Table of Contents
FOREWORD
PREFACE AND ACKNOWLEDGMENTS
Chapter 1 Getting Started in Mergers and Acquisition
Introduction • Key Terms • About Our Question-and-Answer Format • Concluding Comments • Exhibit 1-1: Global M&A Transaction Value (1988 vs. 2018) • Exhibit 1-2: The M&A Process • Notes
Chapter 2 Strategy
Introduction • Strategic Planning • The Role of M&A in Strategic
Planning • Alternatives to M&A • SWOT Analysis • Disclosure of
Strategy • Levels of Strategy • Four Types of M&A Strategy • The Search
Process • Brokers and Finders • Bankers • Initial Regulatory and Legal
Considerations • Concluding Comments • Exhibit 2-1: Outline for a Typical
Strategic Plan • Exhibit 2-2: M&A in a Strategic Decision Tree • Exhibit 2-3:
Range of Structure for Business Collaboration • Exhibit 2-4: Sample SWOT
Analysis Questions • Exhibit 2-5: Sample Checklist of Assets for Use in
Complement/Supplement Analysis • Exhibit 2-6: Sample Checklist of Risks for
Use in Seeking Complementary Acquisitions • Exhibit 2-7: Sample Strategy
Statements • Exhibit 2-8: What Is Alphabet? • Exhibit 2-9: Examples of
Options Embedded in Strategic Acquisitions • Exhibit 2-10: The AI Acquisition
Race • Exhibit 2-11: Sherwin-Williams—Vertical Strategy Leads to Horizontal
Move • Exhibit 2-12: A Guide to M&A Decisions • Exhibit 2-13: Opportunity
Prioritization • Exhibit 2-14: Premerger Notification Thresholds Under Hart-
Scott-Rodino • Appendix 2A: Types of Organizational Structure • Appendix 2B: Checklist of Assets • Appendix 2C: Horizontal Merger Guidelines • Appendix 2D: Tesoro Strikes Gold in California • Notes
Chapter 3 Valuation and Modeling
Introduction • Valuation Fundamentals • Choosing a Valuation Approach • Comparable Companies and Transactions • Comparable Transactions Analysis • DCF Analysis • Forecasting Free Cash Flow • Calculating the Discount Rate • Ascribing a Terminal Value • Conducting Sensitivity
Analyses • The IVS Framework • Concluding Comments • Exhibit 3-1: Valuation Approaches • Exhibit 3-2: Advantages and Disadvantages of Valuation Multiples • Exhibit 3-3: Common Multiples Used in Selected Sectors • Exhibit 3-4: Comparable Companies Checklist • Exhibit 3-5: Variations in Accounting May Affect Valuation Multiples • Exhibit 3-6: Comparable Transactions Checklist • Exhibit 3-7: Summary of Precedent Transactions • Exhibit 3-8: Overview of the DCF Analysis Process • Exhibit 3-9: Advantages of DCF Analysis • Exhibit 3-10: Disadvanatges of DCF Analysis • Exhibit 3-11: Defining Free Cash Flow—Top-down Approach • Exhibit 3-12: Calculating Free Cash Flow—Example of Top-down Approach • Exhibit 3-13: Defining Free Cash Flow—Bottom-up Approach • Exhibit 3-14: Calculating Free Cash Flow—Example of Bottom-up Approach • Exhibit 3-15: Present Value Formula • Exhibit 3-16: WACC Formula • Exhibit 3-17: Cost of Common Equity Formula • Exhibit 3-18: Chart Showing Size Premiums by Quartile and Decile • Exhibit 3-19: Chart Showing Size Premiums by Decile • Exhibit 3-20: Exit Multiple Approach to Estimating Terminal Value • Exhibit 3-21: Terminal Value Model Assuming Constant Growth • Exhibit 3-22: Perpetuity Value Assuming No Growth in Cash Flows • Exhibit 3-23: Perpetuity Value Assuming 2 Percent Growth • Exhibit 3-24: DCF for a Business Already in Constant Growth Mode • Exhibit 3-25: DCF for a No. 2 Pencil Manufacturer • Notes
Chapter 4 Financing and Refinancing
Introduction • Financing Overview • Financing Instruments: Equity vs. Debt vs. Hybrids • Financing Sources • Highly Leveraged Transactions • Minimizing Borrowing • Determining Structure in Debt Financing • Senior Debt • Sale-Leasebacks • Pros and Cons of Preserving Debt and Lease Obligations • Seller Takeback Financing • Warrants • Working Capital Debt of the Seller • The Bank Book and Commitment Letter • Other Principal Issues in Senior Loan Agreements • High-Yield (a.k.a. “Junk”) Bonds • Bridge Loans • Equity Investment Funds • Registration Rights • Intercreditor Issues • Subordination Issues • Intercreditor Agreements • Fraudulent Conveyance and Other Litigation Concerns • Refinancing Issues • Concluding Comments • Exhibit 4-1: The LBO of Beatrice and Its Aftermath • Exhibit 4-2: Sample Company’s Cash Flow and Debt Service Requirements • Exhibit 4-3: Sample Covenant • Exhibit 4-4: Subordination and Corporate Structure • Appendix 4A: Typical Subordination Provisions of Publicly Issued Notes • Appendix 4B: Typical Subordination Provisions of Privately Placed Institutional Notes • Appendix 4C: Typical Subordination Provisions of Seller Notes • Notes
Chapter 5 Structuring Transactions: General, Tax, and Accounting Considerations
Introduction • General Considerations • Structuring Asset Transactions • Structuring Stock Transactions • Structuring Merger Transactions • General Accounting Considerations • Allocating the Price of a Transaction for Accounting Purposes • Difference Between Accounting and Tax Treatments • Tax Considerations • Basic Tax Concepts and Definitions • Basic Tax Structure: Taxable Transactions • Basic Tax Structure: Tax-Deferred Transactions • Choice of Entity • Tax Consequences in Structuring Acquisition
Debt Financing • Management Buyout Tax Basics • Postacquisition Tax Issues • Other Tax Issues • Concluding Comments • Transaction Diagrams • Exhibit 5-1: A Guide to US (Federal) and State Codes • Exhibit 5-2: Forward Subsidiary Merger (FSM) vs. Reverse Subsidiary Merger (RSM) • Exhibit 5-3: Anatomy of a Merger, Acquisition, and Buyout Transaction • Exhibit 5-4: Description of Acquisition Allocation from Emcor Group, Inc. • Exhibit 5-5: Differences in the Purchase Price Computation • Exhibit 5-6: Section 368: Types of Reorganization • Exhibit 5-7: Stock Purchase • Exhibit 5-8: Asset Purchase • Exhibit 5-9: Taxable Forward Merger • Exhibit 5-10: Taxable Reverse Merger • Exhibit 5-11: Taxable Forward Subsidiary Merger • Exhibit 5-12: Tax-Free Forward Merger (A Reorganization) • Exhibit 5-13: Tax-Free Forward Triangular Merger • Exhibit 5-14: Tax-Free Acquisition of Stock for Voting Stock (B Reorganization) • Exhibit 5-15: Acquisition of Property for Voting Stock (C Reorganization) • Exhibit 5-16: Acquisition of Property for Voting Stock (D Reorganization) • Exhibit 5-17: National Starch Transaction (Section 351 Acquisition) • Appendix 5A: Meeting the Reorganization Test: US Examples from the Internal Revenue Service • Notes
Chapter 6 The Due Diligence Inquiry
Introduction • Getting Started • Duration of Due Diligence • Due Diligence Levels • Securities Laws and Due Diligence • Red Flags • Relations with the Seller • Location of Due Diligence Research • Evaluating Assets • Litigation Analysis • Emerging Legal Issues • Due Diligence After Closing • Concluding Comments • Exhibit 6-1: VDR Menu Screen Shot • Exhibit 6-2: A Representative List of Virtual Data Room Providers • Exhibit 6-3: Some Typical Plaintiff Claims in M&A Litigation • Exhibit 6-4: Venn Diagram Showing Interrelationship of M&A, Due Diligence Standards, and Securities Law • Appendix 6A: Sample Confidentiality Agreement • Appendix 6B: Due Diligence Checklist • Appendix 6C: An Annotated Initial Document and Information Request List • Appendix 6D: Sample Index of VDR Documents • Notes
Chapter 7 Negotiating the Letter of Intent and Acquisition Agreement
Introduction • Letter of Intent • The Acquisition Agreement • Components of the Agreement • Introductory Material • Representations and Warranties • Covenants • Conditions to Closing • Indemnity Section • Acquisitions from an Affiliated Group • Transactions Involving Public Companies • Negotiating and Documenting an MBO • Employment Agreements • Stockholders’ Agreements • Concluding Comments • Exhibit 7-1: Seller vs. Buyer Key Goals • Exhibit 7-2: The Safeguards-Price Negotiating Matrix • Exhibit 7-3: The FASB on Materiality • Appendix 7A: Sample Letter of Intent • Appendix 7B:Typical Merger Agreement and Commentary • Notes
Chapter 8 Closing
Introduction • The Basics of Closing • Planning the Closing • Preclosing • Closing • Wire Transfers • Postclosing • Concluding
Comments • Appendix 8A: Sample Closing Memorandum (Including a Detailed Schedule of Closing Documents) • Notes
Chapter 9 Postmerger Integration and Divestitures
Introduction • Basic Concepts of Integration • The Postmerger Plan • Communicating the Integration Plan • Combining Company Names • Integrating Cultures • Integrating Mission, Policy, Ethics, and Vision Statements • Integrating Key Resources, Processes, and Responsibilities • Integrating Resources • Integrating Processes • Integrating Responsibilities • Commitments to Employees • Postmerger Compensation: A Complex Issue • Planning Pay Integration: A Strategic Overview • Merging Benefits Plans • Some General Postmerger Technology Considerations • Divestitures • Concluding Comments • Exhibit 9-1: Audience Media Communications Matrix • Exhibit 9-2: Steps for Naming a Newly Combined Company • Exhibit 9-3: A Matrix for Planning Cultural Integration • Exhibit 9-4: Acquisition Integration Plan for Human Resources Operation • Exhibit 9-5: Three Brand Approaches • Exhibit 9-6: Sample Plan for 30-, 60-, and 90+-Day Milestones • Exhibit 9-7: Old Line Bank and Bay Bank Merger FAQ (Excerpts) • Exhibit 9-8: Marathon Patent Press Release Addressing the Dilution Issue • Exhibit 9-9: Sample Matrix for Postmerger Compensation Planning • Exhibit 9-10: Valuing the Divestiture Option • Exhibit 9-11: The WARN Act: Basic Provisions/Requirements • Appendix 9A: Sample Postmerger Press Release Highlighting Strategic Motivation • Appendix 9B: Sample “Assets” Checklist of Resources, Processes, and Responsibilities • Appendix 9C: Integration Planning Worksheet • Appendix 9D: Integration Timeline from a Midsized Acquirer • Appendix 9E: Pairwise Comparison • Appendix 9F: Principles for Responsible Business • Exhibit 9E-1: Setting Up the Pairwise Comparison Matrix • Exhibit 9E-2: Identifying the Useful Part of the Matrix • Exhibit 9E-3: Filling the Useful Part of the Matrix • Notes
Chapter 10 Special Issues for M&A in Public Companies
Introduction • General Considerations • Proxy Voting • Dodd-Frank, Sarbanes-Oxley, and M&A • Duties of Care and Loyalty • Director Responsibilities in Responding to Unsolicited Bids • M&A Forms • Tender Offer Basics • Proxy Solicitations • Going Private • Merger Disclosure Issues • Insider Trading • Financing the Two-Step Public Transaction with Debt • Takeover Defenses • State Laws Related to Takeover Defense • Concluding Comments • Exhibit 10-1: Some Typical Plaintiff Claims in M&A Litigation • Exhibit 10-2: Federal Class Actions on M&A 2010–2018 • Exhibit 10-3: Likely Responses to Tender Offers Versus Management Promises • Notes
Chapter 11 Workouts, Bankruptcies, and Liquidations
Introduction • General Considerations • Workouts • Bankruptcy • State Insolvency Proceedings • Investing Opportunities: Structuring the Purchase of a Troubled Company • Structuring a Buyout to Minimize Insolvency
Risk • Financing Alternatives for Companies with Losses • Accounting/Tax Issues for Companies with Losses • Liquidation • Concluding Comments • Diagrams Showing Various Structures for Reorganizations and Workouts of Insolvent Companies • Exhibit 11-1: Definitions of Bankruptcy • Exhibit 11-2: Average Corporate Debt Recovery Rates Measured by Ultimate Recoveries, 1987–2018 • Exhibit 11-3: Business vs. Computer Bankruptcies • Exhibit 11-4: Some Common Consolidation Scenarios Applying ASC 810 • Exhibit 11-5: The 10 Largest Bankruptcies in the United States (by Total Assets Pre-Bankruptcy) • Exhibit 11-6: Structure Posing No Fraudulent Conveyance Risk • Exhibit 11-7: Structure Posing Fraudulent Conveyance Risk via Guarantee • Exhibit 11-8: Structure Posing Fraudulent Conveyance Risk via Transfer of Loan Recipient • Exhibit 11-9: Structure Posing Fraudulent Conveyance Risk via Simple Merger • Exhibit 11-10: Structure Posing Fraudulent Conveyance Risk via Distribution to Target Shareholder • Exhibit 11-11: Structure Posing Risk of Fraudulent Conveyance in Multistep Transaction Involving Small Stock Purchase and Large Loan • Exhibit 11-12: Structure Posing Fraudulent Conveyance Risk via Transfer of Risk to a Subsidiary • Notes
Chapter 12 Global Deals: Structuring for Success
Introduction • Nontax Inbound: Issues Regarding Foreign Investment in the United States • Nontax Outbound: Acquisitions Involving Assets Located Outside the United States • Foreign Exchange • Other Global Realities • Financing Outbound Transactions • International Tax and Disclosure Considerations • Tax Considerations in Inbound Acquisitions • Tax Considerations in Outbound Acquisitions • Concluding Comments • Exhibit 12-1: Examples of Eurocurrencies • Appendix 12-1:Meeting the Reorganization Test: Foreign Examples from the Internal Revenue Service • Notes
Landmark and Recent M&A Legal Cases
Cases Alleging Impropriety in Purchasing (or Disclosing an Offer to Purchase) a Company or Controlling Shares • Cases Alleging Impropriety in the Valuation and/or Sale of a Business, Assets, or Controlling Shares • Cases Involving M&A Agreements or Other Contracts • Cases Alleging Violation of Antitrust Laws • Cases Alleging Violations of Health, Safety, and Labor Laws in an M&A Context • Cases Dealing with Jurisdiction or Right to Sue Following a Merger • Additional Cases
INDEX
