Mergers, Acquisitions, and Other Restructuring Activities

An Integrated Approach to Process, Tools, Cases, and Solutions

Donald DePamphilis

• Publisher: Academic Press
• Year: 2009
• ISBN:
  9780080952055
• Edition: 5
• Topic: Business
• Subtopic: Finanza
• Index: Business

In the fifth edition of this well-known text, Dr. DePamphilis explains the real world of mergers, acquisitions, and restructuring based on his academic knowledge and personal experiences with over 30 such deals himself. Important enhancements unique to the fifth edition: all 99 cases involve real-life deals made or announced within the last five years, extensive discussions of all current valuation techniques and their strengths and weaknesses, cross-border transactions analyzed and explained in detail, tax and legal issues covered comprehensively.

• Focuses on the REAL WORLD, not just theory. The 99 case studies span every industry and dozens of countries and show how deals are done rather than just the theory behind them. All cases fully updated for this edition. Cases all involve transactions that have occurred or been announced within the past 3-5 years.
• Extensive updating and enhanced content provided on reorganization, bankruptcy, and liquidation issues both inside and outside of bankruptcy court

Part I

The Mergers and Acquisitions Environment

1 Introduction to Mergers and Acquisitions (M&As)

Publisher Summary

The first decade of the new millennium heralded an era of global megamergers, followed by a period of extended turbulence in the global credit markets. As was true of the frenetic levels of mergers and acquisitions (M&As) in the 1980s and 1990s, the level of activity through mid-2007 was fueled by readily available credit, historically low interest rates, rising equity markets, technological change, global competition, and industry consolidation. The intent of this chapter is to provide an understanding of the underlying dynamics of M&A (merger and acquisition) in the context of an increasingly interconnected world. The chapter begins with a discussion of M&As as a change agent in the context of corporate restructuring. The focus in the chapter is on M&As, why they happen, and why they tend to cluster in waves. It also introduces various legal structures and strategies employed to restructure corporations. Moreover, the role of the various participants in the M&A process is explained. Using the results of the latest empirical studies, the chapter addresses the question of whether mergers pay off for target and acquiring company shareholders and bondholders, as well as for society. Finally, the most commonly cited reasons some M&As fail to meet expectations are discussed.

If you give a man a fish, you feed him for a day.

If you teach a man to fish, you feed him for a lifetime.

—Lao Tze

Inside M&A: Mars Buys Wrigley in One Sweet Deal

Under considerable profit pressure from escalating commodity prices and eroding market share, Wrigley Corporation, a U.S. based leader in gum and confectionery products, faced increasing competition from Cadbury Schweppes in the U.S. gum market. Wrigley had been losing market share to Cadbury since 2006. Mars Corporation, a privately owned candy company with annual global sales of $22 billion, sensed an opportunity to achieve sales, marketing, and distribution synergies by acquiring Wrigley Corporation.

On April 28, 2008, Mars announced that it had reached an agreement to merge with Wrigley Corporation for $23 billion in cash. Under the terms of the agreement, unanimously approved by the boards of the two firms, shareholders of Wrigley would receive $80 in cash for each share of common stock outstanding. The purchase price represented a 28 percent premium to Wrigley’s closing share price of $62.45 on the announcement date. The merged firms in 2008 would have a 14.4 percent share of the global confectionary market, annual revenue of $27 billion, and 64,000 employees worldwide. The merger of the two family-controlled firms represents a strategic blow to competitor Cadbury Schweppes’s efforts to continue as the market leader in the global confectionary market with its gum and chocolate business. Prior to the announcement, Cadbury had a 10 percent worldwide market share.

Wrigley would become a separate stand-alone subsidiary of Mars, with $5.4 billion in sales. The deal would help Wrigley augment its sales, marketing, and distribution capabilities. To provide more focus to Mars’ brands in an effort to stimulate growth, Mars would transfer its global nonchocolate confectionery sugar brands to Wrigley. Bill Wrigley, Jr., who controls 37 percent of the firm’s outstanding shares, would remain executive chairman of Wrigley. The Wrigley management team also would remain in place after closing. The combined companies would have substantial brand recognition and product diversity in six growth categories: chocolate, nonchocolate confectionary, gum, food, drinks, and pet-care products. The resulting confectionary powerhouse also would expect to achieve significant cost savings by combining manufacturing operations and have a substantial presence in emerging markets.

While mergers among competitors are not unusual, the deal’s highly leveraged financial structure is atypical of transactions of this type. Almost 90 percent of the purchase price would be financed through borrowed funds, with the remainder financed largely by a third party equity investor. Mars’s upfront costs would consist of paying for closing costs from its cash balances in excess of its operating needs. The debt financing for the transaction would consist of $11 billion and $5.5 billion provided by J.P. Morgan Chase and Goldman Sachs, respectively. An additional $4.4 billion in subordinated debt would come from Warren Buffet’s investment company, Berkshire Hathaway, a nontraditional source of high-yield financing. Historically, such financing would have been provided by investment banks or hedge funds and subsequently repackaged into securities and sold to long-term investors, such as pension funds, insurance companies, and foreign investors. However, the meltdown in the global credit markets in 2008 forced investment banks and hedge funds to withdraw from the high-yield market in an effort to strengthen their balance sheets. Berkshire Hathaway completed the financing of the purchase price by providing $2.1 billion in equity financing for a 9.1 percent ownership stake in Wrigley.

Chapter Overview

The first decade of the new millennium heralded an era of global megamergers, followed by a period of extended turbulence in the global credit markets. As was true of the frenetic levels of mergers and acquisitions (M&As) in the 1980s and 1990s, the level of activity through mid-2007 was fueled by readily available credit, historically low interest rates, rising equity markets, technological change, global competition, and industry consolidation. In terms of dollar volume, M&A transactions reached a record level worldwide in 2007. The largely debt financed, speculative housing bubble in the United States and elsewhere burst during the second half of the year. Banks, concerned about the value of many of their own assets, became exceedingly selective in terms of the types of transactions they would finance, largely withdrawing from financing the highly leveraged transactions that had become commonplace in 2006. In view of the global nature of the credit markets, the quality of assets held by banks throughout Europe and Asia became suspect. As the availability of credit dried up, the malaise in the market for highly leveraged M&A transactions spread worldwide. The combination of record high oil prices and a reduced availability of credit caused most of the world’s economies to slip into recession in 2008, substantially reducing global M&A activity. Despite a dramatic drop in energy prices and highly stimulative monetary and fiscal policies, the global recession continued in 2009, extending the slump in M&A activity.

In recent years, governments worldwide have intervened aggressively in global credit markets as well as manufacturing and other sectors of the economy in an effort to restore business and consumer confidence and offset deflationary pressures. While it is still too early to determine the impact of such actions on mergers and acquisitions, the implications may be significant. As will be noted in the coming chapters, M&As represent an important means of transferring resources to where they are most needed and removing underperforming managers. Government decisions to save some firms while allowing others to fail are likely to disrupt this process. Such decisions often are based on the notion that some firms are simply too big to fail because of their potential impact on the economy. The choices made by government could potentially produce perverse incentives for businesses to merge to minimize the risk of failing if they can achieve a size that is viewed as “too big too fail.” Such actions disrupt the smooth functioning of markets, which reward good decisions while penalizing those having made poor decisions. There is very little historical evidence that governments can decide who is to fail and who is to survive better than markets.

The intent of this chapter is to provide the reader with an understanding of the underlying dynamics of M&As in the context of an increasingly interconnected world. The chapter begins with a discussion of M&A as a change agent in the context of corporate restructuring. Although other aspects of corporate restructuring are discussed elsewhere in this book, the focus in this chapter is on M&As, why they happen and why they tend to cluster in waves. The author also introduces the reader to various legal structures and strategies employed to restructure corporations. Moreover, the role of the various participants in the M&A process is explained. Using the results of the latest empirical studies, the chapter addresses the question of whether mergers pay off for target and acquiring company shareholders and bondholders, as well as for society. Finally, the most commonly cited reasons why some M&As fail to meet expectations are discussed. Major chapter segments include the following:

• Mergers and Acquisitions as Change Agents

• Common Motivations for Mergers and Acquisitions

• Merger and Acquisition Waves

• Alternative Forms of Corporate Restructuring

• Friendly versus Hostile Takeovers

• The Role of Holding Companies in Mergers and Acquisitions

• The Role of Employee Stock Ownership Plans in Mergers and Acquisitions

• Business Alliances as Alternatives to Mergers and Acquisitions

• Participants in the M&A Process

• Do Mergers and Acquisitions Pay Off for Shareholders?

• Do Mergers and Acquisitions Pay Off for Bondholders?

• Do Mergers and Acquisitions Pay Off for Society?

• Commonly Cited Reasons Some M&As Fail to Meet Expectations

• Long-Term Performance Similar for M&As, Business Alliances, and Solo Ventures

• Things to Remember

Words in italicized bold type are considered by the author to be important and are also found in the glossary at the end of this text for future reference. Throughout this book, a firm that attempts to acquire or merge with another company is called an acquiring company, acquirer, or bidder. The target company, or the target, is the firm that is being solicited by the acquiring company. Takeovers or buyouts are generic terms referring to a change in the controlling ownership interest of a corporation.

A review of this chapter (including practice questions and answers) is available in the file folder entitled Student Study Guide, contained on the CD-ROM accompanying this book. The CD-ROM also contains a Learning Interactions Library enabling students to test their knowledge of this chapter in a “real-time” environment.

Mergers and Acquisitions as Change Agents

Many have observed how businesses come and go. This continuous churn in businesses is perhaps best illustrated by the ever-changing composition of the 500 largest U.S. corporations. The so-called Fortune 500 illustrates remarkable change, in which only 70 of the original 500 firms on the list at its inception in 1955 can be found on the list today. About 2000 firms have appeared on the list at one time or another (aggdata.com, 2008). Most have been eliminated either through merger, acquisition, bankruptcy, downsizing, or some other form of corporate restructuring. Examples of such companies include such icons as Bethlehem Steel, Scott Paper, Zenith, Rubbermaid, and Warner Lambert.

In the popular media, actions taken to expand or contract a firm’s basic o...