Mergers, Acquisitions, and Other Restructuring Activities

PART IThe Mergers andAcquisitions Environment1Introduction to Mergers and AcquisitionsOverview Building a Common Vocabulary Participants in the Mergers and Acquisitions Process Common Motivations for Mergers and Acquisitions Historical Merger and Acquisition Waves Do Mergers and Acquisitions Pay Off for Shareholders? Do Mergers and Acquisitions Pay Off for Bondholders?Do Mergers and Acquisitions Pay Off for Society?Why Do Mergers and Acquisitions Often Fail to Meet ExpectationsThings to Remember Chapter Discussion QuestionsChapter Business Case: America Online Acquires Time Warner—The Rise and Fall of a Vertically Integrated Internet and Media Giant*Chapter Business Case: Vodafone AirTouch Acquires Mannesmann in a Record Setting DealReferences 2Regulatory ConsiderationsOverview Federal Securities Laws Securities Act of 1933 Securities Exchange Act of 1934 Williams Act: Regulation of Tender Offers Sarbanes-Oxley Act of 2002Antitrust Laws Sherman Act Clayton Act Federal Trade Commission Act of 1914 Hart-Scott-Rodino Antitrust Improvements Act of 1976 Procedural Rules The Consent Decree Antitrust Guidelines for Horizontal Mergers Antitrust Guidelines for Vertical Mergers Antitrust Guidelines for Collaborative Efforts Limitations of Antitrust LawsState Regulations Affecting Mergers and Acquisitions Regulated Industries Environmental Laws Labor and Benefit Laws Cross-Border TransactionsThings to Remember Chapter Discussion Questions Chapter Business Case: Exxon and Mobile Merger—The Market Share Conundrum*Chapter Business Case: GE’s Aborted Attempt to Merge with HoneywellReferences 3The Corporate Takeover Market: Common Takeover Tactics, Anti-Takeover Defenses, and Corporate GovernanceOverview Factors Affecting Corporate Governance Factors Internal to the Firm Factors External to the FirmAlternative Takeover Tactics in the Market for Corporate Control The Friendly Approach: “Sweet Talking the Target” The Aggressive Approach The Bear Hug: Limiting the Target’s Options Proxy Contests in Support of a Takeover Pre-Tender Offer Tactics: Purchasing Target Stock in the Open Market Tender Offers: Circumventing the Target’s Board Other Potential Takeover StrategiesDeveloping a Bidding or Takeover Strategy Decision Tree Alternative Takeover Defenses in the Corporate Takeover Market: Pre- and Post-Bid The Role of Planning Pre-Bid Defenses Poison Pills Shark Repellants Golden, Silver, and Tin Parachutes Post-Bid DefensesDeveloping the Target’s Defensive StrategyThings to Remember Chapter Discussion Questions Chapter Business Case: Tyco Rescues AMP from Allied Signal*Chapter Business Case: Pfizer Acquires Warner Lambert in a Hostile Takeover References PART IIThe Mergers and Acquisitions Process:Phases 1–104Planning: Developing Businessand Acquisition Plans—Phases 1 and 2of the Acquisition ProcessOverview A Planning-Based Approach to Mergers and Acquisitions Key Business Planning Concepts The Acquisition ProcessPhase 1: Building the Business Plan Key Activities External Analysis Determining Where to Compete Determining How to Compete Internal Analysis Defining the Mission Statement Setting Strategic or Long-Term Objectives Selecting the Appropriate Corporate Level Strategy Selecting the Appropriate Business Level Strategy Selecting the Appropriate Implementation Strategy Functional Strategies Strategic Controls The Business Plan as a Communication DocumentPhase 2: Building the Merger/Acquisition Implementation Plan Management Objectives Market Analysis Resource Availability Management Preferences ScheduleThings to Remember Chapter Discussion Questions Chapter Business Case: Consolidation in the Global Pharmaceutical Industry—The Glaxo Wellcome and SmithKline Beecham Example*Chapter Business Case: Pepsi Buys Quaker Oats in a Highly Publicized Food FightAppendix A: Common Sources of Economic, Industry, and Market DataReferences 5Implementation: Search through Closing—Phases 3 to 10Overview Phase 3: The Search Process Initiating the Search Brokers and FindersPhase 4: The Screening Process Phase 5: First Contact Alternative Approach Strategies Discussing Value Preliminary Legal DocumentsPhase 6: Negotiation Developing a Negotiating Strategy Defining the Purchase Price Refining Value Deal Structuring Conducting Due Diligence Developing the Financing Plan: The Reality CheckPhase 7: Developing the Integration Plan Earning Trust Earn-Outs Choosing the Integration ManagerPhase 8: Closing Assigning Customer and Vendor Contracts Gaining the Necessary Approvals Completing the Definitive Agreement Is Closing Ever Simple?Phase 9: Implementing Post-Closing Integration Communication plans Employee Retention Satisfying Cash Flow Requirements Employing Best Practices Cultural Issues Phase 10: Conducting Post-Closing Evaluation Things to Remember Chapter Discussion Questions Chapter Business Case: The Anatomy of a Transaction: K2 Incorporated Acquires Fotoball USA*Chapter Business Case: Cingular Acquires AT&T Wireless in a Record-Setting Cash TransactionAppendix A: Legal Due Diligence Preliminary Information RequestReferences 6Integration: Mergers, Acquisitions,and Business AlliancesOverview The Role of Integration in Successful Mergers and Acquisitions Realizing Projected Financial Returns The Impact of Employee Turnover Acquisition-Related Customer AttritionViewing Integration as a Process Integration Planning Developing Communication Plans: Talking to Key Stakeholders Creating a New Organization Developing Staffing Plans Functional Integration Building a New Corporate CultureIntegrating Business Alliances Integrating MechanismsThings to Remember Chapter Discussion Questions Chapter Business Case: Daimler Acquires Chrysler—Anatomy of a Cross-Border Transaction*Chapter Business Case: The Travelers and Citicorp Integration ExperienceReferences PART IIIMerger and Acquisition Toolsand Concepts7A Primer on Mergerand Acquisition ValuationOverview Required Returns Analyzing Risk Calculating Free Cash Flows Time Value of Money Alternative Approaches to Valuation Applying Income or Discounted Cash Flow Methods Estimating the Market Value of the Firm’s DebtValuing Firms under Special Situations Firms with Temporary Problems Firms with Longer-Term Problems Cyclical FirmsApplying Market-Based (Relative Value) Methods Applying Asset-Oriented Methods Valuing the Firm Using the Weighted Average MethodAnalyzing Mergers and Acquisitions in Terms of Real Options Identifying Real Options Embedded in M&A Decisions Applying Real Options to Value Mergers and Acquisitions Valuing Put OptionsValuing Non-Operating AssetsAdjusting the Target Firm’s Equity Value for Non-Operating Assets and Liabilities Things to Remember Chapter Discussion Questions Chapter Practice Problems and AnswersChapter Business Case: The Hunt for Elusive Synergy -- @Home Acquires Excite*References 8Applying Financial Modeling Techniquesto Value and Structure Mergersand AcquisitionsOverview Limitations of Financial Data Model-Building Process Step 1: Value Acquirer and Target Firm as Standalone Businesses Step 2: Value Acquirer and Target Firm Including Synergy Step 3: Determine Initial Offer Price for Target Firm Step 4: Determine the Combined Firm’s Ability to Finance the TransactionFactors Affecting Post-Merger Share Price Share Exchange Ratios Estimating Post-Merger Earnings Per Share Estimating Post-Merger Share PriceKey M&A Model FormulasM&A Model Balance Sheet Adjustment MechanismsAlternative Applications of M&A Models When the Acquirer or Target is Part of a Larger Legal Entity Joint Ventures and Business AlliancesThings to Remember Chapter Discussion Questions Chapter Practice ProblemsChapter Business Case: Ford Acquires Volvo’s Passenger Car Operations*Appendix A: Commonly Used Financial RatiosReferences 9Analysis and Valuation of PrivatelyHeld CompaniesOverview Challenges of Valuing Privately Held Companies Lack of Externally Generated Information Lack of Internal Controls and Inadequate Reporting Systems Firm Specific Problems Common Forms of Manipulating Reported IncomeAdjusting the Income Statement Making Informed Adjustments Areas Commonly Understated Areas Commonly OverlookedApplying Valuation Methodologies to Private Companies Defining Value Hiring Valuation Professionals Selecting the Appropriate Valuation Methodology Developing Capitalization Rates Estimating Marketability or Liquidity DiscountsReverse Mergers The Value of Corporate Shells Avoiding the Cost of Going Public Exploiting Intangible ValueUsing Leveraged Employee Stock Ownership Plans to Buy Private Companies Analyzing Private Shareholder Returns Things to Remember Chapter Discussion Questions Chapter Business Case: Valuing a Privately Held Company*Chapter Business Case: Pacific Wardrobe Acquires Surferdude Apparel by A Skillful Structuring of the Acquisition PlanReferences 10Structuring the Deal: Payment, Legal, Tax,and Accounting ConsiderationsOverview The Deal-Structuring Process Key Components Common LinkagesForm of Acquisition Vehicle Post-Closing Organization Legal Form of Selling EntityForm of Payment or Total Consideration Non-Cash Forms of Payment Closing the Gap on Price Using Collar Arrangements to Preserve Shareholder ValueForm of Acquisition Purchase of Assets Purchase of Stock MergersTax Considerations Taxable Transactions Tax Free Transactions Net Operating LossesFinancial Reporting of Business CombinationsThings to Remember Chapter Discussion Questions Chapter Business Case: Vivendi Universal Entertainment and GE Combine Entertainment Assets*Chapter Business Case: JDS Uniphase-SDL Merger Results in Huge Write-OffReferences PART IVAlternative Strategies and Structures11Financing Transactions:Leveraged Buyout Structures and ValuationOverview The Emergence of the Financial Buyer Characteristics of LBOs in the Early 1980s LBOs in the Mid-to-Late 1980s LBOs in the 1990s and BeyondAlternative Financing Options Asset Based or Secured Lending Security Provisions and Protective Covenants Cash Flow or Unsecured Lenders Junk Bonds Other Sources of FundsCommon Forms of Leveraged Buyout Structures Critical Success Factors Developing an Exit Strategy Impact on Shareholder Returns of Leveraged Buyouts Analyzing Leveraged Buyouts Valuing LBOs: The Variable Risk Method Valuing LBOs: The Adjusted Present Value Method Comparing Variable Risk and Adjusted Present Value Methods Case Study: Pacific Investors Acquires California Kool in a Leveraged BuyoutShareholder and Public Policy IssuesThings to Remember Chapter Discussion Questions Chapter Business Case: Buyout Firms Acquire Yellow Pages Business in Largest LBO Since 1980s*Chapter Business Case: RJR Nabisco Goes Private—Key Shareholder and Public Policy IssuesReferences 12Shared Growth and Shared ControlStrategies: Joint Ventures, Partnerships,Strategic Alliances, and LicensingOverview Motivations for Business Alliances Critical Success Factors for Business Alliances Alternative Legal Forms of Business Alliances Corporate Structures Limited Liability Companies Partnership Structures Franchise Alliances Equity Partnerships Written ContractsStrategic and Operational Plans Resolving Business Alliance Deal Structuring Issues Scope Duration Legal Form Governance Resource Contribution and Ownership Determination Financing Ongoing Capital Requirements Owner or Partner Financing Equity Financing Debt Financing Control Distribution Issues Performance Criteria Dispute Resolution Revision Termination Transfer of Interests Taxes Management and Organization Empirical Findings Things to Remember Chapter Discussion Questions Chapter Business Case: Coca-Cola and Proctor & Gamble’s Aborted Effort to Create a Global Joint Venture Company*Chapter Business Case: Strains Threaten Verizon and Vodafone Joint Venture: References 13Alternative Exit and RestructuringStrategies: Divestitures, Spin-offs,Carve-outs, Split-ups, Split-Offs, Bankruptcy,and LiquidationOverview Motives for Exiting Businesses Divestitures Spin-offs and Split-ups Equity Carve-outsTracking, Targeted, and Letter Stocks Split-OffsVoluntary Liquidations (Bust-ups) Comparing Alternative Exit Restructuring StrategiesChoosing Among Divestiture, Carve-out, and Spin-Off Restructuring StrategiesReturns to Shareholders Business Failure Voluntary Settlements with Creditors Outside of Bankruptcy Voluntary Settlements Resulting in Continued Operation Voluntary Settlement Resulting in Liquidation Reorganization and Liquidation in Bankruptcy Bankruptcy Laws and Procedures Strategic Options for Failing Firms Returns to Firms Emerging From BankruptcyThings to Remember Chapter Discussion Questions Chapter Business Case: The Enron Shuffle---A Scandal to Remember*Chapter Business Case: AT&T—A Poster Child for Restructuring Gone AwryReferences PART VPutting It All Together14The Acquisition Process:The Gee Whiz Media CasePart I: Planning Part II: Implementation Gee Whiz Media Case Study Discussion Questions Index Contents of CDROM Accompanying Text BookAcquirer Due Diligence Question ListExcel Based Mergers and Acquisitions Valuation and Structuring ModelExcel Based LBO Valuation and Structuring ModelExcel Based Real Options Valuation ModelSolutions to Selected End of Chapter Business CasesStudent Chapter PowerPoint PresentationsStudent Study Guide, Practice Questions and Answers*The asterisk indicates that a solution to the case study is available on the CDROM accompanying this book.