Takeovers, restructuring, and corporate governance

641 Pages·3.112 MB·English

by  Weston, J Fred;Mitchell, Mark L;Mulherin, J Harold

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Takeovers, Restructuring,
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ISBN 978-1-29202-086-0
9 781292 020860
Takeovers, Restructuring,
and Corporate Governance
Weston Mitchell Mulherin
Fourth Edition
ISBN 10: 1-292-02086-5
ISBN 13: 978-1-292-02086-0
Pearson Education Limited
Edinburgh Gate
Harlow
Essex CM20 2JE
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© Pearson Education Limited 2014
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book by such owners.
ISBN 10: 1-292-02086-5
ISBN 13: 978-1-292-02086-0
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A catalogue record for this book is available from the British Library
Printed in the United States of America
1111222332591379358121901526818428
P E A R S O N C U S T O M L I B R AR Y
Table of Contents
1. The Takeover Process
J. Fred Weston, Mark L. Mitchell, J. Harold Mulherin 1
2. Strategic Processes
J. Fred Weston, Mark L. Mitchell, J. Harold Mulherin 24
3. The Legal and Regulatory Framework
J. Fred Weston, Mark L. Mitchell, J. Harold Mulherin 52
4. Accounting for M&As
J. Fred Weston, Mark L. Mitchell, J. Harold Mulherin 98
5. Deal Structuring
J. Fred Weston, Mark L. Mitchell, J. Harold Mulherin 119
6. Theories of Mergers and Tender Offers
J. Fred Weston, Mark L. Mitchell, J. Harold Mulherin 130
7. The Timing of Merger Activity
J. Fred Weston, Mark L. Mitchell, J. Harold Mulherin 171
8. Empirical Tests of M&A Performance
J. Fred Weston, Mark L. Mitchell, J. Harold Mulherin 195
9. Alternative Approaches to Valuation
J. Fred Weston, Mark L. Mitchell, J. Harold Mulherin 232
10. Increasing the Value of the Organization
J. Fred Weston, Mark L. Mitchell, J. Harold Mulherin 256
11. Corporate Restructuring and Divestitures
J. Fred Weston, Mark L. Mitchell, J. Harold Mulherin 288
12. Empirical Tests of Corporate Restructuring and Divestitures
J. Fred Weston, Mark L. Mitchell, J. Harold Mulherin 311
13. Financial Restructuring
J. Fred Weston, Mark L. Mitchell, J. Harold Mulherin 328
I
334445566570482502696670813
14. Alliances and Joint Ventures
J. Fred Weston, Mark L. Mitchell, J. Harold Mulherin 356
15. Employee Stock Ownership and MLPs
J. Fred Weston, Mark L. Mitchell, J. Harold Mulherin 379
16. Going Private and Leveraged Buyouts
J. Fred Weston, Mark L. Mitchell, J. Harold Mulherin 406
17. Share Repurchases
J. Fred Weston, Mark L. Mitchell, J. Harold Mulherin 446
18. Takeover Defenses
J. Fred Weston, Mark L. Mitchell, J. Harold Mulherin 487
19. Corporate Governance and Performance
J. Fred Weston, Mark L. Mitchell, J. Harold Mulherin 520
20. Merger Arbitrage
J. Fred Weston, Mark L. Mitchell, J. Harold Mulherin 558
21. Implementations and Management Guides for M&As
J. Fred Weston, Mark L. Mitchell, J. Harold Mulherin 601
Index 623
II
THE TAKEOVER PROCESS
Q
Afterreaching a record $2.3 trillion in 1999,world merger and acquisition (M&A) activity
increased by another 50% to $3.6 trillion in 2000, as shown in Table 1.As of 2000,
merger activity had grown for nine straight years.That growth dramatically reversed in 2001,
with merger activity plummeting to $2.0 trillion.The reversal was especially striking for non-
U.S.M&A activity,which had been growing at a considerably faster rate during the prior
few years.
A historical perspective of M&A activity in the United States is presented in Table 2.The
data in Table 2are from Mergerstat,which compiles announcement data.In contrast,Table 1is
from Securities Data Corporation (SDC) as reported in the Mergers &Acquisitionsmagazine,
which compiles M&A completions and uses different selection criteria.For individual years,
the numbers are sometimes higher for one source,but lower in other years.The trend patterns
over time for the two sources convey the same economic implications.
During the 1980s,merger activity was considered to be at an all-time high.The peak year
during the 1980s was 1988,when merger activity (in 1996 dollars) was $308 billion.This period
has been studied extensively and is viewed as one of the greatest merger booms ever.Yet,the
late 1990s broke numerous records with respect to M&A activity.For example,the 1999 level
(in constant dollars) was more than four times that of the peak year of the 1980s.Even in 2001,
when merger activity dropped considerably,the constant dollar amount was more than twice as
high as that in 1988.
Large firms continue to be susceptible to takeover.Table 3displays the 10 largest mergers,
based on purchase price of the target equity,completed during 2000–2001.At the top of the list
is the $115 billion acquisition of Warner-Lambert by Pfizer.All of these deals exceeded
$25 billion in target value as of the close of the merger.The industries represented in descend-
ing order are telecommunications (four),drugs (two),oil (two),entertainment (one),and finan-
cial services (one).Table 3also illustrates the internationalization of merger activity.BP PLC,
TABLE 1 Worldwide M&A Activity, 1998-2001 ($ billion)
1998 1999 2000 2001
World $2,092 $2,373 $3,565 $2,063
United States $1,343 $1,395 $1,786 $1,143
Rest of Worlda $ 749 $ 979 $1,779 $ 920
aNon-U.S.targets and acquirers
Source:Mergers & Acquisitions Magazine,various issues.
From Chapter 1 of Takeovers,Restructuring,and Corporate Governance,Fourth Edition.J.Fred Weston,
Mark L.Mitchell,J.Harold Mulherin.Copyright © 2004 by Pearson Education,Inc.Published by Pearson
Prentice Hall.All rights reserved.
1
TABLE 2 Merger Announcements: The Mergerstat Series
Number of
Transactions Valued At
Total Dollar $100 GDP 1996 Constant
Value Paid Number Million $1 Billion Deflator Dollar Percent
Years ($ billion) Total or More or More (1996=100) Consideration Change
1975 11.8 2297 14 0 40 29.5
1976 20 2276 39 0 42.3 47.3 60
1977 21.9 2224 41 1 45 48.7 3
1978 34.2 2106 80 0 48.2 70.9 46
1979 43.5 2128 83 3 52.2 83.3 17
1980 44.3 1889 94 4 57 77.7 (cid:2)7
1981 82.6 2395 113 12 62.4 132.4 71
1982 53.8 2346 116 6 66.3 81.2 (cid:2)39
1983 73.1 2533 138 11 68.9 106.2 31
1984 122.2 2543 200 18 71.4 171.1 61
1985 179.8 3011 270 36 73.7 244 43
1986 173.1 3336 346 27 75.3 229.8 (cid:2)6
1987 163.7 2032 301 36 77.6 211 (cid:2)8
1988 246.9 2258 369 45 80.2 307.8 46
1989 221.1 2366 328 35 83.3 265.5 (cid:2)14
1990 108.2 2074 181 21 86.5 125.1 (cid:2)53
1991 71.2 1877 150 13 89.7 79.4 (cid:2)36
1992 96.7 2574 200 18 91.8 105.3 33
1993 176.4 2663 242 27 94 187.6 78
1994 226.7 2997 383 51 96 236.1 26
1995 356 3510 462 74 98.1 362.9 54
1996 495 5848 640 94 100 495 36
1997 657.1 7800 873 120 101.9 644.6 30
1998 1191.9 7809 906 158 103.2 1154.9 79
1999 1425.9 9278 1097 195 104.6 1362.6 18
2000 1325.7 9566 1150 206 107 1238.6 (cid:2)9
2001 699.4 8290 703 121 109.4 639.5 (cid:2)48
Source:Mergerstat Review,various issues.
TABLE 3 Top 10 Mergers Completed During 2000-2001
Rank Target Acquirer Amount ($ billions) Industry
1 Warner-Lambert Pfizer 114.9 drugs
2 Time Warner America Online 86.4 entertainment
3 GTE Bell Atlantic 59.9 telecommunications
4 US West Qwest Communications 43.5 telecommunications
5 MediaOne AT&T 42.7 telecommunications
6 Texaco Chevron 38.4 oil
7 Pharmacia & Upjohn Monsanto 31.0 drugs
8 Atlantic Richfield BP PLC 27.5 oil
9 Voicestream Wireless Deutsche Telekom AG 26.7 telecommunications
10 JP Morgan Chase Manhattan 26.6 financial services
Source:Mergerstat Review,various issues.
2
The Takeover Process
a U.K.oil company,acquired Atlantic Richfield,an American company,illustrating a cross-
border transaction.In addition,VoiceStream Wireless,an American company,was acquired by
Deutsche Telecom AG,a German firm.
Although merger activity during 2001 and 2002 dropped considerably from that of the late
1990s,the daily newspapers and wire services continue to be filled with case studies of mergers
and acquisitions (M&As),tender offers (friendly and hostile),spin-offs,equity carve-outs and
divestitures,corporate recapitalizations and restructurings,changes in ownership structures,
and struggles for corporate control (see glossary for definitions).Although the traditional sub-
ject matter of M&As has been expanded to include these other types of activities,for brevity
we refer to these and related activities as M&As. Investors, especially large institutional
investors,are continually increasing their role in monitoring management with respect to
merger plans.Even small retail investors,who have been empowered via a wealth of informa-
tion from the Internet,are starting to scrutinize mergers rather than simply going along with
management on every deal.The Securities and Exchange Commission (SEC) continues to
actively pursue insider trading cases associated with mergers,as well as pursuing cases of finan-
cial fraud associated with merging parties.
CHANGE FORCES
Merger activities throughout history have been related to the economic and cultural character-
istics of their time and place.The increasing pace of merger activity during the past two decades
is related to the powerful change forces listed in Figure 1.
Overriding all other forces are technological changes,which include computers,computer
services, software, servers, and the many advances in information systems, including the
Internet.Improvements in communications and transportation have created a global economy.
Nations have adopted international agreements such as the General Agreement on Tariffs and
Trade (GATT) that have resulted in freer trade.The euro was launched in 1999 and became the
sole currency for the 12 participating member states in 2002,continuing to result in an opening
of boundaries and restrictions throughout Europe.The growing forces of competition have pro-
duced deregulation in major industries such as financial services,airlines,broadcasting,and
medical services.
FIGURE 1 The 10 Change Forces
1. Technological change
2. Economies of scale,economies of scope,complementarity,and the need to catch up
technologically
3. Globalization and freer trade
4. Changes in industrial organization
5. New industries
6. Deregulation and regulation
7. Favorable economic and financial conditions for much of the past two decades
8. Negative trends in certain individual economies and industries
9. Widening inequalities in income and wealth
10. Relatively high valuations for equities during the 1990s
3
The Takeover Process
Another set of change factors relates to efficiency of operations. Economies of scale
spreadthelargefixedcostofinvestinginmachineryorcomputersystemsoveralargernumber
of units.Economies of scope refer to cost reductions from operations in related activities.In
the information industry,these would represent economies of activities in personal computer
(PC)hardware,PCsoftware,serverhardware,serversoftware,theInternet,andotherrelated
activities.Another efficiency gain is achieved by combining complementary activities—for
example,combining a company that is strong in research with one that is strong in market-
ing.Mergers to catch up technologically are illustrated by the series of acquisitionsAT&T
madeduringthe1990s,manyofwhichAT&Thasbeenattemptingtodivestorspinoffinthe
early2000s.
A third group of change forces stimulating M&A and restructuring activities comprises
changes in industry organization.An example is the shift in the computer industry from verti-
cally integrated firms to a horizontal chain of independent activities.As industries continue to
undergo rapid change,often leading to merger,it is important to note that the change does not
end with the merger.It is difficult to combine organizations when industries undergo rapid
change,and multiple adjustment processes typically are required.
A fourth group of change forces is the result of the favorable economic and financial
conditions during the past two decades.Consequently,prior to the recent decline in equity
values, stock valuations have been high relative to historical relationships. When corpo-
rate managers were optimistic about the future, they made large-scale investments, often
via M&As.As the economy began to struggle in 2001 and the stock market dropped as
well,corporate investment,at the internal and external levels,via M&A,also began a substan-
tial pullback.
ISSUES RAISED BY M&A ACTIVITY
Mergers and industrial restructuring activities have raised important issues for business deci-
sions and for public policy for formulation.No firm is considered safe from the possibility of
takeover.Mergers and acquisitions can be critical to the healthy expansion of business firms as
they evolve through successive stages of growth and development. Internal and external
growth may be complementary in the long-range evolution of firms.Successful entry into new
product markets and into new geographic markets may require M&As at some stage in the
firm’s development.Successful competition in international markets may depend on capabili-
ties obtained in a timely and efficient fashion through M&As.
Some have argued that mergers increase value and efficiency and move resources to their
optimal uses, thereby increasing shareholder value. Others are skeptical.They argue that
acquired companies are already efficient and that their subsequent performance after acquisi-
tion is not improved.Yet others aver that the gains to shareholders merely represent a redistri-
bution away from labor and other stakeholders.Another view is that the M&A activity repre-
sents the machinations of speculators who reflect the frenzy of a “casino society.” This
speculative activity is said to increase debt unduly and to erode equity,resulting in an economy
highly vulnerable to economic instability.
Even individual businesspeople have expressed skepticism about the power of mergers.
4
The Takeover Process
Many managements apparently were overexposed in impressionable childhood years
to the story in which the imprisoned handsome prince is released from a toad’s body
by a kiss from a beautiful princess.Consequently,they are certain their managerial kiss
will do wonders for the profitability of Company T[arget]....Investors can always buy
toads at the going price for toads.If investors instead bankroll princesses who wish to
pay double for the right to kiss the toad,those kisses had better pack some real dyna-
mite.We’ve observed many kisses but very few miracles.Nevertheless,many manager-
ial princesses remain serenely confident about the future potency or their kisses—even
after their corporate backyards are knee-deep in unresponsive toads...
We have tried occasionally to buy toads at bargain prices with results that have
been chronicled in past reports.Clearly our kisses fell flat.We have done well with a
couple of princes—but they were princes when purchased.At least our kisses didn’t
turn them into toads.And,finally,we have occasionally been quite successful in pur-
chasing fractional interests in easily identifiable princes at toadlike prices.
Warren Buffet made these remarks in his 1992 letter to the shareholders of Berkshire
Hathaway.Despite Buffet’s stated skepticism of the power of mergers,Berkshire under his
leadership has engaged in numerous successful acquisitions over the past few decades,and
recently completed acquisitions of large firms such as Fruit of the Loom,Johns Manville,Shaw
Industries,and XTRA Corporation in 2001 and 2002.
In this text,we seek to sort out these opposing views.We offer guidelines for such practical
matters as M&A planning by firms and the valuation of combining firms.Further,the theory
and empirical evidence have implications for social and economic policies toward mergers.
Thus,this work provides a framework for the evaluation of alternative business and social poli-
cies involving M&As.
In this chapter,we provide a framework for understanding the many aspects of mergers
and takeovers.We cover the topics of merger and tender offer terminology,types of mergers
from an economic standpoint,mergers in a legal framework,and the nature or tender offers.
MERGER AND TENDER OFFER TERMINOLOGY
The words merger and tenderoffer are used frequently,but the distinctions are not precise.In
general,mergersrefers to negotiated deals that meet certain technical and legal requirements.
Tender offerusually means that one firm or person is making an offer directly to the sharehold-
ers to sell (tender) their shares at specified prices.In one sense,the word mergerrefers to nego-
tiations between friendly parties who arrive at a mutually agreeable decision to combine their
companies.However,in practice,one firm in a merger might be stronger and might dominate
the transaction.Similarly,tender offers can be friendly or hostile.In either mergers or tender
offers,the negotiations may start out friendly and become hostile.Conversely,negotiations may
start out hostile and become friendly.In addition,there may be wide variations in attitudes in
either direction as negotiations proceed.However,mergers are mostly friendly.Some tender
offers are hostile in the sense that an offer is made to the shareholders without the approval of
the board of directors.
5