Back when he was an M&A attorney, Paul Koenig had a client who volunteered to serve as shareholder representative. It’s a role that’s often difficult to fill, requiring years of work and potential headaches.
“He originally asked, ‘Can your law firm do it?’” Koenig said. “And for a whole host of reasons, a law firm should never be a shareholder representative.” So the client took the job — and wound up getting sued. He was trying to buy a house at the time; the bank denied his application for a mortgage.
“This was a successful venture capitalist; he never should have been turned down. But the bank said, ‘You’re a party to a huge lawsuit, we can’t give you approval for a loan.’”
This imbroglio inspired the founding of SRS Acquiom, a provider of post-closing M&A services, including shareholder representation. (The unlucky VC/shareholder representative serves on the board.) “What if we started a company to solve for this?” Koenig recalled asking. “Then, when we got into it: If that doesn’t make sense, what else doesn’t make sense?”
Payments administration came to mind. “In the past,” Koenig said, “someone would send out a FedEx package to each of the stockholders.” To replace this “antiquated method,” SRS Acquiom developed an online system of validation and disbursement, so people “get paid in minutes or hours, as opposed to days or weeks.”
The company’s other area of focus has been building a better escrow product, something “designed specifically for the liquidity profile of an M&A deposit.”
“Let’s say you have $30 million going into an escrow for 18 months,” Koenig said. A bank might put it in an overnight money market fund or an overnight deposit fund. “Do you need to hold 100 percent of it in overnight liquidity? Certainly not.”
SRS Acquiom developed an alternative whereby the money from an escrow is invested with AXA, which holds it in a segregated pool of diversified assets and separately provides guarantees against losses.
The capital, Koenig explained, “is available when needed, but you can get a more reasonable rate of return on that money by not holding it in 100 percent overnight funds.” And the risk of loss is remote: It would take “two very unlikely events: a decline of assets in the pool and a default by AXA on the obligation to provide any damages.”
Koenig said this option is made more attractive by new regulations, effective Oct. 14, that move prime institutional money market funds to a floating asset value, creating too much risk for most M&A escrows. Government money market funds aren’t subject to all the new rules but offer too little yield.
The product, which Koenig said is used by both private equity funds and strategic buyers, is “effectively doing what money-market funds used to do: ‘We want you to hold this money in a diversified pool of assets but with an insurance wrapped around it.’”
Photo of Paul Koenig courtesy of SRS Acquiom