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There’s been a flurry of activity this winter for Kyphon and its lawyers at Latham & Watkins. The Sunnyvale medical technology company, specializing in minimally invasive treatments for spine fractures, acquired St. Francis Medical Technologies for $525 million last month and then turned around this month with a $400 million convertible bond offering to pay off the loan it used to make the purchase. The company is also set to acquire Disc-O-Tech Medical Technologies, pending regulatory approval. “We’ve all been very busy for the last three months,” said Robert Koenig, a Latham corporate partner in the firm’s Silicon Valley office who advised on the Kyphon offering. The firm represents the company in all its corporate matters. In a convertible bond offering, notes are sold that may later be converted into cash or stock. To offset the potential dilution of its stock, Kyphon agreed to a convertible note hedge with affiliates of the initial purchasers, giving the company the option to buy back stock when the conversion occurs. And to help offset the cost of the note hedge, Kyphon also sold an option for the same number of shares, but at a higher strike price. “The issuer is OK giving up the dilution on the very high end, on the theory that stock holders are going to be happy with it anyway,” explained Koenig. These so called “call spread” transactions have become increasingly common in recent years, Koenig said. Other lawyers on the deal agreed. “[It's] quite common with converts these days as a means of increasing the effective conversion price,” said Alan Denenberg, a Silicon Valley corporate partner from Davis Polk & Wardwell, which represented the initial purchasers � J.P. Morgan Securities Inc.; Goldman, Sachs & Co.; and Bank of America Securities LLC � and their affiliates in the deal. Although more common, not everyone is well-versed in the ins and outs of this type of deal. “[We] needed to be sure the credit agreement permitted the call spread and convert under its covenants,” Denenberg said via e-mail. “Credit lawyers and bankers are not always immediately familiar with the nuances of the convert/call spread market and how covenants need to be drafted to permit those instruments.” “It’s a pretty popular financial instrument,” Latham’s Koenig agreed. The deal, which closed in early February, took about 10 days to hammer out, according Latham’s Koenig. Along with Koenig, Latham corporate partner Alan Mendelson and associates Jennifer Frolik and Nina Kwon advised on the deal in the Silicon Valley office. Additional tax advice was given by Latham attorneys in New York. Davis Polk’s Denenberg was assisted by associates Michael Nordtvedt, Stephen Salmon and John Crawford, all of the Menlo Park office. The tax team also included Menlo Park partner Rachel Kleinberg. Other lawyers assisted from New York.

Zusha Elinson

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