Mergers, Acquisitions, and Corporate Restructurings
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MERGERS, ACQUISITIONS, AND CORPORATE RESTRUCTURINGS FOURTH EDITION PATRICK A. GAUGHAN JOHN WILEY &SONS,INC. MERGERS, ACQUISITIONS, AND CORPORATE RESTRUCTURINGS FOURTH EDITION MERGERS, ACQUISITIONS, AND CORPORATE RESTRUCTURINGS FOURTH EDITION PATRICK A. GAUGHAN JOHN WILEY &SONS,INC. This book is printed on acid-free paper. Copyright 2007 by John Wiley & Sons, Inc. All rights reserved. Published by John Wiley & Sons, Inc., Hoboken, New Jersey. Published simultaneously in Canada. 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Wiley also publishes its books in a variety of electronic formats. Some content that appears in print, however, may not be available in electronic format. For more information about Wiley products, visit our Web site at http://www.wiley.com. Library of Congress Cataloging-in-Publication Data: Gaughan, Patrick A. Mergers, acquisitions, and corporate restructurings / Patrick A. Gaughan.—4th ed. p. cm. Includes index. ISBN: 978–0–471–70564–2 (cloth) 1. Consolidation and merger of corporations. 2. Corporate reorganizations. I. Title. HD2746.5.G38 2007 658.16—dc22 2006020848 Printed in the United States of America. 10987654321 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 xCONTENTS 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 PREFACE The field of mergers and acquisitions continues to experience dramatic growth. Record- breaking megamergers have become commonplace across the globe. While megamergers used to be mainly an American phenomenon, the recently completed fifth merger wave became a truly international merger period. Starting in the 1990s and continuing into the next decade, some of the largest mergers and acquisitions (M&As) took place in Europe. This was underscored by the fact that the largest deal of all time was a hostile acquisition of a German company by a British firm. While deal volume declined when the fifth wave ended it, the pace of M&A picked up again shortly thereafter. By the mid-2000s the nature of the M&A business changed even more. It became even more global with the emergence of the emerging market acquirer. In addition, deregulation combined with economic growth has greatly increased deal volume in Asia. M&A also grew markedly in Latin and South America. 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. As the field has evolved we see that many of the methods that applied to deals of prior years are still relevant, but new rules are also in effect.