Let's say you're a three or four year old company that believes that it has a unique material, in addition to some weak "me too" products. You license your cervical plate and biologics. In order to execute something on a grand scale, you need to raise capital, let's say $30 million in private equity and a debt facility.You issue a new class of Preferred Stock to your new investors with post money valuation. In addition, the investors receive warrants to purchase X amount of shares of Common Stock. There most likely is a conversion clause, a qualified IPO, redemption, anti-dilution protection, voting rights, liquidation preference, first offer rights, realignment of the BOD, registration rights and a stockholders' agreement. Once the minutiae is take care of, what's your next move?
Prior to closing the deal, you performed due diligence on multiple early growth stage companies with the intent of acquiring one of them. In all likelihood, the candidates included Atlas, Choice, Custom, X-Spine and Life Spine. The acquisition would not be predicated on quality of a specific portfolio, it would be centered around who can you buy for the least amount of cash up front, and back load the deal with stock so that in the event you can successfully take your company public, there would be a windfall, not only for yourself, but potentially for the seller.
So what was the deal? Why did someone bite at the bait, while others cut and run? Contingent upon how you structure the term sheet, it was a cash and stock deal. The company that sold, took the bait for numerous reasons. In all likelihood, U.S. Spine was financially distressed, incurring debt, generating mediocre sales, and understanding that in this climate, raising capital was next to impossible with a "me too" portfolio. At best, the upfront payout was probably equivalent to sales, if not less, broken up into term payments. It was a percentage of the cash offering with the stipulation to pay it out over a period of time. The $30 million that was raised will probably be used to acquire another company, reorganize the management team, and develop a larger manufacturing facility. It also left a few dollars to buy salt and pepper shakers to spice up your spine. TSB wants to know, who is the next acquisition target?