substantially lessen competition”[2] if allowed to be executed. Two recent Healthcare M&A transactions which were subject to DOJ review were CVS Health Corporations desired purchase of Aetna Inc. and Cigna Corps take over Express Scripts Holding Company.  Both cases were held to the “substantially lessen competition” and allowed to proceed. However, the CVS-Aetna deal was approved on the condition that Aetna’s Medicare prescription drug business be divested from the deal.

State Antitrust laws must also be considered when entering into a healthcare M&A transaction. States have their own state-specific antitrust laws which may prevent a transaction from being completed. This holds true with the CVS-Aetna deal. Although the DOJ has approved, the States of California, Florida, Hawaii, Mississippi, and Washington have joined the U.S. DOJ Antitrust Division in a civil suit to prevent the transaction on the ground that it would eliminate competition.[3]  The states’ ability to regulate and prevent the execution of healthcare transaction make it necessary to complete high-level reviews of all the states laws which may affect the deal.

  • What Federal and State tax issues must be considered in Healthcare M&A

Healthcare facilities are subject to both Federal and state taxes. The current tax climate makes taxation uncertain which may have some positive and negative effects on M&A transaction in the Healthcare space. Tax due diligence in a health care transaction must be extremely thorough in order to best be prepared for the upcoming tax season.

The repeal of the Affordable Care Act’s individual mandate[4] (the requirement that all citizens have health or pay a fine) is projected to increase the number of uninsured individuals substantially. The increase of insured individuals may negatively affect the finances of healthcare facilities treating more uninsured patients.

According to the Tax Policy Center, the implementation of the Tax Cuts and Jobs Act (TCJA) would result in fewer taxable donation which will be given.[5] Charitable donations are provided by individuals looking to offset their taxable income. The TCJA doubles the standard deductions and limits state and local deductions to $10,000.[6] As a result, less charitable donation will be given. Negatively affecting the finances of healthcare facilities which rely on charitable donations. 

However, the TCJA also increases the charitable contribution deduction to 60% of income at the federal level. This might induce high net worth individuals to donate more to charity as they claim more of their donation as charitable donations.

State governments are allowed to impose a “provider tax” on health care facilities with a limited assessment of up to a quarter of the state’s Medicaid Expenses. It is important to review the tax laws of every state in which the target healthcare facility is subject to.

  • What employment considerations must be made in Healthcare M&A

( I sent this to you already but then I added a footnote so I added in this second round)

The Workers Adjustment and Retraining Notification Act (WARN), provides that employers must give advance notice to its employees prior to any closing or mass layoffs.[7] An employer who violates this act are liable to each employee affected by the violation.[8] Penalties for violating the WARN Act include the average highest wages earned by the employee for the past 3 years, the payout of medical benefits, and civil penalties.  With exception of medical benefits, all of these penalties accrue each day of the violation period, with wage payouts to all the employees affected by the violation.[9]  

The health care industry is massive but not untouched by layoffs and branch closings. Due Diligence must be done to expose any WARN triggering event prior to closing and if so, were all the WARN requirements filed promptly and accurately. As one of the biggest industries in the country, the healthcare industry employs a great number of employees. Thus, Healthcare organizations can incur massive amounts of accumulated penalties which affect the bottom line and put the deal in jeopardy.

Another employment concern which requires due diligence is immigration and the immigration status of those employed in the healthcare industry. According to the U.S. Bureau of Labor Statistics foreign-born workers comprised 5.2% of the healthcare labor force.[10]  That amount rises even higher when you include immigration employment in healthcare supportive roles such as hospital maintenance (8.4%) and Personal care (4.3%).[11]

 Employment concerns include documented and undocumented immigrants. Immigrant doctors, nurses and other employees presumably require specific work Visas as a condition to their employment eligibility.  Visa requirements need to be maintained to prevent the risk of penalties and loss of talent. Undocumented immigrants working in the healthcare sector are cause for concern and can be a violation of laws in and outside of immigration. Proper employment classification is necessary for a healthcare transaction because it directly affects tax liabilities. Presumptively undocumented workers are likely to be classified as independent contractors instead of employees even when they work long hours and for less pay. Employee misclassification can result in higher tax burdens or penalties, as well as, legal liabilities with respect to potential wage and hour laws. Therefore, healthcare M&A transaction involve extensive employment due diligence to prevent these unwanted penalties.

  • What intellectual property considerations must be made in Healthcare M&A

Intellectual property (IP) due diligence is the process by which the IP of a target company is analyzed for accuracy and completeness. Healthcare M&A transactions require extensive intellectual property validation and verification.  Healthcare intellectual property concerns consists of 1) patents on chemical compounds for pharmaceuticals, 2) trademarks on brand name drugs, and 3) trade secret protected and privacy rights in patient list.[12]

Healthcare sector participants such as pharmaceutical companies and bio technologies are driven primarily on the value of their IP. The purpose of IP due diligence is to uncover fraud, copy right infringements, and verify proper filing of ownerships rights in IP. If any issues with the target company’s IP are uncovered, then the deal may be terminated.[13]

When engaged in Healthcare transactions, considerations must be given to how the rights of IP transfer. The struture of a deal may dictate how IP rights are transferred post transaction. In asset deals it may not be required to indicate the transfer of the IP in the purchase agreement.  The transfer of rights is presumed when the business is sold.

In a Stock sale, the IP ownership rights remain with the acquired company. However, All IP rights must be recorded when there is change in ownerships. Any delay in recording may result in the loss of royalties. [14]

  • How is hospital liability and malpractice suites accounted for in a Healthcare M&A

Part of the due diligence process is in M&A is to conduct a legal and insurance due diligence. The legal due diligence will uncover the targets history of malpractice lawsuits and current or potential future litigation. According to the National Practitioner Data Bank[15] medical malpractice payouts amounted to $3.9BN in 2017.[16]  All states require healthcare facilities to carry adequate malpractice insurance. The standard amount of coverage varies by state and may be up to $3M per year.  Insurance due diligence is designed to analyze the targets current insurance to verify adequate coverage. High litigation payout will increase the hospitals insurance premiums, which may significantly devalue the target and put the deal in jeopardy. Malpractice lawsuits can have a substantial effect on a hospitals bottom line regardless of the outcome.  The doctor-patient relationship is the cornerstone of the healthcare market. News of news negligence or other suites may make patients reluctant to seek medical help from that facility.[17]  Malpractice may also drive the overall cost of healthcare up. Malpractice suits commonly result in million-dollar settlements. The cost of which is transferred on to the consumer.  Liability insurance premiums can sky rocket after a lawsuit which may result in a doctor seeking new jurisdictions of which they can work.  Also, defensive medicine will be a concern of doctors prescribing unneeded medical test in order to protect themselves from malpractice claims. [18] All of these factors are considerations made during the due diligence process in a M&A transaction.


[1] 15 USC 18, Acquisition by one corporation of stock of another

[2] 15 USC 18, Acquisition by one corporation of stock of another

[3] https://www.justice.gov/opa/press-release/file/1099831/download

[4] https://www.irs.gov/affordable-care-act/individuals-and-families/aca-individual-shared-responsibility-provision-exemptions

[5] https://www.taxpolicycenter.org/taxvox/21-million-taxpayers-will-stop-taking-charitable-deduction-under-tcja

[6] IRS Publication 5302, https://www.irs.gov/pub/irs-pdf/p5307.pdf

[7] 29 U.S. Code § 2102 – Notice required before plant closings and mass layoffs

[8] 29 U.S. Code § 2104(a)

[9] 29 U.S. Code § 2102(a)3

[10] https://www.bls.gov/opub/ted/2016/foreign-born-more-likely-than-native-born-to-work-in-service-occupations.htm

[11] https://www.bls.gov/opub/ted/2016/foreign-born-more-likely-than-native-born-to-work-in-service-occupations.htm

[12] http://sbca.net/intellectual-property-health-law/

[13] https://www.nutter.com/ip-law-bulletin/5-must-ask-ip-due-diligence-questions-in-corporate-transactions

[14] https://www.wipo.int/export/sites/www/sme/en/documents/pdf/mergers.pdf

[15] https://www.npdb.hrsa.gov

[16] https://www.capson.com/medical-malpractice-insurance-by-state

[17] https://online.tamucc.edu/articles/malpractice-and-its-effects-on-the-healthcare-industry.aspx

[18] https://online.tamucc.edu/articles/malpractice-and-its-effects-on-the-healthcare-industry.aspx

Technology M&A

  1. What is the Pros and Cons for a Vertical Acquisition vs. Horizontal Acquisitions in a Tech M&A (This answer is identical to the HC answer because the same aspects apply)?

M&A activity is the main source for growth in the Technology Industry. The two types of acquisitions which facilitate growth are Horizontal Acquisitions when a tech company acquires another tech company and Vertical Acquisitions when a tech company acquires an manufacturing company or other company which provides a service to the tech company.[1] Horizontal and Vertical Acquisitions are not mutually exclusive.  Tech organizations routinely enter into both types of transaction to facilitate growth.

Horizontal acquisitions in the tech space involve the acquisition of another tech organization which is in the same market, i.e. Tech company acquires it’s competing tech company, such as Facebook acquiring SnapChat and Instagram. The main benefits of this form of acquisition are that it eliminates market competition and increases your market reach automatically.[2] The newly combined power and reach give the company a competitive edge over other competitors. However, a downside is that you also acquire the risk associated with the acquired tech organization which may decrease its value.

Vertical acquisitions in the tech space involve the acquisition of a tech company in a different market. As a larger tech enterprise, the acquiring company has access to multiple markets to diversify its portfolio and increase revenue streams. Also, by joining entities across the tech market, this allows improvements in quality and cost efficiency of care, which in turn are bestowed upon the patients/customers. Quality of care and cost of care are the major concern in the tech industry. Vertical acquisitions allow for the development of consolidated payment plans and streamlined treatment which benefits the customer.

  • Prominent Regulation concerns for a Tech IPO/ICO

IPO Regulations

Initial Product Offerings (IPO), are regulated by the SEC. The Securities Act of 1933 requires companies to open their books to the public and registering the securities they wish to sell with the SEC. The Act has two main functions; to require that investors receive the financial information concerning the securities and to prohibit fraud in the sale of securities. [3]

The SEC was created by The Securities Exchange Act of 1934. The Exchange Act regulates the trading markets and requires compliance with ongoing SEC reporting obligations. 

Public companies are also regulated by the Sarbanes-Oxley Act of 2002. The Oxley Act seeks to prevent corporate fraud. It created the Public Company Accounting Oversight Board.

ICO Regulations

Although it’s a digital market, certain facts may determine that the ICO is a security and fall under the SEC jurisdictions.  To date, no ICO has been registered with the SEC as a security.[4] However, companies issuing ICO may be required to file a regulation D exception with the SEC.  The regulation D exception which will allow them to sell the ICO without the need to register as a security with the SEC.[5]  Companies who do not file a regulation D exception may be subject to fines and other punishments by the SEC.

The main regulatory concern for ICOs in the lack of regulations. By the nature of blockchains, ICOs are designed to be market regulated with minimal third-party oversight. However, the SEC does give some oversight on dealing with ICO to prevent fraud and promote healthy investment opportunities. [6]

  • How to evaluate a tech company in a Tech M&A

M&A valuations are used in determining the purchase price of a target company. There are two fundamental principles in M&A valuations. The Buyer wants to purchase at the lowest value and the Seller wants to receive the highest value.  The traditional method of valuation is to analyze past performance.  Start-up Tech companies are in a unique position in which they do not have a past performance to analyze. Yet tech M&A transactions are continuously placed at a high value. This is done by comparing the start-up with established tech companies which are similar in kind. [7]

In this market-based valuation method, investors look to the price of acquisitions in recent transactions of similar companies. Market Multiples allow investors to get an idea of what the market is paying for similar companies.[8] By analyzing similar companies, investors can forecast the future earnings of the startup. Also, investors can utilize these forecasts to make a backward projection to document potential growth. Another Method of valuation of start-up tech companies is the Discounted Cash Flow (DCF) method.  DCF estimates the value of a start-up tech company based on future cash flow. The present value of expected future cash flow is found by using a discounted rate. The startup is then valued at the present value estimate.[9]  An acquiring tech company will consider buying the startup tech company if the present value estimated is equal to or higher than the cost determined by the market multiples and there is potential future growth.


[1] https://www.investopedia.com/ask/answers/051315/what-difference-between-horizontal-integration-and-vertical-integration.asp

[2] https://www.investopedia.com/ask/answers/051415/what-are-advantages-and-disadvantages-horizontal-integration.asp

[3] https://www.sec.gov/fast-answers/answersregis33htm.html

[4] https://www.sec.gov/news/public-statement/statement-clayton-2017-12-11

[5] https://www.sec.gov/fast-answers/answers-regdhtm.html

[6] https://www.sec.gov/news/public-statement/statement-clayton-2017-12-11

[7] https://www.investopedia.com/articles/financial-theory/11/valuing-startup-ventures.asp

[8] https://www.investopedia.com/articles/financial-theory/11/valuing-startup-ventures.asp

[9] https://www.investopedia.com/terms/d/dcf.asp

Healthcare M&A

  1. What are the fed and state regulatory concerns for Health Care M&A

According to the U.S Department of Health Services[1], the five most important Federal regulations applicable to physicians are the False Claims Act (FCA), the Anti-Kickback Statute (AKS), The physicians Self-Referral Law (Stark Law), the Exclusion Authorities and the Civil Monetary Penalties Law (CMPL).  These laws and their state counterparts were enacted to prevent healthcare providers from obtaining an undue benefit at the expense of the government or their patients. Violation of these laws can result in hefty fines and civil and criminal charges. 

  • The Civil Monetary Penalty Laws and The False Claims Act makes it illegal for healthcare practitioners from submitting fraudulent claims of payments to Medicare and Medicaid.[2]
  • The Anti-Kickback Statute makes it illegal to pay referral fees when involving reimbursement from a Federal Healthcare program.[3] 
  • Physicians Self-Referral Law Stark Laws prohibit physicians from making referrals of Medicare “designated health services” to any entity in which a physician or family member has a financial interest[4].
  • The Exclusion Statutes prohibits individuals who were convicted of healthcare crimes and fraud from participating in Federal Healthcare programs.[5]

Healthcare M&A transaction requires an extensive amount of due diligence to ensure compliance.  To ensure compliance with the various laws state above, a proper due diligence for Healthcare M&A transactions should consist of a review all physician’s contracts and financial relationships, an evaluation of claims processes and procedures and billing and collections processes for accuracy and compliance with Federal regulations.

At the state level, healthcare M&A transaction must determine whether the state has restrictions on who can employ physicians.  State Corporate Practice of Medicine (CPOM) restrict the employment of physicians by non-physicians.      Plainly speaking these laws are design to prevent corporations from influencing healthcare practices by only allowing physicians or those designated by the state, to hire physicians.[6]

Other regulatory concerns which directly affect Healthcare M&A transaction are anti-trust laws, privacy and data security laws, and licensing and certification requirements.

The Federal Trade Commission (FTC) and the Department of Justice (DOJ) have extensive scrutiny on healthcare M&A transactions that involve consolidation or affiliation. In 2017 the JOD denied the merger between Aetna Inc. and Humana Inc two of the biggest health insurance providers. The court ruled that the merger would “substantially . . . lessen competition” of the sale of Medicare Advantage plans and individual commercial health insurance[7]. In the current marketplace, the DOJ looks favorable on vertical merges when the parties are willing to divest themselves of potential antitrust risks. A recent DOJ ruling approved a merger of CVS Health and Aetna to proceed provided that Aetna divested itself of its Medicare prescription drug business.[8] Although this acquisition involved the exact same party (Aetna) as the 2015 case, the DOJ approved the merger because at the core CVS and Aetna provide different services. By divesting the deal of its directly competing market, the risk that the merger would substantially lessen competition in that market space was removed.

  • What post-transaction integration changes must be made in Healthcare M&A

In Healthcare M&A many changes occur after the transaction as a consequence to the integration of the facilities. Changes are necessary to facilitate the integration of the companies and create long-term synergy. 

One of the most necessary changes come with licensing and compliance. In a healthcare transaction, two or more entities join together and operate under the same licensing. There are a great many licensing and regulations in the healthcare space. The new entity must comply with all the laws and regulations as to when they were separate. To remain in compliance or become compliant they must make changes in their system to manage the new licensing requirements and maintain compliance.

The Health Insurance Portability and Accountability Act (HIPAA) mandates the protection and security of patient information.[9] Hefty fines are imposed on violators. The post-transaction phase of a healthcare transaction presents a high risk of exposure of patient information. Each entity involved in the transaction have their own systems and procedures to secure private information. These procedures and systems may not be equal or may not sync when put together and create a hole which private information may be leaked. The newly formed healthcare entity must make the changes in its systems, processes, and trainings to maintain compliance and protect patient information.

Effective post-transaction integration plans are designed to create long-term value. To be effective an integration plan should be developed early on in the process which focuses on creating positive synergies.

  • What employment considerations must be made in Healthcare M&A

The Workers Adjustment and Retraining Notification Act (WARN), provides that employers must give advance notice to its employees prior to any closing or mass layoffs.[10] An employer who violates this act are liable to each employee affected by the violation.[11] Penalties for violating the WARN Act include the average highest wages earned by the employee for the past 3 years, the payout of medical benefits, and civil penalties.  With exception of medical benefits, all of these penalties accrue each day of the violation period, with wage payouts to all the employees affected by the violation.[12]  

The health care industry is massive but not untouched by layoffs and branch closings. Due Diligence must be done to expose any WARN triggering event prior to closing and if so, were all the WARN requirements filed promptly and accurately. As one of the biggest industries in the country, the healthcare industry employs a great number of employees. Thus, Healthcare organizations can incur massive amounts of accumulated penalties which affect the bottom line and put the deal in jeopardy.

Another employment concern which requires due diligence is immigration and the immigration status of those employed in the healthcare industry. According to the U.S. Bureau of Labor Statistics foreign-born workers comprised 5.2% of the healthcare labor force.[13]  That amount rises even higher when you include immigration employment in healthcare supportive roles such as hospital maintenance (8.4%) and Personal care (4.3%).

 Employment concerns include documented and undocumented immigrants. Immigrant doctors, nurses and other employees presumably require specific work Visas as a condition to their employment eligibility.  Visa requirements need to be maintained to prevent the risk of penalties and loss of talent. Undocumented immigrants working in the healthcare sector are cause for concern and can be a violation of laws in and outside of immigration. Proper employment classification is necessary for a healthcare transaction because it directly affects tax liabilities. Presumptively undocumented workers are likely to be classified as independent contractors instead of employees even when they work long hours and for less pay. Employee misclassification can result in higher tax burdens or penalties, as well as, legal liabilities with respect to potential wage and hour laws. Therefore, healthcare M&A transaction involve extensive employment due diligence to prevent these unwanted penalties.

  • How to evaluate HC companies in a HC M&A transaction?  

The Healthcare space is heavily involved in M&A transactions. Valuation of these types of transactions is mainly focused on EBITDA (earnings before interests, taxes, depreciation, and amortization) multiples. EBITDA multiples are derived from dividing the Enterprise Value by EBITDA.  The higher the multiple the higher the Value. The Healthcare space consistently sees multiples of 13x EBITDA and up[14].

Two other main factors used to evaluate healthcare transactions are Risks and Growth. Plain and simple, low risk and high growth potential are desired when evaluating a healthcare transaction.  The main risk associated with healthcare transaction is the level of reliance on federal reimbursements. Healthcare organizations which rely mostly on federal reimbursements are considered to be a high risk. Those that have a good diversity of federal reimbursement and private payments are considered to be less risky.

Growth and the ability for future growth are highly desired when entering into an M&A transaction.  Growth can occur either organically or through acquisitions. Healthcare organizations which have an established platform for growth are considered more valuable. Growth through acquisitions is the dominant growth strategy in the healthcare industry. Larger healthcare organizations are able to develop and hire talent to facilitate growth.

  • What is the Pros and Cons for a Vertical Acquisition vs. Horizontal Acquisitions in a HC M&A?

M&A activity is the main source for growth in the healthcare industry. The two types of acquisitions which facilitate growth are Horizontal Acquisitions when a hospital acquires another hospital and Vertical Acquisitions when a hospital acquires an ambulance company or other company which provides a service to the hospital.[15] Horizontal and Vertical Acquisitions are not mutually exclusive.  Healthcare organizations routinely enter into both types of transaction to facilitate growth.

Horizontal acquisitions in the healthcare space involve the acquisition of another healthcare organization which is in the same market, i.e. Hospital acquires it’s competing hospital and a pharmaceutical company acquiring another pharmaceutical company. The main benefits of this form of acquisition are that it eliminates market competition and increases your market reach automatically.[16] The newly combined power and reach give the company a competitive edge over other competitors. However, a downside is that you also acquire the risk associated with the acquired healthcare organization which may decrease its value. Vertical acquisitions in the healthcare space involve the acquisition of a healthcare organization in a different market. As a larger healthcare enterprise, the acquiring company has access to multiple markets to diversify its portfolio and increase revenue streams. Also, by joining entities across the healthcare market, this allows improvements in quality and cost efficiency of care, which in turn are bestowed upon the patients/customers. Quality of care and cost of care are the major concern in the healthcare industry. Vertical acquisitions allow for the development of consolidated payment plans and streamlined treatment which benefits the customer.


[1] https://oig.hhs.gov/compliance/physician-education/01laws.asp

[2] False Claims Act [31 U.S.C. § § 3729-3733]

[3] Anti-Kickback Statute [42 U.S.C. § 1320a-7b(b)]

[4] Physician Self-Referral Law [42 U.S.C. § 1395nn]

[5] Exclusion Statute [42 U.S.C. § 1320a-7]

[6] Painless Parker v. Board of Dental Examiners, 216 Cal. 285, 14 P.2d 67 (1932

[7] U.S v Aetna Inc, https://www.justice.gov/opa/press-release/file/930356/download

[8] https://www.justice.gov/opa/pr/justice-department-requires-cvs-and-aetna-divest-aetna-s-medicare-individual-part-d

[9] https://www.hhs.gov/hipaa/for-professionals/privacy/laws-regulations/index.html

[10] 29 U.S. Code § 2102 – Notice required before plant closings and mass layoffs

[11] 29 U.S. Code § 2104(a)

[12] 29 U.S. Code § 2102(a)3

[13] https://www.bls.gov/opub/ted/2016/foreign-born-more-likely-than-native-born-to-work-in-service-occupations.htm

[14] Duff & Phelps, Healthcare Services Sector Update Dec. 2017

[15] https://www.investopedia.com/ask/answers/051315/what-difference-between-horizontal-integration-and-vertical-integration.asp

[16] https://www.investopedia.com/ask/answers/051415/what-are-advantages-and-disadvantages-horizontal-integration.asp

Federal And State Regulatory Concerns For HealthCare M&A

According to the U.S Department of Health Services[1], the five most critical Federal regulations applicable to physicians are the False Claims Act (FCA), the Anti-Kickback Statute (AKS), The physicians Self-Referral Law (Stark Law), the Exclusion Authorities and the Civil Monetary Penalties Law (CMPL). These laws and their state counterparts were enacted to prevent healthcare providers from obtaining an improper benefit at the expense of the government or their patients. Violation of these laws can result in hefty fines and civil and criminal charges.

  • The Civil Monetary Penalty Laws and The False Claims Act makes it illegal for healthcare practitioners from submitting fraudulent claims of payments to Medicare and Medicaid.[2]
  • The Anti-Kickback Statute makes it illegal to pay referral fees when involving reimbursement from a Federal Healthcare program.[3]
  • Physicians Self-Referral Law Stark Laws prohibit physicians from making referrals of Medicare “designated health services” to any entity in which a physician or family member has a financial interest[4].
  • The Exclusion Statutes prohibits individuals who were convicted of healthcare crimes and fraud from participating in Federal Healthcare programs.[5]

Healthcare M&A transaction requires an extensive amount of due diligence to ensure compliance. To ensure compliance with the various laws state above, proper due diligence for Healthcare M&A transactions should consist of a review of all physician’s contracts and financial relationships, evaluation of claims processes and procedures and billing and collections processes for accuracy and compliance with Federal regulations.

At the state level, healthcare M&A transaction must determine whether the state has restrictions on who can employ physicians. State Corporate Practice of Medicine (CPOM) restrict the employment of physicians by non-physicians.      Plainly speaking, these laws are design to prevent corporations from influencing healthcare practices by only allowing physicians or those designated by the state, to hire physicians.[6]

Other regulatory concerns which directly affect Healthcare M&A transaction are anti-trust laws, privacy and data security laws, and licensing and certification requirements.

The Federal Trade Commission (FTC) and the Department of Justice (DOJ) have extensive scrutiny on healthcare M&A transactions that involve consolidation or affiliation. In 2017 the JOD denied the merger between Aetna Inc. and Humana Inc two of the most significant health insurance providers. The court ruled that the merger would “substantially . . . lessen competition” of the sale of Medicare Advantage plans and individual commercial health insurance[7]. In the current marketplace, the DOJ looks favourable on vertical merges when the parties are willing to divest themselves of potential antitrust risks. A recent DOJ ruling approved a merger of CVS Health and Aetna to proceed provided that Aetna divested itself of its Medicare prescription drug business.[8] Although this acquisition involved the same party (Aetna) as the 2015 case, the DOJ approved the merger because at the core CVS and Aetna provide different services. By divesting the deal of its directly competing market, the risk that the merger would substantially lessen competition in that market space was removed.


[1] https://oig.hhs.gov/compliance/physician-education/01laws.asp

[2] False Claims Act [31 U.S.C. § § 3729-3733]

[3] Anti-Kickback Statute [42 U.S.C. § 1320a-7b(b)]

[4] Physician Self-Referral Law [42 U.S.C. § 1395nn]

[5] Exclusion Statute [42 U.S.C. § 1320a-7]

[6] Painless Parker v. Board of Dental Examiners, 216 Cal. 285, 14 P.2d 67 (1932

[7] U.S v Aetna Inc, https://www.justice.gov/opa/press-release/file/930356/download

[8] https://www.justice.gov/opa/pr/justice-department-requires-cvs-and-aetna-divest-aetna-s-medicare-individual-part-d

How To Conduct A Tech IPO/ICO

The SEC defines an Initial Public Offering (IPO) as when a company first sells its shares to the public. [1] Technology (Tech) companies distribute IPOs to raise the funding necessary for growth. Tech companies have raised approximately $4.3 billion in funding via IPOs by the third quarter of 2018.[2]

The process of starting an IPO is a long, exhaustive process which involves several layers of intense diligence by investment banks and lengthy filings with the SEC. The SEC requires specific corporate information to become open to the public.[3] During the initial phase of going public, the company and its financials must be prepared to withstand public scrutiny. Extensive due diligence is performed (by an investment banker) to prepare the company books to go public, underwrite the potential IPO, and determine the potential IPO’s value.

The Securities Act of 1933 requires companies to register securities sold on the U.S. market with the SEC. [4] These companies must file a registration statement (From S-1) with the SEC prior to going public.[5] A Preliminary Prospectus is filed as the first draft of the registration statement which includes the pertinent information found in the due diligence process. Once the preliminary prospectus becomes effective, the company will then file a final prospectus to include the IPO’s price range and amount of stock issued.

When conducting an IPO, a tech company must consider that sensitive information might be made public. The value of Intellectual Property is part of the analysis used to determine the price of the company’s IPO. This information may consist of trade secret information and expiration dates of patents. By releasing this information, the company is now open to varies IP related issues which can put a strain on the IPO. Tech companies with considerable IP investments must take the necessary steps to prevent IP issues from arising, pre and post IPO.

Tech companies may also place Initial Coin Offerings (ICO) on the market to raise capital. Similar to IPOs, the ICO process involves registering with the SEC. However, ICO generally does not fall under the SEC’s jurisdiction over securities.[6] Therefore, filing a registration statement with the SEC is not required. Companies that are issuing ICOs, file a Regulation D exception which, will allow them to trade their ICO without registering it as a security.

The first steps to issue an ICO is to create a product and a token. The token/coin will be used to purchase interests in the product.[7] The token and product are then described in detail on a “White Paper” which is published to inform the market of the ICO.


[1] https://www.sec.gov/fast-answers/answersipohtm.html

[2] https://www.pwc.com/us/en/services/deals/q3-2018-capital-markets-watch.html

[3] https://www.investopedia.com/articles/investing/080613/road-creating-ipo.asp

[4] https://www.sec.gov/answers/about-lawsshtml.html#secact1933

[5] https://www.sec.gov/files/forms-1.pdf

[6] https://www.sec.gov/ICO

[7] https://medium.com/swlh/how-to-launch-an-initial-coin-offering-7fa000ba3f59