m&as(class4) (1)

M&As are financial transactions that involve a change in the control of a company:

Control ChangeOperation Changes:- New controlling shareholders- New board of directors- New management- New business strategy

M&As are a consequence of changing markets and competitive environmentsMERGERS AND ACQUISITIONS

The buyer or acquiror may be:- An operating company (the most common)- A group of managers- A group of financial investors- A combination of the three

The seller side may be:- The board of directors- A controlling shareholderMERGERS AND ACQUISITIONS

Financial Justification:The acquisition will increase the per-share value of the acquirer over the long termORCash Flows from the transaction > Cost of the Acquisition

The seller will be immediately paid for the acquisitions expected benefits (if made in cash)ORThe seller will realize a premium over the trading market stock price (if made for stocks)MERGERS AND ACQUISITIONS

Generally Accepted Rules on M&As:

1.Pure conglomerate acquisitions do not necessarily create new shareholder value2.Counter cyclical acquisitions do not necessarily create value3.The market does not reward purely acquisition-induced growthMERGERS AND ACQUISITIONS

Generally Accepted Rules on M&As: (cont.)

4.Related diversification can be an important means of creating value in acquisitions5.Acquisitions can be an important means of reaching a critical mass, where size is an important industry factor6.Acquisitions are a tax-efficient means of investing excess corporate funds

MERGERS AND ACQUISITIONS

There are three different valuing parties in an acquisition:1.The BuyerValue = DCF of: - Long-term operating business- Total or partial liquidation of the business- Synergies from the restructuring of both businesses2.The SellerValue = DCF of the best available alternatives3. A Potential Competing BuyerMERGERS AND ACQUISITIONS

Valuation Techniques:- DCF: The most fundamental method of measuring value (cash)- Acquisition Multiples: Benchmark values based on multiples of earnings, book value, etc.- Premium over Market Trading Value: Percentage premium paid to public shareholders- Liquidation Value: Amount of cash that could be realized if a company sells all of its assets and pays off its liabilities in the near future- Replacement Value: Cost of starting up a similar company from scratchMERGERS AND ACQUISITIONS

Valuation Techniques: DCF- Step 1.a Evaluation of historical and projections of operating characteristics of the company, specifically:* Unit growth rate of sales* Rate of price increases* Cost of goods sold as a percentage of sales* Depreciation as a percentage of net fixed assets* Selling, general, and administrative expenses as a percentage of sales* Effective tax rate* Working capital required as a percentage of sales* Net fixed assets required as a percentage of sales


Valuation Techniques: DCF- Step 1.b Definition of specific economic and industry assumptions:* Inflation* Industry size and unit growth rate* Market share changes within the industry- Step 1.c Definition of scenarios by grouping varying sets of the economic assumptions into: * Maturity scenarios * Growth scenariosMERGERS AND ACQUISITIONS

Valuation Techniques: DCF- Example:MERGERS AND ACQUISITIONS

Sheet1

Flexible Technologies Corporation: Historical Operating Records

Latest Five-Year Average

Rate of unit sales growth7.0%

Rate of price growth6.0%

Operating income (% of sales)22.5%

Depreciation rate (% of net fixed assets)12.0%

Tax rate46.0%

Net working capital required (% of sales)15.0%

Net fixed assets required (% of sales)40.0%

Sheet2

Sheet3

Valuation Techniques: DCF- Example:MERGERS AND ACQUISITIONS

Sheet1



Rate of unit sales growth0.07

Rate of price growth0.06

Operating income (% of sales)0.225

Depreciation rate (% of net fixed assets)0.12

Tax rate0.46

Net working capital required (% of sales)0.15

Net fixed assets required (% of sales)0.4

Flexible Technologies Corporation: Summary of Maturity Scenario

Year 1Year 2Year 3Year 4 and Following

Unit sales growth4.5%2.5%1.5%1.5%

General Inflation4.04.04.04.0

Rela price changes(4.0)(4.0)(4.0)0.0

Total price growth0.00.00.04.0

Operating margin as percentage of sales17.315.011.011.0

Flexible Technologies Corporation: Summary of Growth Scenario

Year 1-8Year 9Year 10Year 11Year 4 and Following

Unit sales growth7.0%4.5%2.5%1.5%1.5%

General Inflation4.04.04.04.04.0

Rela price changes0.0(4.0)(4.0)(4.0)0.0

Total price growth4.00.00.00.04.0

Operating margin as percentage of sales22.517.315.011.011.0

Sheet2

Sheet3

Sheet1



Rate of unit sales growth0.07

Rate of price growth0.06

Operating income (% of sales)0.225

Depreciation rate (% of net fixed assets)0.12

Tax rate0.46

Net working capital required (% of sales)0.15
















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Sheet3

Valuation Techniques: DCF- Step 2. Project Free Cash Flows:Levered FCF = net income after taxes - noncash charges to income (deferred taxes, depreciation, amort. of intangibles, etc.) - capital expenditures - investment in net working capital (excluding cash and short-term debt)Example:MERGERS AND ACQUISITIONS

Sheet1

Flexible Technologies Corporation: Historical Operating RecordsFlexible Technologies Corporation: Summary Calculation of Levered Free Cash Flow

Latest Five-Year AverageNet Income7,800

Rate of unit sales growth0.07Noncash charges

Rate of price growth0.06Depreciation2,700

Operating income (% of sales)0.225Deferred Taxes520

Depreciation rate (% of net fixed assets)0.12Less: Investment in net working capital(680)

Tax rate0.46Less: Capital expenditures(4,700)

Net working capital required (% of sales)0.15Free Cash Flow5,640
















Sheet2

Sheet3

Valuation Techniques: DCF- Step 3. Calculate WACC (k):Optimum Level of Debt = 20% - 50% debt to total capital

WACC (weighted average cost of debt and equity) is defined by:k = kE(% equity) + kp(1 - t)(% debt); where: kE = cost of equitykp = cost of debt (pre-tax)t = marginal tax rate%debt = percentage of debt to total capital% equity = percentage of equity to total capitalMERGERS AND ACQUISITIONS

Valuation Techniques: DCF- Step 3. Calculate WACC (k):(cont.)Cost of Debt (kp) = medium to long-term borrowing rateCost of Equity (kE) = rf + (rm - rf); where

rf = long-term risk free rate rm = long-term return on the market = systematic risk factor of the company and its industry rm - rf = long-term real return on the market (usually estimated between 3% and 8.5%)MERGERS AND ACQUISITIONS

Valuation Techniques: DCF- Step 4. DCF Value CalculationVfirm (DCF value) = Vdebt + VequityDCF value= cash flow component + terminal component= PV of unleveraged FCFs for each projection year (discounted at k) + PV of the terminal value of the firm at the end of the projection period (discounted at k) Unleveraged FCF = FCF + (interest expense)(1 - tax rate) MERGERS AND ACQUISITIONS

Valuation Techniques: Acquisition Multiples- Earnings Multiples: Use unleveraged acquisition multiples = gross acquisition price / operating earnings;Gross acquisition price= price paid for equity + market value of total debt owed by acquired companyOperating Earnings= earnings before interest and taxes (EBIT)= pretax earnings + interest expensePossible Distortions: * Non-comparable accounting principles underlying earnings * Amount of debt associated with an acquired company* Cyclicality of earningsMERGERS AND ACQUISITIONS

Valuation Techniques: Acquisition Multiples- Earnings Multiples: (cont.)Example:MERGERS AND ACQUISITIONS

Sheet1

Flexible Technologies Corporation: Historical Operating RecordsFlexible Technologies Corporation: Summary Calculation of Levered Free Cash Flow

Latest Five-Year AverageNet Income7,800

Rate of unit sales growth0.07Noncash charges

Rate of price growth0.06Depreciation2,700

Operating income (% of sales)0.225Deferred Taxes520

Depreciation rate (% of net fixed assets)0.12Less: Investment in net working capital(680)

Tax rate0.46Less: Capital expenditures(4,700)

Net working capital required (% of sales)0.15Free Cash Flow5,640
















Premiums paid in selected mergers in the commercial banking industry

Price paid as a multiple of acquiree

DatesAcquirorAcquireeTransaction ValueBook ValueEarningsMarket Value

6/24/91Wachovia Corp.South Carolina National Corp./Wachovia Corp.$835.001.7X16.2X1.7X

7/15/91Chemical Banking Corp.Manufacturers Hanover Corp.2136.100.7201.2

7/22/91NCNB Corp.C&S/Sovran Corp.4316.101.423.71.5

8/12/91Bank America Corp.Security Pacific Corp.4180.30116.41.5

9/12/91First America Bank Corp.Security Bancorp, Inc.547.002.817.81.8

10/28/91Comerica Inc.Manufacturers National Corp.1085.201.39.21

10/30/91National City Corp.Merchants National Corp.655.401.916.71.8

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Valuation Techniques: Acquisition Multiples- Book Value Multiples: Useful ONLY for industries where a companys book value plays a role in determining future profitability. Examples:* In rate-of-return regulated industries, such as telephone, electric, and gas utilities, where the companys future earnings are limited to a defined return on the companys equity* In financial institutions such as banks, insurance companies, and security firms, where the balance sheet values of most assets and liabilities are reasonably close to market valuesMERGERS AND ACQUISITIONS

Valuation Techniques: Acquisition Multiples- Cash Flow Multiples: Useful in industries where the cash flow from operations (net income plus noncash charges) is close to the free cash flow of the DCF analysis. Example:* Industries that undertake project-type investments: Real estate and oil and gas industriesMERGERS AND ACQUISITIONS

Valuation Techniques: Premium over Market Trading Value

- When an acquisition candidate is publicly traded, the buyer must pay a premium to market. The amount of the premium will depend on the attitude of the companys management (friendly or hostile to the acquiror) and the regulatory climate- Market trading values are also useful as a benchmark in calculating the value of a privately held company or divisionMERGERS AND ACQUISITIONS

Valuation Techniques: Liquidation and Replacement Values- Liquidation Value: amount of proceeds that could be realized by a stockholder if a company ceased operations, if all assets were sold at prevailing market prices, and if all liabilities and tax obligations were satisfied- Replacement Value: cost that would be incurred if one tried to replicate all of the assets and liabilities of a company by building them or purchasing them on the marketLiquidation ValueMinimum value for a companyReplacement ValueMaximum value for a companyMERGERS AND ACQUISITIONS

Valuation Techniques: Excess Assets and Liabilities

- If there are excess assets or liabilities of a company that play no part in determining the earnings or cash flows on which the basic valuation is made, such assets and liabilities must be separately added to (or substracted from) the basic value estimateMERGERS AND ACQUISITIONS

Financing an Acquisition- Most acquisitions are made in cash- Non cash payments are allowed when an alternative form of consideration can achieve a superior result for both parties- The driving factors for non cash payments are:* Tax Deferrals* Accounting* Regulatory Requirements * Contingent Payments* Financing AbilityMERGERS AND ACQUISITIONS

Financing an Acquisition: Income Tax Aspects - The IRC provides that an acquisition can be accomplished without triggering income tax liability on the part of the selling shareholder, ONLY in the following cases:* Reorganization through Merger* Reorganization through Stock Purchase* Reorganization through Asset Purchase* Reorganization through Forward Triangular Merger* Reorganization through Reverse Triangular MergerMERGERS AND ACQUISITIONS

Financing an Acquisition: Obtaining Tax Deferrals1. Reorganization (merger): Y merges into X to form XY AND at least 40-50% of the consideration paid for Y consists of equity securities of X2. Reorganization (stock purchase): X purchases at least 80% of the voting stock of Y, using only voting stock of X in paymentMERGERS AND ACQUISITIONS

Financing an Acquisition: Obtaining Tax Deferrals (cont.)

3. Reorganization (asset purchase): Y transfers all of its assets (with or without liabilities) to X in exchange for voting stock of X4. Reorganization (forward triangular merger): Y merges in to S (a subsidiary of X) and X retains 100% ownership of S. Ys former shareholders receive 40 to 50% equity securities of X to satisfy the continuity-of-interest testMERGERS AND ACQUISITIONS

Financing an Acquisition: Obtaining Tax Deferrals (cont.)

5. Reorganization (reverse triangular merger): S merges in to Y (a subsidiary of X) and X receives all of the voting securities of Y. Ys former shareholders receive solely voting stock in X- The most commonly used structures for tax-free acquisitions are (4) and (5), the triangular mergersMERGERS AND ACQUISITIONS

(s)he may have dividend treatment on the cash portionFinancing an Acquisition: Obtaining Tax Deferrals (cont.)What happens to the selling shareholders in a tax free reorganization? - If shareholders receive equity securities from the acquirorhe maintains a carry over basis in the new security-

-

Recognition of gain or loss by shareholders will have no impact on the target companyMERGERS AND ACQUISITIONS(s)he owes a capital gains tax on his gainIf shareholders receive cash or debtIf shareholders receive a mixture

Financing an Acquisition: Obtaining Tax Deferrals (cont.)Subsidiary Divestitures: - Section 355 of the IRC allows a company to distribute a subsidiary to its stockholders in 2 ways:1. Spin-off: the shares in the subsidiary are distributed as a pro-rata dividend to the companys common stockholders2. Split-off: one or more stockholders of the company exchange their shares for shares in the subsidiary, on a non-pro rata basisMERGERS AND ACQUISITIONS

Financing an Acquisition: Obtaining Tax Deferrals (cont.)Subsidiary Divestitures: - Section 355 restrictions:* Both, distributing company and subsidiary must have conducted an active trade or business for 5 years preceding the date of the transaction, and not have been acquired during that period* The distribution transaction must transfer at least 80% control of the subsidiary from the company to its stockholders* The transaction must be supported by a non tax corporate business purposeMERGERS AND ACQUISITIONS

Financing an Acquisition: Obtaining Tax Deferrals (cont.)Subsidiary Divestitures: - Section 355 conditions to be used as a tax saving device for divestitures:* The divesting company cannot arrange to sell the subsidiary to a third party* The distributing company receives no cash consideration for its equity in the subsidiary and is effectively shrinking its capitalizationMERGERS AND ACQUISITIONS

Financing an Acquisition: Accounting Aspects- There are two principal methods of accounting for acquisitions of control of a company:

* Pooling Method Accounting: which applies exclusively to acquisitions using the acquirors common stocks* Purchase Method: which applies to all other forms of acquisitionsMERGERS AND ACQUISITIONS

Financing an Acquisition: Obtaining Pooling AccountingPooling of Interest Method of Accounting: - Benefit: Favorable effects on the reported earnings per share (EPS) of an acquiror when the target is being acquired for a high multiple of its earnings- Requirements :* The merger must be for common stocks of the acquiror* No subsidiaries* Mutual independence*Timely completionMERGERS AND ACQUISITIONS

Financing an Acquisition: Obtaining Pooling AccountingPooling of Interest Method of Accounting: - Requirements (cont.):* 90% rule* No equity changes* Repurchases* No voting realignments or restrictions* No contingent earnouts* No plan to dispose of significant assets* No other financial arrangementsMERGERS AND ACQUISITIONS

Financing an Acquisition: Obtaining Pooling AccountingPooling of Interest Method of Accounting: - Balance Sheet treatment: B/Ss are simply added together, line by line, eliminating any inter-company investments which are treated as treasury stocksExample:MERGERS AND ACQUISITIONS

Sheet1

Prior to MergerMerged

ABA + B

Assets

Current assets$200$100$300

Net plant and equipment200100300

Goodwill10050150

Total assets$500$250$750

Liabilities and Shareholders' Equity

Current Liabilities$50$30$80

Long-term debt100100200

Deferred taxes10040140

Total liabilities$250$170$420

Common equity25080330

Total liabilities and shareholders' equity$500$250$750

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Sheet3

Financing an Acquisition: Obtaining Pooling AccountingPooling of Interest Method of Accounting: - Income Statement treatment: All items, down to net income, are simply added together- Key Statistics for Merger Analysis: * Pro-forma EPS: Earnings are additive and the number of shares outstanding after the merger depends on the exchange ratio of the merger. Analyze forecasted EPS dilution to see when it disappears and the opposite emerges* Credit Statistics: Debt ratio and interest coverage must be examined. As a general rule, poolings create the least concern for the credit position of the acquirorMERGERS AND ACQUISITIONS

Pooling of Interest Accounting. Example:MERGERS AND ACQUISITIONS

Sheet1


ABA + B

Assets

Current assets$200$100$300

Net plant and equipment200100300

Goodwill10050150

Total assets$500$250$750

Liabilities and Shareholders' Equity

Current Liabilities$50$30$80

Long-term debt100100200

Deferred taxes10040140

Total liabilities$250$170$420

Common equity25080330

Total liabilities and shareholders' equity$500$250$750


ABA + B

Sales$300$120$420

Cost of Sales(100)(50)(150)

Selling General and admin. Expenses(100)(40)(140)

Interest Expense(20)(14)(34)

Income before taxes$80$16$96

Income taxes(32)(6)(38)

Net Income$48$10$58

EPS$1.20$1.20$1.02

Dividends per share$0.50$0.30$0.50

Number of shares outstanding408.356.6

Market Assumptions

Stock price per share$12$24$12

P/E Ratio102011.8

Total Market Value$480$200$680

Dividend Yield4.2%1.3%4.2%

Credit Statistics

Long-term debt capitalization (see B/S)29%56%38%

Interest Coverage5.02.13.8

Transaction Assumptions

A acquires B

Each share of B is converted into two shares of A (exchange ratio is 2A:1B)

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Sheet3

Financing an Acquisition: Obtaining Purchase AccountingPooling of Interest Method of Accounting: - Basis: The investment has taken place on the part of an acquiror, and it must be recorded at the acquirors full cost- The cost of an investment must be allocated among the assets acquired as follows: * Adjust each acquiree B/S account to its fair value* Any excess of purchase price over net fair value is recorded as goodwill*If the purchase price is bellow net fair value, non current assets should be reduced proportionatelyNegative goodwill is ordinarily not recordedMERGERS AND ACQUISITIONS

Financing an Acquisition: Obtaining Purchase AccountingPooling of Interest Method of Accounting: - Implication for the earnings of the combined companies: * Revaluations must be amortized against future earnings according to the remaining life of the asset* Goodwill must be amortized against future earnings over a period not to exceed 40 years* Revaluations of liabilities (bond discount or premium) must also be amortized into earnings over an appropriate period* In each case, it is important to ascertain the tax effect of the particular adjustment to earningsMERGERS AND ACQUISITIONS

Purchase Method of Accounting. B/S Example:MERGERS AND ACQUISITIONS

Sheet1

Prior to MergerMergedPrior to MergerAdjust B toB asPurchase PriceCombined

ABA + BABFair ValueAdjustedAllocationA and B

AssetsAssets

Current assets$200$100$300Current assets$200$100$110$210

Net plant and equipment200100300Net plant and equipment200100150-350

Goodwill10050150Goodwill10050-230

Total assets$500$250$750Total assets$500$250$260$790

Liabilities and Shareholders' EquityLiabilities and Shareholders' Equity

Current Liabilities$50$30$80Current Liabilities$50$30-$30-$80

Long-term debt100100200Long-term debt10010090290

Deferred taxes10040140Pension Liability--5-5

Total liabilities$250$170$420Deferred taxes1004065-165

Common equity25080330Total liabilities$250$170$190$540

Total liabilities and shareholders' equity$500$250$750Common equity2508070(70)250

Total liabilities and shareholders' equity$500$250$260$790

Prior to MergerMergedTransaction Assumptions

ABA + BA acquires B

Each share of B is exchanged for $24 cash

Sales$300$120$420Total transaction size is $200, which A raises by issuance of $100 in long-term debt and $100 in excess cash

Cost of Sales(100)(50)(150)Since the transaction is a stock purchase, A retains B's old tax basis in its assets





Net Income$48$10$58

EPS$1.20$1.20$1.02



Market Assumptions


P/E Ratio102011.8



Credit Statistics




A acquires B


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Sheet3

Purchase Method of Accounting. B/S Example:Notes on B/S: - a Since B is on LIFO, Bs B/S understates the value of Bs inventory by $10- b Bs fixed assets are worth 50% more as a result of long-term inflation effects- c Goodwill incurred by B in its own past acquisitions has no identifiable value and therefore is eliminated- d Bs outstanding fixed-rate debt is worth less today because of general interest rate rises. It therefore must be revalued at a discount- e Bs unfunded vested pension liability is added- f Bs deferred tax liabilities are increased by the tax effect on timing differences arising from valuation adjustments a, b, c and e. The net valuation adjustment is a debit of $65, which creates an additional deferred tax provision of $25 (at a 38% tax rate)MERGERS AND ACQUISITIONS

Purchase Method of Accounting. B/S Example:Notes on B/S: (cont.)- g This is a balancing adjustment reflecting the net effect on the fair value of Bs common equity- h Transaction price of $200 is financed by $100 in excess cash and $100 in new long-term debt- i Goodwill incurred is aggregate price paid ($200) less fair value of net assets acquired ($70)MERGERS AND ACQUISITIONS

Purchase Method of Accounting. Income Stat. Example:MERGERS AND ACQUISITIONS

Sheet1

Prior to MergerMergedPrior to MergerAdjust B toB asPurchase PriceCombined

ABA + BABFair ValueAdjustedAllocationA and B

AssetsAssets

Current assets$200$100$300Current assets$200$100$110$210

Net plant and equipment200100300Net plant and equipment200100150-350

Goodwill10050150Goodwill10050-230

Total assets$500$250$750Total assets$500$250$260$790

Liabilities and Shareholders' EquityLiabilities and Shareholders' Equity

Current Liabilities$50$30$80Current Liabilities$50$30-$30-$80

Long-term debt100100200Long-term debt10010090290

Deferred taxes10040140Pension Liability--5-5

Total liabilities$250$170$420Deferred taxes1004065-165

Common equity25080330Total liabilities$250$170$190$540

Total liabilities and shareholders' equity$500$250$750Common equity2508070(70)250

Total liabilities and shareholders' equity$500$250$260$790


A acquires B


Total transaction size is $200, which A raises by issuance of $100 in long-term debt and $100 in excess cash

Since the transaction is a stock purchase, A retains B's old tax basis in its assets

Projected Income

Statements in

Absence of MergersPurchase AccountingCombined

ABAdjustmentsA + B

Sales$300$120(10)a$410.0

Cost of Sales(100)(50)8.4b(158.4)

Selling General and admin. Expenses(100)(40)1.6c(141.6)

Interest Expense(20)(14)11.0d(45.0)

Income before taxes$80$16$65.0

Income taxes(32)(6)(11.8)e(26.2)

Net Income$48$10$38.8

EPS$1.20$1.200.97

Dividends per share$0.50$0.300.5


Market Assumptions

Stock price per share$12$24$12.0

P/E Ratio102012.4

Total Market Value$480$200$480.0

Dividend Yield4.201.304.2

Credit Statistics




A acquires B


Total transaction size is $200, which A raises by issuance of $100 in long-term debt and $100 in excess cash

Since the transaction is a stock purchase, A retains B's old tax basis in its assets


ABA + B

Sales$300$120$420

Cost of Sales(100)(50)(150)





Net Income$48$10$58

EPS$1.20$1.20$1.02



Market Assumptions


P/E Ratio102011.8



Credit Statistics

Debt Ratio29%56%38%



A acquires B


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Sheet3

Purchase Method of Accounting. B/S Example:Notes on Income Statement:- a Interest Income forgone on $100 of excess cash (at 10%)- b Increased depreciation on Bs fixed assets $50 increase, amortized over remaining life of six years- c Net change in Bs goodwill amortization, assumes prior amortization of $1.7 per year and 40-year life for amortization of new goodwill ($130) - d Increased expense: $100 new debt, financed at 10%. In addition, amortization of debt discount will generate another $1 of interest expense- e Income tax effect of all purchase accounting adjustments other than goodwill at 40%


Financing an Acquisition: Legal and Regulatory AspectsMergers and Consolidations: - The most basic form of combination. In a merger, 2 corporations, A and B, combine as follows:* The directors of corporations A and B approve an agreement of merger, specifying: - Terms and conditions, - Designation of one corporation as the survivor, - Number of shares or other consideration as a result of the merger, - Timing and means by which the merger is to be carried outMERGERS AND ACQUISITIONS

Financing an Acquisition: Legal and Regulatory AspectsMergers and Consolidations: (cont.)* The % of each corporations outstanding shares that must approve the merger is 50% plus one vote, unless otherwise specified* The surviving corporation files a certificate of merger with the secretary of state of Delaware* As a result of filing, the target corporation ceases to exist and each share of the target Corp. becomes a right to receive the consideration provided in the agreement of merger* All assets and liabilities of the target Corp. becomes assets and liabilities of the survivorMERGERS AND ACQUISITIONS

Financing an Acquisition: Legal and Regulatory AspectsTender Offers:- Solicitation made broadly to shareholders of a target company requesting tenders of shares for purchase by the bidder. The consideration is cash or an exchange offer (less frequent)* Tender offers are regulated by the SEC under Williams Act. The most important regulations are referred to: - Prorationing- Withdrawal - Minimum offer period- Amendments- Purchases outside the offerMERGERS AND ACQUISITIONS

Financing an Acquisition: Legal and Regulatory AspectsAsset Sales:- The buyer agrees to buy specified assets and to assume specified liabilities of the seller. The only assets and liabilities transferred are those specifically agreed to in the purchase and sale agreement* The steps involved in a typical asset sale are: - Buyer and seller reach agreement with respect to the sale of a division, specifying: the price to be paid, terms and conditions, general principal for determination of assets and liabilities to be transferred- Buyer and seller negotiate and execute purchase and sale agreement. Boards of both sides approve it.MERGERS AND ACQUISITIONS

Financing an Acquisition: Legal and Regulatory AspectsAsset Sales:(cont.)- Buyer and seller file for antitrust clearance - Third party waivers and consents are obtained (if necessary)- Asset and liabilities transferred to buyer and buyer makes payment at closing date- Buyer and seller negotiate and execute purchase and sale agreement. Boards of both sides approve it.- Buyer and seller file for antitrust clearance - Third party waivers and consents are obtained (if necessary)- Asset and liabilities transferred to buyer and buyer makes payment at closing dateMERGERS AND ACQUISITIONS

Financing an Acquisition: Legal and Regulatory AspectsAntitrust Review:- The Department of Justice (DOJ) and the Federal Trade Commission (FTC) provide public guidelines to determine possible violations of the antitrust laws. Specifically: * Vertical Mergers: The DOJ generally will not challenge vertical mergers unless it creates barriers to entry, facilitates collusion, or is designed to evade rate regulationMERGERS AND ACQUISITIONS

Financing an Acquisition: Legal and Regulatory AspectsAntitrust Review:(Cont.)* Conglomerate Mergers: They will ordinarily be challenged only ifthey involve the elimination of a potential entrant and:a. the industry HHI* exceeds 1,800;b. entry is difficult;c. there are fewer than 3 other potential entrants; andd. the market share of the acquired firm exceeds 5%

*Herfindahl-Hirschman Index (HHI) is used to measure industry concentrationMERGERS AND ACQUISITIONS

m&as(class4) (1)

Documents

percentage premium

dcf step

market trading value

book value

operating company

industry step

percentage of salesmergers

dcf exam