Mergers, Acquisitions, and Other Restructuring Activities

PART I
The Mergers and
Acquisitions Environment

1
Introduction to Mergers and Acquisitions

Overview
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 Expectations
Things to Remember
Chapter Discussion Questions
Chapter 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 Deal
References

2
Regulatory Considerations

Overview
Federal Securities Laws
Securities Act of 1933
Securities Exchange Act of 1934
Williams Act: Regulation of Tender Offers
Sarbanes-Oxley Act of 2002
Antitrust 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 Laws
State Regulations Affecting Mergers and Acquisitions
Regulated Industries
Environmental Laws
Labor and Benefit Laws
Cross-Border Transactions
Things 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 Honeywell
References
3
The Corporate Takeover Market:
Common Takeover Tactics, Anti-Takeover Defenses, and
Corporate Governance

Overview
Factors Affecting Corporate Governance
Factors Internal to the Firm
Factors External to the Firm
Alternative 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 Strategies
Developing 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 Defenses
Developing the Target’s Defensive Strategy
Things 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 II
The Mergers and Acquisitions Process:
Phases 1–10

4
Planning: Developing Business
and Acquisition Plans—Phases 1 and 2
of the Acquisition Process

Overview
A Planning-Based Approach to Mergers and Acquisitions
Key Business Planning Concepts
The Acquisition Process
Phase 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 Document
Phase 2: Building the Merger/Acquisition Implementation Plan
Management Objectives
Market Analysis
Resource Availability
Management Preferences
Schedule
Things 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 Fight
Appendix A: Common Sources of Economic, Industry, and Market Data
References

5
Implementation: Search through Closing—
Phases 3 to 10

Overview
Phase 3: The Search Process
Initiating the Search
Brokers and Finders
Phase 4: The Screening Process
Phase 5: First Contact
Alternative Approach Strategies
Discussing Value
Preliminary Legal Documents
Phase 6: Negotiation
Developing a Negotiating Strategy
Defining the Purchase Price
Refining Value
Deal Structuring
Conducting Due Diligence
Developing the Financing Plan: The Reality Check
Phase 7: Developing the Integration Plan
Earning Trust
Earn-Outs
Choosing the Integration Manager
Phase 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 Transaction
Appendix A: Legal Due Diligence Preliminary Information Request
References


6
Integration: Mergers, Acquisitions,
and Business Alliances

Overview
The Role of Integration in Successful Mergers and Acquisitions
Realizing Projected Financial Returns
The Impact of Employee Turnover
Acquisition-Related Customer Attrition
Viewing 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 Culture
Integrating Business Alliances
Integrating Mechanisms
Things 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 Experience
References

PART III
Merger and Acquisition Tools
and Concepts

7
A Primer on Merger
and Acquisition Valuation

Overview
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 Debt
Valuing Firms under Special Situations
Firms with Temporary Problems
Firms with Longer-Term Problems
Cyclical Firms
Applying Market-Based (Relative Value) Methods
Applying Asset-Oriented Methods
Valuing the Firm Using the Weighted Average Method
Analyzing 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 Options
Valuing Non-Operating Assets
Adjusting the Target Firm’s Equity Value for Non-Operating Assets and Liabilities
Things to Remember
Chapter Discussion Questions
Chapter Practice Problems and Answers
Chapter Business Case: The Hunt for Elusive Synergy -- @Home Acquires Excite*
References


8
Applying Financial Modeling Techniques
to Value and Structure Mergers
and Acquisitions

Overview
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 Transaction
Factors Affecting Post-Merger Share Price
Share Exchange Ratios
Estimating Post-Merger Earnings Per Share
Estimating Post-Merger Share Price
Key M&A Model Formulas
M&A Model Balance Sheet Adjustment Mechanisms
Alternative Applications of M&A Models
When the Acquirer or Target is Part of a Larger Legal Entity
Joint Ventures and Business Alliances
Things to Remember
Chapter Discussion Questions
Chapter Practice Problems
Chapter Business Case: Ford Acquires Volvo’s Passenger Car Operations*
Appendix A: Commonly Used Financial Ratios
References

9
Analysis and Valuation of Privately
Held Companies

Overview
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 Income
Adjusting the Income Statement
Making Informed Adjustments
Areas Commonly Understated
Areas Commonly Overlooked
Applying Valuation Methodologies to Private Companies
Defining Value
Hiring Valuation Professionals
Selecting the Appropriate Valuation Methodology
Developing Capitalization Rates
Estimating Marketability or Liquidity Discounts
Reverse Mergers
The Value of Corporate Shells
Avoiding the Cost of Going Public
Exploiting Intangible Value
Using 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 Plan
References

10
Structuring the Deal: Payment, Legal, Tax,
and Accounting Considerations

Overview
The Deal-Structuring Process
Key Components
Common Linkages
Form of Acquisition Vehicle
Post-Closing Organization
Legal Form of Selling Entity
Form of Payment or Total Consideration
Non-Cash Forms of Payment
Closing the Gap on Price
Using Collar Arrangements to Preserve Shareholder Value
Form of Acquisition
Purchase of Assets
Purchase of Stock
Mergers
Tax Considerations
Taxable Transactions
Tax Free Transactions
Net Operating Losses
Financial Reporting of Business Combinations
Things 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-Off
References

PART IV
Alternative Strategies and Structures

11
Financing Transactions:
Leveraged Buyout Structures and Valuation

Overview
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 Beyond
Alternative Financing Options
Asset Based or Secured Lending
Security Provisions and Protective Covenants
Cash Flow or Unsecured Lenders
Junk Bonds
Other Sources of Funds
Common 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 Buyout
Shareholder and Public Policy Issues
Things 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 Issues
References

12
Shared Growth and Shared Control
Strategies: Joint Ventures, Partnerships,
Strategic Alliances, and Licensing

Overview
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 Contracts
Strategic 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

13
Alternative Exit and Restructuring
Strategies: Divestitures, Spin-offs,
Carve-outs, Split-ups, Split-Offs, Bankruptcy,
and Liquidation

Overview
Motives for Exiting Businesses
Divestitures
Spin-offs and Split-ups
Equity Carve-outs
Tracking, Targeted, and Letter Stocks
Split-Offs
Voluntary Liquidations (Bust-ups)
Comparing Alternative Exit Restructuring Strategies
Choosing Among Divestiture, Carve-out, and Spin-Off Restructuring Strategies
Returns 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 Bankruptcy
Things 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 Awry
References

PART V
Putting It All Together

14
The Acquisition Process:
The Gee Whiz Media Case

Part I: Planning
Part II: Implementation
Gee Whiz Media Case Study Discussion Questions


Index


Contents of CDROM Accompanying Text Book

Acquirer Due Diligence Question List
Excel Based Mergers and Acquisitions Valuation and Structuring Model
Excel Based LBO Valuation and Structuring Model
Excel Based Real Options Valuation Model
Solutions to Selected End of Chapter Business Cases
Student Chapter PowerPoint Presentations
Student Study Guide, Practice Questions and Answers


*The asterisk indicates that a solution to the case study is available on the CDROM accompanying this book.

Dr. Donald DePamphilis explains the real-world of mergers, acquisitions, and restructuring based on his academic knowledge and personal experiences with over 30 such deals himself. The 77 case studies span every industry and countries and regions worldwide show how deals are done rather than just the theory behind them, including cross-border transactions. New additions to the third edition: 17 new cases, with all 77 cases updated, Glossary, real options applications, projecting growth rates.

• Practical, real-world approach with 77 case studies from around the globe

MBA students taking courses in: Mergers & Acquisitions, corporate restructuring, corporate strategy. Secondary market: practitioners, including CFOs, investment bankers, entrepreneurs