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ASPEN PUBLISHERS

STRUCTURING MERGERS& ACQUISITIONS:

A Guide to CreatingShareholder Value

Fifth Edition

by

Peter A. Hunt

M Wolters KluwerLaw & Business

SUMMARY OF CONTENTS

About the Author

Acknowledgments

Table of Contents

List of Exhibits

Introduction

Glossary

PART I. A SHAREHOLDER VALUE FRAMEWORK

Chapter 1 OVERVIEW OF SHAREHOLDER VALUE

Chapter 2 OVERVIEW OF VALUATION AND FINANCIALANALYSIS

Chapter 3 FINANCIAL STATEMENT ANALYSIS

Chapter 4 DISCOUNTED CASH FLOW ANALYSIS

Chapter 5 COMPARABLE COMPANY ANALYSIS

Chapter 6 COMPARABLE TRANSACTIONS ANALYSIS

Chapter 7 MERGER ANALYSIS

Chapter 8 LEVERAGED BUYOUT ANALYSIS

Chapter 9 STOCK PRICE ANALYSIS

Chapter 10 PRIVATE COMPANY VALUATION

Chapter 11 VALUATION CASE STUDY: TROPICAL PRODUCTSCORP. ACQUISITION OF GLOBAL SNACKS, INC.

PART II. M&A ACCOUNTING

Chapter 12 M&A ACCOUNTING

I X

STRUCTURING MERGERS & ACQUISITIONS

PART III. TRANSACTION TYPES

Chapter 13 MERGERS & ACQUISITIONS

Chapter 14 DIVESTITURES AND ASSET SALES

Chapter 15 JOINT VENTURES AND ALLIANCES

Chapter 16 GOING PRIVATE TRANSACTIONS

Chapter 17 FAIRNESS OPINIONS

PART IV. RESTRUCTURING ALTERNATIVES

Chapter 18 OVERVIEW OF CORPORATE RESTRUCTURINGS

Chapter 19 RECAPITALIZATIONS AND SHARE REPURCHASES

Chapter 20 SPIN-OFFS, SPLIT-OFFS, AND EQUITY CARVE-OUTS

PART V. LEGAL ASPECTS OF MERGERS & ACQUISITIONS

Chapter 21 BUSINESS JUDGMENT RULE

Chapter 22 LEGAL ASPECTS OF MERGERS & ACQUISITIONS

Chapter 23 ANTI-TAKEOVER MEASURES

Chapter 24 HOSTILE ACQUISITIONS

PART VI. STRUCTURING, NEGOTIATING, ANDEXECUTING THE DEAL

Chapter 25 THE FUNDAMENTALS OF NEGOTIATION

Chapter 26 FORMULATING AN OFFER

Chapter 27 STRUCTURING THE LETTER OF INTENT ANDDEFINITIVE AGREEMENT

Chapter 28 COLLARS AND WALK-AWAYS

Chapter 29 TERMINATION FEES, LOCK-UP OPTIONS, ANDNO-SHOP CLAUSES

Chapter 30 EARNOUTS AND CONTINGENT PAYMENTS

SUMMARY OF CONTENTS

Chapter 31 DUE DILIGENCE

Chapter 32 PRE- AND POST-MERGER INTEGRATION

Index

X I

TABLE OF CONTENTS

About the Author v

Acknowledgments vii

Summary of Contents ix

List of Exhibits xxxvii

Introduction xlvii

Glossary Ixxi

PART I. A SHAREHOLDER VALUE FRAMEWORK

Chapter 1

OVERVIEW OF SHAREHOLDER VALUE 3

§ 1.01 Overview 3

§ 1.02 What Is Shareholder Value? 4§ 1.03 How Do Mergers, Acquisitions, and Restructurings Relate to Shareholder

Value? 5§ 1.04 Value Creation Through Mergers and Acquisitions: A Case Study 9§ 1.05 Summary 17

Chapter 2

OVERVIEW OF VALUATION AND FINANCIAL ANALYSIS . . . 19

§2.01 Overview 19

§ 2.02 Intrinsic Versus Relative Value 19§ 2.03 Deal Valuation for Mergers, Acquisitions, and Restructurings 20

[A] Stand Alone Value 21[B] Transaction Value 21[C] Pro Forma Merger Analysis 22[D] Other Analyses 22

§ 2.04 Summary 23


Chapter 3

FINANCIAL STATEMENT ANALYSIS 25

§ 3.01 Overview 26

§ 3.02 Problems with Financial Statement Analysis 27§ 3.03 Elements of Financial Statement Analysis 27

[A] Income Statement Analysis 28[B] Balance Sheet Analysis 29[C] Cash Flow Statement Analysis 31[D] Common Size Analysis 31[E] Footnotes 31[F] Management Discussion and Analysis 33[G] Third Party Commentary 33

§ 3.04 Categories of Financial Statement Analysis 33[A] Profitability 33

[1] Analysis of Return on Sales 34[a] Gross Margin 34[b] Operating Margin 34[c] EBIT Margin 34[d] EBITDA Margin 34[e] Pre-Tax Margin 35[f] Net Income Margin 35

[2] Analysis of Return on Investment 35[a] Return on Assets 35[b] Return on Equity 36[c] Return on Capital 36

[B] Efficiency 36[1] Inventory Turnover Ratio 37[2] Inventory Days 37[3] Receivables Turnover 37[4] Days Sales Outstanding 37[5] Payables Turnover 38[6] Days Payables Outstanding 38[7] Working Capital Turnover 38[8] Fixed Asset Turnover 38[9] Total Asset Turnover 38

[C] Liquidity 38[1] Current Ratio 39[2] Quick Ratio 39[3] Cash Ratio 39[4] Operating Cash Flow Ratio 40

[D] Leverage 40[1] Debt-to-f otal-Capital Ratio 40[2] Debt-to-Equity Ratio 40

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[3] Times Interest Earned (TIE) 41[4] Fixed Charge Coverage Ratio 41

§ 3.05 Sources of Information 42§ 3.06 Financial Statement Analysis Implications for M&A and

Shareholder Value 42§3.07 Summary 43

Chapter 4

DISCOUNTED CASH FLOW ANALYSIS 45

§ 4.01 Overview 45

§ 4.02 The Anatomy of Discounted Cash Flow Analysis 46§4.03 DCF Methodology 48

[A] Calculating an Appropriate Discount Rate 48[1] Cost of Equity 48

[a] Beta 49[b] Risk-Free Rate 50[c] Equity Market Premium 50

[2] Cost of Debt 50[3] Weighted Average Cost of Capital 51

[B] Preparing Financial Forecasts 51[C] Calculating Terminal Value 52

[1] Growth in Perpetuity Method 53[a] Terminal Free Cash Flow 54[b] Expected Growth Rate 55

[2] Multiples Method 56[3] Sale Method 57[4] Liquidation Value 58

[D] Performing the DCF Analysis 58§ 4.04 Discounted Cash Flow Example 58§ 4.05 Summary 64

Chapter 5

COMPARABLE COMPANY ANALYSIS 65

§5.01 Overview 65

§ 5.02 Enterprise Value Versus Equity Value 66§ 5.03 Comparable Company Valuation Methodology 67§ 5.04 Historical Versus Projected Multiples 67§ 5.05 Price/Earnings Multiples 68§ 5.06 Comparable Company Analysis Example 69§5.07 Comparable Company Analysis Versus Discounted

Cash Flow Analysis 71§ 5.08 Summary 72

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Chapter 6

COMPARABLE TRANSACTIONS ANALYSIS 75

§ 6.01 Overview 75

§ 6.02 Comparable Transaction Multiples Analysis 76[A] Methodology 76[B] Example 78[C] Notes of Caution 81

§ 6.03 Comparable Transaction Premiums Analysis 83[A] Methodology 84[B] Example 84

§ 6.04 Comparable Transactions Analysis Versus DCF and ComparableCompany Analysis 86

§ 6.05 Summary 87

Chapter 7

MERGER ANALYSIS 89

§ 7.01 Overview 89

§7.02 Accretion/Dilution Analysis 91[A] Methodology 93[B] Example 93

§ 7.03 Contribution Analysis 99[A] Methodology 101[B] Example 101

§7.04 Summary 103

Chapter 8

LEVERAGED BUYOUT ANALYSIS 105

§ 8.01 Overview 105§ 8.02 How to Evaluate an LBO Candidate 108§ 8.03 The Anatomy of LBO Analysis 108

[A] Capital Structure 108[B] IRR Analysis 110

§ 8.04 LBO Methodology 110[A] Establish a Preliminary Range of LBO Values I l l[B] Establish a Preliminary Capital Structure 112[C] Confirm Initial Debt Capacity 113[D] Structure the Equity 114[E] Perform the LBO Analysis 114

§ 8.05 LBO Example : 115§8.06 Summary 121

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Chapter 9

STOCK PRICE ANALYSIS 123

§9.01 Overview 123

§ 9.02 Stock Price Analysis 124[A] Absolute Price Performance 124[B] Relative Price Performance 124[C] Price/Volume Analysis 126

§ 9.03 Shareholder Analysis 126§9.04 Summary 127

Chapter 10

PRIVATE COMPANY VALUATION 131

§10.01 Overview 132

§ 10.02 Factors That Influence the Valuation of Private Companies 133[A] Lack of Market Liquidity 133[B] Size 133[C] Operating History 134[D] Business Mix 134[E] Management Control 134[F] Earnings Measurement 134[G] Capital Structure 135[H] Risk 135

§ 10.03 Private Company Valuation Methodologies 135[A] Public Company Approaches to Valuing Private Companies 136

[1] Discounted Cash Flow Analysis 136[a] Estimating Beta 136[b] Problems with the Equity Risk Premium 138[c] Estimating Cost of Equity 138[d] Estimating Cost of Debt 138[e] Estimating Cost of Capital 139[f] Special Problems with Private Company

Cash Flows 139[g] Issues with Calculating Terminal Value 139[h] Final Observations on DCF Analysis 140

[2] Comparable Company Trading Multiples Analysis 140[3] Comparable Transactions Analysis 141

[B] Other Valuation Methodologies 141[1] Total Invested Capital 141[2] Replacement Cost 141[3] Asset Appraisal 141

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[4] Internal Rate of Return 142§ 10.04 Special Issues in Valuing Private Companies 142

[A] Corporate Structure 142[B] Intermingling of Personal and Business Expenses 143[C] Accounting Standards 143

§ 10.05 Valuing a Private Company as a Public Company 144[A] IPO Valuation 144[B] Stand Alone Public/Private Valuation 144[C] Private Company Sale to Public Company 144

§10.06 Summary 144

Chapter 11

VALUATION CASE STUDY: TROPICALPRODUCTS CORP. ACQUISITION OF

GLOBAL SNACKS, INC 147

§11.01 Overview 147§ 11.02 Transaction Background 148§ 11.03 Overview of Tropical Products Corp 148§11.04 Overview of Global Snacks, Inc 151§11.05 Industry Overview 154§ 11.06 Competitive Overview 154§ 11.07 Strategic and Business Analysis 155§ 11.08 Financial Statement Analysis 156

[A] Common Size Analysis 157[B] Profitability Analysis 158[C] Efficiency Analysis 159[D] Liquidity Analysis 159[E] Leverage Analysis 159

§ 11.09 Global Snacks Valuation Analysis 160[A] Comparable Trading Multiples Analysis 160[B] Comparable Transactions Analysis 160

[1] Comparable Transaction Multiples Analysis 160[2] Comparable Transaction Premiums Analysis 162

[C] Discounted Cash Flow Analysis 162[D] Stock Price Analysis 166[E] Summary Valuation Analysis 170

§ 11.10 Merger Analysis 170[A] Accretion/Dilution Analysis 171[B] Contribution Analysis 174

§11.11 Summary 175

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PART II. M&A ACCOUNTING

Chapter 12

M&A ACCOUNTING 179

§ 12.01 Overview of M&A Accounting 180

[A] Accounting for Acquisition of Control 180[B] Accounting for Acquisition of Less than Control 180

§ 12.02 The New M&A Accounting Standards: FAS 141R and FAS 160 181[A] Key Changes under FAS 141R and FAS 160 181

[1] Valuation of Equity Securities 181[2] Transaction Costs 182[3] Contingent Consideration 182[4] In-Process Research and Development 182[5] Partial Control Acquisitions 182[6] Partial Non-Control Acquisitions 182

[B] Implications of FAS 141R and FAS 160 183§ 12.03 Purchase Method of Accounting 183

[A] Mechanics of Accounting for a Purchase Transaction 183[B] The Purchase Accounting Adjustments in More Detail 184[C] Purchase Method of Accounting Example 185

§ 12.04 Special Topics in Purchase Accounting 189[A] LIFO Reserve Adjustment 189[B] Writing Up Assets 190

§ 12.05 Equity Method of Accounting 190[A] Mechanics of Accounting for an Equity Transaction 190[B] Equity Method Accounting Example 191

§ 12.06 Cost Method of Accounting 193[A] Mechanics of Accounting for a Cost Accounting

Transaction 194[B] Cost Method Accounting Example 194

§ 12.07 Special Topics in M&A Accounting 195[A] Synergies and Joint Opportunities 195[B] Common Investment Vehicles 196

[1] Preferred Stock 197[2] Subordinated Debt 198[3] Bells, Whistles, and Other Features 198

[a] Conversion Features 198[b] Exchangeable Features 199[c] Call Provisions 199[d] Warrants 199

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PART III. TRANSACTION TYPES

Chapter 13

MERGERS & ACQUISITIONS 203

§ 13.01 Overview 204

§ 13.02 Evidence Behind Mergers & Acquisitions 206[A] General Evidence Behind Mergers & Acquisitions 206[B] What Types of Companies Are Taken Over? 209[C] Mergers Versus Tender Offers 210[D] Cross-Border Mergers & Acquisitions 212

§ 13.03 Rationale Behind Mergers & Acquisitions 213[A] Gain Scale 213[B] Growth '. '. 214[C] Diversification 214[D] Synergies 215

[1] Operating Synergies 216[2] Financial Synergies 217

[E] Enhance Research & Development 217[F] Integrate 218

§ 13.04 Valuation of Mergers & Acquisitions 219[A] Stand Alone Analysis 219[B] Takeover Analysis 220

[1] Cash Tender Offer Premiums 220[2] Merger Premiums 221

[C] Pro Forma Merger Analysis 222[D] Stock Price and Shareholder Analysis 223

§ 13.05 Value Creation in Mergers & Acquisitions 225[A] Strategic Analysis 225[B] Financial Analysis 226[C] Financial Impact on Surviving Company 227[D] Public Market Response 227

§ 13.06 Structural Alternatives 228[A] Tax-Free Transactions 228

[ 1 ] A Reorganizations 229[a] Direct Merger 230[b] Forward Triangular Merger 231[c] Reverse Triangular Merger 231

[2] B Reorganizations 232[3] C Reorganizations 232[4] D Reorganizations 233

[B] Taxable Transactions 234[1] Stock-for-Cash Transactions 234

[a] Section 338 Elections 234

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[i] Section 338(g) Election 235[ii] Section 338(h)(10) Election 236

[2] Asset Transactions 236§ 13.07 Form of Merger or Acquisition 236

[A] Stock-for-Stock Mergers 237[1] Time Line for Stock-for-Stock Mergers 237[2] Disclosure Requirements 238

[B] Cash Transactions 238[1] Time Line for Cash Tender Offers 238[2] Disclosure Requirements 238

[a] Third-Party Tender Offers 239[b] Tender Offers Requiring Shareholder Approval 240[c] Regulation 14D 240[d] Rule 14d-9 and Schedule 14D-9 241[e] Rule 14d-10 241[f] Regulation 14E 241[g] Regulations 13D and 13G 242

§ 13.08 Accounting for Mergers & Acquisitions 242

§ 13.09 Summary 243

Chapter 14

DIVESTITURES AND ASSET SALES 245


§ 14.02 Evidence Behind Divestitures and Asset Sales 246§ 14.03 Rationale Behind Divestitures and Asset Sales 249

[A] Enhance Operating Performance 249[B] Enhance Capital Structure 250[C] Capitalize on Strength of Private Market Value

Versus IPO Value 250[D] Thwart Takeover 251

§ 14.04 Divestitures Versus Other Forms of Restructuring 251§ 14.05 Valuation of Divestitures and Asset Sales 253

. [A] Stand Alone Value 253[B] Takeover Value 253[C] Accretion/Dilution Analysis 254

§ 14.06 The Divestiture Process 254[A] The Negotiated Sale 254[B] The Controlled Competitive Sale 255[C] The Auction 256

[1] The Auction Process 256§ 14.07 Seller Considerations 258

[A] Strategic Buyer's Perspective 258[B] Positioning the Company for Sale 259[C] Negotiation Strategy 260

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[D] Pre- and Post-Deal Considerations 261[E] Deal Structure Considerations 262

§ 14.08 Accounting for Divestitures and Asset Sales 263§ 14.09 Case Study: Diageo PLC Divestiture of Pillsbury Co 263

§ 14.10 Summary 264

Chapter 15

JOINT VENTURES AND ALLIANCES 265


[A] Joint Ventures Versus Alliances 268§ 15.02 Evidence Behind Joint Ventures and Alliances 269§ 15.03 Creating Value Through Joint Ventures and Alliances 270§ 15.04 Motivation and Rationale Behind Joint Ventures and Alliances 270

[A] Access New Technology 271[B] Diversification 271[C] Leverage Partner's Competencies 271[D] Exploit Synergies 271[E] Enter New Markets or Develop New Products 272[F] Gain Competitive Advantage 272[G] Share Risk or Costs 272[H] Maximize Efficiencies 272[I] Attract and Retain Employees 272

§ 15.05 Valuation of Joint Ventures and Alliances 273[A] Value the Initial Contributions of the Parties 274[B] Value the Potential Cash Flows of the Venture 274[C] Estimate the Long-Term "Outcome" of the Venture 275[D] Calculate the Overall Value of the Venture 276

§ 15.06 Key Success Variables 276[A] Plan Ahead 276[B] Simplicity 277[C] Align Incentives 277[D] Learn as You Go and Make Adjustments 277

§ 15.07 Case Studies 277[A] Renault SA Alliance with Nissan Motor Corp 277[B] Vodafone Airtouch Wireless Operations/Bell Atlantic

Wireless Operations 278

§ 15.08 Summary 278

Chapter 16

GOING PRIVATE TRANSACTIONS 281

§ 16.01 Overview ' 283§ 16.02 Definition of Going Private Transactions 285

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§ 16.03 Special Issues in Going Private Transactions 286[A] Acquirer Conflict 286[B] Higher Standard of Fairness 286[C] Litigation 286[D] Enhanced Disclosure Requirements 286[E] Need for Objective Validation 287

§ 16.04 Common Forms of Going Private Transactions 287[A] Squeeze-Outs 287

[1] Overview 287[2] Motivation Behind Squeeze-Outs 294

[a] Poor Market Performance 294[b] Conflicts with Parent Company 295[c] Capitalize on Synergies 295

[3] Valuation of Squeeze-Outs 295[4] Squeeze-Out Case Study: Ford Motor Acquisition

of Hertz Public Shares 296[B] Leveraged Buyouts 296

[1] Overview 296[2] The History of Leveraged Buyouts and the Current

State of the Market 299[3] Overview of Financial Sponsors 300[4] Management Buyouts 301[5] ESOP Leveraged Buyouts 301

[a] Overview of ESOPs 301[b] Use of ESOPs in Leveraged Buyouts 302

[6] Attributes of Attractive Buyout Candidates 302[a] Stable Cash Flows 302[b] Strong Management Team 303[c] Undervalued Assets 303[d] Strong Balance Sheet 303[e] Ability to Reduce Costs 303

[7] Issues and Risks in Leveraged Buyouts 303[a] Conflicts of Going Private 303[b] Bankruptcy 304[c] Exit Strategy 304[d] Board Control 305[e] Forced Sale 305[f] Management Equity and Vesting 305

[8] Structuring a Leveraged Buyout 306[a] Sources of Financing in Leverged Buyouts 306

[i] Secured Debt 306[ii] Unsecured Debt 306[iii] High Yield Debt 306

[b] LBO Capital Structure 307


[9] Creating Value with Leveraged Buyouts 307[ 10] Leveraged Buyouts Versus Leveraged Recapitalizations 308[11] Case Study: Citadel Communications 309

§ 16.05 Techniques for Going Private 310[A] Cash Tender Offer Followed by Clean-Up Merger 310

[1] Issuer Tender Offers 310[2] Third Party Tender Offers 311[3] Affiliate Tender Offers 312[4] Tender Offers Requiring Shareholder Approval 312[5] Key Timing Events 312

[B] One-Step Merger Voted on by Shareholders 312[1] Key Timing Events 313

[C] Structural Considerations in Going Private Transactions 313§ 16.06 Going Private Filing and Disclosure Requirements 314

[A] Rule 13e-3 and Schedule 13E-3 315[B] Rule 13e-4 319[C] Schedule TO ; 320[D] Regulation 14D 321

[1] Regulation 14D 321[2] Rule 14d-9 and Schedule 14D-9 322

[E] Regulations 14A and 14C 322[1] Regulation 14A 322[2] Schedule 14A 323[3] Regulation 14C and Schedule 14C 323

[F] Regulations 13D and 13G 323[1] Regulation 13D 323[2] Schedules 13D and 13G 324

§ 16.07 Tax Issues in Going Private Transactions 324§ 16.08 The Role of the Special Committee and Its Financial Advisor 325

§ 16.09 Summary 326

Chapter 17

FAIRNESS OPINIONS 329


§ 17.02 Why Get a Fairness Opinion? 329§ 17.03 Financial Analysis Supporting the Fairness Opinion 332§ 17.04 Other Analyses Performed 333§ 17.05 The Investment Banker's Perspective 334§ 17.06 Bring Down Opinions 336§ 17.07 Fairness Opinion Methodology 336§17.08 Inclusion of the Fairness Opinion in the Proxy Statement 342§ 17.09 Summary > 349

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PART IV. RESTRUCTURING ALTERNATIVES

Chapter 18

OVERVIEW OF CORPORATE RESTRUCTURINGS 353

§ 18.01 Overview of Restructurings 353

§ 18.02 The Evidence Behind Restructurings 354§ 18.03 Creating Value with Restructurings 355§ 18.04 Reasons Behind Corporate Restructurings 358

[A] Focus on Core Business 359[B] Eliminate Poor Performers 359[C] Highlight Undervalued Assets 360[D] Realize Value from Strong Businesses 361[E] Realign Funding Approach of Different Businesses 361[F] Lower Borrowing Costs and Optimize Capital Structure 361[G] Provide Management Incentives 362[H] Enhance Public Perception 362[I] Avoid Takeover 363

§ 18.05 How to Choose Between Forms of Restructuring 363§ 18.06 Restructuring Financial Analysis 364

[A] Break-Up Valuation Analysis 365[1] Break-Up Valuation Methodology 365[2] Break-Up Valuation Example 365

[B] Capital Structure Analysis 368[C] Accretion/Dilution Analysis 370[D] Shareholder Value Creation Analysis 370[E] Ownership Analysis 371

§ 18.07 The Role of Taxes in Determining a Divestiture Approach 371

§ 18.08 Summary 372

Chapter 19

RECAPITALIZATIONS AND SHARE REPURCHASES 373


§ 19.02 Motivation Behind Recapitalizations and Share Repurchases 375[A] Enhance Shareholder Value 375[B] Distribute Excess Cash 376[C] Thwart Unwanted Takeover Threat 376[D] Concentrate Equity Ownership 379[E] Alternative to a Leveraged Buyout 380

§ 19.03 Advantages and Disadvantages of Recapitalizations and ShareRepurchases 380

§ 19.04 Evidence Behind Recapitalizations and Share Repurchases 381§ 19.05 Creating Value Through Recapitalizations and Share Repurchases 385

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§ 19.06 Structuring a Recapitalization 388[A] Attributes of an Attractive Recapitalization Candidate 388

[1] Stable Cash Flows 389[2] Low Levels of Debt 389[3] Strong Company and Industry Dynamics 389[4] Experienced Management 389[5] Undervalued Assets 390

[B] Forms of Recapitalization 390[1] Assume Incremental Debt 390[2] Share Repurchase 392

[a] Open-Market Share Repurchase 393[b] Self-Tender 397

[i] Fixed-Price Self-Tender 399[ii] Dutch Auction 402

[c] Targeted Block Repurchase 407[d] Share Repurchases in Response to Takeover Threats . . . 408

[3] Leveraged Recapitalization 409[a] Charter Reclassification 409[b] Merger with a Subsidiary 409[c] Example Leveraged Recapitalization 409

[4] Special Dividend 411[5] ESOPs 412

[C] Comparison Between Recapitalization Structures 415§ 19.07 Financing 415§ 19.08 Tax Implications 416

[A] Share Repurchases 416[B] Special Dividends 416[C] Leveraged Recapitalizations 416

§ 19.09 Accounting Implications 417§ 19.10 Recapitalizations Versus Leveraged Buyouts 417§19.11 Case Studies 418

[A] Leveraged Recapitalization Case Study: Caesar's World 418[B] Dutch Auction Case Study: The Limited 418[C] Fixed-Price Tender Case Study: United Parcel Service 419

§ 19.12 Summary 419

Chapter 20

SPIN-OFFS, SPLIT-OFFS,AND EQUITY CARVE-OUTS 421

§ 20.01 Overview 422[A] Evidence Behind Restructurings 422

§ 20.02 Spin-Offs , 423[A] Overview of Spin-Offs 423

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[B] Evidence Behind Spin-Offs 426[C] Creating Value Through Spin-Offs 428[D] Motivation and Rationale 433

[1] Lack of Synergy or Strategic Fit 433[2] Focus on Core Business 433[3] Highlight Value, Monetize Assets, or Reduce Debt 434[4] Avoid Takeover 436[5] Eliminate a Poor Performer 437[6] Tax Efficiency 438[7] Regulatory 439

[E] Key Timing Events in Spin-Offs 439[F] Valuation of Spin-Offs 439[G] Tax Requirements 441[H] Filing Requirements 442[I] Pricing of Spin-Offs 445[J] Issues with Respect to Spin-Offs 445

[1] Section 355 445[2] Management and Governance 445[3] Separation of Assets 446[4] Capitalization 446[5] Contingent and Other Liabilities 446[6] Relations with Customers, Suppliers, and Shareholders 446[7] Subsequent Events 447[8] Communications with Wall Street 447

[K] A Variant on Spin-Offs: Split-Offs 448[L] Case Studies 449

[1] Coach Split Off from Sara Lee 449[2] Zimmer Holdings Spin Off from Bristol-Myers Squibb 451

§ 20.03 Equity Carve-Outs 453[A] Overview of Equity Carve-Outs 453[B] Evidence Behind Equity Carve-Outs 455[C] Creating Value Through Equity Carve-Outs 458[D] Motivation and Rationale Behind Equity Carve-Outs 459[E] Attributes of Equity Carve-Out Candidates 460

[1] Critical Mass 460[2] Strong Balance Sheet 461[3] Strong Management Team 463[4] Attractive Financial Performance 464[5] Attractive Industry 464

[F] Key Timing Events of Equity Carve-Outs 464[G] Valuation of Equity Carve-Outs 466[H] Tax and Accounting Considerations 467[I] Filing Requirements 467[J] Pricing of Equity Carve-Outs 467

XXVII


[K] Issues with Respect to Equity Carve-Outs 469[1] Ownership 469[2] Intent 470[3] Integration 470[4] Management Incentives 470[5] Taxable Nature of Transaction 470

[L] Subsequent Events 471[M] Case Study: Hewlett-Packard's IPO/Spin-Off of Agilent

Technologies 471§ 20.04 Summary 475

PART V. LEGAL ASPECTS OF MERGERS & ACQUISITIONS

Chapter 21

BUSINESS JUDGMENT RULE 481

§ 21.01 Overview and Purpose of the Business Judgment Rule 481

[A] The Sarbanes-Oxley Act of 2002 483§ 21.02 Genesis of the Business Judgment Rule 485

[A] The Model Business Corporation Act 485[B] The Principles of Corporate Governance: Analysis and

Recommendations 487§ 21.03 General Principles of the Business Judgment Rule and Duties

of Directors 488[A] The Duty of Care 488

[1] Smith v. Van Gorkom 489[B] The Duty of Loyalty 491[C] Act in Good Faith 492

§ 21.04 Business Judgment Under Enhanced Scrutiny 492[A] The Unocal Standard 493

[1] Unocal v. Mesa Petroleum Co 493[2] Unitrin v. American General Corp. 494

§ 21.05 Application of the Entire Fairness Standard 494[A] Cede & Co. v. Technicolor, Inc 496[B] Weinberger v. UOP 498

§ 21.06 Fiduciary Duties in the Case of Sale of Control 498[A] Revlon Duties 499

[1] Revlon, Inc. v. Mac Andrews and Forbes Holdings 499[2] Paramount Communications Inc. v. QVC Network, Inc 501[3] Lyendell Chemical Company v. Ryan 501

§ 21.07 Current Topics 503§ 21.08 Summary 505

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Chapter 22

LEGAL ASPECTS OF MERGERS & ACQUISITIONS 507


[A] The Securities and Exchange Commission 508[B] The Securities Act of 1933 509[C] The Securities Exchange Act of 1934 509[D] The Williams Act of 1968 510

§22.02 TenderOffers 511[A] Schedule TO 513[B] Regulation 14D 513

[1] Rule 14d-9 and Schedule 14D-9 517[2] Rule 14d-10 518

[C] Regulation 14E 518[D] Tender Offers by Affiliates and Issuers 521

[1] Rule 13e-4 521§ 22.03 Transactions Requiring Shareholder Approval 522

[A] Regulation 14A 522[B] Schedule 14A 523

§ 22.04 Transactions Not Requiring Shareholder Approval 526[A] Regulation 14C 526

§ 22.05 Going Private Transactions 526[A] Rule 13e-3 528[B] Schedule 13E-3 530

§ 22.06 Other Regulations and Disclosure Filings 530[A] Regulations 13D and 13G 530

. [B] Schedules 13D and 13G 531§ 22.07 Antitrust Laws 531

[A] The Sherman Antitrust Act 537[B] The Clayton Act 537[C] The Federal Trade Commission Act of 1914 537[D] The Celler-Kefauver Act of 1950 538[E] The Hart-Scott-Rodino Antitrust Improvements Act of 1976 538

[1] Implications of the HSR Act on Mergers andAcquisitions 539

[2] Non-HSR Concerns in Mergers and Acquisitions 539[F] Merger Guidelines 540

[1] Horizontal Acquisitions 540[2] Vertical Acquisitions 541

§ 22.08 Summary 541

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Chapter 23

ANTI-TAKEOVER MEASURES 543


§ 23.02 Overview of Directors' Fiduciary Duties 546§ 23.03 State Takeover Statutes 546

[A] Business Combination Statutes 547[B] Control Share Acquisition Statutes 548[C] Fair Price Statutes 548[D] Cash Out Statutes 548

§ 23.04 Assessing a Company's Vulnerability to Takeover 548[A] The Current M&A Environment 549[B] Defensive Posture Analysis 549

[1] Financial Statement and Valuation Analysis 549[2] Stock Price Evaluation and Trading 550[3] Charter and By-Laws and State Corporate/Takeover Law 550[4] Structural and Other Defenses 551[5] Shareholder Profile 552[6] Possible Suitors 553[7] Other 553

§ 23.05 Proactive Anti-Takeover Measures 553[A] Shareholder Rights Plans 553

[1] Overview of Shareholder Rights Plans 553[2] How Do Shareholder Rights Plans Work? 554[3] Implementation, Structure, and Mechanics of Shareholder

Rights Plans 556[4] Accounting and Tax Treatment of Shareholder Rights Plans . . . 561[5] The View from the Courts 561[6] Bells and Whistles 564[7] Poison Pill Summary 565

[B] Charter and By-Law Amendments 566[I] Staggered Board of Directors 566[2] Supermajorty Provisions 567[3] Fair Price Provisions 567[4] Blank Check Preferred Stock 568[5] Increase in Authorized Shares 568[6] Dual Capitalization 568[7] Anti-Greenmail Amendments 568[8] Special Meetings 568[9] Action by Written Consent 569[10] Notice 569II1] Cumulative Voting 569

[C] Other Preemptive Defenses 569[1] Executive Compensation 569

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[2] Structural Defenses 570[a] Protect Crown Jewel Assets 570[b] Review Loan, Lease, and Other Documents for

Constraints 570[c] Obtain Additional Financial Capacity 570[d] Implement Share Repurchase Program 571[e] Issue Stock to an ESOP or Friendly Party 571[f] Make a Defensive Acquisition 572

§ 23.06 Responding to a Takeover Proposal 572[A] Passive Responses 573

[1] Just Say No 573[B] Active Responses 573

[1] White Knights 573[2] White Squires 574[3] Restructuring, Recapitalizations, and LBOs 574[4] ESOPs 574[5] Antitrust Considerations 574[6] Pac-Man Defense 574

§ 23.07 Summary 575

Chapter 24

HOSTILE ACQUISITIONS 577


§ 24.02 Tactical Alternatives for Gaining Control 580[A] Friendly Approaches 581

[1] Negotiated Transaction 581[2] Casual Overture 582

[B] Aggressive Approaches 582[1] Bear Hug 582[2] Stake Acquisition 583

[C] Hostile Approaches 584[1] Tender Offer 584[2] Exchange Offer 587[3] Proxy Solicitation 587

[a] Proxy Contests in Conjunction with Tender Offers 590§ 24.03 Key Considerations for Hostile Transactions 591

[A] Fiduciary Duties of Target's Directors 591[B] Price and Form of Consideration 592[C] Target's Defensive Posture 592

[1] Target Financial Performance 593[2] Structural Defenses 594[3] State Statutes 596

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[4] Antitrust and Other Regulatory Constraints 596[5] Employees and Other Constituents 599[6] Public Relations 599[7] Divestiture Risk and Non-Core Assets 599[8] Litigation 599[9] Bidding Strategy 600

§ 24.04 Target's Potential Reactions to Takeover Proposals 601§ 24.05 Summary 602

PART VI. STRUCTURING, NEGOTIATING, ANDEXECUTING THE DEAL

Chapter 25

FUNDAMENTALS OF NEGOTIATION 605


§ 25.02 The Basics of Negotiation 606[A] Be Informed 606[B] Formulate a Negotiation Plan 607[C] Have a Back-Up Strategy 608[D] Be Creative 609[E] Listen 610[F] Build Trust 610[G] Separate the People from the Issues 610[H] Seek Common Ground 611

§ 25.03 Tricks of the Trade 611[A] Do's 611[B] Don'ts 614[C] Tactics to Look Out For 615

§ 25.04 Summary 616

Chapter 26

FORMULATING AN OFFER 617


§ 26.02 Industry Trends 619§ 26.03 Competitive Environment 619§ 26.04 Stand Alone Valuation of the Target Company 620§ 26.05 Historical Trading Prices and Share Ownership of Target Company 620§ 26.06 Takeover Valuation 621§ 26.07 Impact of Transaction on Shareholder Value 621§ 26.08 Synergies ". 622

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§26.09 Seller's Objectives 623§ 26.10 Your Objectives 623§ 26.11 Intent of the Offer 623§26.12 Formulating the Offer Itself 624§26.13 Case Study: Tropical Products Corp.'s Acquisition of

Global Snacks, Inc 624§ 26.14 The Impact of the Financing Markets 631§26.15 Summary 631

Chapter 27

STRUCTURING THE LETTER OF INTENTAND DEFINITIVE AGREEMENT 633

§ 27.01 Overview 634§ 27.02 The Confidentiality Agreement 634

[A] Definition of Information 635[B] Disclosure of Information 636[C] Discussion with Other Parties 637[D] Non-Solicitation of Employees 638[E] Survival of the Terms of the Confidentiality Agreement 638[F] Standstill Provisions 639

§ 27.03 Formulating the Offer 639§ 27.04 Submitting the Initial Non-Binding Letter of Intent 645

[A] Purchase Price 645[B] Consideration 646[C] Transaction Structure 646[D] Conditions to Closing 646[E] Due Diligence 646[F] Timing 646[G] Approvals 646[H] Non-Binding 647[I] Confidentiality 647

§ 27.05 Advantages and Disadvantages of Letters of Intent 647[A] Advantages 647[B] Disadvantages 647

§ 27.06 The Revised Letter of Intent 649§ 27.07 Perform Due Diligence 650§ 27.08 The Definitive Agreement 650

[A] Business Issues 650[B] Legal Issues 651

§ 27.09 Financing 652§ 27.10 Negotiation and Execution 652§ 27.11 Regulatory Approvals 653

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§27.12 Closing 653

§27.13 Summary 653

Chapter 28

COLLARS AND WALKAWAYS 655


§ 28.02 Fixed-Exchange Ratio Within Price Collar 656[A] Mechanics of Fixed-Exchange Ratio Within Price Collar 658[B] Example of Fixed-Exchange Ratio Within Price Collar 659

§ 28.03 Fixed Price with Floating Exchange Ratio Collar 659[A] Mechanics of Fixed Price Within Collar 661[B] Example of Fixed Price Within Collar 661

§ 28.04 Walk-Aways 662§ 28.05 Factors Influencing Choice of Pricing Structure 662§ 28.06 Summary 664

Chapter 29

TERMINATION FEES, LOCK-UP OPTIONS,AND NO-SHOP CLAUSES 665

§ 29.01 Overview 665§ 29.02 Termination Fees 665

[A] Termination Fee Example 666§ 29.03 Lock-Up Options 667

[A] Stock Lock-Ups 667[B] Asset Lock-Ups 668

§ 29.04 No-Shop Provisions 669[A] No-Shop Example 670

§ 29.05 Go-Shop Provisions 672§ 29.06 Deal Protection Mechanisms and the Business Judgment Rule 673§ 29.07 Summary 674

Chapter 30

EARNOUTS AND CONTINGENT PAYMENTS 677


§ 30.02 Advantages and Disadvantages of Earnouts 679§ 30.03 Size of the Earnout 679§ 30.04 Performance Goals 681§ 30.05 Time Frame 683§ 30.06 Other Structural Considerations 683§ 30.07 Words of Caution 684

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§ 30.08 Limitations on the Use of Earnouts 685

§ 30.09 Summary 686

Chapter 31

DUE DILIGENCE 687

§ 31.01 What Is Due Diligence? 687

[A] Why Perform Due Diligence? 688[B] When to Perform Due Diligence 689[C] Forms of Due Diligence 690

[1] Legal Due Diligence 690[2] Business Due Diligence 690[3] Strategic Due Diligence 690

[D] Who Performs Due Diligence? 690[E] Where to Get Information 691

§ 31.02 The Due Diligence Process 693[A] Establish a Plan and Assemble the Team 693[B] Identify Key Issues 694[C] Prepare the Information Request and Obtain Information 694

[1] The Preliminary Information Request 694[2] The Detailed Due Diligence Review 696[3] Meeting with Management 706[4] Follow-Up Questions 706

[D] Translate Issues into Value, Structure, and Terms 706[E] Resolve Issues 707[F] Plan for Follow-Up, Integration, or Transition 707

§31.03 Summary 707

Chapter 32

PRE- AND POST-MERGER INTEGRATION 709


§ 32.02 Why Mergers & Acquisitions Fail 712§ 32.03 Aligning M&A with Corporate Strategy 714§ 32.04 Constraints to Successful Merger Integration 718

[A] People 718[B] Other Consituents: Suppliers, Customers, Unions,

and Regulators 718[C] Providers of Capital 719[D] Competitors 719[E] Ongoing Review 719

§ 32.05 Pre-Merger Planning 720

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[A] Vision and Leadership 720[B] Integration Plan 721[C] Benchmarks 722[D] Integration Teams 722[E] Due Diligence 723[F] Communication Strategy 723

§ 32.06 Post-Merger Integration 725[A] Appoint Leadership 725[B] Turn Integration Teams Loose 725[C] Review Progress and Assess Change 725

§ 32.07 Best Practices 726[A] Initiate the Integration Process Early On 726[B] Create Teams Early 726[C] Communicate Early and Often 726[D] Manage Change 727[E] Leave Ego at the Door 727[F] Don't Forget the Small Stuff 727[G] Celebrate the Deal 727

§ 32.08 Summary 727

Index 729

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ASPEN PUBLISHERS STRUCTURING MERGERS & ACQUISITIONS … · ASPEN PUBLISHERS STRUCTURING MERGERS &...

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