Trim Size: 7in x 10in k Gaughan ffirs.tex V1 - 11/07/2017 6:58am Page i Mergers, Acquisitions, and Corporate Restructurings k k k Trim Size: 7in x 10in k Gaughan ffirs.tex V1 - 11/07/2017 6:58am Page ii Founded in 1807, John Wiley & Sons is the oldest independent publishing company in the United States. With offices in North America, Europe, Asia, and Australia, Wiley is globally committed to developing and marketing print and electronic products and services for our customers’ professional and personal knowledge and understanding. The Wiley Corporate F&A series provides information, tools, and insights to corporate professionals responsible for issues affecting the profitability of their company, from accounting and finance to internal controls and performance management. k k k Trim Size: 7in x 10in k Gaughan ffirs.tex V1 - 11/07/2017 6:58am Page iii Mergers, Acquisitions, and Corporate Restructurings Seventh Edition PATRICK A.
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| Series: Wiley corporate F&A | Revised edition of the author’s Mergers, acquisitions, and corporate restructurings, 2015. | Identifiers: LCCN 2017034914 (print) | LCCN 2017036346 (ebook) | ISBN 9781119380757 (pdf) | ISBN 9781119380733 (epub) | ISBN 9781119380764 (hardback) | ISBN 9781119380757 (ePDF) Subjects: LCSH: Consolidation and merger of corporations. | BISAC: BUSINESS & ECONOMICS / Accounting / Managerial. Classification: LCC HD2746.1/6—dc23 LC record available at https://lccn.gov/2017034914 Cover Design: Wiley Cover Image: © Image Source RF/Alan Schein Printed in the United States of America.
10 9 8 7 6 5 4 3 2 1 k Trim Size: 7in x 10in k Gaughan ftoc.tex V1 - 11/07/2017 6:58am Page v Contents Preface xi PART I: BACKGROUND Chapter 1: Introduction 3 Recent M&A Trends 3 Terminology 11 Valuing a Transaction 13 Types of Mergers 13 Merger Consideration 14 k Merger Professionals 15 k Merger Arbitrage 18 Leveraged Buyouts and the Private Equity Market 19 Corporate Restructuring 20 Merger Negotiations 21 Deal Structure: Asset versus Entity Deals 24 Merger Agreement 28 Merger Approval Procedures 29 Deal Closing 31 Short-Form Merger 31 Freezeouts and the Treatment of Minority Shareholders 32 Appraisal Arbitrage 33 Reverse Mergers 34 Chapter 2: History of Mergers 41 Merger Waves 41 First Wave, 1897–1904 43 Second Wave, 1916–1929 48 The 1940s 49 Third Wave, 1965–1969 49 Trendsetting Mergers of the 1970s 54 v k Trim Size: 7in x 10in k Gaughan ftoc.tex V1 - 11/07/2017 6:58am Page vi vi ◾ Contents Fourth Wave, 1984–1989 59 Fifth Wave, 1992–2001 64 Sixth Wave, 2004–2007 68 Chapter 3: Legal Framework 71 Laws Governing Mergers, Acquisitions, and Tender Offers 72 Other U. Takeover Rules 85 Takeovers and International Securities Laws 86 U. State Corporation Laws and Legal Principles 96 State Antitakeover Laws 99 Regulation of Insider Trading 108 Antitrust Laws 110 Measuring Concentration and Defining Market Share 117 Example of the HH Index 118 European Competition Policy 121 Research Note: Event Studies Methodology 124 M&A Research: Event Studies 124 k Chapter 4: Merger Strategy 127 k Growth 127 Synergy 136 Operating Synergy 138 Diversification 146 Focus Hypothesis 151 Possible Explanation for the Diversification Discount 152 Do Diversified or Focused Firms Do Better Acquisitions? 156 Other Economic Motives 157 Hubris Hypothesis of Takeovers 168 Do Managerial Agendas Drive M&A? 171 Other Motives 176 PART II: HOSTILE TAKEOVERS Chapter 5: Antitakeover Measures 183 Management Entrenchment Hypothesis versus Stockholder Interests Hypothesis 184 Rights of Targets’ Boards to Resist: United States Compared to the Rest of the World 185 k Trim Size: 7in x 10in k Gaughan ftoc.tex V1 - 11/07/2017 6:58am Page vii Contents ◾ vii Preventative Antitakeover Measures 186 Poison Pills 187 Corporate Charter Amendments 199 Changing the State of Incorporation 210 Active Antitakeover Defenses 211 Information Content of Takeover Resistance 234 Chapter 6: Takeover Tactics 237 Preliminary Takeover Steps 238 Tender Offers 245 Advantages of Tender Offers over Open Market Purchases 260 Proxy Fights 267 Chapter 7: Hedge Funds as Activist Investors 279 Macroeconomic Foundations of the Growth of Activist Funds 281 Leading Activist Hedge Funds and Institutional Investors 282 Hedge Funds as Acquirers 288 Hedge Fund Activism and Firm Performance 292 Buyout Premiums: Activist Hedge Funds versus Private Equity Firms 294 k k PART III: GOING-PRIVATE TRANSACTIONS AND LEVERAGED BUYOUTS Chapter 8: Leveraged Buyouts 305 Terminology 305 Historical Trends in LBOs 306 Management Buyouts 314 Conflicts of Interest in Management Buyouts 318 U. Courts’ Position on Leveraged Buyout Conflicts 319 Financing for Leveraged Buyouts 328 Returns to Stockholders from LBOs 336 Returns to Stockholders from Divisional Buyouts 337 Empirical Research on Wealth Transfer Effects 342 Protection for Creditors 343 Intra-Industry Effects of Buyouts 344 Chapter 9: The Private Equity Market 345 History of the Private Equity and LBO Business 345 k Trim Size: 7in x 10in k Gaughan ftoc.tex V1 - 11/07/2017 6:58am Page viii viii ◾ Contents Private Equity Market 346 Computing Private Equity Internal Rates of Return 360 Characteristics of Private Equity Returns 361 Replicating Private Equity Investing 365 Board Interlocks and Likelihood of Targets to Receive Private Equity Bids 366 Secondary Market for Private Equity Investments 366 Chapter 10: High-Yield Financing and the Leveraged Loan Market 369 History of the Junk Bond Market 369 Leveraged Loan Market 380 Stapled Financing 383 PART IV: CORPORATE RESTRUCTURING Chapter 11: Corporate Restructuring 389 Divestitures 392 Divestiture and Spinoff Process 403 k Managerial Ownership and Sell-Off Gains 408 k Activists and Sell-Offs 408 Shareholder Wealth Effects of Spinoffs: U.
versus Europe 417 Equity Carve-Outs 424 Voluntary Liquidations or Bust-Ups 430 Tracking Stocks 431 Master Limited Partnerships and Sell-Offs 433 Chapter 12: Restructuring in Bankruptcy 437 Types of Business Failure 438 Causes of Business Failure 439 Bankruptcy Trends 444 U. Bankruptcy Laws 448 Reorganization versus Liquidation 449 Reorganization Process 450 Benefits of the Chapter 11 Process for the Debtor 457 Prepackaged Bankruptcy 461 Workouts 465 Corporate Control and Default 470 Liquidation 471 k Trim Size: 7in x 10in k Gaughan ftoc.tex V1 - 11/07/2017 6:58am Page ix Contents ◾ ix Investing in the Securities of Distressed Companies 472 Chapter 13: Corporate Governance 477 Structure of Corporations and Their Governance 477 CEO Severance Payments 494 Managerial Compensation, Mergers, and Takeovers 494 CEO Compensation and Power 495 Golden Parachutes 499 Compensation Characteristics of Boards That Are More Likely to Keep Agency Costs in Check 501 Role of the Board of Directors 502 Antitakeover Measures and Board Characteristics 512 Disciplinary Takeovers, Company Performance, CEOs, and Boards 515 Merger Strategy and Corporate Governance 516 CEO Compensation and M&A Programs 516 Do Boards Reward CEOs for Initiating Acquisitions and Mergers? 516 CEO Compensation and Diversification Strategies 517 Agency Costs and Diversification Strategies 518 Interests of Directors and M&As 519 k k Managerial Compensation and Firm Size 520 Corporate Control Decisions and Their Shareholder Wealth Effects 521 Does Better Corporate Governance Increase Firm Value? 522 Corporate Governance and Competition 523 Executive Compensation and Postacquisition Performance 524 Mergers of Equals and Corporate Governance 525 Chapter 14: Joint Ventures and Strategic Alliances 535 Contractual Agreements 535 Comparing Strategic Alliances and Joint Ventures with Mergers and Acquisitions 536 Joint Ventures 536 Strategic Alliances 542 Chapter 15: Valuation 551 Valuation Methods: Science or Art? 553 Managing Value as an Antitakeover Defense 553 Benchmarks of Value 554 How the Market Determines Discount Rates 566 Valuation of the Target’s Equity 579 k Trim Size: 7in x 10in k Gaughan ftoc.tex V1 - 11/07/2017 6:58am Page x x ◾ Contents Marketability of the Stock 579 Takeovers and Control Premiums 583 Valuation of Stock-for-Stock Exchanges 588 Shareholder Wealth Effects and Methods of Payment 589 Exchange Ratio 595 Fixed Number of Shares versus Fixed Value 602 Merger Negotiations and Stock Offers: Halliburton versus Baker Hughes 603 International Takeovers and Stock-for-Stock Transactions 603 Desirable Financial Characteristics of Targets 604 Chapter 16: Tax Issues in M&A 613 Financial Accounting for M&As 614 Taxable versus Tax-Free Transactions 614 Tax Consequences of a Stock-for-Stock Exchange 617 Asset Basis Step-Up 618 Changes in the Tax Laws 619 Role of Taxes in the Merger Decision 620 Role of Taxes in the Choice of Sell-Off Method 622 k k Organizational Form and M&A Premiums 622 Capital Structure and Propensity to Engage in Acquisitions 623 Taxes as a Source of Value in Management Buyouts 624 Miscellaneous Tax Issues 625 Glossary 631 Index 643 k Trim Size: 7in x 10in k Gaughan fpref.tex V1 - 11/07/2017 6:58am Page xi Preface T he field of mergers and acquisitions has undergone tumultuous changes over the past four decades. The fourth merger wave of the 1980s featured a fascinating period of many hostile deals and leveraged buyouts along with many more “plain vanilla” deals. 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 initially slow, so too was the rebound in M&A activity. However, by 2013 and 2014, M&A volume rebounded strongly and has continued in the years that followed.
Over the past quarter of a century, we have noticed that merger waves have become more frequent. The time periods between waves also has shrunken. When these trends k are combined with the fact that M&A has rapidly spread across the modern world, we k 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 techniques and rules are also in effect.