Mergers, Acquisitions, and Other Restructuring Activities: An Integrated Approach to Process, Tools, Cases, and Solutions

Front Cover
Mergers, Acquisitions, and Other Restructuring Activities
Mergers, Acquisitions, and Other Restructuring Activities: An Integrated Approach to Process, Tools, Cases, and Solutions
Copyright
Dedication
Contents
About the Author
Preface
	To the reader
		The M&A environment
		The M&A process
		M&A valuation and modeling
		Deal structuring and financing strategies
		Alternative business and restructuring strategies
	To the instructor
Acknowledgments
Praise for various editions
I - The mergers and acquisitions environment
	1 - An introduction to mergers, acquisitions, and other restructuring activities
		Inside mergers and acquisitions: the growing popularity of digital payments drives a record-setting deal in the electronics ...
		Chapter overview
		Why do M&As happen?
			Synergy
				Operating synergy
				Financial synergy
			Diversification
			Strategic realignment
			Hubris and the “winner’s curse”
			Buying undervalued assets: the Q-ratio
			Managerialism (agency problems)
			Tax considerations
			Market power
			Misvaluation
		M&A waves
			Why do M&A waves occur?
			Domestic merger waves
			Cross-border merger waves
		Understanding corporate restructuring activities
			Mergers and consolidations
				A legal perspective
				An economic perspective
			Acquisitions, divestitures, spin-offs, split-offs, carve-outs, and leveraged buyouts
		Alternative takeover strategies
		The role of holding companies in mergers and acquisitions
		The role of employee stock ownership plans in M&As
		Business alliances as alternatives to M&As
		Participants in the mergers and acquisitions process
			Providers of specialized services
				Investment banks
				Lawyers
				Accountants
				Proxy solicitors
			Regulators
			Institutional investors and lenders
				Insurance, pension, and mutual funds
				Commercial banks
				Hedge, private equity, and venture capital funds
				Sovereign wealth funds
				Angel investors
			Activist investors
				Mutual funds and pension funds
				Hedge funds and private equity firms
			M&A arbitrageurs
		The impact of protectionism on M&As
		The impact of the 2020 coronavirus pandemic on M&As
		The implications of M&As for shareholders, bondholders, and society
			The limitations of statistical analysis
			Most M&As create shareholder value!
			Premerger returns to shareholders
				Returns high for target shareholders
				Returns to acquirer shareholders are positive on average
				Deal success (or failure) should be viewed in the context of a business strategy
			Postmerger returns to shareholders
			Acquirer returns vary by acquirer, target, and deal characteristics
				Smaller acquirers tend to realize higher M&A returns
				Acquirer returns are often positive for privately owned or subsidiary targets
				Relatively small deals may generate higher returns
				Form of payment impacts acquirer returns
				Firm-specific characteristics may outweigh deal-specific factors
			Payoffs for bondholders
			Payoffs for society
		M&As and corporate socially responsible investing
			Corporate socially responsible investing and value creation
			Deal completion rates, premiums, postmerger performance, and borrowing costs
			Local and international considerations
		The implications of the Biden administration for M&As
		Some things to remember
		Chapter discussion questions
		End-of-chapter case study: Occidental petroleum outbids Chevron in high-stakes energy deal
			Case study objectives
		Discussion questions
	2 - The regulatory environment
		Inside mergers and acquisitions: AT&T’s merger with Time Warner withstands regulatory scrutiny
		Chapter overview
		Understanding federal securities laws
			Securities Act of 1933
			Securities Exchange Act of 1934
				Reporting requirements
				Section 13: periodic reports
				Section 14: proxy solicitations
				Insider trading regulations
				Jumpstart Our Business Startups Act (JOBS Act)
			The Williams Act: regulation of tender offers
				Sections 13(D) and 13(G): ownership disclosure requirements
				Section 14(D): rules governing the tender offer process
			The Sarbanes–Oxley Act of 2002
			Fair disclosure
		Understanding antitrust (competition) legislation
			The Sherman Act
			The Clayton Act
			The Federal Trade Commission Act of 1914
			The Hart–Scott–Rodino Antitrust Improvements Act of 1976
				Title I: what must be filed?
				Title II: who must file and when?
				How does HSR affect state antitrust regulators?
			Procedural rules
			The consent decree
			Antitrust guidelines for horizontal mergers
				Targeted customers and the potential for price discrimination
				Market definition
				Market share and concentration
				Unilateral effects
				Coordinated effects
				Ease of entry
				Efficiencies
				Alternative to imminent failure
				Partial acquisitions
			Antitrust guidelines for vertical mergers
			Antitrust guidelines for mergers involving complementary products
			Antitrust guidelines for collaborative efforts
			Antitrust guidelines for monopsonies
			Revisions to intellectual property guidelines
			When are antitrust regulators most likely to intervene?
			Trends in enforcement efforts
			How business platform strategies complicate antitrust enforcement
			Impact of antitrust actions on firm value
			Does the United States have a monopoly problem?
				Monopoly power (seller-side market power)
				Monopsony power (buyer-side market power)
				Do current antitrust laws need to be changed?
				Do antitrust laws contribute to management–shareholder conflicts?
		M&A implications of the Dodd-Frank Wall Street Reform and Consumer Protection Act (including 2018 revisions)
		M&A implications of privacy, data protection, and copyright regulations
			Data protection regulations
			Copyright regulation
		State regulations affecting M&As
			State antitakeover laws
			State antitrust and securities laws
		Restrictions on direct foreign investment in the United States
		Restrictions on foreign acquisitions by US acquirers
		The US Foreign Corrupt Practices Act
		The Holding Foreign Companies Accountable Act
		Specific industry regulation
			Banking
			Communications
			Railroads
			Defense
			Other regulated industries
		Environmental laws
		Labor and benefit laws
		Cross-border transactions
		Some things to remember
		Chapter discussion questions
		End-of-chapter case study: behavioral remedies as an alternative to structural remedies in addressing anticompetitive practices
			Case study objectives
		Discussion questions
	3 - The corporate takeover market: common takeover tactics, antitakeover defenses, and corporate governance
		Inside mergers and acquisitions: proxy fights—to support a takeover or simply to gain influence?
		Chapter overview
		Corporate governance: protecting and managing stakeholder interests
			Factors internal to the firm
				The board of directors and management
					The role of independent directors
					Leadership structure
					Behavioral and demographic characteristics of CEOs and board members
					Trends in board composition and leadership structure
					Board performance, size, selection, and compensation
					The key to effective boards
					Target board’s advisory role in takeover bids
					The declining importance of executive committees
				Internal controls and incentive systems
				Antitakeover defenses
				Corporate culture and values
				Bond covenants
			Factors external to the firm
				Legislation and the legal system
				Regulators
				Activist investors
				The corporate takeover market
		Understanding alternative takeover tactics
			Friendly takeovers are most common
			Hostile takeovers are more a threat than a reality
			The bear hug: limiting the target’s options
			Proxy contests in support of a takeover or to gain influence
				Implementing a proxy contest
				The impact of proxy contests on shareholder value
			The hostile tender offer
				Pretender offer tactics: toehold bidding strategies
				Implementing a tender offer
				Multitiered offers
			Comparative success rates
		Other tactical considerations
			The importance of premium, board composition, and investor sentiment
			Contract considerations
		Developing a bidding strategy
		Activist investors: gaining influence without control
		Understanding alternative takeover defenses
			Preoffer defenses
				Poison pills (shareholder rights plans and blank check preferred stock)
				Shark repellents
			Strengthening the board’s defenses
			Limiting shareholder actions
			Other shark repellents
				Anti-greenmail provisions
				Fair-price provisions
				Dual-class recapitalization
				Reincorporation
				Golden parachutes (change-of-control payouts)
			Postoffer defenses
				Greenmail
				White knights and white squires
				Employee stock ownership plans
				Leveraged recapitalization
				Share repurchase or buyback plans
				Corporate restructuring
				Litigation
		The impact of takeover defenses on shareholder value
			Takeover defenses and target firm shareholder financial returns
				Management entrenchment theory
				Shareholder interests theory
			Leveraged recapitalizations and target firm financial returns
			Takeover defenses and public offerings
		Some things to remember
		Chapter discussion questions
		End-of-chapter case study: new technologies drive value chain consolidation
			Case study objectives
		Discussion questions
II - The mergers and acquisitions process Phases 1 through 10
	4 - Planning: developing business and acquisition plans: phases 1 and 2 of the acquisition process
		Inside M&As: when cost cutting alone is not a sustainable strategy
		Chapter overview
		The role of planning in M&As
			Key business planning concepts
		The M&A process
		Phase 1: building the business plan or model
			External analysis
				Bargaining power of customers
				Bargaining power of suppliers
				Degree of competitive rivalry
				Potential new entrants
				Availability of substitute products
				Bargaining power of the labor force
				The degree of government regulation
				Global exposure
				Internal analysis
			Defining the mission and vision statements
			Setting strategic or long-term business objectives
				Common business objectives
			Selecting the appropriate corporate and business-level strategies
				Corporate-level strategies
				Business-level strategies
				Price or cost leadership strategy
				Product differentiation strategy
				Focus (or niche) strategy
				Hybrid strategy
				Blue ocean strategy
				Platform strategy
			Selecting an implementation strategy
				The role of intangible factors
				Analyzing assumptions
			Functional strategies
			Strategic controls
		The business plan as a communication document
		Phase 2: building the M&A implementation plan
			Plan objectives
			Resource and capability evaluation
			Management guidance
			Timetable
		Some things to remember
		Chapter discussion questions
		End-of-chapter case study: Newmont becomes global leader in the gold-mining industry
			Case study objectives
		Discussion questions
	5 - Implementation: search through closing: phases 3 to 10 of the acquisition process
		Inside M&A: Salesforce.com makes a big bet to move beyond its core customer relationship management business
		Chapter overview
		Phase 3: the search process
			Initiating the process
			Commonly used information sources
				Data reliability
				Less obvious data sources
		Phase 4: the screening process
		Phase 5: first contact
			Contact strategies
			Discussing value
			Preliminary legal transaction documents
				Confidentiality agreement
				Term sheet
				Letter of intent
		Phase 6: negotiation
			Refining valuation
			Deal structuring
			Conducting due diligence
				The components of due diligence
				Learning from our differences
				Buyer, seller, and lender due diligence
				Protecting customer data
			The rise of the virtual data room
			Developing the financing plan
			Defining the purchase price
				Total consideration
				Total purchase price or enterprise value36
				Net purchase price
		Phase 7: developing the integration plan
			Contract-related issues
			Earning trust
			Choosing the integration manager and other critical decisions
		Phase 8: closing
			Gaining the necessary approvals
			Assigning customer and vendor contracts
			Completing the M&A agreement
				Deal provisions
				Price
				Escrow and holdback clauses
				Go shop provisions
				Allocation of price
				Payment mechanism
				Assumption of liabilities
				Representations and warranties
				Covenants
				Employment and benefits
				Closing conditions
				Indemnification
				Other closing documents
				Financing contingencies
		Phase 9: implementing postclosing integration
			Communication plans
			Employee retention
			Satisfying cash flow requirements
			Using “best practices”
			Cultural issues
		Phase 10: conducting a postclosing evaluation: stop, assess, and learn
			Do not change performance benchmarks
			Ask the difficult questions
			Learn from mistakes
		The application of technology to the M&A process
			Artificial intelligence
				AI applications in business and acquisition strategy development
				AI applications in search and screening
				AI applications in performing due diligence
				AI applications in negotiation
				AI applications in premerger integration planning
				AI applications in postmerger integration
			Blockchain technology and smart contracts
				Blockchain applications to negotiation, due diligence, and deal closing
				Cryptocurrency as a potential form of payment
			Separating hype from reality
				Artificial intelligence
				Blockchain technology
				Business acceptance of these new technologies
				Just because we can do something does not mean we should!
		Some things to remember
		Chapter discussion questions
		End-of-chapter case study: Roche acquires Spark Therapeutics in move to replenish drug pipeline
			Case study objectives
		Discussion questions
	6 - Postclosing integration: mergers, acquisitions, and business alliances
		Inside M&As: setting postmerger integration goals and tactics before closing
		Chapter overview
		The degree of integration varies by type of acquirer and deal
		The role of integration in successful acquisitions
			Realizing projected financial returns
			The impact of employee turnover
			Acquisition-related customer attrition
			Rapid integration does not mean doing everything at the same pace
		Integration is a process, not an event
			Premerger integration planning
			Putting the postmerger integration organization in place before closing
				The postmerger integration organization: composition and responsibilities
			Developing communication plans for key stakeholders
				Employees: addressing the “me” issues immediately
				Customers: undercommitting and overdelivering
				Suppliers: developing long-term vendor relationships
				Investors: maintaining shareholder loyalty
				Lenders: maintaining sound banking relationships
				Communities: building strong, credible relationships
			Creating a new organization
				Establishing a structure
				Developing staffing plans
				Personnel requirements
				Employee availability
				Staffing plans and timetable
				Compensation plans
				Personnel information systems
			Functional integration
				Revalidating due diligence data
				Benchmarking performance
				Resetting synergy expectations
				Integrating manufacturing operations
				Integrating information technology
				Integrating finance
				Integrating sales
				Integrating marketing
				Integrating purchasing
				Integrating research and development
				Integrating human resources
				Integrating legal
			Building a new corporate culture
				Actions speak louder than words
				Collaborative cultures
				Identifying cultural issues through profiling
				Overcoming cultural differences
				Changing culture when employees work remotely
			Digital tools and change management
		Integrating business alliances
			Leadership
			Teamwork and role clarification
			Coordination
			Policies and values
			Consensus decision making
			Integrating family-owned firms
		Some things to remember
		Chapter discussion questions
		End-of-chapter case study: culture clash—AT&T buys Time Warner
			Case study objectives
		Discussion questions
III - Mergers and acquisitions valuation and modeling
	7 - Mergers and acquisitions cash flow valuation basics
		Inside M&As: valuation methods and outcomes in M&A appraisal cases
		Chapter overview
		Economic implications of negative interest rates
		Estimating required financial returns
			Cost of equity and the capital asset pricing model
			Estimating market risk premiums
			Applying CAPM in a near-zero (or negative) interest rate environment
			Accounting conservatism: too much of a good thing?
			Pretax cost of debt
			Cost of preferred stock
			Cost of capital
			Cost of capital with limited interest deductibility
		Risk assessment
			Estimating beta
			Effects of financial and operating leverage on beta
		Calculating free cash flows
			Free cash flow to the firm (enterprise cash flow)
			Selecting the right tax rate
			Dealing with operating leases
			Free cash flow to equity investors (equity cash flow)
		Applying discounted cash flow methods
			Enterprise discounted cash flow model (enterprise or FCFF method)
			Equity discounted cash flow model (equity or FCFE method)
			The zero-growth valuation model
			The constant-growth valuation model
			The variable-growth (supernormal or nonconstant) valuation model
			Determining the duration of the high-growth period
			Determining the stable or sustainable growth rate
			Determining the appropriate discount rate
			The impact of “black swan” events such as coronavirus
			Valuing unicorns
		Using the enterprise method to estimate equity value
			Determining the market value of long-term debt
				Financially stable firms
				Financially distressed firms
				Hybrid securities (convertible bonds and preferred stock)
			Determining the cash impact of deferred taxes
			Determining the cash impact of unfunded pension liabilities
			Determining the cash impact of employee options
			Determining the cash impact of other provisions and contingent liabilities
			Determining the market value of noncontrolling interests
		Valuing nonoperating assets
			Cash and marketable securities
			Investments in other firms
			Unused and undervalued assets
			Patents, service marks, and trademarks
			Overfunded pension plans
		Some things to remember
		Chapter discussion questions
		Practice problems and answers
		End-of-chapter case study: did United Technologies overpay for Rockwell Collins?
			Case study objectives
		Discussion questions
	8 - Relative, asset-oriented, and real-option valuation basics
		Inside M&As: real options can provide management with substantial strategic flexibility
		Chapter overview
		Relative-valuation methods
			The comparable-companies method
			Recent comparable transactions method
			Same- or comparable-industries method
			Enterprise value to EBITDA method
			Adjusting relative-valuation methods for firm growth rates
			Value driver–based valuation
			Fun with numbers and other accounting tricks
		Asset-oriented methods
			Tangible book value (shareholders’ equity less goodwill) method
			Breakup value
			Liquidation value
			The replacement-cost method
		The weighted-average valuation method
		Real-options analysis
			Identifying real options embedded or implied in M&A decisions
			Valuing real options for M&As
			Valuing real options using a decision tree framework
			Valuing real options using the Black-Scholes model
			Option to expand
			Option to delay
			Option to abandon
		Determining when to use the different approaches to valuation
		Valuing initial public offerings
		What do valuation professionals do in practice?
		Some things to remember
		Chapter discussion questions
		Practice problems and answers
		End-of-chapter case study: did British American Tobacco overpay for Reynolds American?
			Case study objectives
		Discussion questions
	9 - Financial modeling basics
		Inside M&As: the role of financial models in the M&A process
		Chapter overview
		What is financial modeling?
		Financial modeling data requirements
			Generally accepted accounting principles and international standards
			GAAP financial statements
			Pro forma accounting
		Common financial model linkages
		Modeling changes in US corporate tax laws
		Key steps in the valuation process
			Step 1: analyze recent financial statements
				Normalize historical data
				Understand determinants of revenue growth and profit margins
			Step 2: project pro forma financial statements
			Step 3: estimate the present value of the projected pro forma cash flows
				Calculating enterprise and equity values
				Calculating the weighted average cost of capital
				Calculating the terminal value
		Model-balancing mechanisms
		Data sources
			Income statement
			Balance sheet
			Cash flow statement
			Risk measures: betas and credit ratios
		Managing the model
		Addressing valuation issues in a near-zero interest rate environment
		Some things to remember
		Chapter discussion questions
		Practice problems and answers
		End-of-chapter case study: Life Technologies undertakes a strategic review
			Case study objectives
			Background
				The life sciences industry
				Life Technologies’ business overview
				Life Technologies’ competitor profile
				Life Technologies’ historical financial performance
			Conclusions
		Discussion questions
	10 - Analysis and valuation of privately held firms
		Inside M&A: factors impacting the success or failure of acquisitions of privately owned firms
		Chapter overview
		Ownership structure, agency conflicts, and stock market returns
		How family control affects M&A activity
		Private versus public company governance
		Challenges of valuing privately held companies
			Lack of externally generated information
			Lack of internal controls and inadequate reporting systems
			Firm-specific problems
			Common forms of manipulating reported income
				Misstating revenue
				Manipulation of operating expenses
		Process for valuing privately held businesses
			Step 1: adjusting financial statements
				Making informed adjustments
					Salaries and benefits
					Travel, meals, and entertainment
					Auto expenses and personal life insurance
					Family members
					Rent or lease payments in excess of fair market value
					Professional services fees
					Depreciation expense
					Reserves
					Accounting for inventory
				Areas that are commonly understated
				Areas that are commonly overlooked
				Explaining adjustments to financial statements
			Step 2: applying valuation methodologies to privately held companies
				Defining value
				Selecting the appropriate valuation methodology
					The income, or discounted cash flow approach
					The relative-value (or market-based) approach
					The replacement-cost approach
					The asset-oriented approach
			Step 3: developing discount rates
				Estimating a private firm’s beta and cost of equity
				Estimating the cost of private-firm debt
				Determining the appropriate tax rate
				Estimating the cost of capital
			Step 4: applying control premiums, liquidity, and minority discounts
				Liquidity discounts
				Purchase price premiums, control premiums, and minority discounts
				The relationship between liquidity discounts and control premiums
				Estimating liquidity discounts, control premiums, and minority discounts
					Factors affecting the liquidity discount
					Factors affecting the control premium
					Factors affecting the minority discount
		Early-stage investment
			Pre- and post-money valuations
			The rise of the unicorn
		Taking private companies public
			Reverse mergers
			Financing reverse mergers
			Special-purpose acquisition corporations
		Using leveraged employee stock ownership plans to buy private companies
		Empirical studies of shareholder returns
		Some things to remember
		Chapter discussion questions
		Practice problems and answers
		End-of-chapter case study: “going public”: reverse merger or initial public offering?
			Case study objectives
		Discussion questions
IV - Deal-structuring and financing strategies
	11 - Structuring the deal: tax and accounting considerations
		Inside M&A: GlaxoSmithKline undertakes a cash tender offer to acquire Tesaro
		Chapter overview
		The deal-structuring process
			Key components of the deal-structuring process
			Common linkages
				Form of payment (Fig. 11.1, arrows 1 and 2) affects choice of acquisition vehicle and postclosing organization
				Form of acquisition (Fig. 11.1, arrows 3–6) affects:
				Tax considerations (Fig. 11.1, arrows 7 and 8) affect:
				Legal form of selling entity (Fig. 11.1, arrow 9) affects form of payment
				Accounting considerations (Fig. 11.1, arrow 10) affect form, amount, and timing of payment
		Form of acquisition vehicle and postclosing organization
			Choosing the appropriate acquisition vehicle
			Choosing the appropriate postclosing organization
		Legal form of the selling entity
		Form of payment
			Cash
			Noncash
			Cash and stock in combination
			Convertible securities
			Cryptocurrency: fiction versus reality
		Managing risk and reaching consensus on purchase price
			Postclosing balance sheet price adjustments and escrow accounts
			Earnouts and other contingent payments
			Contingent value rights
			Rights, royalties, and fees
		Constructing collar arrangements
		M&A options and warrants takeover strategies
			Option-based takeover strategies
			Warrant-based takeover strategies
			Disadvantages of option and warrant takeover strategies
		Form of acquisition
			Purchase of assets
				Advantages and disadvantages from the buyer’s perspective
				Advantages and disadvantages from the seller’s perspective
			Purchase of stock
				Advantages and disadvantages from the buyer’s perspective
				Advantages and disadvantages from the seller’s perspective
			Mergers
				Statutory and subsidiary mergers
				Statutory consolidations
				Mergers of equals
				Tender offers
				Shareholder approvals
				Top-up options and dual-track deal structures
			Special applications of basic structures
		Some things to remember
		Chapter discussion questions
		End-of-chapter case study: Disney’s bold move in the direct-to-consumer video business
			Case study objectives
		Discussion questions
	12 - Structuring the deal: tax and accounting considerations
		Inside M&A: megamerger creates the world’s second-largest aerospace and defense contractor
		Chapter overview
		Understanding tax authority communications
		Alternative tax structures
		Taxable transactions
			Taxable mergers
			Taxable purchase of target assets with cash
			Taxable purchase of target stock with cash
			Section 338 election
		Tax-free transactions
			Qualifying a transaction for tax-free treatment
			Alternative tax-free reorganizations
			Treatment of target tax attributes in M&A deals
			Tax-free transactions arising from 1031 “like-kind” exchanges
		Tax Cuts and Jobs Act of 2017
			Corporate tax rates
			Pass-through income
			Investment in capital
			Alternative minimum corporate income tax
			Deductibility of interest expense
			Dividends received deduction
			Net operating losses
			Carried interest
			Foreign earnings
			Deemed repatriation
			1031 “like-kind” exchanges
		State and local tax issues
			Preclosing, due diligence, and postclosing issues
			Potentially unforeseen tax liabilities
			Pressure on states to raise revenue
		International taxes
		Tax inversions
		Master limited partnerships, real estate investment trusts, and yield cos
		Financial reporting of business combinations
			Acquisition method of accounting
			Who is the acquirer?
			Recognizing acquired net assets and goodwill at fair value
			Recognizing and measuring net acquired assets in step (or stage) transactions
			Recognizing contingent considerations
			In-process research and development assets
			Expensing deal costs
		Impact of acquisition accounting on business combinations
			Balance-sheet considerations
			Income statement and cash flow considerations
			Rule changes affecting the balance sheet
			International accounting standards
			International environmental, social, and governance standards
		Recapitalization (“recap”) accounting
		Putting it all together: takeover and deal-structuring strategies
		Implications of the Biden Administration’s tax policy for M&As
		Some things to remember
		Chapter discussion questions
		Practice problems and answers
		End-of-chapter case study: Bristol-Myers Squibb buys Celgene in the biggest biopharma deal in history
			Case study objectives
		Discussion questions
	13 - Financing the deal: private equity, hedge funds, and other sources of financing
		Inside M&As: financing megamergers and acquisitions
		Chapter overview
		The role of public and private financial markets
		How are M&A transactions commonly financed?
			Financing options: borrowing
				Asset-based (secured) lending
				Cash flow (unsecured) lending
			Types of long-term financing
				Junk bonds
				Leveraged bank loans
				Transferring default risk from lenders to investors
			Financing options: common and preferred equity
			Seller financing
			Asset sales
			Capital structure theory and practice
			How capital structure can impact abnormal financial returns to acquirers
		What is the role of private equity, hedge, and venture capital funds in deal financing?
			Financial intermediaries
			Lenders and investors of last resort
			Providers of financial engineering and operational expertise for target firms
				Prebuyout returns to leveraged buyout target firm (prebuyout) shareholders
				Postbuyout returns to leveraged buyout shareholders
				Private equity–owned firms and financial distress
			Listed versus unlisted fund performance
			Venture capital–backed versus buyout firm–backed IPO performance
		Impact of tax reform on M&A financing
			Internal financing
			External financing
		Fun with acronyms: the transition from LIBOR to SOFR
		Leveraged buyouts as financing strategies
			The private equity market is a global phenomenon
			Sales to strategic buyers represent the most common exit strategy
			The effects of leveraged buyouts on innovation
			The effects of leveraged buyouts on employment growth
			The changing nature of private equity firm collaboration
			Leveraged buyout leverage and employee bankruptcy rights
		What factors are critical to successful leveraged buyouts?
			Target selection
				Firms with little debt, redundant assets, and predictable cash flow
				Firms whose management is competent and motivated
				Firms in attractive industries
				Firms with significant revenue enhancement opportunities
				Firms that are large-company operating divisions
				Firms without change-of-control covenants
			Not overpaying
			Improving operating performance
		How do leveraged buyouts create value?
			Alleviating public firm agency problems
			Providing access to capital for private firms
			Creating a tax shield
			Debt reduction
			Improvement in operating margin
			Timing the sale of the firm
			Estimating tax-deductible interest expense
			The impact on financial returns of alternative transaction strategies
		Common leveraged buyout deal and capital structures
			Common deal structures
			Common capital structures
		Some things to remember
		Chapter discussion questions
		End-of-chapter case study: implications of a credit rating downgrade after a merger or acquisition
			Case study objectives
		Discussion questions and answers
	14 - Highly leveraged transactions: leveraged buyout valuation and modeling basics
		Inside M&As: private equity firms partner to acquire Johnson Controls\' power solutions business
		Chapter overview
		How are leveraged buyouts valued?
		The cost of capital method
			Step 1: project annual cash flows until the target debt-to-equity ratio is achieved
			Step 2: project debt-to-equity ratios
			Step 3: adjust the discount rate to reflect changing risk
			Step 4: determine if the deal makes sense
		Adjusted present value method
			Step 1: estimate the present value of the target firm’s unlevered cash flows
			Step 2: estimate the present value of anticipated tax savings
			Step 3: estimate the potential cost of financial distress
			Step 4: determine if the deal makes sense
		Comparing the cost of capital and adjusted present value methods
		Leveraged buyout valuation and structuring model basics
		Evaluating leveraged buyout opportunities
			Step 1: project cash flows
			Step 2: determine the firm’s borrowing capacity
			Step 3: estimate the target’s enterprise value (purchase price)
			Step 4: estimate the financial sponsor’s initial equity contribution
			Step 5: analyze financial returns
		Leveraged buyout model template
		Some things to remember
		Chapter discussion questions
		Practice problems
		End-of-chapter case study: investor group takes Dun & Bradstreet private in a leveraged buyout
			Case study objectives
		Discussion questions
	15 - Applying financial models: to value, structure, and negotiate stock and asset purchases
		Inside M&As: the role of financial models in getting to yes on price
		Chapter overview
		Understanding and applying M&A financial models
			Common elements of M&A models
			Key data linkages and model balancing mechanism
		M&A models: stock purchases
			Step 1: construct historical financials and determine key value drivers
				Step 1a: collect and analyze required historical data to understand key value drivers
				Step 1b: normalize historical data for forecasting purposes
				Step 1c: build historical financial statements
			Step 2: project Acquirer and Target financials and estimate standalone values
				Step 2a: determine assumptions for each key input variable
				Step 2b: input assumptions into the model and project financials
				Step 2c: select appropriate discount rate and terminal period assumptions to estimate standalone values
			Step 3: estimate value of Newco, including synergy and deal terms
				Step 3a: estimate synergy and investment required to realize synergy
				Step 3b: project Newco financials, including effects of synergy and deal terms
				Step 3c: select appropriate discount rate and terminal period assumptions to value Newco
			Step 4: determine the appropriateness of offer price and postdeal capital structure
				Step 4a: compare offer price with estimated maximum offer price and recent comparable deals
				Step 4b: compare projected credit ratios with industry average ratios
				Step 4c: determine the impact of the deal on Newco’s EPS
				Step 4d: determine if the deal will allow Newco to satisfy or exceed required returns
		M&A models: asset purchases
		Quantifying synergy
			Revenue-related synergy
			Cost savings–related synergies
			Operating- and asset-related synergies
			Financing-related synergies
			Productivity-related synergy
		Things to remember
		Chapter discussion questions
		Practice problems and answers
		End-of-chapter case study: Thermo Fisher acquires Life Technologies
			Case study objectives
		Discussion questions
		Appendix A: debt repayment schedule, convertible securities, interest rates, and betas
			Debt repayment schedule
			Options, warrants, and convertible securities
			Betas
			Interest rates
			Industry credit ratios
V - Alternative business and restructuring strategies
	16 - Domestic and cross-border business alliances: joint ventures, partnerships, strategic alliances, and licensing
		Inside M&As: Altria makes a big bet on cannabis
		Chapter overview
		Motivations for business alliances
			Risk sharing
				Sharing proprietary knowledge
				Sharing management skills, information, and resources
				Sharing substantial capital outlays
				Securing sources of supply
				Cost reduction
			Gaining access to new markets, customers, and products
			Globalization
			A prelude to acquisition or exit
			Favorable regulatory treatment
			Learning
		What makes business alliances successful?
			Synergy
			Clarity of purpose, roles, and responsibilities
			Accountability
			Cooperation and cultural compatibility
			Win–win situation
			Compatible management styles, timeframes, and financial expectations
			Support from the top
			Partner selection
		Alternative legal forms of business alliances
			Corporate structures
				C-type corporations
				Subchapter S corporations
			Limited liability companies
			Partnership structures
				General partnerships
				Limited liability partnerships
				Master limited partnerships
			Franchise alliances
			Equity partnerships
			Written contracts
		Bilateral versus multilateral alliances
		Strategic and operational plans
		Resolving business alliance deal-structuring issues
			Scope
			Duration
			Legal form
			Governance
			Resource contributions and ownership determination
			Financing ongoing capital requirements
			Owner or partner financing
			Equity and debt financing
			Control
			Distribution issues
			Performance criteria
			Dispute resolution
			Revision
			Termination
			Transfer of interests
			Taxes
			Management and organizational issues
			Regulatory restrictions and notifications
		Challenges of cross-border joint ventures
			Governance issues
			Cultural issues
			Fuji Xerox: the demise of a 57-year-old international joint venture
		Potential impediments to cross-border alliances and minority investments
		Empirical findings
			Experience counts
			Impact of alliances on suppliers, customers, and competitors
		Some things to remember
		Chapter discussion questions
		End-of-chapter case study: Disney creates order out of chaos
			Case study objectives
		Discussion questions
	17 - Alternative exit and restructuring strategies: divestitures, spin-offs, carve-outs, split-offs, and tracking stocks
		Inside M&As: reducing leverage through restructuring
		Chapter overview
		Why do firms exit businesses?
			Increasing corporate focus
			Underperforming businesses
			Regulatory concerns
			Lack of fit
			Tax considerations
			Raising funds
			Worth more to others
			Risk reduction
			Discarding unwanted businesses from prior acquisitions
			Avoiding conflicts with customers
			Increasing transparency
		Divestitures
			Motives for divestitures
			Corporate portfolio reviews
			To sell or not to sell
				Step 1: calculating after-tax cash flows
				Step 2: estimating the discount rate
				Step 3: estimating the after-tax market value of the business
				Step 4: estimating the value of the business to the parent
				Step 5: deciding to sell
			Timing of the sale
			The selling process
			Choosing the right selling process
			Tax and accounting considerations for divestitures
		Spin-offs
			Motives for spin-offs
			Tax and accounting considerations for spin-offs
		Equity carve-outs
			Motives for equity carve-outs
			Initial public offerings and subsidiary equity carve-outs
			Tax and accounting considerations for equity carve-outs
		Split-offs and split-ups
			Motives for split-offs
			Cash-rich split-offs
			Spin-offs combined with M&A transactions
		Tracking, targeted, and letter stocks
			Motives for tracking stocks
			Tax and accounting considerations for tracking stocks
			Problems with tracking stocks
		Restructuring implementation issues
			What stays and what goes
			Target capital structure
			Allocation of other liabilities
			Solvency
			Board governance
			Human resource management
		Key restructure legal documents
			Separation and distribution agreement
			Transition agreement
			Tax matters agreement
		Comparing alternative exit and restructuring strategies
		Choosing among divestiture, carve-out, and spin-off restructuring strategies
		Determinants of returns to shareholders resulting from restructuring strategies
			Preannouncement abnormal returns
				Divestitures
				Increasing focus of the divesting firm
				Transferring assets to those who can use them more efficiently
				Resolving management and shareholder differences (agency conflicts)
				Mitigating financial distress
				Spin-offs
				Increasing focus
				Achieving greater transparency (eliminating information asymmetries)
				Wealth transfers
				Equity carve-outs
				Increasing focus
				Providing a source of financing
				Resolving management and shareholder differences (agency conflicts)
				Tracking stocks
			Post carve-out, spin-off, and tracking stock returns to shareholders
		Some things to remember
		Chapter discussion questions
		End-of-chapter case study: Gardner Denver and Ingersoll Rand’s industrial segment merge in a Reverse Morris Trust
			Key points
		Discussion questions
	18 - Alternative exit and restructuring strategies: bankruptcy, reorganization, and liquidation
		Inside M&As: iHeartMedia rises from the ashes
		Chapter overview
		Business failure
		Voluntary settlements outside of bankruptcy court
			Voluntary settlements resulting in continued operation
			Voluntary settlements resulting in liquidation
		Reorganization and liquidation in bankruptcy
			The evolution of US bankruptcy laws and practices
			Filing for Chapter 11 reorganization
			Implementing Chapter 7 liquidation
			The Small Business Reorganization Act of 2019
			“Section 363 sales” from Chapter 11
			Chapter 15: dealing with cross-border bankruptcy
			Motivations for filing for bankruptcy
			The high cost of bankruptcy
			Preparing for Chapter 11: prepackaged bankruptcies
			Preparing for Chapter 11: prearranged bankruptcies
			The 2020 COVID-19 pandemic’s impact on the bankruptcy process
		Alternative options for failing firms
			Merging with another firm
			Reaching an out-of-court voluntary settlement with creditors
			Voluntary and involuntary liquidations
		The increasing role of hedge funds in the bankruptcy process
		Failing firms and systemic risk
			Efforts to limit systemic risk
			Have these risk mitigation efforts been successful?
		Predicting corporate default and bankruptcy
			Model accuracy
			Factors affecting financial distress and default rate predictions
		Empirical studies of financial distress
			Attractive returns to firms emerging from bankruptcy are often temporary
			Returns to financially distressed stocks are unexpectedly low
			Initial public offerings are more likely to experience bankruptcy than established firms
			Financially ailing firms can be contagious
		Some things to remember
		Chapter discussion questions
		End-of-chapter case study: American icon survives Chapter 11 filing
			Case study objectives
		Discussion questions
	19 - Cross-border mergers and acquisitions: analysis and valuation
		Inside M&As: regulatory risk rises amid growing global trade tensions
		Chapter overview
		Is globalization giving way to reduced capital flows, regionalism, and slower economic growth?
			Slowing foreign direct investment
			The rise of regionalism
		Motives for international expansion
			Geographic, industrial, and product diversification
			Accelerating growth
			Industry consolidation
			Utilization of lower raw material and labor costs
			Leveraging intangible assets
			Minimizing tax liabilities
			Seeking more management-friendly environments
			Avoiding tariffs and other entry barriers
			Fluctuating exchange rates
			Following customers
			Gaining access to intellectual property and resources
		Common international market entry strategies
		Navigating cross-border deals amid trade frictions and “black swan” events
			The rise of populism and nationalism
			The emergence of China–United States trade frictions
			Supply chains, tariffs, and “black swan” events
			The new realities of cross-border M&A deals
		Cross-border M&As, institutional voids, and human rights
			What was thought to be irreversible is being reversed
			Underdeveloped institutions contribute to uneven global development
			Can cross-border M&As strengthen weak national institutions?
		Structuring cross-border deals
			Friendly versus hostile deals
			Bidding strategies
			Acquisition vehicles
			Form of payment
			Form of acquisition
			Choosing an ownership stake
			Tax strategies
		Financing cross-border deals
			Debt markets
			Equity markets
			Sovereign wealth funds
		Planning and implementing cross-border transactions in emerging countries
			Political and economic risks
			Sources of information for assessing political and economic risks
			Risk management
		How are cross-border transactions valued?
			Converting foreign target cash flows to acquirer domestic cash flows
				When target firms are in developed (globally integrated) capital market countries
				When target firms are in emerging (segmented) capital market countries
			Selecting the correct marginal tax rate
			Estimating the cost of equity in cross-border transactions
				Estimating the cost of equity in developed (globally integrated) countries
				Estimating the risk-free rate of return (developed countries)
				Adjusting CAPM for risk (developed countries)
				Global CAPM formulation (developed countries)
			Applying the Fisher effect
				Estimating the cost of equity in emerging (segmented) capital market countries
				Estimating the risk-free rate of return (emerging countries)
				Adjusting CAPM for risk (emerging countries)
				Adjusting the CAPM for country or political risk (emerging countries)
				Global CAPM formulation (emerging countries)
				Estimating the local firm’s cost of debt in emerging markets
			Evaluating risk using scenario planning
		Empirical studies of financial returns on cross-border transactions
			International diversification contributes to higher financial returns
			Although most M&A gains go to target shareholders, acquirer shareholders on average also benefit
			M&As in “frontier economies” may result in the highest acquirer returns
			Country familiarity contributes to higher acquirer financial returns
			Form of payment impacts acquirer financial returns
			Improving corporate governance creates significant shareholder value
			Competitive product markets often boost acquirer returns in cross-border deals
		Some things to remember
		Chapter discussion questions
		End-of-chapter case study: Takeda’s high-risk bet to change its strategy and corporate culture
			Case study objectives
		Discussion questions
References
Glossary
Index
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