Tuesday, April 18, 2006


Sometimes it just doesn't pay to be a tough negotiator - witness Qualcomm's announcement Monday that it is entering into a consent decree with DOJ and paying $1.8M to settle claims of gun jumping in its acquisition of Flarion ("gun jumping" being where the acquiror starts getting a bit too intimate with the seller's business ops before the deal has closed).

While a buyer can't run the acquired business before the deal closes, there's always a healthy negotiation over the amount of control the buyer will exert (via operating covenants written into the acquisition agreement) during the pre-closing period. These covenants are typically designed to ensure that, to the extent possible, the acquired business continues to operate in a straight-and-narrow course until closing. Themes for operating covenants include the permissable amount of new debt, capital expenditue limits, asset sales, etc. - anything that might materially change the nature of what the buyer thought they were buying. However, buyers usually have to stay well clear of anything involving customers and markets, particularly when acquiring a competitor, to avoid the appearance of gun jumping.

Gun jumping is of heightened concern in industries like telecom, where the wait for closing can exceed one year. The long wait obviously increases the operating risk during the pre-closing period, thus ratcheting up the desire to steer the target's course during that period or get a jump on integration. Many M&A lawyers take a very conservative stance on gun jumping, preventing most conversation pre-close on the (not unreasonable) presumption that some business people will jump the gun. Buyers want to get moving; sellers usually want to be compliant - the gun gets jumped.

What's interesting about the Qualcomm news is that the claims don't relate to any over-reaching behavior by Qualcomm executives, but rather the language in the merger agreement itself.

Obviously the size of this fine is not material to Qualcomm or even this deal itself (the $1.8M fine is well less than one-half of one percent of the purchase price). However, I'm sure the threat of this action scuttling or slowing the deal caused many a sleepless night for those involved - and may still, if you are a Qualcomm lawyer.

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