PART Ⅰ：TAKEOVERS AND MERGERS IN PRACTICE 1
CHAPTER 1 The Takeover Process 1
Change Forces 3
Issues Raised by M＆A Activity 4
Merger and Tender Offer Terminology 5
Types of Mergers from an Economic Standpoint 6
Horizonal Mergers 6
Vertical Mergers 7
Conglomerate Mergers 7
Mergers in a Legal Framework 10
The Nature of Tender Offers 11
Risk Arbitrage in M＆A Activity 13
Illustrative Example 13
The Nature of the Arbitrage Business 14
Arbitrage Funds 14
Summary 15
Questions 16
Appendix A：Merger Process Information in Proxy Statements 17
Appendix B：The AOL and Time Warner Merger 20
CHAPTER 2 The Legal and Regulatory Framework 24
The Main Securities Laws 25
Federal Securities Laws 26
The Operation of the Securities Acts 29
Tender Offer Regulation—The Williams Act 29
Section 13 29
Section 14 30
Insider Trading Overview 31
The Racketeer Influenced and Corrupt Organizations Act of 1970(RICO) 31
Court Cases and SEC Rules 32
Liability Under Rule 10b-5 of the 1934 Act 33
Other Disclosure Requirements 35
Disclosure Requirements of Stock Exchanges 35
Disclosure of Merger Talks 36
Regulation of Takeover Activity by the States 37
Developments During the 1980s 37
Issues with Regard to State Takeover Laws 38
Antitrust Policies 39
The Basic Antitrust Statutes 40
Sherman Act of 1890 40
Clayton Act of 1914 41
Hart-Scott-Rodino Act of 1976 41
The Antitrust Guidelines 42
Other Market Characteristics 43
Nonhorizontal Mergers 44
Private Antitrust Suits 44
State Antitrust Activity 44
Regulatory Bodies 45
Railroads 45
Commercial Banks 45
Telecommunications 46
International Antitrust 46
Canada 46
United Kingdom 47
Japan 47
Europe 47
Regulation by Publicity 49
Seizure of the First Executive Corporation and First Capital Life 49
The Hostile Takeover of the Pacific Lumber Company 50
Regulation by the Politics of Finance 50
Summary 51
Questions 52
Case 2.1 Broader Board Responsibilities 53
Case 2.2 Van Gorkom 54
Case 2.3 Revlon Inc.v.Pantry Pride 55
Case 2.4 Maxwell Communications v.Macmillan 55
Case 2.5 Paramount v.Time 56
Case 2.6 Paramount v.QVC Network 56
Case 2.7 Sandoz-Gerber 57
Case 2.8 United Airlines and US Airways 57
References 58
Appendix A：Legal Due Diligence Preliminary Information Request 60
CHAPTER 3 Accounting for M＆As 70
Historical Background 70
Pooling of Interests 72
Defects in Pooling 72
FASB Elimination of Pooling 73
Purchase Accounting 74
Purchase Accounting Adjustment Entries 74
Amortization and Impairment Rules 77
Empirical Studies of Pooling Versus Purchase 79
Summary 82
Questions 83
Case 3.1 Wells Fargo Acquisition of First Interstate Bancorporation 83
Case 3.2 Time Warner(TWX)Purchase of the Turner Broadcasting System(TBS) in 1996 86
Case 3.3 The AOL Acquisition of Tune Warner(TWX) 87
Case 3.4 The Pfizer Acquisition of Pharmacia 89
References 89
CHAPTER 4 Deal Structuring 91
Taxation and Acquisitions 91
Taxable Versus Nontaxable Acquisitions 91
The Tax Reforn Act of 1986 93
Stock Versus Asset Purchases 93
Empirical Studies of Taxes and Mergers 95
Form of Payment 96
Stock Mergers with Collars 97
Earnouts in Mergers 98
Summary 99
Questions 99
Case 4.1 Form of Payment in the First Union and Money Store Merger 100
References 101
PART Ⅱ：M＆As—THEORIES AND EMPIRICAL TESTS 102
CHAPTER 5 Strategic Processes 102
The Nature of Strategy 102
Successful Strategies 102
The Importance of the Economic Environment 104
The Investment Accelerator Principle 104
Sales-to-Capacity Relationships 105
Basic Steps in Strategic Planning 106
Monitoring the Organizational Environment 107
Stakeholders 107
Organizational Cultures 107
Alternative Strategy Methodologies 107
Alternative Analytical Frameworks 111
Approaches to Formulating Strategy 114
The Boston Consulting Group 114
The Porter Approach 115
Adaptive Processes 116
Evaluation of the Alternative Approaches 116
Checklists and Iterations 116
Flexibility and Rapid Adjustments 117
Formulating a Merger Strategy 118
Busiess Goals 118
Aligningthe Firm to Its Changing Environment 119
Strategy and Structure 120
Virtual Integration 122
Strategy and M＆A Decisions 122
Summary 123
Questions 123
Case 5.1 Merck Acquisition of Medeo 124
Case 5.2 Acquisition of Lotus Development Corporation by IBM 126
Rererences 128
CHAPTER 6 Theories of Mergers and Tender Offers 130
Some Initial Examples of the Merger Process 130
Hewlett-Packard and Compaq 130
Northrop Grumman and TRW 132
Merger Occurrence：Economies of Scale and Transaction Costs 132
Sizeand Returns to Scale 133
Transaction Costs and Mergers 133
Theories of the Valuation Effects of Mergers and Acquisitions 134
Mergers as Value-Increasing Decisions 134
Mergers as Value-Reducing Decisions 135
Managerial Hubris and Mergers 135
Theoretical Predictions of the Patterns of Gains in Takeovers 136
The Merger Process 136
An Example of the Bidding Process：The Acquisition of Savannah Foods 137
Models of the Takeover Bidding Process 138
The Winner's Curse 139
Bidder Costs 139
Seller Decisions 140
An Example of a Takeover Auction 140
Summary 142
Questions 142
References 143
Appendix A：A Chemical Industry Case Study 144
Appendix B：Measurement of Abnormal Returns 152
CHAPTER 7 The Timing of Merger Activity 171
Conceptual Framework 171
Early Merger Movements 172
The 1895 t0 1904 Horizontal Mergers 172
The 1922 to 1929 Vertical Mergers 173
The Conglomerate Mergers of the 1960s 173
The Deal Decade,1981 to 1989 176
Strategic Mergers,1992-2000 178
Merger Activity After the Bubble 180
Timing of Merger Activity 180
Industry Clustering in Merger Activity 181
Industry Clustering in the 1980s 181
Industry Clustering in the 1990s 182
Extended Analysis of Industry Clustering 183
Mergers and Deregulation 183
Industry Clustering and Deregulation 183
Deregulation,Mergers,and Performance 184
International Perspectives 185
Summary 185
Questions 186
References 186
Appendix A：Telecommunications Industry Case Study 188
CHAPTER 8 Empirical Tests of M＆A Performance 195
The Combined Returns in Mergers and Acquisitions 195
Combined Returns：Event Study Evidence 195
Combined Returns：Extended Analysis 196
Combined Merger Returns：Analysis of the Banking Industry 196
Factors Related to Target Returns 198
Target Returns：Type of Merger and Method of Payment 198
Target Returns：Single Versus Multiple Bidders 199
Target Run-Up 199
Takeover Bidding and Takeover Premiums 202
Factors Related to Bidder Returns 202
Bidder Returns and Method of Payment 202
Bidder Returns：Single Versus Multiple Bidders 204
Do Bad Bidders Become Good Targets? 205
Takeover Regulation and Takeover Hostility 205
Measuring the Effect of the Williams Act 205
Takeover Impediments in the 1980s 206
Is Hostility in the Eyes of the Beholder? 206
Postmerger Operating Performance 206
Long-Term Stock Price Performance Following Mergers 207
General Issues 207
Long-Term Merger Performance 208
Summary Comments on Long-Term Price Performance 209
Efficiency Versus Market Power 210
Which Firms Are Subject to Antitrust Enforcement? 210
The Effect of Mergers on Rival Firms 210
Further Analysis of Industry Spillovers 211
Vertical and Horizontal Mergers 211
Effects of Concentration 212
Impact on Macroconcentration 212
Impact on Microconcentration 213
Summary 213
Questions 214
References 215
Appendix A：Analysis of a Recent M＆A Sample 218
PART Ⅲ：VALUATION-—THE STRATEGIC PERSPECTIVE 232
CHAPTER 9 Alternative Approaches to Valuation 232
Comparables Approaches 232
Comparable CompaniesAnalysis 232
Comparable Transactions Analysis 233
Application of Comparable Transactions Analysis 235
The DCF Spreadsheet Methodology 237
Capital Budgeting Decisions 237
A Real Options Analysis 238
Spreadsheet Projections 240
Brief Evaluation of the Spreadsheet Approach 243
Cost of Capital 243
Cost of Equity 243
Cost of Debt 245
Weighted Average Cost of Capital 245
Capital Structure and the Cost of Capital 246
Formula Approach 248
The Basic Formula 248
Sensitivity Analysis 250
Summary 251
Questions 251
References 252
Appendix A：Derivation of Revenue Growth Valuation Formulas 253
CHAPTER 10 Increasing the Value of the Organization 256
The Exxon-Mobil Merger 256
Industry Characteristics 257
Merger Motivations 257
Deal Terms and Event Returns 258
Cost of Capital Calculations 260
Application of the DCF Percentage-of-Sales Method to ExxonMobil 261
DCF Formula Valuation 264
Sensitivity Analysis 264
Test of Merger Performance 268
Tests of Merger Theory 272
Review 273
Multiple-Stage Valuation 274
Summary 277
Problems 278
References 283
Appendix A：Calculating Growth Rates 284
PART Ⅳ：RESTRUCTURING 288
CHAPTER 11 Corporate Restructuring and Divestitures 288
Corporate Restructuring Strategies 288
Definitions of Corporate Restructuring 288
Asset Sales,Equity Carve-Outs,and Spin-Offs 289
Split-Ups,Tracking Stock,and Exchange Offers 290
Examples of Corporate Restructuring：AT＆T Corporation 290
The Baby Bell Breakup in 1984 291
Restructuring in the 1990s 291
Restructuring Since2000 292
Other Examples of Restructuring and Divestitures 293
The Auto Parts Industry：GM-Delphi and Ford-Visteon 293
Restructuring at Philip Morris 293
Restructuring at Pete's Brewing 294
Some Discussion of Restructuring Motives 294
Why Might Divestitures Create Wealth? 295
Modigliani,Miller,and Irrelevance 295
Corporate Restructuring,Incentives,and Efficiency 295
Corporate Restructuring and Information 295
Why Do Divestitures Occur? 296
Corporate Restructuring and Transaction Costs：The Petrochemical Industry 297
Corporate Restructuring and Change Forces：The Natural Gas Industry 298
Summary 299
Questions 299
References 300
Appendix A：Restructuring in the Diversified Natural Gas Industry in the 1990s 301
CHAPTER 12 Empirical Tests of Corporate Restructuring and Divestitures 311
The Wealth Effects of Restructuring and Divestitures 311
Are Divestitures a Positive NPV Project? 311
Sources of Wealth Gains：Evidence from Asset Sales 312
Sources of Wealth Gains：Information versus Efficiency 314
Corporate Focus 314
Focus and the Wealth Effects of Corporate Divestitures 314
Focus,Diversification,and Firm Value 316
Is There Really a Diversification Discount? 317
Corporate Choice：How to Divest? 317
Summary 318
Questions 319
References 319
Appendix A：Analysis of a Sample of Recent Divestitures 321
CHAPTER 13 Financial Restructuring 328
Unlocking the Value in the Firm 328
Leverage and Leveraged Recapitalizations 329
The Effects of the Use of Leveraged Recaps 332
Subsequent Performance 334
Dual-Class Stock Recapitalizations 335
Reasons for Dual-Class Recapitalizations 335
Market Response to Dual-Class Recaps 335
Paradox of the Entrenchment 336
Exchange Offers 337
Tax Aspects of Exchange Offers 337
Empirical Evidence on Exchange Offers 338
Reorganization Processes 340
Out-of-Court Procedures 340
Merger into Another Firm 341
Formal Legal Proceedings 341
Bankruptcy 342
Recent Data on Bankruptcy 342
Bankruptcy Procedures 343
Financial Engineering 347
Liquidations and Takeover Bust-Ups 348
Empirical Studies 349
Summary 351
Questions 352
Case 13.1 Management Assistance,Incorporated 352
References 353
PART Ⅴ：M＆A STRATEGIES 356
CHAPTER 14 Alliances and Joint Ventures 356
Joint Ventures 357
Uses of Joint Ventures 358
Joint Ventures and Business Strategy 359
Joint Ventures and Restructuring 359
Rationale for Joint Ventures 361
Failure and Success 362
Empirical Tests 363
Strategic Alliances 365
Uses of Strategic Alliances 366
Other Issues 368
Event Studies 369
Successful Strategic Alliances 370
Relative Roles 371
Other Interfirm Relationships 372
Minority Equity Investments 372
Technological and Marketing Agreements 373
Franchising 374
Summary 374
Questions 376
Case 14.1 GM-Toyota Joint Venture 376
References 377
CHAPTER 15 Employee Stock Ownership and MLPs 379
Nature and History of ESOPs 379
Types of Pension Plans 379
Types of ESOPs 380
ESOPs as Pension Plans 381
Concept of a Leveraged ESOP 382
Uses of ESOPs 383
Comparison with a Merger 383
ESOPs in Lieu of Subsidiary Divestitures 385
Other Uses of ESOPs 385
Data on ESOP Characteristies 386
Tax Advantages 388
Interest Exclusion 388
Dividend Deduction 388
Deferment of Capital Gains Tax 389
Tax Loss Carryforwards 389
Excess Pension Asset Reversions 389
Conclusions on Tax Benefits 389
The Performance of ESOPs 390
ESOPs as a Takeover Defense 390
ESOPs Versus Alternative Methods of Raising Funds 390
Comparison with Profit Sharing 391
Effects on Company Productivity 392
Economic Issues 394
ESOP Event Returns 395
Evaluation of ESOPs 396
Master Limited Partnerships 397
The Nature of MLPs 397
The Boston Celtics Example 398
Advantages of MLPs 398
Initial Pricing of MLPs 399
Summary 399
Questions 400
Case 15.1 Pan Petroleum MLP 401
Case 15.2 UAL Corp 402
References 404
CHAPTER 16 Going Private and Leveraged Buyouts 406
The Characteristics of LeverageD Buyouts 407
The Major Stages of Leveraged Buyouts 407
Characteristics of LBOs in the 1980s 410
General Economic and Financial Factors 410
Illustration of an LBO 411
Elements of a Typical LBO Operation 413
Other Aspects of Going-Private Buyouts in the 1980s 414
Empirical Results of Going Private in the 1980s 415
Sources of Gains 418
Evidence of Postbuyout Equity Value 424
The Correction Period 1991 to 1992 426
The Role of Junk Bonds 427
LBOs in the 1992 to 2000 Period 430
Valuation of LBOs 431
Summary 433
Questions 434
Problems 434
References 438
Appendix A：Relation Between WACC and CCF Models 440
Appendix B：Relation Between CCF and APV Models 443
CHAPTER 17 International Takeovers and Restructuring 446
Historical Patterns 446
Large Cross-Border Transactions 446
Examples of Cross-Border Transactions 454
Forces Driving Cross-Border Mergers 460
Growth 461
Technology 461
Advantages in Differentiated Products 462
Roll Ups 462
Consolidation 462
Government Policy 463
Exchange Rates 463
Political and Economic Stability 463
Following Clients 464
Diversification 464
Premiums Paid 464
Event Returns 465
International Joint Ventures 467
Cost of Capital in Foreign Acquisitions and Investments 469
Cost of Debt Relationships 469
Cost of Equity and Cost of Capital 471
Summary 474
Questions 475
Case 17.1 The Saga of Gerber Products 476
Case 17.2 Ciba-Geigy Merger with Sandoz 478
Case 17.3 Vodafone Airtouch Takeover of Mannesmann 480
References 482
PART Ⅵ：STRATEGIES FOR CREATING VALUE 484
CHAPTER 18 Share Repurchases 484
Growth of Share-Repurchase Activity 484
Major Types of Share Repurchase 487
Fixed-Price Tender Offers(FPTs) 487
Dutch Auctions(DAs) 488
Transferable Put Rights(TPRs) 488
Open-Market Repurchases(OMRs) 488
Fixed-Price Tender Offers(FPTs) 489
Basic Stock Repurchase Model 489
Rationale for the Postexpiration Price Changes 491
Dutch Auction Repurchases 492
Transferable Put Rights(TPRs) 495
Event Studies 498
Undervaluation in the 1970s 498
Share Repurchases Around the October 1987 Stock Market Drop 498
Comparisons Between FPTs, DAs,and OMRs 500
Lagged Responses 500
The Mitchell and Stafford(2000)Methodology Critique 500
Event Returns in the 1990s 501
The Impact of Stock Market Declines 501
Implications of Gains and Losses from Share Repurchases 501
A Model of Undervaluation 505
Accounting Treatment of Share Repurchases 508
Empirical Studies of Share Repurchases in the 1990s 510
The Measurement of Share-Repurchase Growth 511
Related Dividend Studies 512
The Substitution Issue 514
Summary 517
Questions 519
Case18.1 FPL 520
Case 18.2 Returns from Open-Market Repurchase Announcements 521
References 522
CHAPTER 19 Takeover Defenses 525
Strategic Perspectives 525
Financial Derensive Measures 527
Corporate Restructuring and Reorganization 527
Reorganization of Assets 527
Other Strategies 528
Greenmail 528
Wealth Effects of Greenmail 529
Antigreenmail Developments 530
Methods of Resistance 531
Pac Man Defense 531
White Knight 532
White Squire 532
Antitakeover Amendments 532
Supermajority Amendments 533
Fair-Price Amendments 533
Classified Boards 533
Authorization of Preferred Stock 534
Other Antitakeover Actions 534
Antitakeover Amendments and Corporate Policy 535
Antitakeover Amendments and Shareholder Returns 536
Takeover Defenses of Newly Public Firms 538
State Laws 538
Poison Pills 539
Types of Plans 539
Case Studies 539
Dead-Hand Provisions 540
Effects of Poison Pills on Shareholder Returns 541
Shareholder Activism 542
Poison Puts 543
Golden Parachutes 544
Rationale 545
Silver and Tin Parachutes 546
Golden Parachutes and Returns to Shareholders 546
Summary 547
Questions 549
Case 19.1 Caner Hawley Hale Versus Marshall Field＆Company 550
Case 19.2 Mattel-Hasbro 551
Case 19.3 Hershey Foods Saga 552
References 555
CHAPTER 20 Corporate Governance and Performance 558
Governance Failure 558
Corporate Fraud 558
Regulatory Responses 560
An Overview of Corporate Governance 562
Corporate Governance Systems in the United States 563
Diffuse Stock Ownership 563
Contractual Theory of the Firm 563
Divergent Interests of Stakeholders 564
Internal Control Mechanisms 564
Role of the Board of Directors 565
Composition of the Board 565
Compensation of Board Members 567
Evaluating a Board of Directors 567
Ownership Concentration 568
Ownership and Performance 568
Other Studies of Ownership Effects 570
Managerial Ownership and Bond Returns 571
Financial Policy and Ownership Concentration 571
Executive Compensation 572
Outside Control Mechanisms 574
Stock Prices and Top Management Changes 574
Institutional Investors 575
Multiple Control Mechanisms 577
Proxy Contests 577
Wealth Effects—Early Studies 578
Wealth Effects—Later Studies 579
The M＆A Market for Control 581
Alternative Governance Systems 582
Summary 583
Questions 585
Case 20.1 Chrysler Corporation Versus Tracinda Corporation—A Struggle for Control 586
Case 20.2 WorldCom 587
Case20.3 AOL Time Warner 590
References 592
CHAPTER 21 Merger Arbitrage 596
Merger Arbitrage Scenarios 597
Cash Deals 597
Stock Mergers 600
Complex Merger Transactions 605
Empirical Research on Merger Arbitrage 607
Risk and Return to Merger Arbitrage 607
Do Merger Arbitrageurs Accurately Forecast Merger Success? 610
Price Pressure Around Mergers 612
Floating-Exchange Ratio Mergers 613
Merger Arbitrage in Action 615
The Mechanics of Trading 616
The Challenge of Stock Mergers 617
The Monitoring Process 618
Summary 620
Questions 620
Case 21.1 Cheap Tickets,Incorporated-Cendant Corporation 621
References 622
Appendix A：Conoco Incorporated-Phillips Petroleum 623
Appendix B：Proposed HotJobs.com,Limited and TMP Worldwide,Inc.Merger Selected Commentary by Deal Analytics.com 625
Appendix C：Illustrative Portfolio Recommendations 635
Appendix D：Hlustrative Portfolio Recommendations Summary 637
CHAPTER 22 Implementation and Management Guides for M＆As 639
M＆As in a Strategic,Long-Range Planning Framework 640
Goals and Objectives 640
The Role of Strategy 641
The Role of Planning 643
Managerial Capabilities Perspective 643
The Foundation for Sound M＆A Decisions 644
Strategic Planning Framework 645
Real Options Framework 646
The Acquisition Process 649
Strategy Formulation 649
The Economics of the Industry 649
The Organization System 651
Multiple Strategies for Value Growth 651
Search Processes 652
Economic Basis—Synergy Potentials 652
Restructuring Potentials 653
Due Diligence 653
Expanding Due Diligence 653
Cultural Factors 654
Valuation 655
Negotiation 656
Deal Structuring 656
Implementation 657
Reviews and Renewal Process 657
Summary 658
Questions 659
References 659
GLOSSARY 661
AUTHOR INDEX 677
SUBJECT INDEX 683