24_mergers & acquisitions.ppt

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T24.1 ChapterOutline

Chapter 24Mergers and Acquisitions

Chapter Organization

24.1 The Legal Forms of Acquisitions

24.2 Taxes and Acquisitions

24. Accounting for Acquisitions

24.4 !ains from Acquisition

24." #ome Financial #ide $ffects of Acquisitions

24.% The Cost of an Acquisition

24.& 'efensi(e Tactics

24.) #ome $(idence on Acquisitions

24.* #ummar+ and Conclusions

Irwin/McGraw-Hill ,The McGraw-Hill

Com anies Inc. 2000

CLICK MOUS O! "ITS#AC$A! TO A%&A'C



Irwin/McGraw-Hill ,The McGraw-Hill Companies,

Inc. 2000

T24.2 "o( to Ma)e a Merger *or)

Are there an+ rules of thum- for merger success Consider thefollo/ing.

1. 'on0t rush the /edding do +our home/or carefull+ to pre(entmorningafter surprises.

2. 3no/ /hat +ou0re -u+ing not ust the financials5 -ut thecorporate culture.

. Adopt each partner0s -est practices don0t assume the -iggercompan+ or the acquirer has all the ans/ers.

4. 6e honest /ith emplo+ees a-out ho/ a merger /ill affect them start earl+ and communicate honestl+ /ith them.

". Tae the time to do internal recruiting mae sure the managers+ou /ant to eep don0t go /andering off to a competitor.

Adapted +ro, -"o( to Ma)e a Merger *or)/ 0ortune ,againe/ anuar3 24/ 14.




Inc. 2000

T24.5 The Mechanics o+ Mergers 6 Acquisitions

7. 8erger

Advantages

#implicit+ 9-u+er assumes all assets and lia-ilities:

;o minorit+ interests

Tax status not affected -+ choice of securities issued

Disadvantages

All lia-ilities assumed 9including potential litigation:

T/o thirds of shareholders 9most states: of -othfirms must appro(e

'issenting shareholders can sue to recei(e their<fair= (alue




Inc. 2000

T24.5 The Mechanics o+ Mergers 6 Acquisitions 7concluded8

77. Acquisition of Assets

Advantages6u+er acquires assets /ith no minorit+ shareholders

Onl+ ">? of seller0s shareholders need appro(e

Disadvantages

Courts ma+ determine that exchange is effecti(el+

a merger 7ndi(idual transfer of assets ma+ -e costl+ in legal fees

777. Acquisition of #toc 9Tender Offer:

Advantage

;o shareholder 9or e(en management: appro(al necessar+ Disadvantage

7ntegration difficult /ithout 1>>? of shares




Inc. 2000

T24.4 A 'ote on Ta)eo9ers

Acquisition

@rox+ contest

!oing pri(ate

Merger or consolidation

Acquisition o+ stoc)

Acquisition o+ assetsTa)eo9ers




Inc. 2000

Firm A

oring capital B 4 $quit+ B2>

Fixed assets 1%

Total B2> B2>

T24.: Accounting +or Acquisitions; #ooling 7Ta<le 24.18

FirmB

Working capital $ 2 Equity $10

Fixed assets 8

Total $10 $10

Firm

AB

Working capital $ !e"t $18

Fixed assets #0 Equity 20

ood%ill 2

Total $#8 $#8

The ,ar)et 9alue o+ the +i=ed assets o+ 0ir, $ is >14 ,illion. 0ir, A pa3s >1?,illion +or 0ir, $ <3 issuing de<t.




Inc. 2000

Firm A

oring capital B 4 $quit+ B2>

Fixed assets 1%

Total B2> B2>

T24.: Accounting +or Acquisitions; #urchase 7Ta<le 24.28

FirmB

Working capital $ 2 Equity $10

Fixed assets 8

Total $10 $10

Firm

AB

Working capital $ Equity $#0

Fixed assets 2&

Total $#0 $#0




Inc. 2000

T24.@ !easons +or Mergers 6 Acquisitions

7. 7ncremental Cash Flo/s

∆ De(enue E ∆Cost E ∆Tax E ∆Capital requirements

A. 7ncreased re(enues

1. 7ncreased maret po/er E monopol+

2. !ains from -etter mareting efforts

. #trategic -enefits<-eachhead= into ne/marets

6. 'ecreased costs

1. $conomies of scale

2. $conomies of (ertical integration

. Complementar+ resources4. $limination of inefficiencies




Inc. 2000

T24.@ !easons +or Mergers 6 Acquisitions 7continued8

7. 7ncremental Cash Flo/s

∆ De(enue E ∆Cost E ∆Tax E ∆Capital requirements

C. Taxes

1. Transfer of net operating losses

2. Gnused de-t capacit+

. <Free cash flo/=rein(estment of surplus funds as analternati(e to pa+ing di(idends or repurchasing stoc

'. Deduced in(estment needs




Inc. 2000

T24. Acquisitions and #S Bro(th

@izza #hac and Checers @izza are merging to form #top 0;!o @izza. The merger isn0t expected to create an+ additional(alue. #top 0; !o5 (alued at B15)&"5>>>5 is to ha(e 12"5>>>shares outstanding at B1" per share

6efore and after merger financial positions

1>>5>>> #top 0; !o shares to #hac holders

2"5>>> #top 0; !o shares to Checers holders




Inc. 2000

T24. Acquisitions and #S Bro(th 7concluded8

#top@izza Checers 0;#hac @izza !o

$arnings per share B 1."> B 1."> B 1.)>

@rice per share 1".>> &."> 1".>>@I$ ratio 1> " ).

;um-er of shares 1>>5>>> ">5>>> 12"5>>>

Total earnings B1">5>>> B&"5>>> B22"5>>>

Total (alue B15">>5>>> B &"5>>> B15)&"5>>>




Inc. 2000

T24.? Mediu, o+ =change in Acquisitions

The net incremental gain from a merger of firms A and 6 isJ

∆ H H A6

9H A

K H6:

The total (alue of Firm 6 to Firm A isJ H6 H6 K ∆ H

The ;@H of the merger isJ ;@H H6 Cost to Firm A of the acquisition

The cost of the acquisition to Firm A depends on the medium of exchangeused to acquire Firm 6J cash or stoc.

hether cash or stoc is used to finance the acquisition depends on thefollo/ing factorsJ

Sharing gains. 7f cash is used5 the selling firm0s shareholders /ill notparticipate in the potential gains 9or losses: from the merger.

Taxes. Cash acquisitions are generall+ taxa-leM stoc acquisitions generall+are not.

Control . Control of the acquiring firm is unaffected in a cash acquisition. Acquisition /ith (oting shares ma+ ha(e implications for control of the mergedfirm.




Inc. 2000

T24. %e+ensi9e Tactics

8anagers /ho -elie(e their firms are liel+ to -ecome taeo(er targetsand /ho /ish to fend off un/anted acquirers often implement one ormore takeover defenses. These defensive tactics tae se(eral formsJ

The Corporate Charter

Establishes conditions that allow for a takeover. Can be amended tomake acquisitions more difficult.

Depurchase and #tandstill Agreements

Targeted repurchases !greenmail"#$ purchase of stock from singlebidder at a premium.

%idders agree to limit holdings of target via standstill agreements.




Inc. 2000

T24. %e+ensi9e Tactics 7concluded8

!oing @ri(ate and Le(eraged 6u+outs 9L6Os:

&n a going private transaction' the publicl( owned stock in a firm isreplaced with complete equit( ownership b( a private group.

&n a leveraged bu(out' debt is used to acquire most or all of the publicl(traded shares in taking the firm private.

$xclusionar+ #elfTenders

The opposite of a targeted repurchase$firm makes a tender offer for agiven amount of its own stock while excluding targeted stockholders.

@oison @ills and #hare Dights @lans 9#D@s:

)oison pill$a financial device designed to make unfriendl( takeoverattempts unappealing' if not impossible.

Share rights plan$provisions allowing existing stockholder to purchasestock at some fixed price should an outside takeover bid come up'discouraging hostile takeover attempts.




Inc. 2000

T24.1 Adoption o+ a Share !ights #lan 7S!#8 70igure 24.18

Dear Stockholder*

7n the current corporate taeo(er en(ironment5 Contel is concerned a-out certaina-usi(e techniques that are sometimes emplo+ed during taeo(er attempts. The useof such tactics is increasing and often threatens the in(estment position of acompan+0s stocholders. 7n response to the increasing use of these a-usi(e tactics5+our 6oard of 'irectors has adopted a share rights plan designed to ensure thatstocholders are treated fairl+ -+ an+one /ho might see to o-tain control of thecompan+. The plan consists of a preferred stoc rights agreement and a di(idend

distri-ution of one preferred stoc purchase right on each outstanding share ofContel common stoc.

The share rights plan /as not adopted -ecause of an+ current effort -+ another part+to acquire the compan+. 7n fact5 /e are not a/are of an+ such effort. Dather5 it is aprecautionar+ step that /ill increase the 6oard0s a-ilit+ to represent effecti(el+ theinterests of the compan+0s stocholders in the e(ent of an unsolicited taeo(erattempt. hile the share rights plan /ill not pre(ent a taeo(er5 it should encouragean+one seeing to acquire Contel to negotiate first /ith the 6oard of 'irectors. 7n

adopting the share rights plan5 the 6oard also considered the fact that more than %">pu-lic companies5 including man+ maor independent telephone companies5 ha(eadopted share rights plan.

9continued:




Inc. 2000

T24.1 Adoption o+ a Share !ights #lan 70igure 24.18 7continued8

Gnder the share rights plan5 +ou /ill recei(e one right for each share of Contelcommon stoc +ou o/n. $ach right /ill entitle +ou to -u+ one onehundredth of a

share of a ne/ series of preferred stoc at an exercise price of B12>. The rights canonl+ -e exercised if a person or group acquires 2> percent or more of Contel commonstoc or announces a tender offer for > percent or more of Contel common stoc.

7f certain triggering e(ents occur5 each right /ould entitle +ou to recei(e Contelcommon stoc or5 in certain circumstances5 cash5 propert+ or other Contel securities/ith a (alue equal to t/ice the exercise price. Triggering e(ents include the acquisition-+ a person or group of 2> percent or more of Contel common stoc5 or a merger /itha compan+ that o/ns 2> percent or more of Contel common stoc in /hich Contel is

the sur(i(ing compan+.

7f Contel /ere acquired in certain other mergers or -usiness com-inations5 or if ">percent of the compan+0s assets or earning po/er is sold or transferred5 each right/ould entitle +ou to recei(e common stoc in the acquiring compan+ /ith a (alueequal to t/ice the exercise price. Contel can redeem the rights for 1 cent each at an+time prior to 1> da+s follo/ing the date that a person or group acquires 2> percent ormore of Contel common stoc. The details of the rights plan are explained in the

attachment to this letter. e urge +ou to read it carefull+.

9continued:




Inc. 2000

T24.1 Adoption o+ a Share !ights #lan 70igure 24.18 7concluded8

The di(idend distri-ution is pa+a-le to stocholders of record on 'ecem-er &5 1*))5and one right /ill attach to each ne/ share of common stoc issued after the record

date and prior to the time someone acquires 2> percent or more of Contel commonstoc or announces a tender offer for > percent or more of Contel common stoc. Therights /ill -ecome part of +our existing stoc certificate and no separate rightscertificates /ill -e issued at this time.

#incerel+5

Charles ohlstetter Chairman

'onald . e-er @resident and Chief $xecuti(e Officer




Inc. 2000

#ummar+ of $mpirical Findings

LongTerm 6efore Around Announcement Announcement

Acquiring firms @ositi(e #mall positi(e tosmall negati(e

Acquired firms ;egati(e Large positi(e

Also' the aggregate gain to the shareholders of the acquiring firmand to the acquired firm /as positive.

T2&'11 E(idence on Acquisitions) *tock +rice ,-anges in

Takeo(ers

24_mergers & acquisitions.ppt

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