CONTENTS
Preface xi
About the Web Site xiii
Part 1 Background 1
1 Introduction 3
Recent M&A Trends 3
Definitions 12
Valuing a Transaction 12
Types of Mergers 13
Reasons for Mergers and Acquisitions 14
Merger Financing 14
Merger Professionals 15
Merger Arbitrage 16
Leveraged Buyouts and the Private Equity Market 17
Corporate Restructuring 18
Merger Negotiations 19
Merger Approval Procedures 21
Short-Form Merger 22
Freezeouts and the Treatment of Minority Shareholders 23
Purchase of Assets Compared with Purchase of Stock 23
Structuring the Deal 24
Assumption of the Seller’s Liabilities 24
Advantages of Asset Acquisitions 24
Asset Selloffs 25
Reverse Mergers 25
Holding Companies 26
2 History of Mergers 29
Merger Waves 29
What Causes Merger Waves? 29
First Wave, 1897–1904 30
Second Wave, 1916–1929 36
The 1940s 39
Third Wave, 1965–1969 40
Trendsetting Mergers of the 1970s 47
vi CONTENTS
Fourth Wave, 1984–1989 53
Fifth Wave 59
Summary 67
3 Legal Framework 69
Laws Governing Mergers, Acquisitions, and Tender Offers 70
Securities Laws 70
Other Specific Takeover Rules in the United States 84
International Securities Laws Relating to Takeovers 85
Business Judgment Rule 91
State Antitakeover Laws 92
Regulation of Insider Trading 98
Antitrust Laws 100
Recent Trends in Antitrust Enforcement in the United States 107
Measuring Concentration and Defining Market Share 109
European Competition Policy 114
Antitrust Remedies 114
Summary 116
4 Merger Strategy 117
Growth 117
Synergy 124
Operating Synergy 126
Diversification 136
Other Economic Motives 145
Hubris Hypothesis of Takeovers 157
Other Motives 163
Tax Motives 165
Summary 165
Part 2 Hostile Takeovers 169
5 Antitakeover Measures 171
Management Entrenchment Hypothesis versus Stockholder Interests Hypothesis 172
Preventative Antitakeover Measures 173
Changing the State of Incorporation 196
Active Antitakeover Defenses 197
Information Content of Takeover Resistance 231
Summary 233
6 Takeover Tactics 234
Preliminary Takeover Steps 236
Tender Offers 240
CONTENTS vii
Open Market Purchases and Street Sweeps 258
Advantages of Tender Offers over Open Market Purchases 260
Arbitrage and the Downward Price Pressures Around M&A Announcements 263
Proxy Fights 263
Summary 281
Part 3 Going Private Transactions and Leveraged Buyouts 283
7 Leveraged Buyouts 285
Terminology 285
Historical Trends in LBOs 286
Costs of Being a Public Company 295
Management Buyouts 297
Conflicts of Interest in Management Buyouts 299
Financing for Leveraged Buyouts 309
Capital Structure of LBOs 314
Sources of LBO Financing 315
Returns to Stockholders from LBOs 317
Returns to Stockholders from Divisional Buyouts 317
Reverse LBOs 319
Empirical Research on Wealth Transfer Effects 324
Protection for Creditors 325
Summary 328
8 Trends in the Financing of Takeovers and Going Private
Transactions 330
Trends in Cash versus Stock Percentage of Takeover Financing 331
Shareholder Wealth Effects and Methods of Payment 335
Private Equity Market 340
Hedge Funds 348
Comparison of Private Equity Funds and Hedge Funds 352
Hedge Fund and Private Equity Fund Convergence 353
Junk Bonds Financing of Takeovers 355
Stapled Financing 373
Securitization and M&A Financing 374
Summary 375
9 Employee Stock Ownership Plans 378
Historical Growth of ESOPs 378
Types of Plans 380
Characteristics of ESOPs 380
Leveraged versus Unleveraged ESOPs 381
viii CONTENTS
Corporate Finance Uses of ESOPs 381
Voting of ESOP Shares 383
Cash Flow Implications 383
Valuation of Stock Contributed into an ESOP 384
Eligibility of ESOPs 384
Put Options of ESOPs 384
Dividends Paid 385
ESOPs versus a Public Offering of Stock 385
Employee Risk and ESOPs 387
Securities Laws and ESOPs 388
Tax Benefits of LESOPs 388
Balance Sheet Effects of ESOPs 389
Drawbacks of LESOPs 389
ESOPs and Corporate Performance 390
ESOPs as an Antitakeover Defense 392
ESOPs and Shareholder Wealth 393
ESOPs and LBOs 394
Summary 397
Part 4 Corporate Restructuring 399
10 Corporate Restructuring 401
Divestitures 403
Divestiture and Spinoff Process 413
Wealth Effects of Selloffs 421
Equity Carve-outs 434
Voluntary Liquidations, or Bustups 437
Tracking Stocks 439
Master Limited Partnerships and Selloffs 440
Summary 442
11 Restructuring in Bankruptcy 443
Types of Business Failure 443
Causes of Business Failure 444
Bankruptcy Trends 446
U.S. Bankruptcy Laws 452
Reorganization versus Liquidation 453
Reorganization Process 454
Benefits of the Chapter 11 Process for the Debtor 459
Company Size and Chapter 11 Benefits 459
CONTENTS ix
Prepackaged Bankruptcy 462
Workouts 465
Corporate Control and Default 470
Liquidation 471
Investing in the Securities of Distressed Companies 471
Summary 477
12 Corporate Governance 479
Failed Corporate Governance: Accounting Scandals 479
Sarbanes-Oxley Act 481
Other Regulatory Changes 482
Corporate Governance 483
Summary 517
13 Joint Ventures and Strategic Alliances 519
Contractual Agreements 519
Comparing Strategic Alliances and Joint Ventures with Mergers
and Acquisitions 520
Joint Ventures 520
Governance of Strategic Alliances 526
Summary 530
14 Valuation 531
Valuation Methods: Science or Art? 533
Managing Value as an Antitakeover Defense 533
Benchmarks of Value 534
How the Market Determines Discount Rates 545
Valuation of the Target’s Equity 555
Takeovers and Control Premiums 555
Marketability of the Stock 557
Valuation of Stock-for-Stock Exchanges 566
Exchange Ratio 567
Fixed Number of Shares versus Fixed Value 575
International Takeovers and Stock-for-Stock Transactions 575
Desirable Financial Characteristics of Targets 575
Summary 583
Appendix 584
15 Tax Issues 588
Financial Accounting 588
Taxable versus Tax-Free Transactions 589
Tax Consequences of a Stock-for-Stock Exchange 591
x CONTENTS
Asset Basis Step-Up 594
Changes in the Tax Laws 595
Role of Taxes in the Merger Decision 596
Taxes as a Source of Value in Management Buyouts 598
Miscellaneous Tax Issues 599
Summary 600
Glossary 601
Index 609