THE ART OF CAPITAL RESTRUCTURING The Robert W. Kolb Series in Finance provides a comprehensive view of the field of finance in all of its variety and complexity. The series is projected to include approximately65volumescoveringallmajortopicsandspecializationsinfinance, rangingfrominvestments,tocorporatefinance,tofinancialinstitutions.Eachvol- umeintheKolbSeriesinFinanceconsistsofnewarticlesespeciallywrittenforthe volume. Each volume is edited by a specialist in a particular area of finance, who devel- ops the volume outline and commissions articles by the world’s experts in that particularfieldoffinance.Eachvolumeincludesaneditor’sintroductionandap- proximately thirty articles to fully describe the current state of financial research andpracticeinaparticularareaoffinance. Theessaysineachvolumeareintendedforpracticingfinanceprofessionals,grad- uatestudents,andadvancedundergraduatestudents.Thegoalofeachvolumeis toencapsulatethecurrentstateofknowledgeinaparticularareaoffinancesothat thereadercanquicklyachieveamasteryofthatspecialareaoffinance. Pleasevisitwww.wiley.com/go/kolbseriestolearnaboutrecentandforthcoming titlesintheKolbSeries. THE ART OF CAPITAL RESTRUCTURING Creating Shareholder Value through Mergers and Acquisitions H. Kent Baker Halil Kiymaz TheRobertW.KolbSeriesinFinance JohnWiley&Sons,Inc. Copyright (cid:2)c 2011byJohnWiley&Sons,Inc.Allrightsreserved. PublishedbyJohnWiley&Sons,Inc.,Hoboken,NewJersey. PublishedsimultaneouslyinCanada. Nopartofthispublicationmaybereproduced,storedinaretrievalsystem,or transmittedinanyformorbyanymeans,electronic,mechanical,photocopying, recording,scanning,orotherwise,exceptaspermittedunderSection107or108ofthe 1976UnitedStatesCopyrightAct,withouteitherthepriorwrittenpermissionofthe Publisher,orauthorizationthroughpaymentoftheappropriateper-copyfeetothe CopyrightClearanceCenter,Inc.,222RosewoodDrive,Danvers,MA01923, (978)750-8400,fax(978)646-8600,orontheWebatwww.copyright.com.Requeststothe PublisherforpermissionshouldbeaddressedtothePermissionsDepartment,John Wiley&Sons,Inc.,111RiverStreet,Hoboken,NJ07030,(201)748-6011,fax(201) 748-6008,oronlineathttp://www.wiley.com/go/permissions. LimitofLiability/DisclaimerofWarranty:Whilethepublisherandauthorhaveused theirbesteffortsinpreparingthisbook,theymakenorepresentationsorwarrantieswith respecttotheaccuracyorcompletenessofthecontentsofthisbookandspecifically disclaimanyimpliedwarrantiesofmerchantabilityorfitnessforaparticularpurpose.No warrantymaybecreatedorextendedbysalesrepresentativesorwrittensalesmaterials. Theadviceandstrategiescontainedhereinmaynotbesuitableforyoursituation.You shouldconsultwithaprofessionalwhereappropriate.Neitherthepublishernorauthor shallbeliableforanylossofprofitoranyothercommercialdamages,includingbutnot limitedtospecial,incidental,consequential,orotherdamages. Forgeneralinformationonourotherproductsandservicesorfortechnicalsupport, pleasecontactourCustomerCareDepartmentwithintheUnitedStatesat(800)762-2974, outsidetheUnitedStatesat(317)572-3993orfax(317)572-4002. Wileyalsopublishesitsbooksinavarietyofelectronicformats.Somecontentthat appearsinprintmaynotbeavailableinelectronicbooks.Formoreinformationabout Wileyproducts,visitourwebsiteatwww.wiley.com. LibraryofCongressCataloging-in-PublicationData: Theartofcapitalrestructuring:creatingshareholdervaluethroughmergersand acquisitions/H.KentBakerandHalilKiymaz,editors. p.cm.–(TheRobertW.Kolbseriesinfinance) Includesindex. ISBN978-0-470-56951-1(cloth);ISBN978-1-11803035-6(ebk);ISBN978-1-11803033-2 (ebk);ISBN978-1-11803034-9(ebk) 1.Consolidationandmergerofcorporations. 2.Corporatereorganizations. 3.Corporategovernance. 4.Corporations–Valuation. I.Baker,H.Kent(HaroldKent), 1944– II.Kiymaz,Halil,1964– HG4028.M4A782011 658.1’62 2010047236 PrintedintheUnitedStatesofAmerica 10 9 8 7 6 5 4 3 2 1 Contents Acknowledgments ix 1 Mergers,Acquisitions,andCorporateRestructuring: AnOverview 1 H.KentBakerandHalilKiymaz PART I Background 2 MergerWaves 17 JarradHarford 3 TakeoverRegulation 39 MarinaMartynovaandLucRenneboog 4 CorporateGovernanceandM&As 57 FeiXie 5 EthicalandSocialIssuesinM&As 71 RobertW.McGee 6 TheoreticalIssuesonMergers,Acquisitions, andDivestitures 87 AbdulH.Rahman 7 TheShort-TermandLong-TermPerformanceofM&As 105 ShantanuDuttaandSamirSaadi PART II Valuation 8 StandardValuation MethodsforM&As 127 PabloFernandez v vi Contents 9 RealOptionsandTheirImpactonM&As 151 HemanthaHerathandJohnS.JaheraJr. 10 TheLawandFinanceofControlPremiums andMinorityDiscounts 169 HelenBowers 11 Cross-BorderValuationEffectsinDeveloped andEmergingMarkets 185 WenjieChen PART III The M&A Deal Process 12 SourcesofFinancingandMeans ofPaymentinM&As 205 MarinaMartynovaandLucRenneboog 13 CulturalDueDiligence 223 RonaldF.PiccoloandMaryBardes 14 NegotiationProcess,BargainingArea, andContingentPayments 243 WilliamA.Grimm 15 MergerNegotiations:TakeoverProcess,Selling Procedure,andDealInitiation 261 NihatAktasandEricdeBodt 16 PostacquisitionPlanningandIntegration 281 OlimpiaMeglioandArturoCapasso 17 OrganizationalandHumanResource IssuesinM&As 297 SiddharthaS.Brahma PART IV Takeovers and Behavioral Effects 18 TakeoverStrategies 323 Shailendra(Shail)Pandit 19 DefensiveStrategiesin Takeovers 339 ChristianRauchandMarkWahrenburg CONTENTS vii 20 TheImpactofRestructuringonBondholders 359 LucRenneboogandPeterG.Szilagyi 21 BehavioralEffectsinM&As 385 JensHagendorff PART V Recapitalization and Restructuring 22 FinancialRestructuring 401 OtgontsetsegErhemjamtsandKartikRaman 23 GoingPrivateandLeveragedBuyouts 419 OnurBayar 24 InternationalTakeoversandRestructuring 437 RitaBiswas PART VI Special Topics 25 JointVenturesandStrategicAlliances: AlternativestoM&As 461 TomasManteconandJamesA.Conover 26 FairnessOpinionsinM&As 483 StevenM.Davidoff,AnilK.Makhija,andRajeshP.Narayanan 27 HowInitialPublicOfferingsAffectM&AMarkets: TheDualTrackingPhenomenon 495 RobertoRagozzinoandJeffreyJ.Reuer 28 TheDiversificationDiscount 511 SeoungpilAhn 29 PartialAcquisitions:MotivationandConsequences onFirmPerformance 527 PengchengZhuandShantanuDutta AnswerstoEnd-of-ChapterDiscussionQuestions 545 Index 581 Acknowledgments The expression “it takes a village” aptly applies to this book because it has involvedalargecastofparticipantsinwhicheachhasprovidedimportant contributions.AttheheartofTheArtofCapitalRestructuringistheoutstand- ingworkofthescholarswhowrotethechaptersaswellastheauthorswhosework iscitedtherein.MeghanNesmithmeticulouslyreviewedthechaptersandprovided many helpful edits and substantive suggestions. Thomas Bradley also provided assistance.WethankourtalentedpublishingteamatJohnWiley&Sons,especially Emilie Herman and Claire Wesley, who took the manuscript to final production while demonstrating professionalism and expertise throughout the process. Bob Kolb,theserieseditor,deservesourappreciationforhisvisionindevelopingthis series. We also want to recognize the support provided by the Kogod School of BusinessatAmericanUniversityandtheCrummerGraduateSchoolofBusinessat RollinsCollege.Finally,ourfriendsandfamilies,whohavebeensilentpartnersin thiseffort,deserveourgratitude.LindaBakerdeservesspecialthanksforeditorial assistance and her endless patience and support. Nilgun Kiymaz also provided supportthatwarrantsspecialrecognition. ix The Art of Capital Restructuring: Creating Shareholder Value Through Mergers and Acquisitions by H. Kent Baker and Halil Kiymaz Copyright © 2011 John Wiley & Sons, Inc. CHAPTER1 Mergers, Acquisitions, and Corporate Restructuring: An Overview H.KENTBAKER UniversityProfessorofFinanceandKogodResearchProfessor,AmericanUniversity HALILKIYMAZ BankofAmericaChairandProfessorofFinance,RollinsCollege INTRODUCTION An important question in finance is whether managerial actions create market valueorshareholderwealth.Neoclassicaleconomictheoryassumesthatcorporate managementactstomaximizeshareholderwealth.Studiesinvolvingmergersand acquisitions(M&As)directlyexaminethisissue.Suchstudies,whicharerelevant toshareholders,managers,regulators,andotherstakeholders,showconsiderable variation in their results. Thus, debate continues about both the short-term and long-term performance of M&As. As markets become more integrated, M&As continue to be a hot topic in both academia and the business world. Given the frequency of these activities, businesspeople need to understand why and how suchactivitiestakeplace. Althoughsometimesusedinterchangeablyorsynonymously,thetermsmerger andacquisitionmeanslightlydifferentthings.Amergerisacombinationoftwoor more companies in which one company survives and themerged company goes outofexistence.Unlikeamerger,aconsolidationisabusinesscombinationinwhich twoormorecompaniesjointoformanentirelynewfirm.Withanacquisition,one companytakescontrollingownershipinterestinanotherfirm,typicallybuyingthe selected assets or shares of the target company. On the surface, the distinction in meaningmaynotseemtomatterbecauseallofthemarestrategictransactionsthat usually change not only the control of a company but also its strategic direction. Dependingonthetransaction,thefinancial,legal,tax,andevenculturalimpactof adealmaydiffersubstantially. M&Asrepresentafast-pacedandhighlycomplexenvironmentinwhichtrans- actions provide unique opportunities with considerable risk. Worldwide M&A transactions involve trillions of dollars that can have a major impact on both domestic and global economies. M&As are a vital part of any healthy economy 1 2 TheArtofCapitalRestructuring becausetheyforcefirmstousetheirresourcesefficientlyandallowstrongcompa- niestogrowandweakercompaniestobeswallowed.Further,M&Asenablefirms toachieveormaintaintheircompetitiveadvantagebyanticipatingandadjusting tochange.ThroughM&Asacompanycangrowrapidlywithouthavingtocreate another business entity. Consequently, M&As represent a vital business tool and an alternative growth and expansion strategy for many companies. In short, an M&Aisaninstrumentofmacroeconomicrenewal.Yet,thesecomplextransactions are laden with potential problems and pitfalls. In fact, many M&A transactions failtorealizeexpectedbenefits.Understandinghowtoensurethesuccessfulcon- summationofthesetransactionsiscriticaltothegoalofmaximizingshareholder wealth. PURPOSE OF THE BOOK This book provides a fresh look at the current state of mergers, acquisitions, and corporaterestructuringinbothdevelopedandemergingmarkets.AlthoughM&As generallyfocusoncorporateexpansion,companiessometimescontractanddown- size their operations. Restructuring refers to the act of partially dismantling or otherwise reorganizing a company for the purpose of making it more profitable. This book considers several different forms of physical restructuring such as di- vestituresaswellascapitalrestructuring,whichreferstoalterationsinthecapital structureofthefirm.Thisvolumeexplainsnotonlythefinancialaspectsofthese transactions but also legal, regulatory, tax, ethical, social, and behavioral consid- erations. In short, although economics plays an essential role in understanding M&A activity, psychology also plays a critical part. Thus, achieving “success” in anyM&Aeffortisacombinationofbothartandscience. Additionally, the latest research on M&A-related topics permeates the book. The coverage extends from discussing basic concepts, motives, strategies, and valuation techniques to their application to increasingly complex and real-world situations.Thebookexplainsthesemethodsfrombothamanagementandinvestor perspectivewhileemphasizingthewealtheffectsonshareholdersofthesedifferent strategies.Thus,thisvolumespansthegamutfromtheoreticaltopractical,while attemptingtoofferausefulbalanceofdetailedanduser-friendlycoverage. DISTINGUISHING FEATURES OF THE BOOK Given the popularity and importance of mergers, acquisitions, divestitures, and other financial capital restructuring, the fact that many books deal with these topicsisnotsurprising.Yet,mostdonotofferthescopeofcoverageandbreadth ofviewpointscontainedinthisvolume.Thebookprovidesacomprehensiveand current discussion of theoretical developments, empirical results, and practice involvingM&As.Wherepossible,thisvolumeavoidstheoreticalandmathematical derivations unless they are necessary to explain the topic. It attempts to distill the results of several hundred empirical studies in an understandable and clear manner.