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Mergers, Acquisitions and LBOs Sris Chatterjee

Mergers, Acquisitions and LBOs Sris Chatterjee. Naming the Post-Merger Entity. Retain the acquiror’s name Retain both names Adopt a new name Retain the target’s name. Large M&A Transactions from Recent Years. Source: Mergers & Acquisitions Journal. Year Acquirer/Target Price ($ bn)

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Mergers, Acquisitions and LBOs Sris Chatterjee

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  1. Mergers, Acquisitions and LBOsSris Chatterjee

  2. Naming the Post-Merger Entity • Retain the acquiror’s name • Retain both names • Adopt a new name • Retain the target’s name

  3. Large M&A Transactions from Recent Years Source: Mergers & Acquisitions Journal Year Acquirer/Target Price ($ bn) • 1996 Disney/Capital Cities ABC 18.36 Worldcom/MFS 13.36 Chase/Chemical 9.88 Gillette/Duracell 7.23 • 1997 Bell Atlantic/NYNEX 21.35 SBC/Pacific Telesis 16.49 Boeing/McDonnell Douglas 13.36 CUC/HFS 11.34 Dean Witter/Morgan Stanley 10.57

  4. Recent Large M&As Year Acquirer/Target Price ($ bn) • 1998 Traveler/Citicorp 72.6 NationsBank/BankAmerica 61.6 BP/Amoco 48.2 Worldcom/MCI 41.9 Daimler/Chrysler 40.5 Compaq/Digital 9.1 • 1999 Exxon/Mobil 78.9 SBC/Ameritech 62.6 AT&T/TCI 53.6 Lucent/Ascend 21.4 Allied Signal/Honeywell 15.6

  5. Recent Large M&As Year Acquirer/Target Price ($ bn) • 2000 Vodafone/Mannesmann 202.8 Pfizer/Warner Lambert 89.2 Bell Atlantic/GTE 53.4 AT&T/Media One 49.3 Viacom/CBS 39.4 Chase/JPMorgan 33.6 BPAmoco/ARCO 27.2 Monsanto/Pharmacia 26.5 UBS/PaineWebber 16.5 CSFB/DLJ 13.5

  6. Recent Large M&As Year Acquirer/Target Price ($ bn) • 2001 AOL/Time Warner 164.7 Chevron/Texaco 42.9 JDS Uniphase/SDL Inc 41.1 Deutsche Telekom/VoiceStream 29.4 Pepsico/Quaker Oats 14.4 First Union/Wachovia 13.1 Dow Chemical/Union Carbide 11.7 Nestle/Ralston Purina 10.5

  7. Recent Large M&As Year Acquirer/Target Price ($ bn) • 2002 HP/Compaq 25.3 Amgen/Immunex16.9 Philips Petroleum/Conoco 15.3 Northrop Grumman/TRW 6.7 Washington Mutual/Dime 5.2 Anthem/Trigon 4.0

  8. Recent Large M&As Year Acquirer/Target Price ($ bn) • 2003 Pfizer/Pharmacia 59.5 IDEC Pharmaceuticals/Biogen 6.8 Univision/Hispanic Broadcasting 3.5 J&J/Scios Inc 2.3 IBM/Rational Software 2.1 GE/Instrumentarium 1.9

  9. Most Active Industries in 2000 • Industry Value ($ bn) % of Total M&A • Telecommunications 235.4 13.5 • Radio & TV Stations 173.2 9.9 • Business Services 170.9 9.8 • Electric, Gas & Water Utilities 132.0 7.6 • Drugs 110.9 6.3 • Investment & Commodity Firms 93.0 5.3 • Computer Software 92.5 5.3 • Oil & Gas 79.7 4.5

  10. Most Active Industries in 2001 • Industry Value ($ bn) % of Total M&A • Motion Pictures 188.5 16.5 • Oil & Gas 115.7 10.1 • Commercial Banks 80.7 7.1 • Telecommunications 79.8 7.0 • Electronics & Electrical Equipment 65.2 5.7 • Food 63.0 5.5 • Electric, Gas & Water Utilities 55.9 4.9 • Insurance 51.9 4.5

  11. Most Active Industries in 2002 • Industry Value ($ bn) % of Total M&A • Radio & TV Stations 96.2 15.7 • Oil & Gas 58.8 9.6 • Electric, Gas and Water Utilities 47.0 7.7 • Business Services 41.5 6.8 • Computer and Office Equipment 28.9 4.7 • Real Estate 27.6 4.5 • Drugs 26.1 4.3 • Investment and Commodity Firms 25.5 4.2

  12. Most Active Industries in 2003 • Industry Value ($ bn) % of Total M&A • Investment and Commodity Firms 27.7 5.5 • Business Services 27.1 5.4 • Credit Institutions 26.0 5.2 • Food 23.5 4.7 • Utilities 22.9 4.6 • Real Estate 22.3 4.4 • Oil & Gas 21.4 4.3 • Radio & TV Stations 21.2 4.2 • Commercial Banks 18.2 3.6

  13. Sector Breakdown of M&A in 2001 Category No. of Deals % Value ($ bn) % _____________________________________________ Non-Financial Services 2482 39.9 326.1 28.5 Industrial 1912 30.7 409.1 35.8 Financial Services 939 15.1 225.4 19.7

  14. Sector Breakdown of M&A in 2002 Category No. of Deals % Value ($ bn) % _____________________________________________ Non-Financial Services 2118 38.6 177.0 28.9 Industrial 1770 32.3 250.6 40.9 Financial Services 843 15.4 96.0 15.7

  15. Macro-Economic Reasons Behind Takeover Activity • Deregulation • Global Competition & Markets • Financial Innovations and Financial Markets • Changes in Technology and Industry Conditions

  16. Micro-Economic or Firm-Level Rationale For Takeovers • Economy of Scale/Critical Mass • Gaining Strategic Advantage in Entering a New Market • Benefits of an Internal Capital Market • Cost and Competitive Advantage of Vertical Integration • Management Entrenchment

  17. Indicators of M&A Dynamics • Overall Takeover Volume (in dollars and number of deals) • Friendly Mergers vs Hostile Takeovers • Proportion of Tender Offers • Form of Payment : Cash, Bonds/Notes, Stocks, Options/Warrants and other Contingent Payments such as Earnouts) • Average Premium • Antitrust and other Legal Issues

  18. FTC’s Classification for Mergers • Horizontal Mergers • Vertical Mergers • Conglomerate Mergers • Product Extension Mergers • Market Extension Mergers • Pure Coglomerates

  19. Q: How can one public company get control of another public company ? Ans: Essentially, in one of three ways: 1. By completing a statutory merger 2. By making a tender offer for the voting common stock of the target 3. By purchasing the assets of the target company

  20. Statutory Mergers • A merger (or statutory merger) is the product of state law. • In a merger of two companies, one corporation is the surviving corporation. The other company is dissolved. The common stock of the non-surviving company is exchanged for cash or the shares of the surviving corporation. • A merger requires the approval of the shareholders of both pre-merger companies. State laws require a simple majority or 2/3 majority. • Advantages of a merger include standard documentation, minority freeze-out (although dissenting shareholders have appraisal rights) and (before 2001) availability of Pooling method of accounting.

  21. Statutory Mergers • The common forms of mergers are : • Direct statutory merger • Forward triangular merger • Reverse triangular merger

  22. Features of Friendly Mergers • White Knight • Merger of Equals • Lock-up Options • Termination Fees

  23. Features of Hostile Takeovers • Bear Hug Letter • Tender Offer • Proxy Contest • Greenmail and Standstill Agreement

  24. Assumption of Liabilities • In a merger, the acquiring company assumes all the liability of the target. One advantage of the asset purchase mode of acquiring control is that both assets and liabilities can be chosen selectively. • WSJ or similar newspapers will sometimes explicitly say that the acquiring company has completed a takeover with the assumption of all the liabilities. This may actually imply that the debtholders were paid a premium at the expense of the stockholders. The following example is typical of such payments: • In General Cinema’s 1991 acquisition of Harcourt Brace Jovanovich, GC’s initial offer was unsuccessful because bondholders refused to waive a covenant that allowed the bondholders to receive 102% of the face value in the event of a successful takeover. GC eventually made a large payment to the bondholders and simultaneously reduced the payment to stockholders.

  25. Traditional Accounting Issues • Pooling of Interest Method • Not Allowed in USA after June 2001 • Purchase Accounting • Goodwill Amortization/Impairment

  26. Important Documents and Legal Steps in a Takeover • Antitrust Issues : Hart-Scott-Rodino (HSR) filing • Securities Law : Williams Act, 13D and 14D filing • Insider Trading Laws • SEC Requirements, such as Proxy Statement • State Laws regarding Corporate Governance Issues • Takeover Defenses, including Charter Provisions • No-Shopping clause/Standstill Agreement/Confidentiality Agreement/Termination Fee • Due Diligence (Financial, Legal, Tax, etc) • Fairness Opinions • Merger Agreement

  27. Corporate Governance Issues • Poison Pills • Blank Check Preferred Stock • Stakeholder Clause • Classified/Staggered Board • Fair Price Charter Amendement • Supermajority Voting Requirement • Unequal (Dual Class) Voting Rights • Shareholder Meeting Requirements (including Right to Act by Written Consent)

  28. Some Stylized Research Findings • Although many divestitures are the result of previous acquisitions and although the takeover curve seems to lead the divestiture curve, the two trends are remarkably positively correlated • Historical data on M&A show that takeovers seem to be bunched together over time (probably coinciding with business cycles), thus creating the concept of takeover waves • The main beneficiaries of takeovers are the shareholders of the target company. Event study results confirm that announcement period abnormal return for target shareholders is significantly positive for all types of acquisitions, and the same for acquiring shareholders is zero or negative. Target shareholders have higher returns in a hostile offer and also if there are multiple bidders. • Acquiring shareholders have negative long-term returns in stock-payment mergers but have long-term positive returns in tender offers and cash-payment acquisitions.

  29. From the Finance Specialist’s Corner • Valuation DCF models Value Multiples such as Enterprise Value/EBITDA • Mode of Payment Cash/Notes/Stock/Warrants/Earnouts/CVRs • Risk Arbitrage • Event Study/Abnormal Returns

  30. Financial Aspects of the Deal • Collars • Earnouts • Contingent Value Rights (CVR) • Lock-up Options • Break-up/Termination Fee

  31. The Challenge

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