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Mergers, Acquisitions, andOther RestructuringActivitiesAn Integrated Approachto Process, Tools, Cases,and SolutionsFifth EditionDonald M. DePamphilis, Ph.D.College of Business AdministrationLoyola Marymount UniversityLos Angeles, CaliforniaAMSTERDAM BOSTON HEIDELBERG LONDONNEW YORK OXFORD PARIS SAN DIEGOSAN FRANCISCO SINGAPORE SYDNEY TOKYOr*J \\ *.V I P.KAcademic Press is an imprint of Elsevier

ContentsPreface to the Fifth EditionAcknowledgmentsAbout the AuthorxxixxxxiiixxxvPart I. The Mergers and Acquisitions Environment1.Introduction to Mergers and Acquisitions (M&As)Inside M&A: Mars Buys Wrigley in One Sweet Deal3Chapter Overview4Mergers and Acquisitions as Change Agents5Common Motivations for Mergers and Acquisitions6Merger and Acquisition Waves13Alternative Forms of Corporate Restructuring18Friendly versus Hostile Takeovers21The Role of Holding Companies in Mergers and Acquisitions22The Role of Employee Stock Ownership Plans in Mergersand Acquisitions22Business Alliances as Alternatives to Mergers and Acquisitions23Participants in the Mergers and Acquisitions Process24Do Mergers and Acquisitions Pay Off for Shareholders?30Do Mergers and Acquisitions Pay Off for Bondholders?38Do Mergers and Acquisitions Pay Off for Society?38Commonly Cited Reasons Why Some Mergers and AcquisitionsFail to Meet Expectations39Long-Term Performance Similar for Mergers and Acquisitions,Business Alliances, and Solo Ventures39Things to Remember40Chapter Discussion Questions41

x CONTENTSChapter Business Cases2.43Procter & Gamble Acquires Competitor43The Free Market Process of Creative Destruction:Consolidation in the Telecommunications Industry44Regulatory ConsiderationsInside M&A: Justice Department Approves Maytag/WhirlpoolCombination Despite Resulting Increase in Concentration47Chapter Overview47Federal Securities Laws48Antitrust Laws56State Regulations Affecting Mergers and Acquisitions67National Security-Related Restrictions on Direct ForeignInvestment in the United StatesForeign Corrupt Practices Act70Regulated Industries70Environmental Laws75Labor and Benefit Laws75Cross-Border Transactions76Things to Remember77Chapter Discussion Questions77Chapter Business Cases79Global Financial Exchanges Pose Regulatory Challenges3.6979GE's Aborted Attempt to Merge with HoneywellThe Corporate Takeover Market: Common TakeoverTactics, Antitakeover Defenses, and CorporateGovernance80Inside M&A: InBev Buys an American Icon for 52 Billion85Chapter Overview86Factors Affecting Corporate Governance87Alternative Takeover Tactics in the Corporate Takeover Market95Developing a Bidding or Takeover Strategy Decision Tree102Alternative Takeover Defenses in the CorporateTakeover Market103Things to Remember118

CONTENTS xiChapter Discussion Questions119Chapter Business Cases120Mittal Acquires Arcelor—A Battle of Global Titansin the European Market for Corporate Control120Verizon Acquires MCI—The Anatomy of AlternativeBidding Strategies123Part II. The Mergers and Acquisitions Process: Phases 1-104.Planning: Developing Business and AcquisitionPlans—Phases 1 and 2 of the Acquisition ProcessInside M&A: Nokia Moves to Establish Industry Standards131Chapter Overview132A Planning-Based Approach to Mergers and Acquisitions133Phase 1. Building the Business Plan135The Business Plan as a Communication Document152Phase 2. Building the Merger-AcquisitionImplementation PlanThings to Remember158Chapter Discussion Questions160Chapter Business Cases161BofA Acquires Countrywide Financial CorporationOracle Continues Its Efforts to Consolidate theSoftware IndustryAppendix: Common Sources of Economic, Industry,and Market Data5.153161162163Implementation: Search through Closing—Phases 3-10Inside M&A: Bank of America Acquires Merrill Lynch165Chapter Overview166Phase 3. The Search Process167Phase 4. The Screening Process170Phase 5. First Contact172Phase 6. Negotiation175Phase 7. Developing the Integration Plan186Phase 8. Closing187

xii CONTENTSPhase 9. Implementing Postclosing Integration191Phase 10. Conducting Postclosing Evaluation193Things to Remember194Chapter Discussion Questions195Chapter Business Cases196The Anatomy of a Transaction: K2 IncorporatedAcquires Fotoball USA196Cingular Acquires AT&T Wireless in a Record-SettingCash Transaction202Appendix: Legal Due Diligence PreliminaryInformation Request6.203Integration Mergers, Acquisitions, andBusiness AlliancesInside M&A: GE's Water Business Fails to Meet ExpectationsChapter Overview205206The Role of Integration in Successful Mergersand Acquisitions207Viewing Integration as a Process208Integrating Business Alliances231Things to Remember232Chapter Discussion Questions233Chapter Business Cases234The Challenges of Integrating Steel GiantsArcelor and Mittal234Alcatel Merges with Lucent Highlighting Cross-CulturalIssues236Part III. Merger and Acquisition Valuation and Modeling7.A Primer on Merger and Acquisition Cash-FlowValuationInside M&A: The Importance of Distinguishing betweenOperating and Nonoperating Assets241Chapter Overview241

CONTENTS xiiiRequired Returns242Analyzing Risk246Calculating Free Cash Flows (D/E)250Applying Income or Discounted Cash-Flow Methods253Valuing Firms under Special Situations262Valuing a Firm's Debt and Other Obligations263Valuing Nonoperating Assets267Adjusting the Target Firm's Equity Value for NonoperatingAssets, Debt, and Other Obligations8.271Things to Remember273Chapter Discussion Questions273Chapter Practice Problems and Answers274Chapter Business Cases277Creating a Global Luxury Hotel Chain277The Hunt for Elusive Synergy— Home Acquires Excite278Applying Relative, Asset-Oriented, and Real-OptionValuation Methods to Mergers and AcquisitionsInside M&A: A Real Options' Perspective onMicrosoft's Takeover Attempt of Yahoo281Chapter Overview282Applying Relative-Valuation (Market-Based) Methods284Applying Asset-Oriented Methods294Replacement-Cost Method298Valuing the Firm Using the Weighted-Aver age (Expected-Value)Method298Analyzing Mergers and Acquisitions in Terms ofReal Options299Determining When to Use the Different Approachesto Valuation312Things to Remember313Chapter Discussion Questions313Chapter Practice Problems and Answers314Chapter Business Cases317

xiv CONTENTS9.Google Buys YouTube—Brilliant or Misguided?317Merrill Lynch and BlackRock Agree to Swap Assets319Applying Financial Modeling Techniques to Value,Structure, and Negotiate Mergers and AcquisitionsInside M&A: HP Buys EDS—The Role of FinancialModels in Decision Making321Chapter Overview321Limitations of Financial Data323Model-Building Process325Adjusting the Target's Offer Price for the Effects ofOptions and Convertible Securities338Factors Affecting Postmerger Share Price338Key M&A Model Formulas342M&A Model Balance-Sheet Adjustment Mechanisms344Applying Offer Price-Simulation Models in theContext of M&A Negotiations345Alternative Applications of M&A Financial Models346Things to Remember349Chapter Discussion Questions349Chapter Practice Problems and Answers350Chapter Business Cases351Cleveland Cliffs Fails to Complete Takeover of AlphaNatural Resources in a Commodity PlayDetermining the Initial Offer Price: Alanco TechnologiesInc. Acquires StarTrak Systems353Appendix: Utilizing the M&A Model on CD-ROMAccompanying This Book36635110. Analysis and Valuation of Privately Held CompaniesInside M&A: Cashing Out of a Privately Owned Enterprise369Chapter Overview370Demographics of Privately Owned Businesses371Challenges of Valuing Privately Held Companies374Process for Valuing Privately Held Businesses376

CONTENTS xvStep 1. Adjusting the Income Statement377Step 2. Applying Valuation Methodologies toPrivate CompaniesStep 3. Developing Discount (Capitalization) Rates383385Step 4. Applying Liquidity Discounts, Control Premiums,and Minority DiscountsReverse Mergers389401Using Leveraged Employee Stock Ownership Plans to BuyPrivate Companies403Empirical Studies of Shareholder Returns403Things to Remember404Chapter Discussion Questions405Chapter Practice Problems and Answers406Chapter Business Cases407Panda Ethanol Goes Public in a Shell CorporationCantel Medical Acquires Crosstex InternationalPart IV. Deal Structuring and Financing Strategies40740911. Structuring the Deal: Payment and Legal ConsiderationsInside M&A: News Corp's Power Play in SatelliteBroadcasting Seems to Confuse Investors413Chapter Overview414The Deal-Structuring Process414Form of Acquisition Vehicle419Postclosing Organization419Legal Form of the Selling Entity420Form of Payment or Total Consideration421Managing Risk and Closing the Gap on Price424Using Collar Arrangements (Fixed and Variable)to Preserve Shareholder Value430Form of Acquisition434Things to Remember446

xvi CONTENTSChapter Discussion Questions446Chapter Business Cases447Vivendi Universal Entertainment and GE CombineEntertainment Assets to Form NBC Universal447Using Form of Payment as a Takeover Strategy:Chevron's Acquisition of Unocal44812. Structuring the Deal: Tax and AccountingConsiderationsLInside M&A: Teva Pharmaceuticals Acquires Ivax Corp453Chapter Overview453General Tax Considerations454Taxable Transactions455Tax-Free Transactions458Other Tax Considerations Affecting CorporateRestructuring Activities466Financial Reporting of Business Combinations470Impact of Purchase Accounting on Financial Statements474International Accounting Standards479Recapitalization Accounting479Things to Remember480Chapter Discussion Questions480Chapter Practice Problems and Answers481Chapter Business Cases482Boston Scientific Overcomes Johnson & Johnson toAcquire Guidant—A Lesson in Bidding Strategy482"Grave Dancer" Takes Tribune Corporation Privatein an Ill-Fated Transaction48513. Financing Transactions: Private Equity, Hedge Funds,and Leveraged Buyout Structures and ValuationInside M&A: HCA's LBO Represents a High-RiskBet on Growth489Chapter Overview490Characterizing Leveraged Buyouts491When Do Firms Go Private?498

CONTENTS xviiFinancing Transactions499Common Forms of Leveraged Buyout Deal Structures506What Factors Are Critical to Successful LBOs?510Prebuyout and Postbuyout Shareholder Returns512Valuing Leveraged Buyouts516Building an LBO Model524Things to Remember529Chapter Discussion Questions529Chapter Practice Problems530Chapter Business Cases532Cerberus Capital Management AcquiresChrysler Corporation532Pacific Investors Acquires California Kool in aLeveraged Buyout533Part V. Alternative Business and Restructuring Strategies14. Joint Ventures, Partnerships, Strategic Alliances,and LicensingInside M&A: Garmin Utilizes Supply Agreement asAlternative to Acquiring Tele Atlas545Chapter Overview546Motivations for Business Alliances547Critical Success Factors for Business Alliances552Alternative Legal Forms of Business Alliances554Strategic and Operational Plans560Resolving Business Alliance Deal-Structuring Issues561Empirical Findings572Things to Remember573Chapter Discussion Questions574Chapter Business Cases575SABMiller in Joint Venture with Molson Coors575Coca-Cola and Procter & Gamble's Aborted Effort toCreate a Global Joint Venture Company576

xviii CONTENTS15. Alternative Exit and Restructuring Strategies:Divestitures, Spin-Offs, Carve-Outs, Split-Ups,and Split-OffsInside M&A: Financial Services Firms Streamlinetheir Operations579Chapter Overview580Commonly Stated Motives for Exiting Businesses581Divestitures584Spin-Offs and Split-Ups587Equity Carve-Outs590Split-Offs592Voluntary Liquidations (Bust-Ups)595Tracking, Targeted, and Letter Stocks595Comparing Alternative Exit and Restructuring Strategies597Choosing among Divestiture, Carve-Out, and Spin-OffRestructuring Strategies598Determinants of Returns to Shareholders Resulting fromRestructuring Strategies600Things to Remember606Chapter Discussion Questions607Chapter Business Cases608Hughes Corporation's Dramatic Transformation608AT&T (1984-2005)—A Poster Child for RestructuringGone Awry60916. Alternative Exit and Restructuring Strategies:Reorganization and LiquidationInside M&A: Calpine Emerges from the Protectionof Bankruptcy Court615Chapter Overview616Business Failure616Voluntary Settlements with Creditors outside of Bankruptcy618Reorganization and Liquidation in Bankruptcy621Analyzing Strategic Options for Failing Firms634Predicting Corporate Default and Bankruptcy638

CONTENTS xixEmpirical Studies of Financial Distress640Things to Remember641Chapter Discussion Questions642Chapter Business Cases643The Enron Shuffle—A Scandal to Remember643Delta Airlines Rises from the Ashes64617. Cross-Border Mergers and Acquisitions: Analysisand ValuationInside M&A: Arcelor Outbids ThyssenKrupp for Canada'sDofasco Steelmaking Operations649Chapter Overview650Distinguishing between Developed and Emerging Economies650Globally Integrated versus Segmented Capital Markets651Motives for International Expansion652Common International Market Entry Strategies655Structuring Cross-Border Transactions658Financing Cross-Border Transactions662Planning and Implementing Cross-Border Transactions inEmerging CountriesValuing Cross-Border Transactions663665Empirical Studies of Financial Returns to InternationalDiversification677Things to Remember679Chapter Discussion Questions679Chapter Business Cases680Political Risk of Cross-Border Transactions—CNOOC'sAborted Attempt to Acquire UnocalVodafone AirTouch Acquires Mannesmann in aRecord-Setting DealReferencesGlossaryIndex680682687715735

Inside M&A: Mars Buys Wrigley in One Sweet Deal 3 Chapter Overview 4 Mergers and Acquisitions as Change Agents 5 Common Motivations for Mergers and Acquisitions 6 Merger and Acquisition Waves 13 Alternative Forms of Corporate Restructuring 18 Friendly versus Hostile Takeovers 21 The Role of Holding Companies in Mergers and Acquisitions 22

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