0409005 Informal Interpretation

From:(redacted)
Sent:Tuesday, September 14, 2004 10:10 PM
To:Verne, B. Michael
Subject: Contingent PurchasePrice

Michael -- I have reviewed the HSR rules and other explanatory materials and it appears that thecontingent earnout portion of the purchase price is part of the"determined" price if it can be reasonably estimated (presumably byestablishing the odds of the contingencies being met). If it cannot bereasonably estimated, and thus "determined," then it is based on fairmarket value as determined in good faith by the board of directors. Consider atransaction in which an acquiror is purchasing a business like an advertisingagency that has few hard assets, and has priced the deal at $30 million upfront cash, and an additional $30 million contingent purchase price that can beearned over three years if certain revenue goals are achieved. The revenuegoals are based on high revenue growth that has occurred during the past twoyears continuing over the next three years. The odds of whether that growth willcontinue is hard to say, but maybe 50-50. Would it be appropriate to reduce the"value" of the $30 million earnout to reflect those odds -which wouldplace the earnout value at $15 million. Added to the $30 million cash, theassets to be acquired total $45 million, and the transaction would be exemptfrom filing. Can you comment informally on whether this is the appropriateapproach to valuing the deal? I appreciate your input. (redacted)