Mergers, Acquisitions, and Corporate Restructurings

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Gaughan Patrick А.. Mergers, Acquisitions, and Corporate Restructurings

Preface

Part I. Background

Chapter 1. Introduction

Recent M&A Trends

Terminology

Valuing a Transaction

Types of Mergers

Merger Consideration

Merger Professionals

Merger Arbitrage

Leveraged Buyouts and the Private Equity Market

Corporate Restructuring

Merger Negotiations

Merger Agreement

Merger Approval Procedures

Deal Closing

Short-Form Merger

Freeze-Outs and the Treatment of Minority Shareholders

Reverse Mergers

Holding Companies

Chapter 2. History of Mergers

Merger Waves

What Causes Merger Waves?

First Wave, 1897–1904

Second Wave, 1916–1929

The 1940s

Third Wave, 1965–1969

Trendsetting Mergers of the 1970s

Fourth Wave, 1984–1989

Fifth Wave

Sixth Merger Wave

Chapter 3. Legal Framework

Laws Governing Mergers, Acquisitions, and Tender Offers

Other Specific Takeover Rules in the United States

International Securities Laws Relating to Takeovers

U.S. State Corporation Laws and Legal Principles

State Antitakeover Laws

Regulation of Insider Trading

Antitrust Laws

Measuring Concentration and Defining Market Share

European Competition Policy

Chapter 4. Merger Strategy

Growth

Synergy

Operating Synergy

Diversification

Types of Focus Increases

Focus Increasing Asset Sales Increase Firm Values

Explanation for the Diversification Discount

Do Diversified or Focused Firms Do Better Acquisitions?

Other Economic Motives

Hubris Hypothesis of Takeovers

Do Managerial Agendas Drive M&A?

Other Motives

Major Expansion into Financial Services

Anticipated Synergy: Cross-Selling to Each Other's Customers

Anticipated Synergy: Selling Financial Services through Retail Stores

Corporate Governance: A Management-Dominated Board and an Institutional Investor Revolt

Market Reaction and Shareholder Returns

Part II. Hostile Takeovers

Chapter 5. Antitakeover Measures

Management Entrenchment Hypothesis versus Stockholder Interests Hypothesis

Rights of Targets Boards to Resist: United States Compared to the Rest of the World

Preventative Antitakeover Measures

Changing the State of Incorporation

Active Antitakeover Defenses

Information Content of Takeover Resistance

Chapter 6. Takeover Tactics

Preliminary Takeover Steps

Tender Offers

Advantages of Tender Offers over Open Market Purchases

Proxy Fights

Chapter 7. Hedge Funds as Activist Investors

Macroeconomic Foundations of the Growth of Activist Funds

Hedge Funds as Acquirers

Part III. Going-Private Transactions and Leveraged Buyouts

Chapter 8. Going-Private Transactions and Leveraged Buyouts

Terminology

Historical Trends in LBOs

Management Buyouts

Conflicts of Interest in Management Buyouts

U.S. Courts' Position on Leveraged Buyout Conflicts

Financing for Leveraged Buyouts

Returns to Stockholders from LBOs

Returns to Stockholders from Divisional Buyouts

Empirical Research on Wealth Transfer Effects

Protection for Creditors

Intra-industry Effects of Buyouts

Chapter 9. The Private Equity Market

History of the Private Equity and LBO Business

Private Equity Market

Secondary Market for Private Equity Investments

Chapter 10. The Junk Bond and the Leveraged Loan Market and Stapled Financing

History of the Junk Bond Market

Leveraged Loan Market

Stapled Financing

Part IV. Corporate Restructuring

Chapter 11. Corporate Restructuring

Divestitures

Divestiture and Spin-Off Process

Market Liquidity and the Decision to Divest a Unit

Round-Trip Wealth Effects

Wealth Effects of Sell-Offs

Managerial Ownership and Sell-Off Gains

Activists and Sell-Offs

Shareholder Wealth Effects of Spin-Offs: U.S. versus Europe

Equity Carve-Outs

Voluntary Liquidations or Bust-Ups

Tracking Stocks

Master Limited Partnerships and Sell-Offs

Chapter 12. Restructuring in Bankruptcy

Types of Business Failure

Causes of Business Failure

Bankruptcy Trends

U.S. Bankruptcy Laws

Reorganization versus Liquidation

Reorganization Process

Benefits of the Chapter 11 Process for the Debtor

Prepackaged Bankruptcy

Workouts

Corporate Control and Default

Liquidation

Investing in the Securities of Distressed Companies

Chapter 13. Corporate Governance

Structure of Corporations and Their Governance

Golden Parachutes

CEO Severance Payments

Reform of Excesses of Golden Parachutes and Severance Payments

Managerial Compensation, Mergers, and Takeovers

CEO Compensation and Power

Compensation Characteristics of Boards That Are More Likely to Keep Agency Costs in Check

Role of the Board of Directors

Regulatory Standards for Directors

Antitakeover Measures and Board Characteristics

Disciplinary Takeovers, Company Performance, CEOs, and Boards

Merger Strategy and Corporate Governance

CEO Compensation and M&A Programs

Do Boards Reward CEOs for Initiating Acquisitions and Mergers?

CEO Compensation and Diversification Strategies

Agency Costs and Diversification Strategies

Interests of Directors and M&As

Managerial Compensation and Firm Size

Corporate Control Decisions and Their Shareholder Wealth Effects

Does Better Corporate Governance Increase Firm Value?

Corporate Governance and Competition

Executive Compensation and Postacquisition Performance

Mergers of Equals and Corporate Governance

Chapter 14. Joint Ventures and Strategic Alliances

Contractual Agreements

Comparing Strategic Alliances and Joint Ventures with Mergers and Acquisitions

Joint Ventures

Strategic Alliances

Chapter 15. Valuation

Valuation Methods: Science or Art?

Managing Value as an Antitakeover Defense

Benchmarks of Value

How the Market Determines Discount Rates

Valuation of the Target's Equity

Marketability of the Stock

Takeovers and Control Premiums

Valuation of Stock-for-Stock Exchanges

Shareholder Wealth Effects and Methods of Payment

Exchange Ratio

Fixed Number of Shares versus Fixed Value

Merger Negotiations and Stock Offers: Halliburton vs Baker Hughes

International Takeovers and Stock-for-Stock Transactions

Desirable Financial Characteristics of Targets

Chapter 16. Tax Issues in M&A

Financial Accounting for M&As

Taxable versus Tax-Free Transactions

Tax Consequences of a Stock-for-Stock Exchange

Asset Basis Step-Up

Changes in the Tax Laws

Role of Taxes in the Merger Decision

Role of Taxes in the Choice of Sell-Off Method

Organizational Form and M&A Premiums

Capital Structure and Propensity to Engage in Acquisitions

Leverage and Deal Structure

Taxes as a Source of Value in Management Buyouts

Miscellaneous Tax Issues

Glossary

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THE FIELD OF MERGERS and acquisitions has undergone tumultuous changes over the past 20 years. The 1990s witnessed the fifth merger wave – a merger wave that was truly international in scope. After a brief recessionary lull, the merger frenzy began once again and global megamergers began to fill the corporate landscape. This was derailed by the subprime crisis and the Great Recession. When the economic recovery was slow, so too was the rebound in M&A activity. However, by 2013 and 2014 M&As began to rebound more strongly.

Over the past quarter of a century we have noticed that merger waves have become longer and more frequent. The time periods between waves also has shrunken. When these trends are combined with the fact that M&A has rapidly spread across the modern world, we see that the field is increasingly becoming an ever more important part of the worlds of corporate finance and corporate strategy.

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While the contents will vary, the typical term sheet identifies the buyer and seller, the purchase price and the factors that may cause that price to vary prior to closing (such as changes in the target's financial performance). It will also indicate the consideration the buyer will use (i.e., cash or stock) as well as who pays what expenses. While there are many other elements that can be added based on the unique circumstances of the deal, the term sheet should also include the major representations and warranties the parties are making.

The term sheet may be followed by a more detailed letter of intent (LOI). This letter delineates more of the detailed terms of the agreement. It may or may not be binding on the parties. LOIs vary in their detail. Some specify the purchase price, while others may only define a range or formula. It may also define various closing conditions, such as providing for the acquirer to have access to various records of the target. Other conditions, such as employment agreements for key employees, may also be noted. However, many merger partners enter into a merger agreement right away. So a LOI is something less than that, and it may reflect one of the parties not necessarily being prepared to enter into a formal merger agreement, For example, a private equity firm might sign a LOI when it does not yet have firm deal financing. This could alert investors, such as arbitragers, that the deal may possibly never be completed.

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