Mergers, Acquisitions, and Corporate Restructurings Book

Case Study

Preface

Part 1 Background 1

1 Introduction 3

Recent M&A Trends 3

Definitions 12

Valuing a Transaction 13

Types of Mergers 13

Reasons for Mergers and Acquisitions 14

Merger Consideration 15

Merger Professionals 16

Merger Arbitrage 19

Leveraged Buyouts and the Private Equity Market 20

Corporate Restructing 21

Merger Negotiations 21

Structuring the Deal 24

Merger Agreement 24

Merger Approval Procedures 25

Deal Closing 26

Short-Form Merger 26

Freezeouts and the Treatment of Minority Shareholders 27

Purchase of Assets Compared with Purchase of Stock 27

Assumption of the Seller's Liabilities 28

Advantages of Asset Acquisitions 28

Asset Selloffs 28

Reverse Mergers 29

Holding Companies 33

2 History of Mergers 35

Merger Waves 35

What Causes Merger Waves? 36

First Wave, 1897-1904 36

Second Wave, 1916-1929 42

The 1940s 44

Third Wave, 1965-1969 44

Trendsetting Mergers of the 1970s 51

Fourth Wave, 1984-1989 57

Fifth Wave 63

Sixth Merger Wave 71

Summary 73

3 Legal Framework 74

Laws Governing Mergers, Acquisitions, and Tender Offers 75

Other Specific Takeover Rules in the United States 86

International Securities Laws Relating to Takeovers 88

Business Judgment Rule 95

State Antitakeover Laws 97

Regulation of Insider Trading 104

Antitrust Laws 107

Recent Trends in Antitrust Enforcement in the United States 114

Measuring Concentration and Defining Market Share 116

European Competition Policy 120

Antitrust Remedies 122

Summary 123

4 Merger Strategy 125

Growth 125

Synergy 132

Operating Synergy 134

Diversification 146

Other Economic Motives 156

Hubris Hypothesis of Takeovers 168

Other Motives 174

Summary 179

Part 2 Hostile Takeovers 181

5 Antitakeover Measures 183

Management Entrenchment Hypothesis versus Stockholder Interests Hypothesis 184

Preventative Antitakeover Measures 185

Changing the State of Incorporation 206

Active Antitakeover Defenses 206

Information Content of Takeover Resistance 240

Summary 241

6 Takeover Tactics 243

Preliminary Takeover Steps 245

Tender Offers 250

Open Market Purchases and Street Sweeps 267

Advantages of Tender Offers Over Open Market Purchases 269

Arbitrage and the Downward Price Pressures around M&A Announcements 271

Proxy Fights 271

Hedge Funds as Activist Investors 286

Summary 288

Part 3 Going-Private Transactions and Leveraged Buyouts 291

7 Leveraged Buyouts 293

Terminology 293

Historical Trends in LBOs 293

Costs of Being a Public Company 302

Management Buyouts 304

Conflicts of Interest in Management Buyouts 307

U.S. Courts' Position on Leveraged Buyouts Conflicts 307

Financing for Leveraged Buyouts 316

Returns to Stockholders From LBOs 321

Returns to Stockholders From Divisional Buyouts 322

Empirical Research on Wealth Transfer Effects 329

Protection for Creditors 329

Summary 333

8 Topics in Going-Private Transactions 335

Private Equity Market 335

Junk Bonds' Financing of Takeovers 344

Stapled Financing 361

Securitization and M&A Financing 362

Summary 364

9 Employee Stock Ownership Plans 366

Historical Growth of ESOPs 366

Types of Plans 367

Characteristics of ESOPs 368

Leveraged versus Unleveraged ESOPs 369

Corporate Finance Uses of ESOPs 369

Voting of ESOP Shares 371

Cash Flow Implications 371

Valuation of Stock Contributed into an ESOP 372

Eligibility of ESOPs 372

Put Options of ESOPs 372

Dividends Paid 373

ESOPs versus a Public Offering of Stock 373

Employee Risk and ESOPs 375

Securities Laws and ESOPs 376

Tax Benefits of LESOPs 376

Balance Sheet Effects of ESOPs 377

Drawbacks of LESOPs 377

ESOPs and Corporate Performance 378

ESOPs as an Antitakeover Defense 381

ESOPs and Shareholder Wealth 382

ESOPs and LBOs 383

Summary 386

Part 4 Corporate Restructuring 387

10 Corporate Restructuring 389

Divestitures 391

Divestiture and Spinoff Process 402

Wealth Effects of Selloffs 410

Equity Carve-Outs 424

Voluntary Liquidations or Butups 428

Tracking Stocks 430

Master Limited Partnerships and Selloffs 431

Summary 433

11 Restructuring in Bankruptcy 435

Types of Business Failure 435

Causes of Business Failure 437

Bankruptcy Trends 440

U.S. Bankruptcy Laws 446

Reorganization Versus Liquidation 447

Reorganization Process 448

Benefits of the Chapter 11 Process for the Debtor 454

Prepackaged Bankruptcy 457

Workouts 460

Corporate Control and Default 465

Liquidation 465

Bankruptcy Fire Sales 466

Investing in the Securities of Distressed Companies 467

Summary 471

12 Corporate Governance 473

Failed Corporate Governance: Accounting Scandals 473

Sarbanes-Oxley Act 475

Other Regulatory Changes 477

Corporate Governance 477

Golden Parachutes 487

Managerial Compensation, Mergers, and Takeovers 490

CEO Compensation and Power 492

Compensation Characteristics of Boards That Are More Likely to Keep Agency Costs in Check 494

Role of the Board of Directors 495

Interlocking Boards 496

Independence of Directors 497

Regulatory Standards for Directors 503

Antitakeover Measures and Board Characteristics 504

Disciplinary Takeovers, Company Performance, CEOs, and Boards 506

Merger Strategy and Corporate Governance 507

Do Boards Reward CEOs for Initiating Acquisitions and Mergers? 507

CEO Compensation and Diversification Strategies 509

Agency Costs and Diversification Strategies 509

Interests of Directors and M&As 510

Managerial Compensation and Firm Size 511

Corporate Control Decisions and Their Shareholder Wealth Effects 512

Does Better Corporate Governance Increase Firm Value? 513

Corporate Governance and Competition 514

Executive Compensation and Postacquisition Performance 514

Mergers of Equals and Corporate Governance 515

Summary 522

13 Joint Ventures and Strategic Alliances 523

Contractual Agreements 523

Comparing Strategic Alliances and Joint Ventures with Mergers and Acquisitions 524

Joint Ventures 524

Strategic Alliances 530

Summary 537

14 Valuation 538

Valuation Methods: Science or Art? 540

Managing Value as an Antitakeover Defense 540

Benchmarks of Value 541

How the Market Determines Discount Rates 553

Valuation of the Target's Equity 562

Takeovers and Control Premiums 564

Marketability of the Stock 566

Valuation of Stock-for-Stock Exchanges 575

Trends in Cash versus Stock Percentage of Takeover Financing 576

Shareholder Wealth Effects and Methods of Payment 580

Exchange Ratio 586

Fixed Number of Shares versus Fixed Value 593

Adjusting Stock Offers for the Effects of Stock Options and Convertible Securities 593

International Takeovers and Stock-for-Stock Transactions 593

Desirable Financial Characteristics of Targets 594

Summary 602

Appendix 603

15 Tax Issues 607

Financial Accounting For M&As 607

Taxable Versus Tax-Free Transactions 608

Tax Consequences of a Stock-For-Stock Exchange 610

Asset Basis Step-Up 613

Changes in The Tax Laws 614

Role of Taxes in The Merger Decision 616

Role of Taxes in the Choice Selloff Method 617

Organizational Form and M&A Premiums 617

Capital Structure And Propensity to Engage in Acquisitions 618

Leverage and Deal Structure 618

Taxes as a Sources of Value in Management Buyouts 619

Miscellaneous Tax Issues 620

Summary 621

Glossary 623

Index 631