BUSINESS ACQUISITIONS FIRST CLASS COURSE DESCRIPTION MOTIVATION FOR ACQUISITIONS MERGER & ACQUISITION BASICS © 2006 Joseph...
BUSINESS ACQUISITIONS An Interdisciplinary Approach Towards Teaching the Skills of a Business Lawyer
PREMISE OF THE COURSE The Role of the Transactional  Attorney is to Add  Value  to a  Business Transaction
ADDING VALUE TO A TRANSASCTION <ul><ul><ul><li>By  structuring  the transaction to enhance  financial return, reduce risk ...
BASIC ROLES OF THE ACQUISTION ATTORNEY <ul><li>Design the Structure of the Transaction </li></ul><ul><li>Implement Reducti...
COMMON RISKS <ul><li>Financial Risks </li></ul><ul><li>Environmental </li></ul><ul><li>Employment Laws </li></ul><ul><li>E...
THE COURSE WILL EMPHASIZE THE USE OF INTERDISCIPLINARY SKILLS Interdisciplinary Skills Include Legal, Financial and Busine...
INTERDISCIPLINARY   LEGAL SKILLS <ul><li>Corporations </li></ul><ul><li>Contracts </li></ul><ul><li>Tax </li></ul><ul><li>...
EXTRA-LEGAL INTERDISCIPLIANRY BUSINESS SKILLS <ul><li>Managerial and Cost Accounting </li></ul><ul><li>Finance </li></ul><...
DOCUMENTATION OF THE TRANSACTION <ul><li>Provide Congruency among the expectation of the client, the negotiated transactio...
THE ACQUIRED SKILL TO APPLY MULTI- LEGAL AND EXTRA-LEGAL DISCIPLINES IN A SEAMLESS MANNER WITHIN A SINGLE TRANSACTION
CLIENTS EXPECT THE BUSINESS ATTORNEY <ul><li>To Be a Constructive Counselor Regarding Price and Structure of a Transaction...
WHAT IS THIS COURSE ABOUT? (What is the Common Goal of the Buyer and Seller?)
$ $ $ $ MONEY
THE LANGUAGE OF MONEY <ul><li>Financial Statements </li></ul><ul><li>Projections </li></ul><ul><li>Valuation Analysis </li...
DETERMINING PRICE REQUIRES VALUATION ANALYSIS <ul><li>Basic Knowledge of Financial Statements </li></ul><ul><ul><li>Analys...
CRTITICAL CONCEPUTAL ANALYSIS OF  “VALUE” <ul><li>Value Based on Target’s Assets and Liabilities </li></ul><ul><ul><li>Tho...
CRTITICAL CONCEPUTAL ANALYSIS OF  “VALUE” <ul><li>Value Based Upon Net Discounted Future Cash Flow of the Business </li></...
NEW CONCEPTS AND TERMS <ul><li>EBITDA  (Earnings Before Interest, Taxes, Depreciation and Amortization) and Cash Flow </li...
STRUCTURING THE TRANSACTION <ul><li>Considerations for the Structure </li></ul><ul><ul><li>Acquiring the Attributes and Av...
PRELIMINARY NEGOTIATIONS AND INVESTIGATION <ul><li>Confidentiality Agreements </li></ul><ul><li>Letter of Intent </li></ul...
IDENTIFICATION OF REGULARLY RECURRING ISSUES <ul><li>Successor Liability </li></ul><ul><li>Labor and Employment Issues </l...
ISSUES RELATED TO DOCUMENTATION <ul><li>What is being Acquired </li></ul><ul><li>Purchase Price Payment Provisions </li></...
FINANCING THE TRANSACTION <ul><li>Working Knowledge of Financing Techniques (Secured, Unsecured, Mezzanine…etc.) </li></ul...
CORPORATE GOVERNANCE <ul><li>Decision Making Process of Public Vs. Private Corporation </li></ul><ul><li>Duties of Directo...
SPECIFIC ISSUES RELATED TO PUBLICLY HELD TARGETS <ul><li>Takeover Techniques </li></ul><ul><li>Hostile Bids and Defensive ...
ANTITRUST ISSUES <ul><li>General Antitrust Principals </li></ul><ul><li>Determination of Undue Share of Market </li></ul><...
COURSE PROCEDURES <ul><li>Assignments will be sent by E-Mail and will be Posted at the Business Acquisitions Web Site </li...
COURSE PROCEDURES <ul><li>Attendance is expected.  Attendance roles will not be regularly taken, but the right is reserved...
COURSE PROCEDURES <ul><li>This year the examination will be an 8 hour open book exam. </li></ul><ul><li>The Exam Will Test...
JOSEPH D. LEHRER [email_address] I can be reached at:
Merger & Acquisitions BASIC CONCEPTS
MERGER & ACQUISITION BASICS <ul><li>An Acquisition is the Purchase of a Business </li></ul><ul><ul><li>Acquisition of Asse...
MERGER WAIVES <ul><li>1893-1904:  Consolidation of Railroads, Oils, Steel, ..etc.  (Rockefeller, Vanderbilt, Carnegie) </l...
MERGER WAIVES <ul><li>1919-1929:  Further Consolidation and Vertical Integration (e.g., automobile industry) </li></ul><ul...
MERGER WAIVES <ul><li>1955-1973: Era of the Conglomerate </li></ul><ul><li>Large Players:  ITT (Harold Geneen), LTV (Jimmy...
MERGER WAIVES <ul><li>The 1980’s:  The Growth of LBO’s, Financial Buyers, MBO’s, and the Hostile Takeover, Break Up LBO’s,...
MERGER WAIVES <ul><li>1993-2000:  Merger Mania </li></ul><ul><li>Motivated by: </li></ul><ul><ul><li>Deregulation (Banks, ...
 
 
 
 
 
Top 10 Deals of 2005 Source:  Mergerstat
 
Source:  Bank of America Capital Business Capital
MOTIVATIONS OF BUYER AND SELLER What Causes The Urge to Merge?
TYPES OF BUYERS <ul><li>Strategic Buyer </li></ul><ul><ul><li>Buyer Who Has a Strategic Reason to Purchase the Business wh...
SYNERGISTIC TRANSACTIONS <ul><li>Horizontal - Combining Similar Products or Services </li></ul><ul><li>Vertical - Combinin...
MOTIVATIONS OF A BUYER <ul><li>Creation of Synergies -- The Value of the Whole Exceeds the Sum of the Parts </li></ul><ul>...
MOTIVATIONS OF A BUYER <ul><li>Diversification </li></ul><ul><li>Perceived Undervalued Target (e.g., assets at below repla...
MOTIVATIONS OF A SELLER <ul><li>Privately Held Companies: </li></ul><ul><ul><li>Family and Estate Planning Issues </li></u...
MOTIVATIONS OF A SELLER <ul><li>Publicly Held Company </li></ul><ul><ul><li>Value to Shareholders </li></ul></ul><ul><ul><...
Lipton’s Article Identifies Exogenous Factors and Autogenous Factors Affecting Mergers <ul><li>Exogenous Factors: Regulato...
WASSERSTEIN’S FIVE PISTONS FOR M&A <ul><li>Regulatory and Political Change </li></ul><ul><li>Technological Developments </...
DO MERGERS SUCCEED? Is The Economist right when saying (January 9, 1999  After the deal  ): &quot;Study after study of pas...
GRADING ACQUISITIONS <ul><li>McKinsey says that 74% of Acquisitions Fail to Create Shareholder Value </li></ul><ul><li>KPM...
 
 
Returns to Investors in LBO’s Have Not Equaled the Risk of an LBO
CAUSES FOR BAD ACQUISTIONS <ul><li>Too High of a Purchase Price </li></ul><ul><ul><li>Caught up in Auction Atmosphere </li...
MERGER & ACQUISITION BASICS <ul><li>An Acquisition is the Purchase of a Business </li></ul><ul><ul><li>Acquisition of Asse...
TYPES OF TARGETS <ul><li>Acquisition of a Privately Held Company </li></ul><ul><li>Acquisition of a Publicly Held Company ...
THREE BASIC ACQUISITION STRUCTURES <ul><li>Stock Purchase </li></ul><ul><li>Asset Purchase </li></ul><ul><li>Merger </li><...
STOCK PURCHASE <ul><li>Buyer purchases all of the issued and outstanding stock of the Target’s shareholders </li></ul><ul>...
Think of a Corporation as a Box
In an Acquisition Structured as a Stock Purchase, the Acquirer Purchases the Entire Corporation (i.e., the entire box) inc...
 
But without Investigation, the Buyer may not Know what is Inside the Box
There could be an Unpleasant Surprise Inside the Box
BUYER SHAREHOLDERS STOCK TARGET Purchase Price Stock Purchase  Transaction
BUYER SHAREHOLDERS Cap Gains Tax STOCK TARGET Purchase Price As a result of  Stock Purchase
ASSET PURCHASE <ul><li>Buyer Purchases Selected assets of  the Corporation </li></ul><ul><li>Assumption of selected liabil...
In an Asset Purchase the Buyer can Choose what Assets and Liabilities are Acquired
TARGET BUYER Assets Assumed Liabilities Purchase Price Shareholders Asset  Purchase
Statutory Stock Merger <ul><li>A statutory merger of the Target into the Buyer (or its subsidiary) </li></ul><ul><li>The T...
USING THE ANLAOGY OF THE BOX <ul><li>Assume that everything in one box is poured into the other box -- Everything is Combi...
Target Target S-H’s Buyer Merger Buyer’s  Stock Buyer’s S-H’s Statutory Merger A Reorg.
Target S-H’s BUYER Target’s Assets & Liabilities Buyer’s  S-H’s As a result of the Merger
Upcoming SlideShare
Loading in …5
×

Week 1 06

765 views

Published on

Thanks to the authors

0 Comments
0 Likes
Statistics
Notes
  • Be the first to comment

  • Be the first to like this

No Downloads
Views
Total views
765
On SlideShare
0
From Embeds
0
Number of Embeds
2
Actions
Shares
0
Downloads
35
Comments
0
Likes
0
Embeds 0
No embeds

No notes for slide

Week 1 06

  1. 1. BUSINESS ACQUISITIONS FIRST CLASS COURSE DESCRIPTION MOTIVATION FOR ACQUISITIONS MERGER & ACQUISITION BASICS © 2006 Joseph D. Lehrer
  2. 2. BUSINESS ACQUISITIONS An Interdisciplinary Approach Towards Teaching the Skills of a Business Lawyer
  3. 3. PREMISE OF THE COURSE The Role of the Transactional Attorney is to Add Value to a Business Transaction
  4. 4. ADDING VALUE TO A TRANSASCTION <ul><ul><ul><li>By structuring the transaction to enhance financial return, reduce risk and limit costs . </li></ul></ul></ul><ul><ul><ul><li>Using multiple skill sets to shepherd the Transaction. </li></ul></ul></ul><ul><ul><ul><li>Working as a member of a team, including the client and other professionals. </li></ul></ul></ul><ul><ul><ul><li>Facilitating the consummation of a beneficial Transaction </li></ul></ul></ul>
  5. 5. BASIC ROLES OF THE ACQUISTION ATTORNEY <ul><li>Design the Structure of the Transaction </li></ul><ul><li>Implement Reduction of Risk </li></ul><ul><li>Negotiate the Details of the Transaction </li></ul><ul><li>Prepare Documentation of the Transaction </li></ul><ul><li>Create Congruency Between: (i) the Business Goals and Expectations for the Transaction and (ii) The Structure and Documentation of the Transaction </li></ul>
  6. 6. COMMON RISKS <ul><li>Financial Risks </li></ul><ul><li>Environmental </li></ul><ul><li>Employment Laws </li></ul><ul><li>Employee Benefits </li></ul><ul><li>Commercial Litigation </li></ul><ul><li>Tax </li></ul><ul><li>Intellectual Property Infringement </li></ul><ul><li>Antitrust </li></ul>
  7. 7. THE COURSE WILL EMPHASIZE THE USE OF INTERDISCIPLINARY SKILLS Interdisciplinary Skills Include Legal, Financial and Business Skills
  8. 8. INTERDISCIPLINARY LEGAL SKILLS <ul><li>Corporations </li></ul><ul><li>Contracts </li></ul><ul><li>Tax </li></ul><ul><li>Real Estate </li></ul><ul><li>Labor and Employment </li></ul><ul><li>Employee Benefits </li></ul><ul><li>Intellectual Property </li></ul><ul><li>Antitrust </li></ul><ul><li>Securities </li></ul><ul><li>Environmental </li></ul><ul><li>Uniform Commercial Code </li></ul><ul><li>Insurance </li></ul>
  9. 9. EXTRA-LEGAL INTERDISCIPLIANRY BUSINESS SKILLS <ul><li>Managerial and Cost Accounting </li></ul><ul><li>Finance </li></ul><ul><li>Marketing </li></ul><ul><li>Valuation </li></ul><ul><li>Negotiations </li></ul>
  10. 10. DOCUMENTATION OF THE TRANSACTION <ul><li>Provide Congruency among the expectation of the client, the negotiated transaction and the documentation of the transaction </li></ul><ul><li>Coordinate the Documentation with the results of Due Diligence </li></ul><ul><li>Use Familiar Formats and Procedures of Documentation to Reflect the Transaction </li></ul>
  11. 11. THE ACQUIRED SKILL TO APPLY MULTI- LEGAL AND EXTRA-LEGAL DISCIPLINES IN A SEAMLESS MANNER WITHIN A SINGLE TRANSACTION
  12. 12. CLIENTS EXPECT THE BUSINESS ATTORNEY <ul><li>To Be a Constructive Counselor Regarding Price and Structure of a Transaction </li></ul><ul><li>Possess Multiple Legal and Business Skills Based Upon Interdisciplinary Education and Experience of Many “Deals” </li></ul><ul><li>Be a Facilitator Who Finds Solutions for Both the Buyer and Seller </li></ul><ul><li>Be a Constructive Negotiator Who Creatively Avoids Impasse </li></ul>
  13. 13. WHAT IS THIS COURSE ABOUT? (What is the Common Goal of the Buyer and Seller?)
  14. 14. $ $ $ $ MONEY
  15. 15. THE LANGUAGE OF MONEY <ul><li>Financial Statements </li></ul><ul><li>Projections </li></ul><ul><li>Valuation Analysis </li></ul><ul><li>Financial Terms of Art </li></ul>
  16. 16. DETERMINING PRICE REQUIRES VALUATION ANALYSIS <ul><li>Basic Knowledge of Financial Statements </li></ul><ul><ul><li>Analysis of the Balance Sheet, Income Statement and Statement of Cash Flows </li></ul></ul><ul><ul><li>Additional Information of Target Disclosed in Notes to Financial Statements </li></ul></ul><ul><ul><li>Analysis of Financial Projections </li></ul></ul><ul><li>Basic Valuation Drivers and Techniques </li></ul><ul><li>Identification and Analysis of Synergies </li></ul><ul><ul><li>Marketing and Revenue Enhancement </li></ul></ul><ul><ul><li>Expense Savings </li></ul></ul>
  17. 17. CRTITICAL CONCEPUTAL ANALYSIS OF “VALUE” <ul><li>Value Based on Target’s Assets and Liabilities </li></ul><ul><ul><li>Those Reflected on the Balance Sheet </li></ul></ul><ul><ul><li>Those Not Reflected on the Balance Sheet </li></ul></ul><ul><li>Value Based on Historical Financial Results </li></ul><ul><li>Value Based on Financial Projections </li></ul><ul><li>Value Based upon Comparable Companies’ Stock Market Values </li></ul><ul><li>Value Based Upon Perceived Synergies </li></ul>
  18. 18. CRTITICAL CONCEPUTAL ANALYSIS OF “VALUE” <ul><li>Value Based Upon Net Discounted Future Cash Flow of the Business </li></ul><ul><ul><li>How to Predict Future Cash Flow </li></ul></ul><ul><ul><li>What Discount Rate to Use Based Upon Expected Return, Perceived Risk and Cost of Funds </li></ul></ul><ul><ul><li>How to Integrate Synergies of Multiple Businesses Within Such Analysis </li></ul></ul>
  19. 19. NEW CONCEPTS AND TERMS <ul><li>EBITDA (Earnings Before Interest, Taxes, Depreciation and Amortization) and Cash Flow </li></ul><ul><li>Leverage and Leveraged Buy-Out (LBO) </li></ul><ul><li>Multiples </li></ul><ul><li>Discount Rate and Present Value </li></ul><ul><li>Cost of Capital </li></ul><ul><li>ROI (Return on Equity) </li></ul><ul><li>IRR (Internal Rate of Return) </li></ul>
  20. 20. STRUCTURING THE TRANSACTION <ul><li>Considerations for the Structure </li></ul><ul><ul><li>Acquiring the Attributes and Avoiding Unwanted Liabilities </li></ul></ul><ul><ul><li>Accounting Issues </li></ul></ul><ul><ul><li>Tax Issues </li></ul></ul><ul><li>Basic Acquisition Structures </li></ul>
  21. 21. PRELIMINARY NEGOTIATIONS AND INVESTIGATION <ul><li>Confidentiality Agreements </li></ul><ul><li>Letter of Intent </li></ul><ul><li>Due Diligence Investigation </li></ul>
  22. 22. IDENTIFICATION OF REGULARLY RECURRING ISSUES <ul><li>Successor Liability </li></ul><ul><li>Labor and Employment Issues </li></ul><ul><li>Intellectual Property Issues </li></ul><ul><li>Corporate Law Issues </li></ul><ul><li>Environmental Issues </li></ul>
  23. 23. ISSUES RELATED TO DOCUMENTATION <ul><li>What is being Acquired </li></ul><ul><li>Purchase Price Payment Provisions </li></ul><ul><li>Representations and Warranties </li></ul><ul><li>Covenants </li></ul><ul><li>Conditions for Closing </li></ul><ul><li>Indemnity Provisions </li></ul>
  24. 24. FINANCING THE TRANSACTION <ul><li>Working Knowledge of Financing Techniques (Secured, Unsecured, Mezzanine…etc.) </li></ul><ul><li>Interplay of Finance, Accounting, Creditors’/Debtors’ Rights and Securities Law </li></ul>
  25. 25. CORPORATE GOVERNANCE <ul><li>Decision Making Process of Public Vs. Private Corporation </li></ul><ul><li>Duties of Directors </li></ul><ul><li>Who Decides Whether to Sell, to Whom and for How Much? </li></ul><ul><ul><li>The Shareholders? </li></ul></ul><ul><ul><li>The Directors? </li></ul></ul><ul><ul><li>The Courts? </li></ul></ul><ul><li>Takeover Defenses </li></ul>
  26. 26. SPECIFIC ISSUES RELATED TO PUBLICLY HELD TARGETS <ul><li>Takeover Techniques </li></ul><ul><li>Hostile Bids and Defensive Techniques to a Hostile Bid </li></ul><ul><li>The Role of the Board, Shareholders & Courts </li></ul><ul><li>The Special Case of the Management Buy-Out </li></ul><ul><li>The Role of State Statutes </li></ul>
  27. 27. ANTITRUST ISSUES <ul><li>General Antitrust Principals </li></ul><ul><li>Determination of Undue Share of Market </li></ul><ul><li>Pre-Merger Notification Requirements </li></ul>
  28. 28. COURSE PROCEDURES <ul><li>Assignments will be sent by E-Mail and will be Posted at the Business Acquisitions Web Site </li></ul><ul><ul><li>Readings in Adobe, Word or as an HTML </li></ul></ul><ul><ul><li>Usually before the weekend </li></ul></ul><ul><ul><li>Assignments are not necessarily fully covered in class </li></ul></ul><ul><li>I will try to have all written assignment materials downloadable from the Course Web Site </li></ul><ul><li>Use of Links to the Internet For Some Assignments </li></ul><ul><li>Each Class PowerPoint Presentation will be in a Printable Form on the Web Site Prior to Class </li></ul>
  29. 29. COURSE PROCEDURES <ul><li>Attendance is expected. Attendance roles will not be regularly taken, but the right is reserved to contact the student who doesn’t attend class. </li></ul><ul><li>Preparation is expected , and students who are not prepared for Class “volunteer” for extra assignments </li></ul><ul><li>Class participation will not always be Voluntary </li></ul><ul><li>Teacher may miss some classes -- make up on Fridays to be announced (MLK class will be rescheduled for “Negotiation” Session) </li></ul><ul><li>Grades will be primarily based upon examination, but Teacher reserves the right to take into account attendance and class participation. </li></ul>
  30. 30. COURSE PROCEDURES <ul><li>This year the examination will be an 8 hour open book exam. </li></ul><ul><li>The Exam Will Test Students’ Ability to Apply Interdisciplinary Skills, and will Hopefully also be a Learning Experience. </li></ul><ul><li>The Test Will Cover the Assignment Materials and Emphasize the Items Covered in Class (Including Items Not Contained on the Power Point Presentations). </li></ul>
  31. 31. JOSEPH D. LEHRER [email_address] I can be reached at:
  32. 32. Merger & Acquisitions BASIC CONCEPTS
  33. 33. MERGER & ACQUISITION BASICS <ul><li>An Acquisition is the Purchase of a Business </li></ul><ul><ul><li>Acquisition of Assets of a Corporation </li></ul></ul><ul><ul><li>Acquisition of the Stock of a Corporation </li></ul></ul><ul><li>A Merger is the Combination of Two Corporations </li></ul>
  34. 34. MERGER WAIVES <ul><li>1893-1904: Consolidation of Railroads, Oils, Steel, ..etc. (Rockefeller, Vanderbilt, Carnegie) </li></ul><ul><ul><li>Motivated in large part by New Technologies </li></ul></ul><ul><ul><li>Consolidation of Fragmented Industries (e.g., Railroads) </li></ul></ul><ul><ul><li>Fueled by Foreign Money (Instituted by J. P. Morgan) </li></ul></ul>
  35. 35. MERGER WAIVES <ul><li>1919-1929: Further Consolidation and Vertical Integration (e.g., automobile industry) </li></ul><ul><li>Motivated by New Technologies: Automobile, Airplanes, Movies and Radio </li></ul><ul><li>Personalities: Ford, Durant, </li></ul>
  36. 36. MERGER WAIVES <ul><li>1955-1973: Era of the Conglomerate </li></ul><ul><li>Large Players: ITT (Harold Geneen), LTV (Jimmy Ling) </li></ul><ul><li>Diversification, not Consolidation, was the Driver </li></ul><ul><li>The Hodge Podge Acquisitions look Irrational in Retrospect </li></ul>
  37. 37. MERGER WAIVES <ul><li>The 1980’s: The Growth of LBO’s, Financial Buyers, MBO’s, and the Hostile Takeover, Break Up LBO’s, …etc. </li></ul><ul><li>Spurred in Large Part by Sophisticated Financing and Leverage </li></ul><ul><li>Personalities: Milken, T. Boone Pickens, KKR, Perelman,..etc. </li></ul>
  38. 38. MERGER WAIVES <ul><li>1993-2000: Merger Mania </li></ul><ul><li>Motivated by: </li></ul><ul><ul><li>Deregulation (Banks, Broadcasting, …etc.) </li></ul></ul><ul><ul><li>Relaxation of Antitrust Restraints </li></ul></ul><ul><ul><li>Technology </li></ul></ul><ul><ul><li>Foreign Investment </li></ul></ul><ul><ul><li>Cheap Money </li></ul></ul><ul><ul><li>Globalization </li></ul></ul><ul><li>Fueled by the “Irrational Exuberance” of Stock Market Valuations </li></ul>
  39. 44. Top 10 Deals of 2005 Source: Mergerstat
  40. 46. Source: Bank of America Capital Business Capital
  41. 47. MOTIVATIONS OF BUYER AND SELLER What Causes The Urge to Merge?
  42. 48. TYPES OF BUYERS <ul><li>Strategic Buyer </li></ul><ul><ul><li>Buyer Who Has a Strategic Reason to Purchase the Business which will Enhance Revenue and/or Reduce Expenses </li></ul></ul><ul><li>Financial Buyer </li></ul><ul><ul><li>Buyer who Purchases the Business Based Solely upon the Value of the Business and the Financial Expectancies of the Business without any Synergies </li></ul></ul>
  43. 49. SYNERGISTIC TRANSACTIONS <ul><li>Horizontal - Combining Similar Products or Services </li></ul><ul><li>Vertical - Combining Two Firms Along Value-Chain (Such as a Supplier and Customer) </li></ul><ul><li>Conglomerate - Two Companies in Completely Different Industries Combine </li></ul>
  44. 50. MOTIVATIONS OF A BUYER <ul><li>Creation of Synergies -- The Value of the Whole Exceeds the Sum of the Parts </li></ul><ul><ul><li>Reduction or Elimination of Redundant Expenses </li></ul></ul><ul><ul><li>Enhance Revenues by Access to Customers, Technology and/or Marketing </li></ul></ul><ul><li>Gain Human Resources -- Intellectual Capital and Resources </li></ul><ul><li>Utilize Buyer’s Equity as Currency </li></ul>
  45. 51. MOTIVATIONS OF A BUYER <ul><li>Diversification </li></ul><ul><li>Perceived Undervalued Target (e.g., assets at below replacement cost or break-up value) </li></ul><ul><li>Perceived Additional Management Value </li></ul><ul><li>Managerial Ego, Ambition and Hubris </li></ul>
  46. 52. MOTIVATIONS OF A SELLER <ul><li>Privately Held Companies: </li></ul><ul><ul><li>Family and Estate Planning Issues </li></ul></ul><ul><ul><li>Successorship Issues </li></ul></ul><ul><ul><li>Price Offered is Higher than Present Value of Business </li></ul></ul><ul><ul><li>Diversify Wealth </li></ul></ul><ul><ul><li>Lifestyle Issues </li></ul></ul>
  47. 53. MOTIVATIONS OF A SELLER <ul><li>Publicly Held Company </li></ul><ul><ul><li>Value to Shareholders </li></ul></ul><ul><ul><li>Desire for an “Exit” for Large Shareholders </li></ul></ul><ul><ul><li>Management’s Desire (Possibly because of Stock Options) </li></ul></ul><ul><ul><li>Internal Political Reasons </li></ul></ul><ul><ul><li>Financial or Liquidity Pressures </li></ul></ul>
  48. 54. Lipton’s Article Identifies Exogenous Factors and Autogenous Factors Affecting Mergers <ul><li>Exogenous Factors: Regulatory, Political, Markets, Taxes , Financing, Currency Fluctuations, …etc, </li></ul><ul><li>Autogenous Factors: Diversification, Response to Technological Change, Vertical Integration, Horizontal Integration, Quest for Global Market, Cost Cutting, Pressure to Grow Shareholder Value, Response to Industrial Consolidation, …etc. </li></ul>
  49. 55. WASSERSTEIN’S FIVE PISTONS FOR M&A <ul><li>Regulatory and Political Change </li></ul><ul><li>Technological Developments </li></ul><ul><li>Fluctuations in the Financial Markets </li></ul><ul><li>Leadership Style </li></ul><ul><li>Drive for Scale </li></ul>
  50. 56. DO MERGERS SUCCEED? Is The Economist right when saying (January 9, 1999 After the deal ): &quot;Study after study of past merger waves have shown that two of every three deals have not worked; the only winners are the shareholders of the acquired firm, who sell their company for more than it is really worth.&quot;
  51. 57. GRADING ACQUISITIONS <ul><li>McKinsey says that 74% of Acquisitions Fail to Create Shareholder Value </li></ul><ul><li>KPMG Says that it is 83% </li></ul>
  52. 60. Returns to Investors in LBO’s Have Not Equaled the Risk of an LBO
  53. 61. CAUSES FOR BAD ACQUISTIONS <ul><li>Too High of a Purchase Price </li></ul><ul><ul><li>Caught up in Auction Atmosphere </li></ul></ul><ul><ul><li>Overestimate Growth and Buyer’s Capabilities </li></ul></ul><ul><ul><li>Overestimate Synergies With Existing Business </li></ul></ul><ul><li>Poor Due Diligence Investigation of Target </li></ul><ul><li>Poor Integration of Target Into Existing Business </li></ul><ul><li>Inadequate Protection From Risks </li></ul>
  54. 62. MERGER & ACQUISITION BASICS <ul><li>An Acquisition is the Purchase of a Business </li></ul><ul><ul><li>Acquisition of Assets of a Corporation </li></ul></ul><ul><ul><li>Acquisition of the Stock of a Corporation </li></ul></ul><ul><li>A Merger is the Combination of Two Corporations </li></ul>
  55. 63. TYPES OF TARGETS <ul><li>Acquisition of a Privately Held Company </li></ul><ul><li>Acquisition of a Publicly Held Company </li></ul>
  56. 64. THREE BASIC ACQUISITION STRUCTURES <ul><li>Stock Purchase </li></ul><ul><li>Asset Purchase </li></ul><ul><li>Merger </li></ul>
  57. 65. STOCK PURCHASE <ul><li>Buyer purchases all of the issued and outstanding stock of the Target’s shareholders </li></ul><ul><li>As a consequence, all assets and all liabilities are acquired by virtue of Buyer owning target as wholly owned subsidiary </li></ul>
  58. 66. Think of a Corporation as a Box
  59. 67. In an Acquisition Structured as a Stock Purchase, the Acquirer Purchases the Entire Corporation (i.e., the entire box) including everything inside of the Box (i.e., all assets and all liabilities)
  60. 69. But without Investigation, the Buyer may not Know what is Inside the Box
  61. 70. There could be an Unpleasant Surprise Inside the Box
  62. 71. BUYER SHAREHOLDERS STOCK TARGET Purchase Price Stock Purchase Transaction
  63. 72. BUYER SHAREHOLDERS Cap Gains Tax STOCK TARGET Purchase Price As a result of Stock Purchase
  64. 73. ASSET PURCHASE <ul><li>Buyer Purchases Selected assets of the Corporation </li></ul><ul><li>Assumption of selected liabilities of the business </li></ul><ul><li>The Selling Company may retain specified assets and liabilities </li></ul><ul><li>Normally, the selling corporation liquidates after the transaction is completed </li></ul><ul><li>Inefficient tax consequences if the corporate seller is not S Corporation or an LLC </li></ul>
  65. 74. In an Asset Purchase the Buyer can Choose what Assets and Liabilities are Acquired
  66. 75. TARGET BUYER Assets Assumed Liabilities Purchase Price Shareholders Asset Purchase
  67. 76. Statutory Stock Merger <ul><li>A statutory merger of the Target into the Buyer (or its subsidiary) </li></ul><ul><li>The Target’s shareholders receive a Buyer’s Shares of Stock in Exchange for Target’s shares. </li></ul><ul><li>The Combined Corporation Surviving the Merger Possesses All of the Assets, Liabilities and Obligations of Each of the Two Corporations. </li></ul>
  68. 77. USING THE ANLAOGY OF THE BOX <ul><li>Assume that everything in one box is poured into the other box -- Everything is Combined </li></ul><ul><li>There is no opportunity to pick and choose which liabilities are going into the combined box </li></ul><ul><li>The owners of both boxes end up owning the combined box, as the survivor to the Merger. </li></ul>
  69. 78. Target Target S-H’s Buyer Merger Buyer’s Stock Buyer’s S-H’s Statutory Merger A Reorg.
  70. 79. Target S-H’s BUYER Target’s Assets & Liabilities Buyer’s S-H’s As a result of the Merger

×