Front Cover 1
Mergers, Acquisitions, andOther Restructuring Activities: An Integrated Approachto Process, Tools, Cases,and Solutions 6
Copyright Page 7
Dedication Page 8
Contents 10
Contents of CD-ROM Accompanying Textbook 22
Business Case Studies 24
Preface to the Fifth Edition 30
Acknowledgments 34
About the Author 36
Part I: The Mergers and Acquisitions Environment 38
Chapter 1: Introduction to Mergers and Acquisitions (M&As) 40
Inside M&A: Mars Buys Wrigley in One Sweet Deal 40
Chapter Overview 41
Mergers and Acquisitions as Change Agents 42
Common Motivations for Mergers and Acquisitions 43
Merger and Acquisition Waves 50
Alternative Forms of Corporate Restructuring 55
Friendly versus Hostile Takeovers 58
The Role of Holding Companies in Mergers and Acquisitions 59
The Role of Employee Stock Ownership Plans in Mergers and Acquisitions 59
Business Alliances as Alternatives to Mergers and Acquisitions 60
Participants in the Mergers and Acquisitions Process 61
Do Mergers and Acquisitions Pay Off for Shareholders? 67
Do Mergers and Acquisitions Pay Off for Bondholders? 75
Do Mergers and Acquisitions Pay Off for Society? 75
Commonly Cited Reasons Why Some Mergers and Acquisitions Fail to Meet Expectations 76
Long-Term Performance Similar for Mergers and Acquisitions, Business Alliances, and Solo Ventures 76
Things to Remember 77
Chapter Discussion Questions 78
Chapter Business Cases 80
Case Study 1-1. Procter & Gamble Acquires Competitor 80
Case Study 1-2. The Free Market Process of Creative Destruction: Consolidation in the Telecommunications Industry 81
Chapter 2: Regulatory Considerations 84
Inside M&A: Justice Department Approves Maytag/Whirlpool Combination Despite Resulting Increase in Concentration 84
Chapter Overview 84
Federal Securities Laws 85
Antitrust Laws 93
State Regulations Affecting Mergers and Acquisitions 104
National Security-Related Restrictions on Direct Foreign Investment in the United States 106
Foreign Corrupt Practices Act 107
Regulated Industries 107
Environmental Laws 112
Labor and Benefit Laws 112
Cross-Border Transactions 113
Things to Remember 114
Chapter Discussion Questions 114
Chapter Business Cases 116
Case Study 2-7. Global Financial Exchanges Pose Regulatory Challenges 116
Case Study 2\u20138. GE\u2019s Aborted Attempt to Merge with Honeywell 117
Chapter 3: The Corporate Takeover Market: Common Takeover Tactics, Antitakeover Defenses, and Corporate Governance 122
Inside M&A: InBev Buys an American Icon for $52 Billion 122
Chapter Overview 123
Factors Affecting Corporate Governance 124
Alternative Takeover Tactics in the Corporate Takeover Market 132
Developing a Bidding or Takeover Strategy Decision Tree 139
Alternative Takeover Defenses in the Corporate Takeover Market 140
Things to Remember 155
Chapter Discussion Questions 156
Chapter Business Cases 157
Case Study 3-1. Mittal Acquires Arcelor-A Battle of Global Titans in the European Market for Corporate Control 157
Case Study 3-2. Verizon Acquires MCI-The Anatomy of Alternative Bidding Strategies 160
Part II: The Mergers and Acquisitions Process: Phases 1-10 166
Chapter 4: Planning: Developing Business and Acquisition Plans: Phases 1 and 2 of the Acquisition Process 168
Inside M&A: Nokia Moves to Establish Industry Standards 168
Chapter Overview 169
A Planning-Based Approach to Mergers and Acquisitions 170
Phase 1. Building the Business Plan 172
The Business Plan as a Communication Document 189
Phase 2. Building the Merger-Acquisition Implementation Plan 190
Things to Remember 195
Chapter Discussion Questions 197
Chapter Business Cases 198
Case Study 4-3. BofA Acquires Countrywide Financial Corporation 198
Case Study 4-4. Oracle Continues Its Efforts to Consolidate the Software Industry 199
Appendix: Common Sources of Economic, Industry, and Market Data 200
Chapter 5: Implementation: Search through Closing-Phases 3-10 202
Inside M&A: Bank of America Acquires Merrill Lynch 202
Chapter Overview 203
Phase 3. The Search Process 204
Phase 4. The Screening Process 207
Phase 5. First Contact 209
Phase 6. Negotiation 212
Phase 7. Developing the Integration Plan 223
Phase 8. Closing 224
Phase 9. Implementing Postclosing Integration 228
Phase 10. Conducting a Postclosing Evaluation 230
Things to Remember 231
Chapter Discussion Questions 232
Chapter Business Cases 233
Case Study 5-3. The Anatomy of a Transaction: K2 Incorporated Acquires Fotoball USA 233
Case Study 5-4. Cingular Acquires AT&T Wireless in a Record-Setting Cash Transaction 239
Appendix: Legal Due Diligence Preliminary Information Request 240
Chapter 6: Integration Mergers, Acquisitions, and Business Alliances 242
Inside M&A: GE's Water Business Fails to Meet Expectations 242
Chapter Overview 243
The Role of Integration in Successful Mergers and Acquisitions 244
Viewing Integration as a Process 245
Integrating Business Alliances 268
Things to Remember 269
Chapter Discussion Questions 270
Chapter Business Cases 271
Case Study 6-6. The Challenges of Integrating Steel Giants Arcelor and Mittal 271
Case Study 6-7. Alcatel Merges with Lucent, Highlighting Cross-Cultural Issues 273
PART III: Merger and Acquisition Valuation and Modeling 276
Chapter 7: A Primer on Merger and Acquisition Cash-Flow Valuation 278
Inside M&A: The Importance of Distinguishing between Operating and Nonoperating Assets 278
Chapter Overview 278
Required Returns 279
Analyzing Risk 283
Calculating Free Cash Flows (D/E) 287
Applying Income or Discounted Cash-Flow Methods 290
Valuing Firms under Special Situations 299
Valuing a Firm's Debt and Other Obligations 300
Valuing Nonoperating Assets 304
Adjusting the Target Firm's Equity Value for Nonoperating Assets, Debt, and Other Obligations 308
Things to Remember 310
Chapter Discussion Questions 310
Chapter Practice Problems and Answers 311
Chapter Business Cases 314
Case Study 7-1. Creating a Global Luxury Hotel Chain 314
Case Study 7-2. The Hunt for Elusive Synergy-@Home Acquires Excite 315
Chapter 8: Applying Relative, Asset-Oriented, and Real-Option Valuation Methods to Mergers and Acquisitions 318
Inside M&A: A Real Options' Perspective on Microsoft's Takeover Attempt of Yahoo 318
Chapter Overview 319
Applying Relative-Valuation (Market-Based) Methods 321
Applying Asset-Oriented Methods 331
Replacement-Cost Method 335
Valuing the Firm Using the Weighted-Average (Expected-Value) Method 335
Analyzing Mergers and Acquisitions in Terms of Real Options 336
Determining When to Use the Different Approaches to Valuation 349
Things to Remember 350
Chapter Discussion Questions 350
Chapter Practice Problems and Answers 351
Chapter Business Cases 354
Case Study 8\u20131. Google Buys YouTube-Brilliant or Misguided? 354
Case Study 8-2. Merrill Lynch and BlackRock Agree to Swap Assets 356
Chapter 9: Applying Financial Modeling Techniques to Value, Structure, and Negotiate Mergers and Acquisitions 358
Inside M&A: HP Buys EDS-The Role of Financial Models in Decision Making 358
Chapter Overview 358
Limitations of Financial Data 360
Model-Building Process 362
Adjusting the Target's Offer Price for the Effects of Options and Convertible Securities 375
Factors Affecting Postmerger Share Price 375
Key M&A Model Formulas 379
M&A Model Balance-Sheet Adjustment Mechanisms 381
Applying Offer Price-Simulation Models in the Context of M&A Negotiations 382
Alternative Applications of M&A Financial Models 383
Things to Remember 386
Chapter Discussion Questions 386
Chapter Practice Problems and Answers 387
Chapter Business Cases 388
Case Study 9-1. Cleveland Cliffs Fails to Complete Takeover of Alpha Natural Resources in a Commodity Play 388
Case Study 9-2. Determining the Initial Offer Price: Alanco Technologies Inc. Acquires StarTrak Systems 390
Appendix: Utilizing the M&A Model on the CD-ROM Accompanying This Book 403
Chapter 10: Analysis and Valuation of Privately Held Companies 406
Inside M&A: Cashing Out of a Privately Owned Enterprise 406
Chapter Overview 407
Demographics of Privately Owned Businesses 408
Challenges of Valuing Privately Held Companies 411
Process for Valuing Privately Held Businesses 413
Step 1. Adjusting the Income Statement 414
Step 2. Applying Valuation Methodologies to Private Companies 420
Step 3. Developing Discount (Capitalization) Rates 422
Step 4. Applying Liquidity Discounts, Control Premiums, and Minority Discounts 426
Reverse Mergers 438
Using Leveraged Employee Stock Ownership Plans to Buy Private Companies 440
Empirical Studies of Shareholder Returns 440
Things to Remember 441
Chapter Discussion Questions 442
Chapter Practice Problems and Answers 443
Chapter Business Cases 444
Case Study 10-4. Panda Ethanol Goes Public in a Shell Corporation 444
Case Study 10-5. Cantel Medical Acquires Crosstex International 446
Part IV: Deal Structuring and Financing Strategies 448
Chapter 11: Structuring the Deal 450
Inside M&A: News Corp's Power Play in Satellite Broadcasting Seems to Confuse Investors 450
Chapter Overview 451
The Deal-Structuring Process 451
Form of Acquisition Vehicle 456
Postclosing Organization 456
Legal Form of the Selling Entity 457
Form of Payment or Total Consideration 458
Managing Risk and Closing the Gap on Price 461
Using Collar Arrangements (Fixed and Variable) to Preserve Shareholder Value 467
Form of Acquisition 471
Things to Remember 483
Chapter Discussion Questions 483
Chapter Business Cases 484
Case Study 11-5. Vivendi Universal and GE Combine Entertainment Assets to Form NBC Universal 484
Case Study 11-6. Using Form of Payment as a Takeover Strategy: Chevron\u2019s Acquisition of Unocal 485
Chapter 12: Structuring the Deal: Tax and Accounting Considerations 490
Inside M&A: Teva Pharmaceuticals Acquires Ivax Corp 490
Chapter Overview 490
General Tax Considerations 491
Taxable Transactions 492
Tax-Free Transactions 495
Other Tax Considerations Affecting Corporate Restructuring Activities 503
Financial Reporting of Business Combinations 507
Impact of Purchase Accounting on Financial Statements 511
International Accounting Standards 516
Recapitalization Accounting 516
Things to Remember 517
Chapter Discussion Questions 517
Chapter Practice Problems and Answers 518
Chapter Business Cases 519
Case Study 12-2. Boston Scientific Overcomes Johnson & Johnson to Acquire Guidant-A Lesson in Bidding Strategy 519
Case Study 12\u20133. \u201cGrave Dancer\u201d Takes Tribune Corporation Private in an Ill-Fated Transaction 522
Chapter 13: Financing Transactions: Private Equity, Hedge Funds, and Leveraged Buyout Structures and Valuation 526
Inside M&A: HCA's LBO Represents a High-Risk Bet on Growth 526
Chapter Overview 527
Characterizing Leveraged Buyouts 528
When Do Firms Go Private? 535
Financing Transactions 536
Common Forms of Leveraged Buyout Deal Structures 543
What Factors Are Critical to Successful LBOs? 547
Prebuyout and Postbuyout Shareholder Returns 549
Valuing Leveraged Buyouts 553
Building an LBO Model 561
Things to Remember 566
Chapter Discussion Questions 566
Chapter Practice Problems 567
Chapter Business Cases 569
Case Study 13-4. Cerberus Capital Management Acquires Chrysler Corporation 569
Case Study 13-5. Pacific Investors Acquires California Kool in a Leveraged Buyout 570
Part V: Alternative Business and Restructuring Strategies 580
Chapter 14: Joint Ventures, Partnerships, Strategic Alliances, and Licensing 582
Inside M&A: Garmin Utilizes Supply Agreement as Alternative to Acquiring Tele Atlas 582
Chapter Overview 583
Motivations for Business Alliances 584
Critical Success Factors for Business Alliances 589
Alternative Legal Forms of Business Alliances 591
Strategic and Operational Plans 597
Resolving Business Alliance Deal-Structuring Issues 598
Empirical Findings 609
Things to Remember 610
Chapter Discussion Questions 611
Chapter Business Cases 612
Case Study 14-4. SABMiller in Joint Venture with Molson Coors 612
Case Study 14-5. Coca-Cola and Procter & Gamble\u2019s Aborted Effort to Create a Global Joint Venture Company 613
Chapter 15: Alternative Exit and Restructuring Strategies: Divestitures, Spin-Offs, Carve-Outs, Split-Ups, and Split-Offs 616
Inside M&A. Financial Services Firms Streamline their Operations 616
Chapter Overview 617
Commonly Stated Motives for Exiting Businesses 618
Divestitures 621
Spin-Offs and Split-Ups 624
Equity Carve-Outs 627
Split-Offs 629
Voluntary Liquidations (Bust-Ups) 632
Tracking, Targeted, and Letter Stocks 632
Comparing Alternative Exit and Restructuring Strategies 634
Choosing among Divestiture, Carve-Out, and Spin-Off Restructuring Strategies 635
Determinants of Returns to Shareholders Resulting from Restructuring Strategies 637
Things to Remember 643
Chapter Discussion Questions 644
Chapter Business Cases 645
Case Study 15-4. Hughes Corporation\u2019s Dramatic Transformation 645
Case Study 15-5. AT&T (1984\u20132005)-A Poster Child for Restructuring Gone Awry 646
Chapter 16: Alternative Exit and Restructuring Strategies: Reorganization and Liquidation 652
Inside M&A: Calpine Emerges from the Protection of Bankruptcy Court 652
Chapter Overview 653
Business Failure 653
Voluntary Settlements with Creditors outside of Bankruptcy 655
Reorganization and Liquidation in Bankruptcy 658
Analyzing Strategic Options for Failing Firms 671
Predicting Corporate Default and Bankruptcy 675
Empirical Studies of Financial Distress 677
Things to Remember 678
Chapter Discussion Questions 679
Chapter Business Cases 680
Case Study 16-7. The Enron Shuffle-A Scandal to Remember 680
Case Study 16-8. Delta Airlines Rises from the Ashes 683
Chapter 17: Cross-Border Mergers and Acquisitions: Analysis and Valuation 686
Inside M&A: Arcelor Outbids ThyssenKrupp for Canada's Dofasco Steelmaking Operations 686
Chapter Overview 687
Distinguishing between Developed and Emerging Economies 687
Globally Integrated versus Segmented Capital Markets 688
Motives for International Expansion 689
Common International Market Entry Strategies 692
Structuring Cross-Border Transactions 695
Financing Cross-Border Transactions 699
Planning and Implementing Cross-Border Transactions in Emerging Countries 700
Valuing Cross-Border Transactions 702
Empirical Studies of Financial Returns to International Diversification 714
Things to Remember 716
Chapter Discussion Questions 716
Chapter Business Cases 717
Case Study 17-3. Political Risk of Cross-Border Transactions-CNOOC\u2019s Aborted Attempt to Acquire Unocal 717
Case Study 17\u20134. Vodafone AirTouch Acquires Mannesmannin a Record-Setting Deal 719
References 724
Glossary 752
Index 771