Mergers, Acquisitions, and Corporate Restructurings TheWileyCorporateF&Aseriesprovidesinformation,tools,andinsightstocorporateprofessionals responsibleforissuesaffectingtheprofitabilityoftheircompany,fromaccountingandfinanceto internalcontrolsandperformancemanagement. Foundedin1807,JohnWiley&SonsistheoldestindependentpublishingcompanyintheUnited States.WithofficesinNorthAmerica,Europe,Asia,andAustralia,Wileyisgloballycommittedto developingandmarketingprintandelectronicproductsandservicesforourcustomers’professional andpersonalknowledgeandunderstanding. Mergers, Acquisitions, and Corporate Restructurings Sixth Edition PATRICK A. GAUGHAN CoverDesign:Wiley CoverImage:©iStock.com/jpique Copyright©2015byJohnWiley&Sons,Inc.Allrightsreserved. PublishedbyJohnWiley&Sons,Inc.,Hoboken,NewJersey. TheFifthEditionwaspublishedbyJohnWiley&Sons,Inc.in2011. PublishedsimultaneouslyinCanada. 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LibraryofCongressCataloging-in-PublicationData: ISBN978-1-118-99754-3(Hardcover) ISBN978-1-119-06335-3(ePDF) ISBN978-1-119-06336-0(ePub) PrintedintheUnitedStatesofAmerica 10987654321 Contents Preface xi PARTI:BACKGROUND Chapter1:Introduction 3 RecentM&ATrends 3 Terminology 12 ValuingaTransaction 15 TypesofMergers 15 MergerConsideration 16 MergerProfessionals 17 MergerArbitrage 20 LeveragedBuyoutsandthePrivateEquityMarket 21 CorporateRestructuring 21 MergerNegotiations 23 MergerAgreement 30 MergerApprovalProcedures 30 DealClosing 32 Short-FormMerger 33 Freeze-OutsandtheTreatmentofMinorityShareholders 33 ReverseMergers 34 HoldingCompanies 38 Chapter2:HistoryofMergers 41 MergerWaves 41 WhatCausesMergerWaves? 42 FirstWave,1897–1904 42 SecondWave,1916–1929 48 The1940s 49 ThirdWave,1965–1969 49 v ◾ vi Contents TrendsettingMergersofthe1970s 56 FourthWave,1984–1989 62 FifthWave 67 SixthMergerWave 73 Chapter3:LegalFramework 75 LawsGoverningMergers,Acquisitions,andTenderOffers 76 OtherSpecificTakeoverRulesintheUnitedStates 88 InternationalSecuritiesLawsRelatingtoTakeovers 89 U.S.StateCorporationLawsandLegalPrinciples 98 StateAntitakeoverLaws 101 RegulationofInsiderTrading 109 AntitrustLaws 111 MeasuringConcentrationandDefiningMarketShare 117 EuropeanCompetitionPolicy 121 Chapter4:MergerStrategy 125 Growth 125 Synergy 136 OperatingSynergy 138 Diversification 148 TypesofFocusIncreases 154 FocusIncreasingAssetSalesIncreaseFirmValues 154 ExplanationfortheDiversificationDiscount 155 DoDiversifiedorFocusedFirmsDoBetterAcquisitions? 159 OtherEconomicMotives 159 HubrisHypothesisofTakeovers 169 DoManagerialAgendasDriveM&A? 173 OtherMotives 177 PARTII:HOSTILETAKEOVERS Chapter5:AntitakeoverMeasures 187 ManagementEntrenchmentHypothesisversusStockholder InterestsHypothesis 188 RightsofTargetsBoardstoResist:UnitedStatesComparedtothe RestoftheWorld 189 PreventativeAntitakeoverMeasures 189 ChangingtheStateofIncorporation 214 ◾ Contents vii ActiveAntitakeoverDefenses 214 InformationContentofTakeoverResistance 247 Chapter6:TakeoverTactics 249 PreliminaryTakeoverSteps 250 TenderOffers 257 AdvantagesofTenderOffersoverOpenMarketPurchases 272 ProxyFights 279 Chapter7:HedgeFundsasActivistInvestors 291 MacroeconomicFoundationsoftheGrowthofActivistFunds 294 HedgeFundsasAcquirers 301 PARTIII:GOING-PRIVATETRANSACTIONSANDLEVERAGED BUYOUTS Chapter8:Going-PrivateTransactionsandLeveragedBuyouts 311 Terminology 311 HistoricalTrendsinLBOs 312 ManagementBuyouts 319 ConflictsofInterestinManagementBuyouts 323 U.S.Courts’PositiononLeveragedBuyoutConflicts 325 FinancingforLeveragedBuyouts 332 ReturnstoStockholdersfromLBOs 340 ReturnstoStockholdersfromDivisionalBuyouts 341 EmpiricalResearchonWealthTransferEffects 346 ProtectionforCreditors 347 Intra-industryEffectsofBuyouts 347 Chapter9:ThePrivateEquityMarket 349 HistoryofthePrivateEquityandLBOBusiness 349 PrivateEquityMarket 350 SecondaryMarketforPrivateEquityInvestments 369 Chapter10:TheJunkBondandtheLeveragedLoanMarketand StapledFinancing 371 HistoryoftheJunkBondMarket 371 LeveragedLoanMarket 382 StapledFinancing 386 ◾ viii Contents PARTIV:CORPORATERESTRUCTURING Chapter11:CorporateRestructuring 391 Divestitures 393 DivestitureandSpin-OffProcess 404 MarketLiquidityandtheDecisiontoDivestaUnit 406 Round-TripWealthEffects 406 WealthEffectsofSell-Offs 407 ManagerialOwnershipandSell-OffGains 410 ActivistsandSell-Offs 410 ShareholderWealthEffectsofSpin-Offs:U.S.versusEurope 416 EquityCarve-Outs 421 VoluntaryLiquidationsorBust-Ups 427 TrackingStocks 428 MasterLimitedPartnershipsandSell-Offs 430 Chapter12:RestructuringinBankruptcy 433 TypesofBusinessFailure 434 CausesofBusinessFailure 435 BankruptcyTrends 440 U.S.BankruptcyLaws 444 ReorganizationversusLiquidation 445 ReorganizationProcess 446 BenefitsoftheChapter11ProcessfortheDebtor 453 PrepackagedBankruptcy 457 Workouts 461 CorporateControlandDefault 469 Liquidation 469 InvestingintheSecuritiesofDistressedCompanies 471 Chapter13:CorporateGovernance 477 StructureofCorporationsandTheirGovernance 477 GoldenParachutes 486 CEOSeverancePayments 490 ReformofExcessesofGoldenParachutesandSeverance Payments 491 ManagerialCompensation,Mergers,andTakeovers 491 CEOCompensationandPower 493