1 INTRODUCTION RECENT M&A TRENDS ‘The pace of mergers and acquisitions (MAS) picked up inthe early 2100s ater a son bias in 2001. The scnomic slowdown and recession inthe United States and ‘elewhere in 2001 brought an end to the record-seting Hfth merger wave. Tis pod featured an unprecedented volume of M&AS. followed on the beels ofa prior ror sting merger wave—the fourth, This one in the 1990s, however, was ver ferent fom its counterpart inthe prior decade. The fifth wave was tly an ntemational one and it feaured heightened volume of dels Europe ad to some exten, Asi, adition to the Unita Stats. The pir merger waves been mainly 9 U.S, phenomenon, When the fourth merger wave ended with the 1990-91 recession, many felt tht i wou Be a Tong time before we would see anoher merger wave like. However, af «relatively short recession and an inialy stow recovery. the economy picked up speed in 1998, tnd by 1998 we were ona path to another rsont-seting merger potod. Ths one would Feature deals tat would make te ones ofthe 1980s seem modest. There wes he many Imegamergers and many cross bodes involving US. buyers and sellers, bt also many lage deals not iavlving U.S. ams. In thefts wave the age-scale M&A ousincss had ‘bacome a global phenomenon. This wk in shap contrast o poe merger erode when ‘the major players were manly U.S. companies, ‘Staring in th carly 1980s and the beginning of the fourth merger wave, we see the M&A area business mainly centered inthe United States withthe val maoty of ‘eansctos aking place witio the continent United Sates. From a elabal perspective, the most pronounced increase in MAGA volume in he Bh merger wave took ple in Europe. After a hort illo at the end ofthe fourth merger wave, European NACA volume Picked up dramatically staring in 1995, when it doubled See Exhibit 1). The valve of Bropean deals peaked in 1999, when it equaled 38% of usa global M&A. deal vale ‘There are several reasons why Europe became the scene for sich an ieresed volume of deals. Fis, tbe same fotos that caused M&A volume to pick wp ir the United Sats, soc asthe increase in worldwide economic demand, also played Key role in Europe, However, similar economic conditions prevailed inthe 1980s, and Euope filed to produce a comparable increase in merges as it did inthe 19905. The resons why the European response was much different dhs tine was that the European eonomy had stracturlly changed. The Earopean Union had been established and artic epulatoryburies were being dismantled nthe past, many European corporations were controll by lage blockholers such as those owned by individual families. However, bythe ith merger wave, these holdings had become somewhat les significant and mor shares were in the hands of her partes who would be more reepive to M&As, The fect remains, ‘hough tat family conyol of European corporations sil x greiter than i the United ‘States. Examples include the Beeton fai, whit controls the lin cling company ‘ofthe same name; Francois Pinal, who contls age reach eal empires incloes Gees the German faniy-contoled Bertelsmann empire; and the Wallenter faiy's holdings in Swedish companies such as Exesson and ABB, As these hong gt posed 1m to ltr generations the companies will more likely become takeover ut. Exhibit LI clearly shows thatthe ith merger wave peaked in 1999 andthe value ‘of M&AS declined significantly in 2001 and even moreso in 2002. Sine eends are apparent in both Earope andthe United States. The magnitude ofthe fh wave dels i ‘ery appient when we look af Table 1, which shows that ll ofthe are deals ofall time occured in the yeas 1998-2001. This table ao reveals another interesting trend ofthis perio. A disproportionate aumber ofthe dens came from certsn sector of the cconomy. In panticular,telecommnistions, meta, and hanking and finance feted a oor wane Fa Vue ov MAT BD-20DR Un San Fo Source: hoon Scie Finacial asop pau veu29 evsoczor ons vowpewen mpegs poomauey wonen 2a wen ano open ery aun sey mea aaAisproportonate amount of total dea! volume. These sectors were re hot nthe 1990s, There are several reasons fr this. One was the “rational exuberance” tat erwhehmed some of thes sectors, such as pars af the technology sectors, We wl dicts this further in Chaper 2. Other industries, sich as banking continued process of consolidation that had begun inthe prior decade when indsty drepuation began "The very important vole of Europe in the M&A market i underscored by the fact thatthe largest dealin history was the $205 billion seqisition of Mennes naan AG by Vodafone Aitouch PLC in Jane 2000 The vale ofthis deal was more than double the next largest European vansscton, which was the S82 billion sequison of Telecom Talia SPA by Deutsche Telekom AG (see Table 1.2. Inch Asian markets we se that with the exception of Ausra, which his paicipated im both the fourth and ith mecger wave, Asin counts, including pan, hive generally ot had much MAA activity within ther borders (see Exhibit 1.2) In dap which the worl's second largest economy, this changed dramatically in 1999, when ‘he county's eal volume skyrocketed. The number of deals slowed in the few years tat followed ‘but sued to rebound in 2003. similar end is apparet in South Kore, Both nations had very restrictive and inrlcked corporate statues that hegan to wiravel toward the end ofthe 1990s— pay in response to the pressures ofan esonomic downturn, As bah economies tepan to restuctare starting inthe late 1950s, selfs and uequsitions bectme more common. In Exhibit 12 we have combined the deal volume data Fr Chins nd Hong Kong, but boa are significant. However, Table 1-3 shows the important ole of Hong Kong, the largest Asian deal was the August 2000 sequstion of Cable and Wireless HET by Pai {Century CyerWorks—both Hong Kong ims, Te dels also noteworthy m hat it was ‘hostile takeover. Pacific Century CyberWodks, ed hy Intret investor Ricard Li ho 's the son of Hong Kong tycoon Li Ke-shing, oui Singapore Teleconmuniciions Lid iis interesting thatthe combination of Cable and Wireless and Pie Century CyherWorks crested a telecom and media conglomerate that was second in siz ony to AOL Time Warner, which self was the pret of filed megumerge [As the Chinese economy continues to grow dramatically, i has begun to neeasngly took outside its borders for acquisition candidates. The 2008 acquisition cf IBM's PC busines by Lenovo is an example. However, squisiions of Chinese companies by no ‘Chinese finns ae dificult and risky a tht county itil inte early stages of Becoming. les centralized and more of a fee market economy, Deal volume in Taiwan is relatively ‘small, but that is mainly due tothe comparatively smaller size of the economy. India ‘emains a relatively small payer in the workdwide M&A market, bows his may change ove he coming yar Air the United States, Europe, and Asia theses largest M&A markets are Cet and South America, In 200, the highest deal volume year for M&A in many eepions including South America, deal volume in Sow Ameicn was approxinely equal to ‘Austai, somewhat higher than Hong Keng and rovghly double del volun in South Korea. While deal volume in both South sod Central Ameria varies, the volume i South Ameria has been roughly double tat of Cental America (ee Exhibit 13 and Table 14),ae ‘ae Target Name Target Nan ThqurrNae ge Non wream0 Wensemsan kG Germany ola oasis aar2000 nite ings nie ing ‘202000 aoa Decenber 5, 2005.3 Ee Si tient | ce i ee SF =i =iwn ampemnes ae ~ seas pains puso ey ors senencos sen ges seems on ges sens teat aoe tts pis iy sence mo depute ow Sey — de Sontag <0 ny ai separ Shey Seo oy wee sn 9 on Bog ox os syoyogts Uap ogy hoya) son 9 99 evr omiy ——__sumromiy neve ary ten—ome awouen 0b Tor sa egons apse en ato open ie, se 1 aNDer eae SYR weNDUY NOS do Ao Ys vena mee ou és hooear sano seg eng suey ant en ie on a esa oa 9 RW OUD= call He DTIUOUET ‘ier TMA Vora, 1901-205") nar Anca Sau Having reviewed the recent tends in the fil, et us being with our xudy of the subject of M&AS. This wi he begin with a discussion ofthe basi terminc og) sed in the flDEFINITIONS [A merger is» combination of two corporations in which only one corpvaion survives land the merged corporation goes oat af existence. Ina merger, the acquiring company assumes the assets and labile of the merged company. Sometimes the ten stattory Imerger is used wo refer to his typeof busines transaction, It sally msans tht the ‘merger is boing dove consent with a specific sate state. The most common state for merges isthe Delavare one, as so many companies are incorporated ic that tt. ‘A stattory merger dirs fom a subsidiary merger. which i 4 merger af 69 com nies in which the target company becomes a subsidy of past of subiiary of the Parent company. The acquisition by General Motor of Electronic Data System, led by ‘is coll Chet Executive Oficer Ros Pra, san example ofa ssi merger. In a reverse subsidiary merger a subsidiary of the acquire s merged ito the target ‘A merger dilfers trom a consoldation, which is business combination whereby two of more companies join to form an entirely new company. All ofthe combining ‘companies ate dissolved and only the new eniy continues to operate. For example in 1086, she computer manufactuees Burouphs and Spent combined to form UNISYS, In a consolidation, dhe original companies cease to exist and thee stockholers become ‘stockholders inthe new company. One way took at the differences between 2 megoe and a consolidation is that with a merger A+B =A, where company 3 is merged {no company A. In consolidation, +B = C, where C is an eaiely new company Despite the differences between them, tbe tems merger and consolidation, 8 8 tre of many of the terms in the M&A fil, re sometines wsed interchanged. In gen fea. when the combining fms are approximately the same sie, the tem consoidation applies; when the evo firms differ significa by size, meger isthe more appropri fe term. In practice, however, this distinction is often blued, withthe tem merger boing broly applied to combinations that involve firms of Bot fret and si Another term tht is broadly wed o eer to various types of ranscton is taeover This term is vaguer: sometimes it refers only 10 hostile taasetions, and ether times it refers to ba endl and untienly mergers VALUING A TRANSACTION ‘Throughout this book we cite various merger stasis on deal values The metho used by Mewersut isthe most eommon method relied 10 vale deals. Entergise vale is etna asthe base equity pice ps the valve ofthe tag's debt (inclirg Bot shor land log term) and prefered stock Tesi cash. The hae equiy price ise total pice les the vale of the debt. The buyer is defined asthe company With the Dger market aptlization or the company tha issuing shares to exchange for he eer company's shares ina stock-forstock transaction.‘TYPES OF MERGERS. Merges are often categorized as horizontal, vewical, or conglomerate. horiontal ‘merger occurs when wo competitors combine. For example, in 1988, «xo petroleum companies, Exxon and Mobi combined ina $78 9ilion merger. I hori merger {eauses the eombiaed fm o experience an increase i market power hat WI have ai= competitive effets, the merger may be opponed on antnist grounds. In cent yes, however, the US, government has been somewhat liberal in allowing mary horizontal mergers to go unopposed Vertical mergers are combinations of companies that have & buyer-seer relation ship. For example, in 1993, Merck, the work's largest dog company, scared Medco ‘Containment Services, In, the largest marketer of tscount prescription medicine, for Sébilion. The tansction enabled Merck to go frm being the largest phumaceuical company to also being the largest inexrated producer and distsbutr of phamaceaieas ‘This transition was not opposed by ants regulators eventhough the combination clearly rested in more powerful fi nical repultrs cited increwed compet tion and lower prices a the antcpated res. Merc, however, might have been beter of ifthe deal had boen held up by regulators. Following this seqstion, an ther copy cat deals by comptiors, ret concerns were raised about Merk's effet on consumer Arg choice decisions, While Merck saw the deal asa way t place is drugs he hands of patients ahead of competitors, thee was a backlash about devg manufactures wing ‘isibators to lect consimer drug eaten choices. When this problem emerged ther were few benefits ofthe deal und Meck was fored to pat with the dsb. This was 8 good example of uber buying a company ina sia business, one which tough itknew well, where it would have been beter off tying with what dd st making and markecng dogs. ‘A conglamerate merger occurs when the companies are not comptitors and do wat ‘have a bayer-sller relationship. One example would he Philip Moni, tbseco com pany, which acquired General Foods in 1985 for $5 billion, Kral in 1988 for $18.8 bilien, and Nabisco in 2000 for $18.9bilion. lteretingy, Philip Mortis, ow called Alta, has used the eash Hows from its food and oboceo husinesses to become less fof a domestic ohacco company and more of a food business, This is becatse the US. tobacco industy has been dectning at an average rate of 25 por te (a ship= mens) although the iterations tobacen business has not boon experiencing. stich 2 decline, ‘Another major example ofa conslomecate is General Elctc (GB). Tis company has done what many others have not been able to do successfully manage a diverse porfolo of companies ina way that cestessharsholder wealth, GE is «seal acquirer tnd a highly sacessfl oe a tha, Ax we will discuss in Chapter 4, the sk record of aivesifying and conglomerate tequsion 8 not good. We wil explore why few ‘eompanies have bee abe to do thi while many oer have notREASONS FOR MERGERS AND ACQUISITIONS ‘As discussed in Chaper 4 there are several possible motives or reasons tha fms might ‘engage in M&As. One ofthe most common mies is expansion, Acauing a campy ina line of business or geographic are into which the company may Wat © expr can be quicker than intemal expansion. An acquisition of particular company may provide ‘eran synergistic benefits forthe aeqier suchas when two ines of business comple ment one anoter, However, an acquisition may be pat ofa diversification program that allows the company to move into other lines of business. In the port of expansion, Finns engaging in MLAs cite potential synergistic guns as one of the reasons for the ‘eansaction. Synergy occurs when the sum af the pas is mote productive and valsble ‘han the individual compodents. There ae mary potential sources of syne and they ae discussed in Chapter 4 Finacial factors motivate some M&AS. For example. an acquirer's fnacial analysis ‘may reveal hat the targets undervalied. Thi ste value ofthe yer may be signif cai in excess of the market vale of the target, even when a premium thts norally ‘sociated with changes in contol added othe acquisition pice. Other natives, such 5 tx motives, also may play role in an acguision decision, These motives nd ohare ‘eerily examined in pester detail i Chapter 15, [MERGER FINANCING Mergers may be pu fr in soveral ways Trametons may we all ash, al securities, ‘or combination of cash and securities. Secrties transitions may we the stock of the acuire a wel a oer secures sch as debentures. The stock may be eer common stock or prefered stock. They maybe registered, meaning they ar able to be foe waded fo organized exchanges o they may be restced, meaning they cant be ofeed for public sale, although private transactions amoag 2 limited number of buyers, such 36 Insitional investors, ae pennssibe I a bidder affes is sock in exchange forthe target's shares, this ofr may ier poole for a fined or Rowing exchange ratio, When the exchange ratio i Routing the bidder offers a dollar vale of shares as opposed to a specific numberof shares. The ‘uber of shares that is eventually pid by the bier is determined by dividing the value offered by the bidder's average stock price dung 4 pespeiid period, This pei, called the pricing period, usually some months afer the deals amounced snd before the closing of the wansation. The offer could aso he defined in terms ofa “ollar™ which provide fora maximum and minim nimberof shares within the foating vale agement Stock transactions may offer the seller certin tax enti that cash wanactons do ot provide. However, secures wamsactons eequite the parties 10 agree on the vale fof the socures. This may create some uncertainty and may ive cish sn advantage over secures transactions from the seller's point of view. For large deals all-cash Compensation my mean tht the bidder has To incor det, which may any wih it unwanted adverse risk consequences. Although such deals wee relatively moe common inthe 1980, securities transactions became more popula inthe 1950s,[MERGER PROFESSIONALS ‘When a company decides it wants to acquire or merge with another Rm, pill does so by using tho serves of cutie professionals, These professionals usally include investment bankers, ators, accountants, and valuation experts. Invest! bankers may provide a varcy of services, inlading helping to select the appropriate target, valuing the target, advising on staiegy, and rising the requisite rancng to complete the transaction. During the eyday of the Fourth merger wave inthe ISHDs, merger ‘advisory and faancing fees wore a signifesnt component of the overall profitably of ‘the major invest banks. Table 1-5 shows & ranking of M&A financial advisors. Investment banks derive fees in various ways fom MAS. They may recive advisory fees for ter expenise in strotring the deal and handing th strategy —especialy in hostile bids. These fees may be contingent on the sucestal completion ofthe deal, At ‘hat poin investment bankers may eacelve fein the range of 1 1029 ofthe total ‘value of the tansactio. Investment hanks aso may make money from financing work fon M&AS. Ia ation the investment bank may havea arbitrage department that my profit in ways we will scans shorty The roe of investment banks changed somewhat afr the Fourth merger wave ended ‘The dcalmakers who promoted transactions jst oponeat ees became unppula. Cm nies that were engaged in MEAs tended to be moe invlved inthe deals an took over Some of the responsbitos that had been relegated to investment bankers the 1980s More companies ducted the sctvities oftheir investment bankers a opposed to merely Following tei instvetons as they di inthe prior decade, Managers of sorportions decided tat they would onto heir aeqisiom statgy and for a whe this ele ia more statepie and better conceived dens, However, as we wl ee, manages teissves ‘began to make major merger Blunders as we moved tough te ith meg’ wave, ok Feed ber Tal inveed Tal Niner Capa of Deas esl Mord inn) ‘orn Sn sue 12 merltyne & Co ne 2608 ns Leman ters Hogs, mass on Credit Suisse Fit ane naam 7 Death ink Secutles , 928 ”a Te ior Tol necied ‘Toll Number Cop af Deak of Deals Worked ion) 2 Wc pon Rosen & at ass 6s 2 salon & Cromwell? an ua © WallCaha& Mange LP 205, 0 8 wsPok & Wal ry 16 Given the complex legal environment that strounds M&AS, attorneys also pay 9 ey role in #suceessfol acquisition process, Law ims may be even more important in hte takeovers than in friendly aeqsitions because pt ofthe resistance ofthe target ‘may come through leu! maneuvering. Dele lings wit the Seuss and Exchange ‘Commission (SEC) may need to be completed under the guidance of leg! expen. In both peivate and public MAAS, thee is a Tegal duc diligence process tht storeys shouldbe retuned to perform. Table 1.6 shows the leading legal M&A advisers in 2000, Accountanis also pl an important role i M&AS. Tey have ther ow accounting ve ailgence process, In addition, acountants perform virions other cons sch as ‘preparing pro forma financial statements sed on scenarios put forwd by management ‘oroher professionals, Sill another group of professionals who provide important services jn M&As ae valuation expen. Those individuals may be tained by eth a bidder o 4 target to determine the valde of a company. We will seein Chapter I tht these Values may vary depending onthe assumptions employed. Therefore, valution expen ‘may build a model that incorporates variovs assumptions, sich ae revene gow ae oF ‘oss, which may be eliminated afer the desl, As these and eter assumptions vary, the ‘esting valve derived fom the dtl also may change MERGER ARBITRAGE ‘Another group of professionals who can pla an important rok in wheovers is abiagers (ash. Generally, arbitrage refers othe buying ofan asst in one market and sling it in another. Risk aritagets look for pce dserepances between different markets for the same assets and seek to sellin the higher priced market and buy ithe lower one Prattoners of these kinds of transactions ty to do them simultaneously, this looking in thei gins without sk. With respet to M&A, arbiragers purchase stock of companiesleve@AGED BUYOUTS AND IME PATVATE EQUITY ABE » that may be taken over inthe hope of geting takeover premium when the del closes. “This is refed to as risk arieage, ab purchasers of sires of targets canot be cern ‘he da! wil be competed. They have evaluate the probability of completion ad pursue eal wih saticently high probabiiy, ‘The merger arirage busines is faugh wih sks. When markets tun down and the ecomomy slows, deals are often canceled. This occured in the lat 180k, when he sock ‘market crashed in 1987 and the junk bond market declined dramatically. Te jon bond ‘market was the ful for many ofthe deb-laden deals of tit period In aon, when merger waves end, dea volume disp, lowering theft business ave ‘Some investment banks have arbitrage departments. However fan invstment hark is advising a cient regarding the possible aquisition of a company iis inerative that 4 Chinese wall bee the abizage department and the advisors working Srey with te clint be consisted so thatthe arbirger do nt henetit rom the infematin that the advisors have but that is ot yet readily availble to the marke, To deve Hana ‘enelis foe this type of aside information i volstion of securities law, ‘The arbitrage business has greatly expanded over the past ive 10 ten yeas, Sever setive funds specialize in merger abizage. These funds may bet on many dels atthe sae ime. They usualy purchase the shares afer a pic announcement ofthe ole has been made. Shares in these funds can bean aactive javement boca thee etme may notte as closely comelatd with the matet as otber investments ence in cases OF sharp and unexpected downtrt). LEVERAGED BUYOUTS AND THE PRIVATE EQUITY MARKET. In a leveraged buyout (LBO), buyer uses debt wo finance the aegusition of company. ‘The term i usualy reserved, however, for acquisition of public compunss where the acquied company becomes private This is efered to as gong private bees al ofthe public equity i purchased, usally bya smal group ora single buyer and fe comypsy is nolnger traded insecurities markers. One version of an LBO 83 management buses Ina management buyout, the buyer of a company, oF division of a company, i he manager ofthe en ‘Most LBOs are buyouts of stl and medium sized companies or divisions of large companies. However, in what wat then the largest transition ofall tine, the 1989 525.1 billon LBO of RIK. Nabiso by Kohlberg Kravis & Roberts shoo the finan ial word. The leveraged buyout business delind afer tho fourth merger wave but rebounded somewhat inthe fifth wave (ExhbiC 1). Thre ate several eons for this, including the collapse ofthe junk bond market. These issues are discussed at ent CChapers7 and 8. However te LBO busines rebounded in the Aifth merger wave and then ook off i the mi-200 Kp 2005 and 2006, we saw thereto of the megs-LO, In avon, this basnes beeame a tray global one by tat ine [LBOs vitizea significant amount of dee along with an equity investnent, Often this ‘equity imvestmeat comes from investment pools ceated by priate equity fms. Those Fas solicit investments from instaionliovestor, The monies ae used to agi uit posions in various companies. Sometimes these private equity bujes acquirecate companies, while i ther instances they tae equity positions in companis, Some: times they may use some oftheir equity, which they may combine witha significant amount of de to pursue an LBO. The private equity business has grown significantly ‘in ecoot years, We will cus this futher in Chapter 8 ‘CORPORATE RESTRUCTURING Users ofthe tem corporate restructuring usally ae refering ase sels sich a8 dlivestinres. Compasies that have acquired other firms or ave develope athe divi Sons hough aetviis such av product extensions may decide that these divisions no longer fit ito the companys plans. The desi to sll pars of « company my’ come from poor performance of a division, financial exigency, of a change i the strategie ‘oreaation of the compuny. For example, the company may decid to reaeus one ‘ore business and selloff noncore subsidies. This type of actly incre ater the nd of the thfd merger wave ss many companies tat engaged in divene acquisition ampalgns to build conglomerates began to question the advisability of these combi nations. There are several forms of corporate sells, with divestiures tang omy one kind Spin-offs enjoyed increased popularity inthe early 199%, while ayity care ‘outs provided another way that ellos could be accomplished. The relive benehis of cach of these alternative means of selling off part of a company are discussed in Chager 10 (Otter forms of corporate restricting te cost and workforce restrtrng. Inthe 1990s, we saw many companies engage in coyporate downing as they stove to Hecomeror lent This was encouraged by several factors, including the 1990-91 recession andthe iterational competitive pressure of the globalization of word mares, Another Term of corporate estuctring i nancial eractring, which refers to allerations inthe capt steactare ofthe frm, such aang det and thereby increasing nail levee, Atough this type of restructuring is imporant incorporate fiance and soften done as part of the financing actives for M&AS, its no wea in this Wel 38 form of omorate esructring. Rather, the term restructuring i reserved fr the more pysical forms of estuctring such a divestitures. [MERGER NEGOTIATIONS Most M&As ate negotiated in a rendly environment. The proess usally begins when the management of one frm contacts the target company's management, ten through the investment bankers of each fim. The management of bot rms Keep Ue respective tans of iectors up-to-date onthe progress ofthe negdations because mergers wally require the boards approval. Sometimes this process works smoohly and es 0 a quck merger agreement. A good example ofthis was the 1998 $19hilionaequison of Capital Cie!ABC Ine. by Walt Disney Co. In spite of the size ofthis del there was qck rmecing of the minds by management ofthese two firms and rendly deal was sompleted relatively quickly. Pechaps the speed with which these managers pushed thse! through ws to fst, a the combination Teh much to be desired andthe synergies between the two companies were olen hard toss. A quick deel may not be the best. The ATT acquisition of TCI is anoler good example ofa fren del whece the buyer dif ot ots bomework and the sller di «good job of aceonsmodating the buyers (AT&T's) esr to do a quick deal at a higher pic. Speed may help wan off unwented bidders bt it may work against a lose semtny of the transaction, Sometimes fondly ngotations may besk down, leading tothe termination of the bid ors hose takeover. An example of # negotiated del that ale and elt 4 hose bid was the 1995 tender offer by Moore Corporation for Wallace Computer Services, Ie Here negotiations between two arevivals inthe busines forms nd printing business proceeded for five moaths before they were ealled of, ling toa $1 Jalon hose bid. In other instances a bid is opposed by the tage right sway andthe transaction ‘quickly becomes a hosile one. pod example ws the 2004 stile bid ty Oracle for PeopleSoft. This takeover bate was unusual for its practed length. Te bale went ‘on for approximately year Before PeopleSoft finaly capitulated an! accepted higher Oracle is Except fr hose ansactons, mergers ually are the protic a negoistion process between the management ofthe merging companies. The bidding fr spicy nites the negotiations when i contacts the target's managsment (one whee he company is forsale and to express is intrest in buying the target. This iret any be the product ofan extensive search process to find the right aeqison candidates. However, could be «recent interest inspired by the bidder's investment bak approssing it with propos that it eleves would be ood it forthe bidder, For salsa acquisitions, this itemediary might be a business brokerMost merger agreements ache a materi! adverse change clause. Tis case may low ether pry to withdraw from the deal if major change in ecamtances arises that would aller the valve of the deal, This occured inte 2005, whee Johnson & Shnson (8H) sated that it wanted to terminate its §25-bilion purchase of Guidant ‘Corporation afer Guida's problems with recalls of heart devies it marbted became ‘more pronounced. J&J, hich sill felt the eres that i had paid too much fori lage roe acquisition, Ala, which it acquired in 2001 for $12 Selon, di not want to overpay fora company tha might have unpredictable Habis that would erode is ‘value overtime, 187 and Guidant exchanged legal thats but eventually agreed on Tower valve of $215 billion. J&I"s strategy of using the material adverse dange clause to get a better pice hacked, a t opened the door for Bost Seientic to make an limatve offer and evenly outbid 18 for Guidant wih 4 $27bilion fal ofr. ‘Bosh the bide and he target should conduc their own valatonsnalsesto determine hat the targets worth, As sensed io Chaper 1, the vale ofthe tert forthe yer may be diferent from the value of that company forthe seller. Valuations can difer ‘de to varying uses of the target assets or diferent opinion onthe fue growth of the target Ifthe target believes that itis worth substantially move than what the buyer is willing to pay. friendly deal may note possible. If, however, the ele i ineresed in selling and both paris ae able to reach an agreement on price, a dal may be sible. Other important ess sch as fnancil and regulatory approvals, f necessary, ‘would have 1 be competed before the negation process could Ted 10 a completed ‘When to companies engage in M&AS they often ener ino conden agreements Which allow them to exchange confidential information that may enable te pais ‘eter understand the value ofthe dea. Following the eveatua ale of Guidant to second bidder Boston Scenic for $27 billion, Jk} sued Boston Seienie and bat Labo ‘ores in Septeiber, 2006, 18) alleged that Guidant aked confidential information {0 Abbot which had agreed wo purchase Guida’s cardiac stent business for approxi ‘mately 4 billion thereby educing anitust concerns. JI alleged Guidan's eease of this information violated its orginal agreement with J&. This underscores anther rik Of M&A the release of valuable intemal infortation, Disclosure of Merger Negotiations ‘Before 1988, it was not lar what obligations companies involved ia merger negotiations hat to disclose thei activities. However, in 1988, sn the landmark Basie Ie. Levin decision, the US. Supreme Court made ices Ua a denis ha negotiations ae taking place when the opposite i the eas is improper. Companies may not deceive the market by siseminatng inaccurate or deceptive informutin, even whe the discussions are preliminary and do not show much promise of coming to tution. The Cou’s position reversed earlier posiions that had wested proposals of negations as being immaterial The Base». Levinson decision does no £030 fat 36 to require companies to dele all plans or eral proposal involving acquisitions, Negotiations between two potential merger parers, however, may not be denied. The exact timing ofthe sscloswre is St not clear. Given the requitement to disclose, «company’s hand may be Toreod bythe pressure of market speculation. I is often dificult to confidently coatinue such negations and planning for any length of time. Rather an lt the inforation slowly Teak, the company has an obligation to conduct an ondrly disclosure nse it is lear that confidentiality maybe tisk or hit prior samen the company has me are no longer accurate. In cases in which there i speculation that takeover is Being planned, signicat market movements instock prices ofthe companies invelved—paniculay the target—may aocur. Sach market movements may ive rise to ingly from the ‘exchange on which the company trades or fom the National Associaton of Secures Dealers (NASD). Although exchanges have come under exit for beng somewhat lox about enforcing these types of tle, a isicient response from te companics involved may give eset dsiplinary action against the companies MERGER APPROVAL PROCEDURES In the Unite tates, each state has 2 statue tht authorizes M&AS of corporations. The rules may be diferent for domestic and fori corporations. Once the Board of diectors ‘ofeach company reaches an agreement they adopt a resoltion approving te del. This resolution should include the names of the companies involved inthe del snd the name ofthe new company. The resolution shold iaclade the fsancia erms ofthe deal and ler relevant information suchas the mathod that sw be used 0 conver securities of ‘each company ito seers ofthe survig cosporatin I Ure are ary changes nthe cls of incospration, these should he relerenced inthe resolution, ‘A his pot the deal i taken to the shareholders for approval. Friendly deals that are a proc of a Tee negotiation process Between the management of two companies ‘are (ically approved hy shareholder. A recent exception to tht was terest of ‘1 majority ofthe shareolders of VNU NV. a Dutch publishing compan. 0 approve ‘the 2005 S7bilion proposed acquisition of IMS Heal, lnc, a phamaceucal research publisher. VNU shareholders questioned the logic ofthe sequin, and this left VNU In the cliticut positon of having to bak out of the deal without having t pay IMS for the expenses i incurred. Ii ric that VNU shirehoders tured downs soouson ‘of IMS, as this jon what IMS sirebolers di in 2000 when is own sharchokers tuned down a sale of the company tothe THiZeto Group ne. Following shareholder approval, the merger plan must be submited to the relevant toe oficial wally the seereary of state. The document hat contains this plans called the ances for merger or consoldation, Once te sate official determines at he proper ocumentation his been received, i issues cerifete of merge or consoldation. SEC rules require a proxy solicitation tobe accompanied by a Schodule 14A. em 1 ofthis Schedule sets oth the spesifi information that must e incl in proxy statement ‘when there will bea vote for an approval of a merger, sale of substan asst, oF Tiguiaton or dissolution ofthe corpation. Fora meget, this information mst inclode the terms and reasons for the uaassction as well a a desription of the secounting ‘ween and tx consequenoxs ofthe dea. Fnac salmon nd asaemeat regarding ‘elevat sate and federal regulatory compliance are requied Faimessopinicas and other felted documents so mst he includSpecial Committees of the Board of Directors “The boat of diectoes may choose 10 form a special commie of the boa! 0 evaluate the merger propos. Directors who might personaly enelic fom the merger. such as ‘sen the buyout proposal contains provisions that management rests my potentially Profit fom the deal, should not be members of tis commitee. The moe complex the transition, the more likely tht a commitee willbe appoint This commites should seek legal counsel to guide itn legal isues such as the firme of the uansaction, the business judgment rule, and namerous cer leg issves. The comnts, and the ‘oar in genera, needs to make sire titi carefully conser ll olvint spect of the transaction, A court may ater scrutinize the decision-making proves, sich a8 what ‘occured inthe Smith. Vn Gorkom case (Sce Chaper 14) In dha ease the court found the ditetos peesonally lable because it thought thatthe decison aking process was inadequate, eventhough the decision self was appareily a ood one for sharcholders Fairness Opinions nis common forte board 1 retain an outside valuation fim, such a an awstent bank ‘ora um that specializes in valuations, 1 evaluate dhe unsaction’s terms and pie. This ‘inn may then fender a Taeess opinion in which may sate tat the offers na ange that it determines to be accurate This hecimeeven more important flr the South». Ne Gorkom decision, which places directors under greater seratiny, Directors may seck void these Iga pressures By soliciting a faimes opinion from an acceped authority ‘According to one sve, for deals valved at less than SSbilion, the avcage fires opinion Tee was S#00,00, whereas ordeals valued at more than $5 bilion the average {aims opinion fee was $4.6 milion.’ These opinions may be somewhat tee and usually feature a limited discussion ofthe underlying Grancal analysis. As part ofthe opinion that rendered, the evaluator shold sate what was investigated and verfed sn wht vas not. The fees received and any potential confit of intrest should alse be evel, ‘Voting Approval {Upon reaching agreeable terms and receiving board approval, the dal stake before dhe shareholders for thee approval, which is grand duh a vote The exast percentage necessary for stockholder approval depends on the articles of incorporation, whic in tum ae regulated by te prevaling state corporation laws. Following apeoral cach fm files te necessary docoments with the sate thors in which each Be i incorpo ‘ae Once this sep is completed andthe compensation has changed hand, the deli completed SHORT-FORM MERGER [A stortform merger may tke place in situations in which the stecKholer approval, process is not necessary. Stockholder approval maybe Bypesed whet the srparation’ssock is concentrated in the hands of a small group, such as management, which is ‘avoeating the merger. Some sae lavs may allow this eoup 10 approve the rnsetion ‘nits ow without slicing the approval ofthe othe stockholders. The bord of directors ‘Simply approves the merger by a ress, 'A sor-foxm merger may occur ony when the stackollings of insiders are beyond 4 cenain threshold stipulated inthe prevailing sate corporation laws. Th precntage ‘aie: depending on the stat in which the company is incorporated, bat i usualy i the 9 to 955 range, Under Delaware lw the short-form meger percents i 907% FREEZEOUTS AND THE TREATMENT OF MINORITY SHAREHOLDERS ‘Typically, a many of shareolders must provide tei porovl before a merger can be completed. A 514% margin ia common majority dhesbol. When this majoty approves the dal, minty shareholders are required to tender their shares, even though they di ot vote in favor ofthe deal Minority shareholders are sid be frozen out of tir Psion. This majority approval requiement s designed t povent ahold problem, which may occur when a minority aemps to old up the completion oft tamaction unless they receive compeasation over an above the aequiston tock pie. This no ‘to say that dssonting sharabolders re witout rights. Those shareholders who believe that their shares are work sigificanly more than wha he tems of the merger ae offering may go io court to purse thse shareholder appraisal igs. To successfully pursue these sips. dssetng shareholders must follow the proper procedures. Paramount among these procedures is the reguizement that the dissenting shareholders objet to th eal within ‘he designated period of ime. Then they may demand a cash setement fr the dfeence between the "fi value” of tier shares and the compensation they actly recived, OF couse, coporations resist these manewers because te payment of cash forthe val of shares will ise peoblems relating to the position of oer noskholers. Sich sits ae ‘vo dificult fr dissenting sharsholdrs to win. Dissenting shareholders miy Be sit ‘onl f the corporation doesnot le sit to have the fair vale of the shares dterined, Alter having been noted ofthe dissenting shareholder” objection. I tees si the our may appoint an appraise oasis the determination ofthe ae vu. PURCHASE OF ASSETS COMPARED WITH PURCHASE OF STOCK ‘The most common form of marge or aequison involves purchasing the stock of the merged or acquired concer, An alterative to the stock acquisition isto purchase the larget company's asses. In doing so he acquiring company can imi gqusions 0 those pans of the firm that coincide with he acquzer’s needs. When a sgneant part of the target remains afer the asset aequsin, the transaction is only & part acgusition ofthe get. When al the targer’sases are purchased, the tage Becomes corporate Sell wih only the cash or scoutes that lt eeved fom the aouisiion #8 set, In those stations, the corporation may choose to pay Soekodersligudatng dividend and disolve the company. Aleoaivel, th firm may use its gud ase to purchase thor sesso anti compan.STRUCTURING THE DEAL Most deals employ a tiangnor structure ailing a sbidary corporation thi scre- ‘aed by the bayer wo facllate the acquisition ofthe tygel, The aogier cates a shell Sbsidary whose shares repurchased with eas o sock ofthe parent Tis cash oF tock is then wed to acquire either the assets orth stock of the target company te assets of the target ae seid, then the surviving tagst corporation sus hiss. I the shares ofthe target ae acquired, the target corporation then merges with he subsiiary, ‘which now hus the acs and lables ofthe target, When the subsiiany survives the merger this suc i sometines rere to as a forward triangular merger. Another slemative is «reverse angular merger, where the subsidiary is mergod withthe target and doesnot survive the merger but the target corporation does. The advantage of using tubsidinies and this angular struct i hat the aeirer gains cont of the target without dietly assuming the own, and potentially unknown, lates ofthe tat ASSUMPTION OF THE SELLER'S LIABILITIES 1 tbe acquirer buy all the targe's stock, i assumes the seller's Habilies The change in tack ownership does no re the new ower of the stock fom the seller's ibis, Most state laws provide this protection, whichis sometimes refemed to as successor abit. An auier may try to avid assuming the sles abilities by buying only the sets rather than the stock ofthe tarzl tn cases in which a buyer purchases substantial Doron ofthe target's ates, he courts have ruled tat the buyer is sesponsible forthe Seller's abilies. Tiss koown a the tas funds doctrine. The cout may aso rule that the transaction is de facto merger—a merger that oceus when the Bayer purchases the ases of the target, and, fo ll stents and purposes, the transaction i tested as & merger The isu of suoessorHibilty may ako apply o other commitment ofthe Hm, such a union conrats. The National Labor Relations Boas positon on his issue is that collective Bargaining agrcements ae sll im elect after acousitons. As we have noted, sellers ty to separate the target corporation's abilities fom their om by keeping them in a erent corporation dough the use of 3 angle deal statue tht wires subsidiary ompoation, ADVANTAGES OF ASSET ACQUISITIONS ‘One of the advantage ofan asset acaviston, as oppor toa stock aequiston is thst the bidder may not have fo gain the approval of its shareholders. Such approval usally is necessary oy when the asses ofthe target ate purchased wsing shares 9 he bidder tnd when tho bidder doos not aleady have sulicient shares authorized to complete the tasaction. If dere aze-notsuient shies authorized, the bidder ay have take the necesary sleps, which may include amending the ancles of inception, 1 ‘in approval. This is very ciferet from the positon ofthe target company. where is Shareholders may have to approve the sue ofa substantial amouat of th: company’s assets. The necessary shareholder approval percentage is usally the same a Fr stock ‘oquistions.ASSET SELLOFFS \When a corporton chooses to sel of all is asst o anther company, becomes & coorate sll wit cash andor secues a ts sole asses. The fm may ten decide istibae the cash 1 ts loekholdes a a igidting divided and go otf existence ‘The proceeds ofthe assets sale may also be distributed through a cash repurhase tender fer. Tha s,s rm makes a ender offer for its own shares using the pcceeds of the se se to pay for shares. The frm may aso choose to continue odo busiess 2 use its Hguid asets to purchase other ases or companies. Fums that choose io remain in txstence without assets are subject tothe Investment Company’ Act of 1940, This av, fone ofa series of secures Jas passed inthe wake of the Great Depreson and he associated stock market crash of 1929, applies when 100 oF more stcktoldrs remain flr the sale ofthe aie It requires tha investment companies reper withthe SEC {nd adhere its regultions applying to investment companies. The law ls establishes Standards that regulate investment companies. Specify, i cover Promotion ofthe investment company’s stvites Reporting requirements Pricing of scours forsale to the public Issuance of prospectuses for slos af seuss Allocation of assets within the investment company's porto 1a company tat sels ff lt assets chooses to invest the races ofthe asset sale in Treasury Bil, these investments are ao egulated bythe Act. There ae two kinds of Javestment companies: apen-end investment companies and closed-end ines! com panies. Open-endinvestinent companies, commonly refered 4 88 mutual funds ate ‘hres that ate equal 1 the value of the Fund divided hy the numberof shires that ae ‘ought, afer taking nto aboot the costs of rnin the fr. The mber of shares in mutual fund increases or decreases depending onthe numberof new share old or the redemption of shares already issued. Cosed-end investment companies gene do aot, Fate new shares after the inal nance, The value of these shares is dterned by the ‘value of the investments tht ae made using the proceeds of the inal she offering, REVERSE MERGERS. A reverse merger isa merger in which 4 private company may go public by merging ‘with an sea public company tht often i inactive or corporate sel The combined ompany may then se secures and may not have to ne ao he eossend seating that mormslly would be associated with a inal pubic ofleing. The rive company then has greatly enhanced uit for its equity, Another advantage is that the process a take plae quickly In aklition the private company shares are poli traded after the deal, and that cane more atactve to serge thatthe bidder may De psig “Most reverse mergers involve smaller companies tat are looking fea es expensive way ‘of going public. An example of «recent reverse merger was the March 2001 $229 milion reverse merger involving Ariel Corporation and Mayan Network Corp. Under this dal, Mayan acquired Ariel Mayan shreholers owned SO ofthe combined compny, whileAriel shreholers owned the remaining 10%. One unusual aspect ofthis reverse merger ‘was ts size, a most sich deals involve smaller finns, The deal presente benefits for both companies because i allowed Mayan, a company tat only recently had signed up its fs wo customers, o tap public markets, while giving Ave, whose ck pice and Financing were wea, an oppotaity to improve ils hratetal condition HOLDING COMPANIES, Rather than & merger ot an aoquisition, the acquiring company may choose to purchase ‘only potion ofthe target’ stock and at ast holding company, which fa company that owns sufcien stock o have aconoling intrest in the target. Holding companies teae thee origin back to 1889, when New Jersey became the fist tate pass lw that allowed corporations tobe formed forthe express purpose of owning Hoek in ther comporatios. I an acquirer buys 100% of the target the company is known a8 wholly ‘ned ebvdiory, However, is at necessary to own all of 8 company"s ack Wo exert como over it Infact, even a 51% interest may not be necesary tall’ a buyer to conto a target. For companies witha widely distibuted equity base, effective working ‘onto can be established with as litle as 1D to 208 ofthe outstanding common stock, Advantages olng companies have cen advantages that may make this form of cont anscton preferable oan outright aequisiion, Some ofthese avantges at ‘+ Lower cost With a holding company structure, an seuier may be sle to atin ‘contol ofa farget for a mich smaller investment than would be micessay in [00% stock acquisition. Obviously. a stller quer of shares to Se purchased permits a lower ttl purchuse pice to be set In adton, because fever shares te demanded in the market, thee i less upwaed pice peessure oat fis stock ‘na the cost por share may be lower. The aguier may allem wo minimize the upward price pressure by gradually buying shares over an extended period of ine + Nocontol promium. Becawse 51% ofthe shares were not purchased the contol premium tha is normally associated with St to 100% stock acquisitons may not have tobe pai + Comot with fractional ownership. As noted, working contol may be established with les than 51% of the target company's shares. This may allow te controling company to exe eertaninlucnce over the tage in manner tat I Fre the controling company’s objectives 1+ Approval not requed. To the exten that i is allowable under federal and state laws, a olding company may simply purchase shares ia a target withot hav ing to solicit the apeoval ofthe tuget company's shacholders. As discussed in CChspier 3, ths has come more dificult o accomplish beats varios awe make it ifca for the holding company to achieve such contr if serious shareholder opposition exis Tire Fas eS Ai 23 ilio Re Mr” ey 0208.4isadvantages oling compnies also have disadvantage that make this type of wansactonatactive ‘only under cern circumstances. Some ofthese disavantaes are: + Mulipte oxtin. The bolsing company structure ads another layerto the compo fate structure, Nonmily, stockholder income is subject to double taxation, Income is taxed atthe corporat level and some of the remaining income may then be Aistibaed 10 stocKoldes inthe form of dividends. Slockholders ae then tad individually om this diviend income. Holding companies rssve dividend income from a company tht has already been taxed at te corporate level. This income may hen e tated atthe holding company level Before itis dstbued to stock oer. This amounts to triple tration of corporate income. However, if the oling company owns 80% or more of a subiday's voting equ, the Inter ral Revenve Servic allows ling of consolidate elas #0 which te dividends ‘received from th parent company are not axed. When the ower intrest Tess than 80S, ets cannot be consid, but Between 0 and 80% of the dividends are no subject to taxation. + Animus sues. A hong company combination may fae some of the same nist concems with which an ough acgison i fed IF he wegulatory utortes do find te Holling company strcture anticompetive, weve, is comparatively easy 1 equze the holding company wo divest itself of is holdings Jn the tage. Given the ease with which his ean be accomplished, the regulatory suthoces may be mare quick to require this compared witha mow intgrted coxporate ste + Lack of 100% ownership. Although the fact hata hong company cn be formed ‘without a 100% share purchase may be a scum of cost savings, 1 eaves the holding company with othr outside shacholders who will have some contlling Intuence inthe company. This may lead to disagreements over the deection of the company Special Purchase Acquistion Vehicles Special purchase sequiston vehicles (SPACS) ar companies that ase capil nan inal public offering (IPO) where the funds are earmarked fr acquisitions, Usually between OS to 90% ofthe funds are placed ina tt which earns x rate of ret while the ‘company seeks to aves the monies in aequstions. The remainder ofthe movie are wed to py expenses. Shareholders usly have the ight to jet proposed deals Inuit, it the company fails to complete acquisitions the movies are returned 1 avestors less ‘expenses and plas an return eared in he eaptl Such investments can be sky for investors as ts possible thatthe eumpany may ot complete an acquisition, I that ete ease investors could get back es monies than they originally invested. Even when the company does compete deals they 40 not know in advance what ages will be acquired “The IPO oferings of SPACS are unique are fer in many ways from wadtional IPOs in adton to te lleences inthe nature of the company which we hase discussed,‘hey usually sll in “units” which include a share apd one o to warans which usualy etch fom the shares and trade separately 2 couple of weeks aller the IPO. Because the market for these shares can be liquid, they often tre at» discost—simiar to ‘many closet end funds. The post IPO secures canbe interesting invesnents a8 they represent shaes in an entity which hol! a known ammount of cash but which tides at ale that may be Tess than this amount