STRUCTURING MERGERS & ACQUISITIONS:

Transcription

1 ASPEN PUBLISHERS STRUCTURING MERGERS & ACQUISITIONS: A Guide to Creating Shareholder Value ) Fourth Edition by Peter A. Hunt.Wolters Kluwer Law & Business AUSTIN BOSTON CHICAGO NEW YORK THE NETHERLANDS

2 TABLE OF CONTENTS About the Author Acknowledgments Summary of Contents List of Exhibits Introduction Glossary v vii ix xxxvii xlix Ixxi PART I. A SHAREHOLDER VALUE FRAMEWORK Chapter 1 OVERVIEW OF SHAREHOLDER VALUE Overview What Is Shareholder Value?.'.' How Do Mergers, Acquisitions, and Restructurings Relate to Shareholder Value? Cardinal Health: A Case Study in Value Creation Through Mergers and Acquisitions Summary 13 Chapter 2 OVERVIEW OF VALUATION AND FINANCIAL ANALYSIS Overview Intrinsic Versus Relative Value Deal Valuation for Mergers, Acquisitions, and Restructurings 16 [A] Stand Alone Value 17 [B] Transaction Value 17 [C] Pro Forma Merger Analysis 18 [D] Other Analyses Summary 19 xm

3 STRUCTURING MERGERS & ACQUISITIONS Chapter 3 FINANCIAL STATEMENT ANALYSIS Overview ^/ Problems with Financial Statement Analysis Elements of Financial Statement Analysis 23 [A] Income Statement Analysis 24 [B] Balance Sheet Analysis 25 [C] Cash Flow Statement Analysis 27 [D] Common Size Analysis 27 [E] Footnotes 27 [F] Management Discussion and Analysis 29 [G] Third Party Commentary Categories of Financial Statement Analysis 29 [A] Profitability 29 [1] Analysis of Return on Sales 30 [a] Gross Margin 30 [b] Operating Margin 30 [c] EBIT Margin 30 [d] EBITDA Margin 30 [e] Pre-Tax Margin 31 [f] Net Income Margin 31 [2] Analysis of Return on Investment 31 [a] Return on Assets 31 [b] Return on Equity 32 [c] Return on Capital 32 [B] Efficiency 32 [1] Inventory Turnover Ratio 33 [2] Inventory Days 33 [3] Receivables Turnover 33 [4] Days Sales Outstanding 33 [5] Payables Turnover 34 [6] Days Payables Outstanding 34 [7] Working Capital Turnover 34 [8] Fixed Asset Turnover 34 [9] Total Asset Turnover 34 [C] Liquidity 34 [1] Current Ratio 35 [2] Quick Ratio 35 [3] Cash Ratio 35 [4] Operating Cash Flow Ratio 36 [D] Leverage 36 [1] Debt-to-Total-Capital Ratio 36 [2] Debt-to-Equity Ratio 36 xiv

4 TABLE OF CONTENTS [3] Times Interest Earned (TIE) 37 [4] Fixed Charge Coverage Ratio Sources of Information Financial Statement Analysis Implications for M&A and Shareholder Value.^y/ Summary 39 Chapter 4 DISCOUNTED CASH FLOW ANALYSIS Overview The Anatomy of Discounted Cash Flow Analysis DCF Methodology 44 [A] Calculating an Appropriate Discount Rate 44 [1] Cost of Equity 44 [a] Beta 45 [b] Risk-Free Rate 46 [c] Equity Market Premium 46 [2] Cost of Debt 46 [3] Weighted Average Cost of Capital 47 [B] Preparing Financial Forecasts 47 [C] Calculating Terminal Value 48 [1] Growth in Perpetuity Method 49 [a] Terminal Free Cash Flow 50 [b] Expected Growth Rate 51 [2] Multiples Method 52 [3] Sale Method /. 53 [4] Liquidation Value, 54 [D] Performing the DCF Analysis Discounted Cash Flow Example Summary 60 Chapter 5 COMPARABLE COMPANY ANALYSIS Overview Enterprise Value Versus Equity Value Comparable Company Valuation Methodology Historical Versus Projected Multiples Price/Earnings Multiples Comparable Company Analysis Example Comparable Company Analysis Versus Discounted Cash Flow Analysis Summary 68 xv

5 STRUCTURING MERGERS & ACQUISITIONS Chapter 6 /^ COMPARABLE TRANSACTIONS ANALYSIS Overview Comparable Transaction Multiples Analysis 72 [A] Methodology 72 [B] Example 74 [C] Notes of Caution Comparable Transaction Premiums Analysis 79 [A] Methodology 80 [B] Example Comparable Transactions Analysis Versus DCF and Comparable Company Analysis Summary 83 Chapter 7 MERGER ANALYSIS Overview Accretion/Dilution Analysis 87 [A] Methodology 89 [B] Example Contribution Analysis 95 [A] Methodology 97 [B] Example Summary 99 Chapter 8 LEVERAGED BUYOUT ANALYSIS Overview How to Evaluate an LBO Candidate The Anatomy of LBO Analysis 104 [A] Capital Structure 104 [B] IRR Analysis LBO Methodology 106 [A] Establish a Preliminary Range of LBO Values 107 [B] Establish a Preliminary Capital Structure 108 [C] Confirm Initial Debt Capacity 109 [D] Structure the Equity 110 [E] Perform the LBO Analysis LBO Example Ill 8.06 Summary 117 xvi

6 TABLE OF CONTENTS Chapter 9 STOCK PRICE ANALYSIS Overview Stock Price Analysis 120 [A] Absolute Price Performance 120 [B] Relative Price Performance 120 [C] Price/Volume Analysis Shareholder Analysis Summary 123 Chapter 10 PRIVATE COMPANY VALUATION Overview Factors That Influence the Valuation of Private Companies 129 [A] Lack of Market Liquidity 129 [B] Size 129 [C] Operating History 130 [D] Business Mix 130 [E] Management Control 130 [F] Earnings Measurement 130 [G] Capital Structure 131 [H] Risk Private Company Valuation Methodologies 131 [A] Public Company Approaches to Valuing Private Companies 132 [1] Discounted Cash Flow Analysis 132 [a] Estimating Beta 132 [b] Problems with the Equity Risk Premium 134 [c] Estimating Cost of Equity 134 [d] Estimating Cost of Debt 134 [e] Estimating Cost of Capital 135 [f] Special Problems with Private Company Cash Flows 135 [g] Issues with Calculating Terminal Value 135 [h] Final Observations on DCF Analysis 136 [2] Comparable Company Trading Multiples Analysis 136 [3] Comparable Transactions Analysis 137 [B] Other Valuation Methodologies 137 [1] Total Invested Capital 137 [2] Replacement Cost 137 [3] Asset Appraisal 137 xvn

7 STRUCTURING MERGERS & ACQUISITIONS [4] Internal Rate of Return V Special Issues in Valuing Private Companies 138 [A] Corporate Structure 138 [B] Intermingling of Personal and Business Expenses 139 [C] Accounting Standards Valuing a Private Company as a Public Company 140 [A] IPO Valuation 140 [B] Stand Alone Public/Private Valuation 140 [C] Private Company Sale to Public Company Summary 140 Chapter 11 VALUATION CASE STUDY: TROPICAL PRODUCTS CORP. ACQUISITION OF GLOBAL SNACKS, INC Overview Transaction Background Overview of Tropical Products Corp Overview of Global Snacks, Inc Industry Overview Competitive Overview Strategic and Business Analysis Financial Statement Analysis 152 [A] Common Size Analysis 153 [B] Profitability Analysis 154 [C] Efficiency Analysis 155 [D] Liquidity Analysis 155 [E] Leverage Analysis Global Snacks Valuation Analysis 156 [A] Comparable Trading Multiples Analysis 156 [B] Comparable Transactions Analysis 156 [1] Comparable Transaction Multiples Analysis 156 [2] Comparable Transaction Premiums Analysis 158 [C] Discounted Cash Flow Analysis 158 [D] Stock Price Analysis 162 [E] Summary Valuation Analysis Merger Analysis 166 [A] Accretion/Dilution Analysis 167 [B] Contribution Analysis Summary 171 XVHl

8 TABLE OF CONTENTS PART II. M&A ACCOUNTING \ Chapter 12 M&A ACCOUNTING Overview of M&A Accounting 176 [A] Accounting for Acquisition of Control 176 [B] Accounting for Acquisition of Less than Control Summary of SFAS 141 and SFAS [A] SFAS 141: Business Combinations 178 [B] SFAS 142: Goodwill and Intangible Assets 179 [1] Goodwill Impairment Testing 179 [2] Accounting for Intangible Assets Excluding Goodwill The New M&A Accounting Standards: FAS 141R and FAS [A] Key Changes under FAS 141R and FAS [1] Valuation of Equity Securities 182 [2] Transaction Costs 182 [3] Contingent Consideration 182 [4] In-Process Research and Development 183 [5] Partial Control Acquisitions 183 [6] Partial Non-Control Acquisitions 183 [B] Implications of FAS 141R and FAS Purchase Method of Accounting 184 [A] Mechanics of Accounting for a Purchase Transaction 184 [B] The Purchase Accounting Adjustments in More Detail 184 [C] Purchase Method of Accounting Example Special Topics in Purchase Accounting 190 [A] LIFO Reserve Adjustment 190 [B] Writing Up Assets Equity Method of Accounting 190 [A] Mechanics of Accounting for an Equity Transaction 190 [B] Equity Method Accounting Example Cost Method of Accounting 194 [A] Mechanics of Accounting for a Cost Accounting Transaction 194 [B] Cost Method Accounting Example Special Topics in M&A Accounting 196 [A] Synergies and Joint Opportunities 196 [B] Common Investment Vehicles 197 [1] Preferred Stock 197 [2] Subordinated Debt 198 [3] Bells, Whistles, and Other Features 199 [a] Conversion Features 199 xix

9 STRUCTURING MERGERS & ACQUISITIONS [b] Exchangeable Features 199 [c] Call Provisions 199 [d] Warrants 199 PART III. TRANSACTION TYPES Chapter 13 MERGERS & ACQUISITIONS Overview Evidence Behind Mergers & Acquisitions 206 [A] General Evidence Behind Mergers & Acquisitions 206 [B] What Types of Companies Are Taken Over? 208 [C] Mergers Versus Tender Offers 210 [D] Cross-Border Mergers & Acquisitions Rationale Behind Mergers & Acquisitions 212 [A] Gain Scale 212 [B] Growth 213 [C] Diversification 213 [D] Synergies 215 [1] Operating Synergies 216 [2] Financial Synergies 216 [E] Enhance Research & Development 216 [F] Integrate, Valuation of Mergers & Acquisitions 218 [A] Stand Alone Analysis 218 [B] Takeover Analysis 219 [1] Cash Tender Offer Premiums 220 [2] Merger Premiums 220 [C] Pro Forma Merger Analysis 220 [D] Stock Price and Shareholder Analysis Value Creation in Mergers & Acquisitions 223 [A] Strategic Analysis 224 [B] Financial Analysis 224 fc] Financial Impact on Surviving Company 225 [D] Public Market Response Structural Alternatives 226 [A] Tax-Free Transactions. 227 [1] A Reorganizations 228 [a] Direct Merger 229 [b] Forward Triangular Merger 229 [c] Reverse Triangular Merger 229 [2] B Reorganizations 230 xx

10 TABLE OF CONTENTS [3] C Reorganizations 231 [4] D Reorganizations 232 [B] Taxable Transactions 232 [1] Stock-for-Cash Transactions 232 [a] Section 338(h)(10) 233 [2] Asset Transactions Form of Merger or Acquisition 233 [A] Stock-for-Stock Mergers 234 [1] Time Line for Stock-for-Stock Mergers 234 [2] Disclosure Requirements 234 [B] Cash Transactions 235 [1] Time Line for Cash Tender Offers 235 [2] Disclosure Requirements 235 [a] Third-Party Tender Offers 236 [b] Tender Offers Requiring Shareholder Approval 237 [c] Regulation 14D 237 [d] Rule 14d-9 and Schedule 14D [e] Rule 14d [f] Regulation 14E 238 [g] Regulations 13D and 13G Accounting for Mergers & Acquisitions Case Study 240 [A] Cardinal Health Acquisition of Boron LePore Summary 242 Chapter 14 DIVESTITURES AND ASSET SALES Overview Evidence Behind Divestitures and Asset Sales Rationale Behind Divestitures and Asset Sales 249 [A] Enhance Operating Performance 249 [B] Enhance Capital Structure 250 [C] Capitalize on Strength of Private Market Value Versus IPO Value 250 [D] Thwart Takeover Divestitures Versus Other Forms of Restructuring Valuation of Divestitures and Asset Sales 253 [A] Stand Alone Value 253 [B] Takeover Value 253 [C] Accretion/Dilution Analysis The Divestiture Process '. 254 [A] The Negotiated Sale 254 [B] The Controlled Competitive Sale 255 xxi

11 STRUCTURING MERGERS & ACQUISITIONS [C] The Auction 256 [1] The Auction Process Seller Considerations 258 [A] Strategic Buyer's Perspective 258 [B] Positioning the Company for Sale 259 [C] Negotiation Strategy 260 [D] Pre- and Post-Deal Considerations 261 [E] Deal Structure Considerations Accounting for Divestitures and Asset Sales Case Study: Diageo PLC Divestiture of Pillsbury Co Summary 264 Chapter 15 JOINT VENTURES AND ALLIANCES Overview 265 [A] Joint Ventures Versus Alliances Evidence Behind Joint Ventures and Alliances Creating Value Through Joint Ventures and Alliances Motivation and Rationale Behind Joint Ventures and Alliances 270 [A] Access New Technology 270 [B] Diversification 270 [C] Leverage Partner's Competencies 271 [D] Exploit Synergies 271 [E] Enter New Markets or Develop New Products 271 [F] Gain Competitive Advantage 271 [G] Share Risk or Costs 271 [H] Maximize Efficiencies 272 [I] Attract and Retain Employees Valuation of Joint Ventures and Alliances 272 [A] Value the Initial Contributions of the Parties 273 [B] Value the Potential Cash Flows of the Venture 274 [C] Estimate the Long-Term "Outcome" of the Venture 275 [D] Calculate the Overall Value of the Venture Key Success Variables 275 [A] Plan Ahead 275 [B] Simplicity 276 [C] Align Incentives 276 [D] Learn as You Go and Make Adjustments Case Studies 277 [A] Renault SA Alliance with Nissan Motor Corp 277 [B] Vodafone Airtouch Wireless Operations/Bell Atlantic Wireless Operations Summary 278 xxii

12 TABLE OF CONTENTS Chapter 16 GOING PRIVATE TRANSACTIONS Overview Definition of Going Private Transactions Special Issues in Going Private Transactions 284 [A] Acquirer Conflict 284 [B] Higher Standard of Fairness, 284 [C] Litigation 284 [D] Enhanced Disclosure Requirements 284 [E] Need for Objective Validation Common Forms of Going Private Transactions 285 [A] Squeeze-Outs 285 [1] Overview 285 [2] Motivation Behind Squeeze-Outs 291 [a] Poor Market Performance 291 [b] Conflicts with Parent Company 291 [c] Capitalize on Synergies 291. [3] Valuation of Squeeze-Outs 291 [4] Squeeze-Out Case Study: Ford Motor Acquisition of Hertz Public Shares 292 [B] Leveraged Buyouts 292 [1] Overview 292 [2] The History of Leveraged Buyouts and the Current State of the Market 295 [3] Overview of Financial Sponsors 296 [4] Management Buyouts 296 [5] ESOP Leveraged Buyouts 297 [a] Overview of ESOPs 297 [b] Use of ESOPs in Leveraged Buyouts 298 [6] Attributes of Attractive Buyout Candidates 299 [a] Stable Cash Hows 299 [b] Strong Management Team 299 [c] Undervalued Assets 299 [d] Strong Balance Sheet 299 [e] Ability to Reduce Costs 299 [7] Issues and Risks in Leveraged Buyouts 300 [a] Conflicts of Going Private 300 [b] Bankruptcy 300 [c] Exit Strategy 301 [d] Board Control 301 [e] Forced Sale 301 [f] Management Equity and Vesting 301 [8] Structuring a Leveraged Buyout 302 xxni

13 STRUCTURING MERGERS & ACQUISITIONS [a] Sources of Financing in Leverged Buyouts 302 [i] Secured Debt 302 [ii] Unsecured Debt 302 [iii] High Yield Debt 303 [b] LBO Capital Structure 303 [9] Creating Value with Leveraged Buyouts 304 [10] Leveraged Buyouts Versus Leveraged Recapitalizations 305 [11] Case Study: Citadel Communications Techniques for Going Private 306 [A] Cash Tender Offer Followed by Clean-Up Merger 306 [1] Issuer Tender Offers 306 [2] Third Party Tender Offers 307 [3] Affiliate Tender Offers 308 [4] Tender Offers Requiring Shareholder Approval 308 [5] Key Timing Events 308 [B] One-Step Merger Voted on by Shareholders 309 [1] Key Timing Events 309 [C] Structural Considerations in Going Private Transactions Going Private Filing and Disclosure Requirements 311 [A] Rule 13e-3 and Schedule 13E [B] Rule 13e [C] Schedule TO 316 [D] Regulation 14D 317 [1] Regulation 14D 317 [2] Rule 14d-9 and Schedule 14D [E] Regulations 14A and 14C 318 [1] Regulation 14A 318 [2] Schedule 14A 319 [3] Regulation 14C and Schedule 14C 319 [F] Regulations 13D and 13G 320 [1] Regulation 13D 320 [2] Schedules 13D and 13G Tax Issues in Going Private Transactions The Role of the Special Committee and Its Financial Advisor Summary 322 Chapter 17 FAIRNESS OPINIONS Overview Why Get a Fairness Opinion? Financial Analysis Supporting the Fairness Opinion Other Analyses Performed The Investment Banker's Perspective Bring Down Opinions 332 xxiv

14 TABLE OF CONTENTS Fairness Opinion Methodology Inclusion of the Fairness Opinion in the Proxy Statement Summary 345 PART IV. RESTRUCTURING ALTERNATIVES Chapter 18 OVERVIEW OF CORPORATE RESTRUCTURINGS Overview of Restructurings ; The Evidence Behind Restructurings Creating Value with Restructurings Reasons Behind Corporate Restructurings 354 [A] Focus on Core Business 354 [B] Eliminate Poor Performers 355 [C] Highlight Undervalued Assets 356 [D] Realize Value from Strong Businesses 356 [E] Realign Funding Approach of Different Businesses 357 [F] Lower Borrowing Costs and Optimize Capital Structure 357 [G] Provide Management Incentives 358 [H] Enhance Public Perception 358 [I] Avoid Takeover How to Choose Between Forms of Restructuring Restructuring Financial Analysis 360 [A] Break-Up Valuation Analysis 360 [1] Break-Up Valuation Methodology 361 [2] Break-Up Valuation Example 361 [B] Capital Structure Analysis 365 [C] Accretion/Dilution Analysis 365 [D] Shareholder Value Creation Analysis 366 [E] Ownership Analysis The Role of Taxes in Determining a Divestiture Approach Summary 367 Chapter 19 RECAPITALIZATIONS AND SHARE REPURCHASES Overview Motivation Behind Recapitalizations and Share Repurchases 371 [A] Enhance Shareholder Value 371 [B] Distribute Excess Cash 372 [C] Thwart Unwanted Takeover Threat 372 [D] Concentrate Equity Ownership 374 [E] Alternative to a Leveraged Buyout 375 XXV

15 STRUCTURING MERGERS & ACQUISITIONS Advantages and Disadvantages of Recapitalizations and Share Repurchases Evidence Behind Recapitalizations and Share Repurchases Creating Value Through Recapitalizations and Share Repurchases Structuring a Recapitalization 383 [A] Attributes of an Attractive Recapitalization Candidate 383 [1] Stable Cash Flows 384 [2] Low Levels of Debt 384 [3] Strong Company and Industry Dynamics 384 [4] Experienced Management 384 [5] Undervalued Assets 384 [B] Forms of Recapitalization 385 [1] Assume Incremental Debt 386 [2] Share Repurchase 386 [a] Open-Market Share Repurchase 388 [b] Self-Tender [i] Fixed-Price Self-Tender 394 [ii] Dutch Auction 397' [c] Targeted Block Repurchase 402 [d] Share Repurchases in Response to Takeover Threats [3] Leveraged Recapitalization 404 [a] Charter Reclassification 404 [b] Merger with a Subsidiary 405 [c] Example Leveraged Recapitalization 405 [4] Special Dividend 406 [5] ESOPs '. 407 [C] Comparison Between Recapitalization Structures Financing Tax Implications 410 [A] Share Repurchases 410 [B] Special Dividends 411 [C] Leveraged Recapitalizations Accounting Implications Recapitalizations Versus Leveraged Buyouts Case Studies 412 [A] Leveraged Recapitalization Case Study: Caesar's World 412 [B] Dutch Auction Case Study: The Limited 413 [C] Fixed-Price Tender Case Study: United Parcel Service Summary 414 Chapter 20 SPIN-OFFS, SPLIT-OFFS, EQUITY CARVE-OUTS, AND TRACKING STOCK Overview 417 xxvi

16 TABLE OF CONTENTS [A] Evidence Behind Restructurings Spin-Offs 418 [A] Overview of Spin-Offs 418 [B] Evidence Behind Spin-Offs 421 [C] Creating Value Through Spin-Offs 423 [D] Motivation and Rationale 427 [1] Lack of Synergy or Strategic Fit 427 [2] Focus on Core Business 427 [3] Highlight Value, Monetize Assets, or Reduce Debt 428 [4] Avoid Takeover.430 [5] Eliminate a Poor Performer 431 [6] Tax Efficiency 432 [7] Regulatory 433 [E] Key Timing Events in Spin-Offs 433 [F] Valuation of Spin-Offs 433 [G] Tax Requirements 434 [H] Filing Requirements 436 [I] Pricing of Spin-Offs 438 [J] Issues with Respect to Spin-Offs 438 [1] Section [2] Management and Governance 438 [3] Separation of Assets 439 [4] Capitalization 440 [5] Contingent and Other Liabilities 440 [6] Relations with Customers, Suppliers, and Shareholders 440 [7] Subsequent Events 441 [8] Communications with Wall Street 441 [K] A Variant on Spin-Offs: Split-Offs 442 [L] Case Studies 442 [1] Coach Split Off from Sara Lee 442 [2] Zimmer Holdings Spin Off from Bristol-Myers Squibb Equity Carve-Outs 446 [A] Overview of Equity Carve-Outs 446 [B] Evidence Behind Equity Carve-Outs 449 [C] Creating Value Through Equity Carve-Outs 452 [D] Motivation and Rationale Behind Equity Carve-Outs 453 [E] Attributes of Equity Carve-Out Candidates 454 [1] Critical Mass 454 [2] Strong Balance Sheet 455 [3] Strong Management Team 455 [4] Attractive Financial Performance 455 [5] Attractive Industry 457 [F] Key Timing Events of Equity Carve-Outs 457 [G] Valuation of Equity Carve-Outs 458 [H] Tax and Accounting Considerations 460 XX VU

17 STRUCTURING MERGERS & ACQUISITIONS [I] Filing Requirements 461 [J] Pricing of Equity Carve-Outs 461 [K] Issues with Respect to Equity Carve-Outs 461 [1] Ownership 461 [2] Intent 463 [3] Integration 463 [4] Management Incentives 464 [5] Taxable Nature of Transaction 464 [L] Subsequent Events 464 [M] Case Study: Hewlett-Packard's IPO/Spin-Off of Agilent \ ^ Technologies Tracking Stock 466 [A] Overview of Tracking Stock 466 [B] Evidence Behind Tracking Stock 473 [C] Creating Value Through Tracking Stock 476 [D] Motivation and Rationale Behind Tracking Stock 476 [1] Enhance Shareholder Value 476 [2] Create Acquisition Currency 477 [3] Avoid Takeover 479 [E] Key Timing Events in Tracking Stock 479 [F] Valuation of Tracking Stock 480 [G] Tax and Accounting Issues 480 [H] Filing Requirements 482 [I] Pricing of Tracking Stock 482 [J] Issues with Respect to Tracking Stock 482 [1] Conflicts 483 [2] Difficult to Maintain 483 [3] Financial Statements 483 [4] Shareholder Approval 483 [5] Cross-Over Liabilities 483 [K] Subsequent Events 483 [L] Case Study: Genzyme Corporation Summary 488 PART V. LEGAL ASPECTS OF MERGERS & ACQUISITIONS Chapter 21 BUSINESS JUDGMENT RULE Overview and Purpose of the Business Judgment Rule 495 [A] The Sarbanes-Oxley Act of Genesis of the Business Judgment Rule 498 [A] The Model Business Corporation Act 499 xxvm

18 TABLE OF CONTENTS [B] The Principles of Corporate Governance: Analysis and Recommendations General Principles of the Business Judgment Rule and Duties of Directors 502 [A] The Duty of Care 502 [1] Smith v. Van Gorkom 503 [B] The Duty of Loyalty 505 [C] Act in Good Faith Business Judgment Under Enhanced Scrutiny 506 [A] The Unocal Standard./. 506 [1] Unocal v. Mesa Petroleum Co (. 507 [2] Unitrin v. American General Corp Application of the Entire Fairness Standard 508 [A] Cede & Co. v. Technicolor, Inc 510 [B] Weinberger v. UOP Fiduciary Duties in the Case of Sale of Control 512 [A] Revlon Duties 513 [1] Revlon, Inc. v. Mac Andrews and Forbes Holdings 513 [2] Paramount Communications Inc. v. QVC Network, Inc Current Topics Summary 516 Chapter 22 LEGAL ASPECTS OF MERGERS & ACQUISITIONS Overview, 520 [A] The Securities and Exchange Commission 520 [B] The Securities Act of [C] The Securities Exchange Act of [D] The Williams Act of Tender Offers 523 [A] Schedule TO 525 [B] Regulation 14D 525 [1] Rule 14d-9 and Schedule 14D [2] Rule 14d [C] Regulation 14E 530 [D] Tender Offers by Affiliates and Issuers 533 [1] Rule 13e Transactions Requiring Shareholder Approval 534 [A] Regulation 14A 534 [B] Schedule 14A Transactions Not Requiring Shareholder Approval 538 [A] Regulation 14C 538 XXIX

19 STRUCTURING MERGERS & ACQUISITIONS Going Private Transactions 538 [A] Rule 13e [B] Schedule 13E Other Regulations and Disclosure Filings 542 [A] Regulations 13D and 13G 542 [B] Schedules 13D and 13G Antitrust Laws 543 [A] The Sherman Antitrust Act 549 [B] The Clayton Act 549 [C] The Federal Trade Commission Act of [D] The Celler-Kefauver Act of [E] The Hart-Scott-Rodino Antitrust Improvements Act of [1] Implications of the HSR Act on Mergers and Acquisitions 550 [2] Non-HSR Concerns in Mergers and Acquisitions j [F] Merger Guidelines 551 [1] Horizontal Acquisitions 552 [2] Vertical Acquisitions Summary.553 Chapter 23 ANTI-TAKEOVER MEASURES Overview Overview of Directors' Fiduciary Duties State Takeover Statutes 558 [A] Business Combination Statutes 559 [B] Control Share Acquisition Statutes 560 [C] Fair Price Statutes 560 [D] Cash Out Statutes Assessing a Company's Vulnerability to Takeover 560 [A] The Current M&A Environment 561 [B] Defensive Posture Analysis 561 [1] Financial Statement and Valuation Analysis 561 [2] Stock Price Evaluation and Trading 561 [3] Charter and By-Laws and State Corporate/Takeover Law 562 [4] Structural and Other Defenses 563 [5] Shareholder Profile 564 [6] Possible Suitors 564 [7] Other, Proactive Anti-Takeover Measures 565 [A] Shareholder Rights Plans 565 [1] Overview of Shareholder Rights Plans 565 [2] How Do Shareholder Rights Plans Work? 566 [3] Implementation, Structure, and Mechanics of Shareholder Rights Plans 567 XXX

20 TABLE OF CONTENTS [4] Accounting and Tax Treatment of Shareholder Rights Plans [5] The View from the Courts 573 [6] Bells and Whistles 574 [7] Poison Pill Summary 575 [B] Charter and By-Law Amendments 575 [I] Staggered Board of Directors 576 [2] Supermajorty Provisions 576 [3] Fair Price Provisions 577 [4] Blank Check Preferred Stock 577 [5] Increase in Authorized Shares 578 [6] Dual Capitalization 578 [7] Anti-Greenmail Amendments 578 [8] Special Meetings 578 [9] Action by Written Consent 578 [10] Notice 579 II1] Cumulative Voting 579 [C] Other Preemptive Defenses 579 [1] Executive Compensation 579 [2] Structural Defenses 580 [a] Protect Crown Jewel Assets 580 [b] Review Loan, Lease, and Other Documents for Constraints 580 [c] Obtain Additional Financial Capacity 580 [d] Implement Share Repurchase Program 580 [e] Issue Stock to an ESOP or Friendly Party 581 [f] Make a Defensive Acquisition Responding to a Takeover Proposal 582 [A] Passive Responses 582 [1] Just Say No 582 [B] Active Responses 583 [1] White Knights 583 [2] White Squires 584 [3] Restructuring, Recapitalizations, and LBOs 584 [4] ESOPs 584 [5] Antitrust Considerations 584 [6] Pac-Man Defense Summary 584 Chapter 24 HOSTILE ACQUISITIONS Overview Tactical Alternatives for Gaining Control 590 XXXI

21 STRUCTURING MERGERS & ACQUISITIONS [A] Friendly Approaches 590 [1] Negotiated Transaction 591 [2] Casual Overture 591 [B] Aggressive Approaches 592 [1] Bear Hug 592 [2] Stake Acquisition 593 [C] Hostile Approaches 594 [1] Tender Offer 594 [2]\Exchange Offer., 596 [3] Proxy Solicitation 598 [a] Proxy Contests in Conjunction with Tender Offers Key Considerations for Hostile Transactions 600 [A] Fiduciary Duties of Target's Directors 600 [B] Price and Form of Consideration 601 [C] Target's Defensive Posture 602 [1] Target Financial Performance 603 [2] Structural Defenses 603 [3] State Statutes 606 [4] Antitrust and Other Regulatory Constraints 607 [5] Employees and Other Constituents r 607 [6] Public Relations [7] Divestiture Risk and Non-Core Assets 609 [8] Litigation 609 [9] Bidding Strategy Target's Potential Reactions to Takeover Proposals Summary 611 PART VI. STRUCTURING, NEGOTIATING, AND EXECUTING THE DEAL Chapter 25 THE FUNDAMENTALS OF NEGOTIATION Overview The Basics of Negotiation 616 [A] Be Informed 616 [B] Formulate a Negotiation Plan 617 [C] Have a Back-Up Strategy 618 [D] Be Creative 619 [E] Listen 619 [F] Build Trust 620 [G] Separate the People from the Issues 620 xxxii

22 TABLE OF CONTENTS [H] Seek Common Ground Tricks of the Trade 621 [A] Do's 621 [B] Don'ts 623 [C] Tactics to Look Out For Summary 625. Chapter 26 FORMULATING AN OFFER Overview Industry Trends C Competitive Environment Stand Alone Valuation of the Target Company Historical Trading Prices and Share Ownership of Target Company Takeover Valuation Impact of Transaction on Shareholder Value Synergies Seller's Objectives Your Objectives Formulating the Offer Itself Case Study: Tropical Products Corp. Acquisition of Global Snacks, Inc The Impact of the Financing Markets Summary.' 640 Chapter 27 STRUCTURING THE LETTER OF INTENT AND DEFINITIVE AGREEMENT Overview The Confidentiality Agreement 644 [A] Definition of Information 645 [B] Disclosure of Information 646 [C] Discussion with Other Parties 647 [D] Non-Solicitation of Employees 648 [E] Survival of the Terms of the Confidentiality Agreement 648 [F] Standstill Provisions Formulating the Offer Submitting the Initial Non-Binding Letter of Intent 655 [A] Purchase Price 655 [B] Consideration 656 [C] Transaction Structure 656 XXX1U

23 STRUCTURING MERGERS & ACQUISITIONS [D] Conditions to Closing 656 [E] Due Diligence 656 [F] Timing 656 [G] Approvals 656 [H] Non-Binding 657 [I] Confidentiality Advantages andtjisadvantages of Letters of Intent 657 [A] Advantages 657 [B] Disadvantages The Revised Letter of Intent Perform Due Diligence The Definitive Agreement 660 [A] Business Issues 660 [B] Legal Issues Financing Negotiation and Execution Regulatory Approvals Closing Summary 663 Chapter 28 COLLARS AND WALK-A WAYS Overview Fixed-Exchange Ratio Within Price Collar 666 [A] Mechanics of Fixed-Exchange Ratio Within Price Collar 668 [B] Example of Fixed-Exchange Ratio Within Price Collar Fixed Price with Floating Exchange Ratio Collar 669 [A] Mechanics of Fixed Price Within Collar 671 [B] Example of Fixed Price Within Collar Walk-Aways Factors Influencing Choice of Pricing Structure Summary 674 Chapter 29 TERMINATION FEES, LOCK-UP OPTIONS, AND NO-SHOP CLAUSES Overview Termination Fees 675 [A] Termination Fee Example Lock-Up Options 677 [A] Stock Lock-Ups 677 [B] Asset Lock-Ups 678 XXXIV

24 TABLE OF CONTENTS No-Shop Provisions 679 [A] No-Shop Example Deal Protection Mechanisms and the Business Judgment Rule Summary 683 Chapter 30 EARNOUTS AND CONTINGENT PAYMENTS Overview Advantages and Disadvantages of Earnouts Size of the EarnouTTT? Performance Goals..\ Time Frame Other Structural Considerations Words of Caution Limitations on the Use of Earnouts Summary 694 Chapter 31 DUEDILIGENCE What is Due Diligence? 695 [A] Why Perform Due Diligence? 696 [B] When to Perform Due Diligence 697 [C] Forms of Due Diligence 698 [1] Legal Due Diligence 698 [2] Business Due Diligence 698 [3] Strategic Due Diligence 698 [D] Who Performs Due Diligence? 698 [E] Where to Get Information The Due Diligence Process 701 [A] Establish a Plan and Assemble the Team 701 [B] Identify Key Issues 702 [C] Prepare the Information Request and Obtain Information 702 [1] The Preliminary Information Request 702 [2] The Detailed Due Diligence Review 704 [3] Meeting with Management 714 [4] Follow-Up Questions 714 [D] Translate Issues into Value, Structure, and Terms 714 [E] Resolve Issues 715 [F] Plan for Follow-Up, Integration, or Transition Summary 715 XXXV

25 STRUCTURING MERGERS & ACQUISITIONS Chapter 32 PRE- AND POST-MERGER INTEGRATION Overview Why Mergers & Acquisitions Fail Aligning M&A with Corporate Strategy Constraints to Successful Merger Integration 727 [A] People 727 [B] Other Consituents: Suppliers, Customers, Unions, and Regulators 728 [C] Providers of Capital 728 [D] Competitors 728 [E] Ongoing Review Pre-Merger Planning 729 [A] Vision and Leadership 730 [B] Integration Plan 730 [C] Benchmarks 731 [D] Integration Teams 732 [E] Due Diligence 732 [F] Communication Strategy Post-Merger Integration 734 [A] Appoint Leadership 734 [B] Turn Integration Teams Loose 735 [C] Review Progress and Assess Change Best Practices 735 [A] Initiate the Integration Process Early On 735 [B] Create Teams Early 736 [C] Communicate Early and Often 736 [D] Manage Change 736 [E] Leave Ego at the Door 736 [F] Don't Forget the Small Stuff 736 [G] Celebrate the Deal Summary 737 Index 739 XXXVI