EXAM NO. _ MERGERS & ACQUISITIONS Professor John Orcutt Spring Semester 2006 FINAL EXAMINATION Instructions : 1. This is an open-book examination. You may bring any materials you wish to the examination with the exception of computers, telephones or other electronic devices. Calculators, however, are permitted - although I do not believe they will be necessary. 2. This is a 165-minute examination and is worth 280 points. There are 7 short- to mediumanswer essa uestions. The oint allocation b uestion is as follows : Questions I and 2 are based on a single fact pattern : No. 1 = 40 points ; and No. 2 = 60 points Question 3 = 45 points Questions 4 and 5 are based on a single fact pattern : No. 4 = 30 points ; and No. 5 = 20 points Question 6 = 45 points Question 7 = 40 points It is your responsibility to apportion your time appropriately amongst the nine questions. I wrote this as a 150-minute exam. If you base your time on the number of possible points per question, the time apportionment should be : P- Question No. 1 = 21.5 minutes Question No. 5 = 11 minutes 0-Question No. 2 = 32 minutes I-Question No. 6 = 24 minutes I- Question No. 3 = 24 minutes 0, Question No. 7 = 21.5 minutes I-Question No. 4 = 16 minutes Because this is the end of the exam period and you are probably quite tired, I have given you 15 additional minutes to apportion as you see fit. 3. The grading of examinations is anonymous. So, you must write your examination number on the examination and each blue book that you use. YOU MAY NOT WRITE YOUR NAME ON ANYTHING - YOU MAY ONLY USE YOUR EXAM NUMBER. 4. Please write your answers in blue books. Remember to write your examination number on each blue book that you use. The only answers that will be graded are the answers written into a blue book. While you are free to use scratch paper, answers written on scratch paper, or anything else other than a blue book, will not be read and will not be counted for any credit. Please write only on the front side of the paces in the blue book. Please remember that organization, persuasiveness, neatness and legibility all count in determining your grade on an answer. To improve the organization of an answer, you may wish to quickly outline the answer on a separate sheet of paper prior to writing your full answer in the blue book. 5. Should you find it necessary in answering a question to assume a fact not given in the problem as stated, you may do so. However, you should clearly indicate that you are making an assumption and you should explain why you consider it a reasonable assumption to make. 6. I have tried my best to write and proofread the exam so that there are no distracting typos or other errors - but, I may not have been totally successful. If you believe there is a typo or other error that makes it difficult to answer a particular question, please point out the error in your blue book and any assumption you used to answer the question. Good luck on the examination! DO NOT TURN TO PAGE 2 UNTIL THE PROCTOR TELLS YOU TO BEGIN 1 of 8
QUESTIONS 1 AND 2 WILL BE BASED ON THE FOLLOWING FACT SCENARIO : The following hypothetical involves three publicly-traded, Delaware corporations 1. Long-Distance Discount Service, Inc. ("LDS") = LDS is a leading global communications provider. LDS boasts the industry's most expansive global IP backbone and has one of the largest fiber-optic communication networks in the world. 2. ABC Communications, Inc. ("ABC") = ABS is one of the world's leading providers of communication services and is largest communication services provider in the United States. ABC is widely considered the communication services market leader in the United States. Z Communications Corp. ("Z") = Z is also a major communication services provider, but is widely considered to be a less successful company than ABC. ABC is substantially larger than Z (roughly 4x larger) ; ABC is growing faster than Z ; ABC is considered to have better management ; and Some in the industry believe there is a potential risk that Z will could be required to declare bankruptcy in the near term. There is no such concern for ABC. LDS is coming out of a very turbulent time, and its board of directors is beginning to question whether it makes sense for the company continue as a stand-alone entity. At a recent board meeting, LDS's board of directors passed the following resolution : RESOLVED, the board believes in the value of keeping the corporation independent, but for informational purposes is exploring an alternative to remaining independent. As a result, it is hereby resolved that the CEO of LDS is hereby empowered to engage a financial advisor on behalf of LDS and to actively solicit offers to acquire all or part of LDS either pursuant to a merger (cash or stock), acquisition (cash or stock), tender offer (cash or stock) or otherwise. Barney Fife, the CEO of LDS immediately engaged Quatrone Securities ('QS") as a financial advisor for LDS. Barney, a number of other LDS officers, LDS's legal counsel and QS proceeded to do the following : Came up with a list of the 10 most likely potential acquirers of LDS ; Drafted a set of materials describing LDS (the "Marketing Materials") to the potential acquirers ; and Contacted the 10 potential acquirers to solicit their interest in acquiring LDS. 5 of the potential acquirers expressed some interest in considering an acquisition of LIDS, and these five companies were sent the Marketing Materials. After receiving the Marketing Materials, it became quickly apparent that there were two serious potential acquirers of LDS : ABC and Z. After serious discussions with each party, ABC and Z made the following proposals to LDS's board of directors. At the time the proposals were made, LDS's stock (which trades on the NYSE) was trading at roughly $15 per share. 2 of8
ABC PROPOSAL : ABC proposed to acquire LIDS through a forward triangular merger. As merger consideration, ABC offered $20 per share (a 33%% premium) that consisted of $16 in ABC common stock and $4 in cash. Total merger consideration would be $2 billion. Z PROPOSAL : Z also proposed to acquire LDS through a forward triangular merger. As merger consideration, Z offered $22 per share (a 46'34% premium) that consisted of $11 in Z common stock and $11 in cash. Total merger consideration would be $2.2 billion. Barney took both proposals to LDS's board. Barney called for a board meeting and notified the board of the reason for the meeting. Two days prior to the meeting, Barney sent to each LDS director the following : A copy of the ABC Proposal and a draft merger agreement that accompanied the proposal ; A copy of the Z Proposal and a draft merger agreement that accompanied the proposal ; Analysis for each proposal that was prepared by QS ; A due diligence packet on each of ABC and Z ; and A number of industry analysis reports that described current and future trends in the communications industry. At the board meeting, Barney presented each proposal. In making the presentation, Barney explained that he favored the ABC Proposal and he explained why. In addition, a number of other officers from LDS (including its CFO) also made presentations to the board. A managing director from QS made a presentation to the board and explained the QS analysis. QS did not, however, issue a fairness opinion. LDS's legal counsel planned on attending the board meeting, but she had a serious medical issue and had to miss the meeting. After many hours of discussion and deliberation, the LDS board unanimously voted to accept the ABC Proposal and issued a board resolution authorizing Barney to enter into the merger agreement with ABC on behalf of LDS. Barney did execute the merger agreement with ABC. ABC and LIDS then jointly issued a press release announcing the transaction. QUESTION NO. 1 (40 points possible) : What are Revlon Duties? What do they require of a corporation's directors? Did the decision by the LDS directors to merge with ABC (including its decision to turn down the Z Proposal) trigger Revlon Duties for LDS's directors? QUESTION NO. 2 (60 points possible) : What standard of review would be applied to the decision by LDS's board to merge with ABC? Please explain, including an analysis of whether LDS's board satisfied that standard. 3 of8
QUESTION NO. 3 (45 points possible) : This question also involves three publicly-traded, Delaware corporations : Target Company ("Tamet") ; 2. Red Sox, Corp. ("RS") ; and 3. Yankees Corp. ("Y"). Target is struggling as a stand alone company and thought that it might make sense to find a potential buyer. The two most logical buyers were RS and Y. Y initially passed on acquiring Target, explaining that it was not interested at the time being, but could be interested later. RS, on the other hand, is very interested in acquiring Target. Specifically, RS would like to acquire Target through a stock-for-stock forward triangular merger. However, RS has no desire to serve as a "stalking horse" for Y. RS estimates that it will take at least three months to get from signing of the deal to closing, and RS does not want to have to worry about Y coming and stealing Target from RS during that period. As a result, RS will only pursue a deal with Target if the deal can be "locked up tight." Based on the recent OmniCare case, please advise RS on its ability to "lock the deal up tight" and discuss what RS can do to ensure that Y does not "steal" Target away from RS after the signing of a merger agreement. 4 of8
QUESTIONS 4 AND 5 WILL BE BASED ON THE FOLLOWING FACT SCENARIO : Acme Corp. ("Acme"), a Delaware corporation, acquired a 92% interest in Fox Corp. ("Fox"), which is also a Delaware corporation, pursuant to a tender offer (the "Tender Offer"). The Tender Offer looked like this : Tender Offer Takeover Subsidiary Post-Tender Offer SHs i Acme Takeover Subsidiary Remaining Other SHs 92% oho Acme wanted to remove the remaining 8% shareholders of Fox Corp (the "8% SHs"). Acme decided to accomplish this by squeezing-out the remaining 8% shareholders pursuant to an upstream, 253 cash merger into Takeover Subsidiary (which would be renamed Fox upon conclusion of the transaction) (the "Squeeze-Out Merger"). 5 of 8
The success of Fox pre- and post-tender was strikingly different : Pre-Tender Offer : At the time the Tender Offer was launched, Fox was struggling terribly. Fox was barely profitable and Fox's forecasts called for decreasing, rather than growing, profits for the foreseeable future. Post-Tender Offer : Upon conclusion of the Tender Offer, Acme promptly installed a new management team and a new business strategy. The results were immediate and shockingly successful. Fox's profits increased 25% in each of the first two quarterss after the Tender Offer and Fox's projections called for substantial profit increases for the foreseeable future. The Squeeze-Out was launched approximately nine months after completion of the Tender Offer, by which time Fox was well on the way to its successful turnaround under new management. In calculating Fox's value for purposes of determining the cash merger consideration that was to be paid to the 8% SHs, the board of directors of Takeover Subsidiary used Fox's "Pre-Tender Offer" profits and profit projections (the "Pre-Tender Offer Numbers"). At the time the Squeeze-Out Merger was announced, each of the 8% SHs requested appraisal rights. In addition, the 8% SHs challenged the valuation technique used by the directors of Takeover Subsidiary. The 8% SHS contend that for purposes of valuing the 8% SHs' interest, the directors of Takeover Subsidiary should have used the improved Post-Tender Offer profit numbers and profit projections - specifically the profit numbers and profit projections on the date of the merger (the "Merger-Date Numbers"). Takeover Subsidiary's directors responded by arguing that the value of substituting new management does not belong to the dissenting shareholders Oust as it did not belong to the shareholders who tendered in the Tender Offer). Takeover Subsidiary's directors argue that the 8% SHs should not get a better deal than the shareholders who tendered in the Tender Offer. QUESTION NO. 4 (30 points) : Was Takeover Subsidiary required to grant appraisal rights to the 8% SHs in the Squeeze-Out Merger? Which side should prevail in the dispute regarding whether the Pre-Tender Offer Numbers or the Merger Date Numbers are to be used in valuing the 8% SHs' interest? QUESTION NO. 5 (20 points) : The 8% SHs are also considering filing a suit against the board of directors of Takeover Subsidiary that contends the directors breached their duties of care and loyalty to the 8% SHs when they established the value of the cash consideration to be paid to the 8% SHs in the Squeeze-Out Merger. Please advise the 8% SHs on the potential merits of such a suit. 6 of8
QUESTION NO. 6 (45 points possible) : Tech Corp. ("Tech") is a highly specialized research and development company, with a particular focus on communications hardware. Recently, Tech entered into a license agreement (the "License Agreement") with BlackBox Inc. ("BB") to use certain of BB's patented core router technology. Tech intends to use this technology to develop new products. In the communications hardware industry, Tech is considered to be a very small company. Its annual revenues are in the range of $5 million. BB, on the other hand, is one of the largest communications hardware companies and has annual revenues in the $20 billion range. BB's motivation for entering into the License Agreement with Tech is not to generate licensing royalties (which are minimal under the License Agreement). Rather, BB is impressed with the engineering team that Tech has developed and is interested in seeing what Tech is able to develop using BB's patented technology. The License Agreement includes the following key concepts : Tech received a non-exclusive license ; The License Agreement included the following clause : "Transferability of License Aqreement : Tech shall not assign or transfer the License Agreement, including pursuant to a merger, reverse merger or consolidation, without the prior written consent of BB, which consent BB has the absolute right to refuse." Pierce Communications Inc. ("PC"), is a fierce competitor of BB. PC would very much like to acquire the License Agreement, because it would allow PC to use BB's core router technology in PC's products, which is currently impossible since BB refuses to license that technology to PC. To make matters more interesting for PC, the royalty structure under the License Agreement provides for a substantially below-market license fee so PC would not only get to use BB's technology, PC would get to use it at a substantially discounted rate. Please assume that you are legal counsel representing PC. PC has asked you whether a deal could be structured with Tech that would allow PC to acquire the License Agreement without BB's consent. Please advise PC. 7 of8
QUESTION NO. 7 (40 points possible) : USA Company ("USA") is a manufacturer and distributor of widgets. USA is a Delaware corporation that is privately held (i.e., it is not listed on a national exchange and it is not required to file public reports under the Exchange Act of 1934, as amended). USA's biggest product line is its At 000 Widgets, which USA began to manufacture and sell in 2000. The At 000 Widgets are one of the best selling lines of widgets in the United States and sell in all 50 states. Recently, USA was approached by Tiger, Inc. ("Tier"). Tiger specializes in acquiring U.S. manufacturing companies from owners that have grown tired of the struggle of operating a manufacturing company in the United States. Tiger would like to acquire USA. While conducting due diligence on USA, Tiger discovered the following issue : A1000 Widqet Lawsuits : Between 2001 and 2005, approximately 2 lawsuits were filed each year against USA regarding product defects in their At 000 Widgets. It turns out that an early version of the Al 000 Widget had problems when used in temperatures exceeding 200 F. The problem appears to have been corrected with some modifications that were made to the A1000 Widget in 2004, but a substantial number of pre-2004 A1000 Widgets remain in the market. The face value of the currently outstanding At 000 Widget lawsuits is a combined $10 million. You are legal counsel representing Tiger. Tiger is adamant that it not incur any liability from the A1000 Widget Lawsuits. Not surprisingly, Tiger would like to structure the deal as some form of asset acquisition. Please advise Tiger. *****END OF EXAM***** FOR THE 3Ls AND THE GRADUATE STUDENTS : Enjoy wonderful careers and please keep in touch. FOR THE 2Ls AND RETURNING GRADUATE STUDENTS : I look forward to seeing you next year. 8 of8