Mergers, Acquisitions, and Other Restructuring Activities : An Integrated Approach to Process, Tools, Cases, and Solutions

Mergers, Acquisitions, and Other Restructuring Activities: An Integrated Approach to Process, Tools, Cases, and Solutions, Tenth Edition, is the most comprehensive and cutting-edge text available on the subject. Supported by recent peer-reviewed academic research, this book provides many recent, notable deals, precedent-setting judicial decisions, government policies and regulations, and trends affecting M&As, as well as takeover strategies and tactics. Today's policies, politics and economics are reflected in the book's 40 case studies, 90% of which involve deals either announced or completed during the last several years. These cases represent friendly, hostile, highly leveraged, and cross-border transactions in ten different industries, involving public and private firms and those experiencing financial distress. Sections discuss an overview of M&As, key regulations, common strategies and tactics, how managers may choose a business strategy from available options, valuation methods and basic financial modeling techniques, the negotiating process, how deal structuring and financing are inextricably linked, how consensus is reached during the bargaining process, the role of financial models in closing the deal and strategic growth options as alternatives to domestic M&As. Provides a rigorous discussion of the strengths and limitations of financial modeling as applied to M&A and how these models can be applied in various areas Includes new academic research and updated/revised case studies Presents updated M&A tactics and strategies, along with court cases and new regulations governing business combinations, valuation methodologies and financing Cover Praise for various editions MERGERS, ACQUISITIONS, AND OTHER RESTRUCTURING ACTIVITIES An Integrated Approach to Process, Tools, Cases, and Solutions Copyright Dedication About the Author Preface to the Tenth Edition To The Reader M&A Environment M&A Process M&A Valuation and Modeling Deal Structuring and Financing Strategies Alternative Business and Restructuring Strategies Updated Ancillary Materials To the Instructor Acknowledgments Part I: The Mergers and Acquisitions Environment 1 An Introduction to Mergers, Acquisitions, and Other Restructuring Activities Inside Mergers and Acquisitions: Centurylink Acquires Level 3 in a Search for Scale Chapter Overview Why Do M&As Happen? Synergy Operating Synergy Financial Synergy Diversification Strategic Realignment Hubris and the “Winner’s Curse” Buying Undervalued Assets: The Q-Ratio Managerialism (Agency Problems) Tax Considerations Market Power Misvaluation Merger and Acquisition Waves Why M&A Waves Occur? Domestic Merger Waves Cross-Border Merger Waves Understanding Corporate Restructuring Activities Mergers and Consolidations A Legal Perspective An Economic Perspective Acquisitions, Divestitures, Spin-Offs, Split-Offs, Carve-Outs, and Leveraged Buyouts Alternative Takeover Strategies The Role of Holding Companies in Mergers and Acquisitions The Role of Employee Stock Ownership Plans (ESOPs) in M&As Business Alliances as Alternatives to M&As Participants in the Mergers and Acquisitions Process Providers of Specialized Services Investment Banks Lawyers Accountants Proxy Solicitors Public Relations Firms Regulators Institutional Investors and Lenders Insurance, Pension, and Mutual Funds Commercial Banks Hedge, Private Equity, and Venture Capital Funds Sovereign Wealth Funds Angel Investors Activist Investors Mutual Funds and Pension Funds Hedge Funds and Private Equity Firms M&A Arbitrageurs (Arbs) The Implications of M&As for Shareholders, Bondholders, and Society Premerger Returns to Shareholders Returns High for Target Shareholders Returns to Acquirer Shareholders are Positive on Average Postmerger Returns to Shareholders Acquirer Returns Vary by Characteristics of Acquirer, Target, and Deal Smaller Acquirers Tend to Realize Higher M&A Returns Acquirer Returns Often Positive for Privately Owned or Subsidiary Targets Relatively Small Deals May Generate Higher Returns Form of Payment Impacts Acquirer Returns Firm Specific Characteristics May Outweigh Deal Specific Factors Payoffs for Bondholders Payoffs for Society Corporate Socially Responsible (CSR) Investing Some Things to Remember Chapter Discussion Questions Discussion Questions 2 The Regulatory Environment Inside Mergers and Acquisitions: DowDuPont’s Regulatory Nightmare Chapter Overview Understanding Federal Securities Laws Securities Act of 1933 Securities Exchange Act of 1934 Reporting Requirements Section 13: Periodic Reports Section 14: Proxy Solicitations Insider Trading Regulations Jumpstart Our Business Startups Act (JOBS Act) SEC Enforcement Effectiveness The Williams Act: Regulation of Tender Offers Sections 13(D) and 13(G): Ownership Disclosure Requirements Section 14(D): Rules Governing the Tender Offer Process The Sarbanes-Oxley Act of 2002 Fair Disclosure Understanding Antitrust Legislation The Sherman Act The Clayton Act The Federal Trade Commission Act of 1914 The Hart-Scott-Rodino (HSR) Antitrust Improvements Act of 1976 Title I: What Must Be Filed? Title II: Who Must File and When? How Does HSR Affect State Antitrust Regulators? Procedural Rules The Consent Decree Antitrust Guidelines for Horizontal Mergers Targeted Customers and the Potential for Price Discrimination Market Definition Market Share and Concentration Unilateral Effects Coordinated Effects Ease of Entry Efficiencies Alternative to Imminent Failure Partial Acquisitions Antitrust Guidelines for Vertical Mergers Antitrust Guidelines for Collaborative Efforts Revisions to Intellectual Property Guidelines When Are Antitrust Regulators Most Likely to Intervene? Trends in Enforcement Efforts How Business Platform Strategies Complicate Antitrust Enforcement Impact of Antitrust Actions on Firm Value The Impact of Politics on Gaining Regulatory Approval M&A Implications of the Dodd-Frank Wall Street Reform and Consumer Protection Act (Including 2018 Revisions) M&A Implications of Data Protection Regulations State Regulations Affecting Mergers and Acquisitions State Antitakeover Laws State Antitrust and Securities Laws Restrictions on Direct Investment in the United States The US Foreign Corrupt Practices Act Specific Industry Regulation Banking Communications Railroads Defense Other Regulated Industries Environmental Laws Labor and Benefit Laws Cross-Border Transactions Some Things to Remember Chapter Discussion Questions Discussion Questions 3 The Corporate Takeover Market: Common Takeover Tactics, Antitakeover Defenses, and Corporate Governance Inside Mergers and Acquisitions: Auction Euphoria Can Result in Buyer’s Remorse Chapter Overview Corporate Governance Factors Internal to the Firm The Board of Directors/Management The Role of Independent Directors CEO Duality Behavioral and Demographic Characteristics of CEOs and Board Members Trends in Board Composition and CEO Duality Board Performance, Selection, and Compensation Board Diversity and Firm Performance Dealing With Activist Investors and Takeover Attempts Target Board’s Advisory Role in Takeover Bids Internal Controls and Incentive Systems Antitakeover Defenses Corporate Culture and Values Bond Covenants Factors External to the Firm Legislation and the Legal System Regulators Institutional Activists The Corporate Takeover Market Understanding Alternative Takeover Tactics Friendly Takeovers Are Most Common Hostile Takeovers Are More a Threat Than a Reality The Bear Hug: Limiting the Target’s Options Proxy Contests in Support of a Takeover or to Gain Influence Implementing a Proxy Contest The Impact of Proxy Contests on Shareholder Value The Hostile Tender Offer Pretender Offer Tactics: Toehold Bidding Strategies Implementing a Tender Offer Multitiered Offers Comparative Success Rates Other Tactical Considerations The Importance of Premium, Board Composition, and Investor Sentiment Contract Considerations Developing a Bidding Strategy Activist Investors: Gaining Influence Without Control Understanding Alternative Takeover Defenses Preoffer Defenses Poison Pills (Shareholder Rights Plans and Blank Check Preferred Stock) Shark Repellents Strengthening the Board’s Defenses Limiting Shareholder Actions Other Shark Repellents Antigreenmail Provisions Fair-Price Provisions Dual Class Recapitalization Reincorporation Golden Parachutes (Change-of-Control Payouts) Postoffer Defenses Greenmail White Knights and White Squires Employee Stock Ownership Plans Leveraged Recapitalization Share Repurchase or Buyback Plans Corporate Restructuring Litigation Most Commonly Used Takeover Defenses The Impact of Takeover Defenses on Shareholder Value Takeover Defenses and Target Firm Shareholder Financial Returns Management Entrenchment Theory Shareholder Interests Theory Leveraged Recapitalizations and Target Firm Financial Returns Takeover Defenses and Public Offerings Some Things to Remember Chapter Discussion Questions Discussion Questions Part II: The Mergers and Acquisitions Process: Phases 1–10 4 Planning: Developing Business and Acquisition Plans—Phases 1 and 2 of the Acquisition Process Inside Mergers and Acquisitions: Home Shopping Feels the Heat From Amazon Chapter Overview The Role of Planning in Mergers and Acquisitions Key Business Planning Concepts The Merger and Acquisition Process Phase 1: Building the Business Plan/Model External Analysis Bargaining Power of Customers Bargaining Power of Suppliers Degree of Competitive Rivalry Potential New Entrants Availability of Substitute Products Bargaining Power of the Labor Force The Degree of Government Regulation Global Exposure Internal Analysis Defining the Mission/Vision Statement Setting Strategic or Long-Term Business Objectives Common Business Objectives Selecting the Corporate and Business Level Strategies Corporate-Level Strategies Business-Level Strategies Price or Cost Leadership Product Differentiation Focus or Niche Strategies Hybrid Strategies Blue Ocean Strategy Platform Strategies Choosing an Implementation Strategy The Role of Intangible Factors Analyzing Assumptions Functional Strategies Strategic Controls The Business Plan as a Communication Document Phase 2: Building the Merger-Acquisition Implementation Plan Plan Objectives Resource/Capability Evaluation Management Guidance Timetable Some Things to Remember Chapter Discussion Questions Discussion Questions 5 Implementation: Search Through Closing—Phases 3–10 of the Acquisition Process Inside M&A: In the Wake of Industry Consolidation Discovery Communications Buys Scripps Networks Chapter Overview Characteristics of High Performing Acquirers Phase 3: The Search Process Phase 4: The Screening Process Phase 5: First Contact Discussing Value Preliminary Legal of Transaction Documents Confidentiality Agreement Term Sheet Letter of Intent (LOI) Phase 6: Negotiation Refining Valuation Deal Structuring Conducting Due Diligence The Components of Due Diligence Buyer, Seller, and Lender Due Diligence Protecting Customer Data The Rise of the Virtual Data Room Developing the Financing Plan Defining the Purchase Price Total Consideration Total Purchase Price/Enterprise Value31 Net Purchase Price Phase 7: Developing the Integration Plan Contract-Related Issues Earning Trust Choosing the Integration Manager and Other Critical Decisions Phase 8: Closing Gaining the Necessary Approvals Assigning Customer and Vendor Contracts Completing the Acquisition/Merger Agreement Deal Provisions Price Escrow and Holdback Clauses Go Shop Provisions Allocation of Price Payment Mechanism Assumption of Liabilities Representations and Warranties Covenants Employment and Benefits Closing Conditions Indemnification Other Closing Documents Financing Contingencies Using Artificial Intelligence (AI) to Draft M&A Contracts Phase 9: Implementing Postclosing Integration Communication Plans Employee Retention Satisfying Cash Flow Requirements Employing “Best Practices” Cultural Issues Phase 10: Conducting a Postclosing Evaluation Do Not Change Performance Benchmarks Ask the Difficult Questions Learn From Mistakes The Increasing Application of Data Analytics in M&As Some Things to Remember Chapter Discussion Questions Discussion Questions 6 Postclosing Integration: Mergers, Acquisitions, and Business Alliances Inside Mergers and Acquisitions: Postmerger Integration Challenges Chapter Overview The Degree of Integration Varies by Type of Acquirer and Deal The Role of Integration in Successful Acquisitions Realizing Projected Financial Returns The Impact of Employee Turnover Acquisition-Related Customer Attrition Rapid Integration Does Not Mean Doing Everything at the Same Pace Integration Is a Process, Not an Event Premerger Integration Planning Putting the Postmerger Integration Organization in Place Before Closing The Postmerger Integration Organization: Composition and Responsibilities Developing Communication Plans for Key Stakeholders Employees: Addressing the “Me” Issues Immediately Customers: Undercommitting and Overdelivering Suppliers: Developing Long-Term Vendor Relationships Investors: Maintaining Shareholder Loyalty Lenders: Reassuring Lenders Communities: Building Strong, Credible Relationships Creating a New Organization Establishing a Structure Developing Staffing Plans Personnel Requirements Employee Availability Staffing Plans and Timetable Compensation Plans Personnel Information Systems Functional Integration Revalidating Due Diligence Data Benchmarking Performance Reset Synergy Expectations Integrating Manufacturing Operations Integrating Information Technology Integrating Finance Integrating Sales Integrating Marketing Integrating Purchasing Integrating Research and Development Integrating Human Resources Building a New Corporate Culture Identifying Cultural Issues Through Cultural Profiling Overcoming Cultural Differences Digital Tools and Change Management The Role of Accounting: Its Strengths and Limitations Common Performance Tracking Metrics Integrating Business Alliances Integrating Mechanisms Leadership Teamwork and Role Clarification Coordination Policies and Values Consensus Decision Making Integrating Family Owned Firms Some Things to Remember Chapter Discussion Questions Discussion Questions Part III: Mergers and Acquisitions Valuation and Modeling 7 Mergers and Acquisitions Cash Flow Valuation Basics Inside M&A: Delaware Supreme Court Rules on the Role of Valuation Methods in Appraisal Rights Chapter Overview Estimating Required Financial Returns Cost of Equity and the Capital Asset Pricing Model Estimating Market Risk Premiums Applying CAPM in a Near Zero (or Negative) Interest Rate Environment Pretax Cost of Debt Cost of Preferred Stock Cost of Capital Cost of Capital With Limited Interest Deductibility Risk Assessment Effects of Financial and Operating Leverage on Beta Calculating Free Cash Flows Free Cash Flow to the Firm (Enterprise Cash Flow) Selecting the Right Tax Rate Dealing With Operating Leases Free Cash Flow to Equity Investors (Equity Cash Flow) Applying Discounted Cash Flow Methods Enterprise Discounted Cash Flow Model (Enterprise or FCFF Method) Equity Discounted Cash Flow Model (Equity or FCFE Method) The Zero-Growth Valuation Model The Constant-Growth Valuation Model The Variable-Growth (Supernormal or Nonconstant) Valuation Model Determining the Duration of the High-Growth Period Determining the Stable or Sustainable Growth Rate Determining the Appropriate Discount Rate Using the Enterprise Method to Estimate Equity Value Determining the Market Value of Long-Term Debt Financially Stable Firms Financially Distressed Firms Hybrid Securities (Convertible Bonds and Preferred Stock) Determining the Market Value of Operating Leases Determining the Cash Impact of Deferred Taxes Determining the Cash Impact of Unfunded Pension Liabilities Determining the Cash Impact of Employee Options Determining the Cash Impact of Other Provisions and Contingent Liabilities Determining the Market Value of Non-controlling Interests Valuing Nonoperating Assets Cash and Marketable Securities Investments in Other Firms Unutilized and Undervalued Assets Patents, Service Marks and Trademarks Overfunded Pension Plans Some Things to Remember Chapter Discussion Questions Practice Problems and Answers Discussion Questions 8 Relative, Asset-Oriented, and Real Option Valuation Basics Inside Mergers & Acquisitions: Thyssenkrupp and Tata Steel Combine European Steel Operations Chapter Overview Relative-Valuation Methods The Comparable Companies Method Recent Comparable Transactions Method Same- or Comparable-Industries Method Enterprise-Value-to-EBITDA Method Adjusting Relative-Valuation Methods for Firm Growth Rates Value-Driver-Based Valuation Asset-Oriented Methods Tangible Book Value (Shareholders’ Equity Less Goodwill) Method Breakup Value Liquidation Value The Replacement-Cost Method The Weighted-Average Valuation Method Real-Options Analysis Identifying Real Options Embedded or Implied in M&A Decisions Valuing Real Options for Mergers and Acquisitions Valuing Real Options Using a Decision Tree Framework Valuing Real Options Using the Black-Scholes Model Option to Expand Option to Delay Option to Abandon Determining When to Use the Different Approaches to Valuation Valuing Initial Public Offerings What Do Valuation Professionals Do in Practice? Some Things to Remember Chapter Discussion Questions Practice Problems and Answers Discussion Questions 9 Financial Modeling Basics Inside M&A: Verizon Discounts the Yahoo Purchase Price Chapter Overview What Is Financial Modeling? Financial Modeling Data Requirements Generally Accepted Accounting Principles and International Standards GAAP Financial Statements Pro Forma Accounting Common Financial Model Linkages Modelling Changes in US Corporate Tax Laws Key Steps in the Valuation Process Step 1: Analyze Recent Financial Statements Normalize Historical Data Understand Determinants of Revenue Growth and Profit Margins Step 2: Project Pro Forma Financial Statements Step 3: Estimate the Present Value of the Projected Pro Forma Cash Flows Calculating Enterprise and Equity Values Calculating the Weighted Average Cost of Capital Calculating the Terminal Value Model Balancing Mechanism Data Sources Income Statement Balance Sheet Cash Flow Statement Risk Measures: Betas and Credit Ratios Managing the Model Addressing Valuation Issues in a Near Zero Interest Rate Environment Some Things to Remember Chapter Discussion Questions Practice Problems and Answers Background The Life Sciences Industry Life Technology’s Business Overview Life Technologies Competitor Profile Life Technologies’ Historical Financial Performance Conclusions Discussion Questions 10 Analysis and Valuation of Privately Held Firms Inside M&A: The Need for Capital Forces Sale of Demand Energy Chapter Overview How Family Control Affects M&A Activity Private Versus Public Company Governance Challenges of Valuing Privately Held Companies Lack of Externally Generated Information Lack of Internal Controls and Inadequate Reporting Systems Firm-Specific Problems Common Forms of Manipulating Reported Income Misstating Revenue Manipulation of Operating Expenses Process for Valuing Privately Held Businesses Step 1: Adjusting Financial Statements Making Informed Adjustments Salaries and Benefits Travel, Meals, and Entertainment Auto Expenses and Personal Life Insurance Family Members Rent or Lease Payments in Excess of Fair Market Value Professional Services Fees Depreciation Expense Reserves Accounting for Inventory Areas That Are Commonly Understated Areas That Are Commonly Overlooked Explaining Adjustments to Financial Statements Step 2: Applying Valuation Methodologies to Privately Held Companies Defining Value Selecting the Appropriate Valuation Methodology The Income, or Discounted Cash Flow (DCF), Approach The Relative-Value (or Market-Based) Approach The Replacement-Cost Approach The Asset-Oriented Approach Step 3: Developing Discount Rates Estimating a Private Firm’s Beta and Cost of Equity Estimating the Cost of Private-Firm Debt Determining the Appropriate Tax Rate Estimating the Cost of Capital Step 4: Applying Control Premiums, Liquidity, and Minority Discounts Liquidity Discounts Purchase Price Premiums, Control Premiums, and Minority Discounts The Relationship Between Liquidity Discounts and Control Premiums Estimating Liquidity Discounts, Control Premiums, and Minority Discounts Factors Affecting the Liquidity Discount Factors Affecting the Control Premium Factors Affecting the Minority Discount Early Stage Investment Taking Private Companies Public Reverse Mergers Wealth Effects: Reverse Mergers Versus IPOs and Sellouts Financing Reverse Mergers Special Purpose Acquisition Corporations Dell Technologies (Dell) Goes Public Using Leveraged Employee Stock Ownership Plans to Buy Private Companies Empirical Studies of Shareholder Returns Some Things to Remember Chapter Discussion Questions Practice Problems and Answers Discussion Questions Part IV: Deal Structuring and Financing Strategies 11 Structuring the Deal: Payment and Legal Considerations Inside M&A: Getting to Yes on Price Chapter Overview The Deal-Structuring Process Key Components of the Deal-Structuring Process Common Linkages Form of Payment (Fig. 11.1, Arrows 1 and 2) Affects Choice of Acquisition Vehicle and Postclosing Organization Effects of Form of Acquisition (Fig. 11.1, Arrows 3–6) Effects of Tax Considerations (Fig. 11.1, Arrows 7 and 8) Legal Form of Selling Entity (Fig. 11.1, Arrow 9) Affects Form of Payment Accounting Considerations (Fig. 11.1, Arrow 10) Affect Form, Amount, and Timing of Payment Form of Acquisition Vehicle and Postclosing Organization Choosing the Appropriate Acquisition Vehicle Choosing the Appropriate Postclosing Organization Legal Form of the Selling Entity Form of Payment Cash Noncash Cash and Stock in Combination Convertible Securities Cryptocurrency: Fiction Versus Reality Managing Risk and Reaching Consensus on Purchase Price Postclosing Balance-Sheet Price Adjustments and Escrow Accounts Earnouts and Other Contingent Payments Contingent Value Rights Rights, Royalties, and Fees Constructing Collar Arrangements M&A Options and Warrants Takeover Strategies Option Based Takeover Strategies Warrant Based Takeover Strategies Disadvantages of Options and Warrant Takeover Strategies Form of Acquisition Purchase of Assets Advantages and Disadvantages From the Buyer’s Perspective Advantages and Disadvantages From the Seller’s Perspective Purchase of Stock Advantages and Disadvantages From the Buyer’s Perspective Advantages and Disadvantages From the Seller’s Perspective Mergers Statutory and Subsidiary Mergers Statutory Consolidations Mergers of Equals Tender Offers Shareholder Approvals Top-Up Options and Dual Track Deal Structures Special Applications of Basic Structures Some Things to Remember Chapter Discussion Questions Discussion Questions 12 Structuring the Deal: Tax and Accounting Considerations Inside M&A: CVS’s Takeover of Aetna Blurs Traditional Roles in the US Healthcare Industry Chapter Overview Understanding Tax Authority Communications Alternative Tax Structures Taxable Transactions Taxable Mergers Taxable Purchase of Target Assets With Cash Taxable Purchase of Target Stock With Cash Section 338 Election Tax-Free Transactions Qualifying a Transaction for Tax-Free Treatment Alternative Tax-Free Reorganizations Treatment of Target Tax Attributes in M&A Deals Tax-Free Transactions Arising From 1031 “Like-Kind” Exchanges Tax Cuts and Jobs Act of 2017 Corporate Tax Rates Pass-Through Income Investment in Capital Alternative Minimum Corporate Income Tax (AMT) Deductibility of Interest Expense Dividends Received Deduction Net Operating Losses Carried Interest Foreign Earnings Deemed Repatriation 1031 “Like-Kind” Exchanges Tax Cut Expectations and Firm Value State and Local Tax Issues Preclosing, Due Diligence, and Postclosing Issues Potentially Unforeseen Tax Liabilities Pressure on States to Raise Revenue International Taxes Tax Inversions Master Limited Partnerships (MLPs), Real Estate Investment Trusts (REITs), and Yield Cos Financial Reporting of Business Combinations Acquisition Method of Accounting Who is the Acquirer? Recognizing Acquired Net Assets and Goodwill at Fair Value Recognizing and Measuring Net Acquired Assets in Step (or Stage) Transactions Recognizing Contingent Considerations In-Process Research and Development Assets Expensing Deal Costs Impact of Acquisition Accounting on Business Combinations Balance-Sheet Considerations Income Statement and Cash Flow Considerations Rule Changes Affecting the Balance Sheet International Accounting Standards Recapitalization (“RECAP”) Accounting Putting It All Together: Takeover and Deal Structure Strategies Some Things to Remember Chapter Discussion Questions Practice Problems and Answers Discussion Questions 13 Financing the Deal: Private Equity, Hedge Funds, and Other Sources of Financing Inside M&A: Staples Goes Private in Response to the Shift to Online Retailing Chapter Overview The Role of Public and Private Financial Markets How Are M&A Transactions Commonly Financed? Financing Options: Borrowing Asset-Based (Secured) Lending Cash Flow (Unsecured) Lending Types of Long-Term Financing Junk Bonds Leveraged Bank Loans Transferring Default Risk From Lenders to Investors Financing Options: Common and Preferred Equity Seller Financing Asset Sales Capital Structure Theory and Practice Impact of Near Zero/Negative Interest Rates on M&As What Is the Role of Private Equity, Hedge, and Venture Capital Funds in Deal Financing? Financial Intermediaries Lenders and Investors of Last Resort Providers of Financial Engineering and Operational Expertise for Target Firms Prebuyout Returns to LBO Target Firm (Prebuyout) Shareholders Postbuyout Returns to LBO Shareholders Private Equity-Owned Firms and Financial Distress Listed Versus Unlisted Fund Performance Impact of Tax Reform on M&A Financing Internal Financing External Financing Leveraged Buyouts as Financing Strategies The Private Equity Market Is a Global Phenomenon Sales to Strategic Buyers Represent the Most Common Exit Strategy The Effects of LBOs on Innovation The Effects of LBOs on Employment Growth The Changing Nature of Private Equity Firm Collaboration What Factors Are Critical to Successful LBO’s? Target Selection Firms With Little Debt, Redundant Assets, and Predictable Cash Flow Firms That Are Poorly Performing With Potential to Generate Cash Flow Firms With Significant Agency Problems Firms Whose Management Is Competent and Motivated Firms in Attractive Industries Firms That Are Large-Company Operating Divisions Firms Without Change-of-Control Covenants Not Overpaying Improving Operating Performance How Do LBO’s Create Value? Alleviating Public Firm Agency Problems Providing Access to Capital for Private Firms Creating a Tax Shield Debt Reduction Improvement in Operating Margin Timing the Sale of the Firm Estimating Tax Deductible Interest Expense The Impact on Financial Returns of Alternative Transaction Strategies Common LBO Deal and Capital Structures Common Deal Structures Common Capital Structures Some Things to Remember Chapter Discussion Questions Discussion Questions 14 Applying Financial Models: To Value, Structure, and Negotiate Stock and Asset Purchases Inside M&A: The Anatomy of a M&A Negotiation Chapter Overview Understanding and Applying M&A Financial Models Common Elements of M&A Models Key Data Linkages and Model Balancing Mechanism M&A Models: Stock Purchases Step 1 Construct Historical Financials and Determine Key Value Drivers Step 1 (a) Collect and Analyze Required Historical Data to Understand Key Value Drivers Step 1 (b) Normalize Historical Data for Forecasting Purposes Step 1 (c) Build Historical Financial Statements Step 2 Project Acquirer and Target Financials and Estimate Standalone Values Step 2 (a) Determine Assumptions for Each Key Input Variable Step 2 (b) Input Assumptions Into the Model and Project Financials Step 2 (c) Select Appropriate Discount Rate and Terminal Period Assumptions to Estimate Standalone Values Step 3 Estimate Value of Newco, Including Synergy and Deal Terms Step 3 (a) Estimate Synergy and Investment Required to Realize Synergy Step 3 (b) Project Newco Financials Including Effects of Synergy and Deal Terms Step 3 (c) Select Appropriate Discount Rate and Terminal Period Assumptions to Value Newco Step 4 Determine Appropriateness of Offer Price and Posttransaction Capital Structure Step 4 (a) Compare Offer Price With Estimated Maximum Offer Price and Recent Comparable Deals Step 4 (b) Compare Projected Credit Ratios With Industry Average Ratios Step 4 (c) Determine Impact of Deal on Newco EPS Step 4 (d) Determine If the Deal Will Allow Newco to Meet or Exceed Required Returns M&A Models: Asset Purchases Quantifying Synergy Revenue-Related Synergy Cost Savings-Related Synergies Operating/Asset-Related Synergies Things to Remember Chapter Discussion Questions Practice Problems and Answers Discussion Questions Appendix A: Debt Repayment Schedule, Convertible Securities, Interest Rates, and Betas Debt Repayment Schedule Options, Warrants, and Convertible Securities Betas Interest Rates Industry Credit Ratios Part V: Alternative Business and Restructuring Strategies 15 Domestic and Cross-Border Business Alliances: Joint Ventures, Partnerships, Strategic Alliances, and Licensing Inside M&A: Comcast and Charter Forge Wireless Alliance Chapter Overview Motivations for Business Alliances Risk Sharing Sharing Proprietary Knowledge Sharing Management Skills, Information, and Resources Sharing Substantial Capital Outlays Securing Sources of Supply Cost Reduction Gaining Access to New Markets Globalization A Prelude to Acquisition or Exit Favorable Regulatory Treatment Learning What Makes Business Alliances Successful? Synergy Clarity of Purpose, Roles, and Responsibilities Accountability Cooperation and Cultural Compatibility Win-Win Situation Compatible Management Styles, Timeframes, and Financial Expectations Support From the Top Alternative Legal Forms of Business Alliances Corporate Structures C-Type Corporations Subchapter S Corporations Limited Liability Company Partnership Structures General Partnerships Limited Liability Partnerships Master Limited Partnerships Franchise Alliance Equity Partnership Written Contract Bilateral Versus Multilateral Alliances Strategic and Operational Plans Resolving Business Alliance Deal-Structuring Issues Scope Duration Legal Form Governance Resource Contributions and Ownership Determination Financing Ongoing Capital Requirements Owner or Partner Financing Equity and Debt Financing Control Distribution Issues Performance Criteria Dispute Resolution Revision Termination Transfer of Interests Taxes Management and Organizational Issues Regulatory Restrictions and Notifications Challenges of Cross-Border Joint Ventures Potential Impediments to Cross-Border Alliances and Minority Investments Empirical Findings Some Things to Remember Chapter Discussion Questions Discussion Questions 16 Alternative Exit and Restructuring Strategies: Divestitures, Spin-Offs, Carve-Outs, Split-Offs, and Tracking Stocks Inside M&A: Managing Risk Through Restructuring Chapter Overview Why Do Firms Exit Businesses? Increasing Corporate Focus Underperforming Businesses Regulatory Concerns Lack of Fit Tax Considerations Raising Funds Worth More to Others Risk Reduction Discarding Unwanted Businesses From Prior Acquisitions Avoiding Conflicts With Customers Increasing Transparency Divestitures Motives for Divestitures Corporate Portfolio Revi __Mergers, Acquisitions, and Other Restructuring Activities: An Integrated Approach to Process, Tools, Cases, and Solutions, Tenth Edition,__ is the most comprehensive and cutting-edge text available on the subject. Supported by recent peer-reviewed academic research, this book provides many recent, notable deals, precedent-setting judicial decisions, government policies and regulations, and trends affecting M&As, as well as takeover strategies and tactics. Today's policies, politics and economics are reflected in the book's 40 case studies, 90% of which involve deals either announced or completed during the last several years. These cases represent friendly, hostile, highly leveraged, and cross-border transactions in ten different industries, involving public and private firms and those experiencing financial distress. Sections discuss an overview of M&As, key regulations, common strategies and tactics, how managers may choose a business strategy from available options, valuation methods and basic financial modeling techniques, the negotiating process, how deal structuring and financing are inextricably linked, how consensus is reached during the bargaining process, the role of financial models in closing the deal and strategic growth options as alternatives to domestic M&As.