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1、,Corporate Finance Ross Westerfield Jaffe,Sixth Edition,Chapter Outline,30.1 The Basic Forms of Acquisitions 30.2 The Tax Forms of Acquisitions 30.3 Accounting for Acquisitions 30.4 Determining the Synergy from an Acquisition 30.5 Source of Synergy from Acquisitions 30.6 Calculating the Value of the

2、 Firm after an Acquisition 30.7 A Cost to Stockholders from Reduction in Risk 30.8 Two Bad Reasons for Mergers 30.9 The NPV of a Merger 30.10 Defensive Tactics 30.11 Some Evidence on Acquisitions 30.12 The Japanese Keiretsu 30.13 Summary and Conclusions,30.1 The Basic Forms of Acquisitions,There are

3、 three basic legal procedures that one firm can use to acquire another firm: Merger Acquisition of Stock Acquisition of Assets,Varieties of Takeovers,Takeovers,30.2 The Tax Forms of Acquisitions,If it is a taxable acquisition, selling shareholders need to figure their cost basis and pay taxes on any

4、 capital gains. If it is not a taxable event, shareholders are deemed to have exchanged their old shares for new ones of equivalent value.,30.3 Accounting for Acquisitions,The Purchase Method The source of much “goodwill” Pooling of Interests Pooling of interest is generally used when the acquiring

5、firm issues voting stock in exchange for at least 90 percent of the outstanding voting stock of the acquired firm. Purchase accounting is generally used under other financing arrangements.,30.4 Determining the Synergy from an Acquisition,Most acquisitions fail to create value for the acquirer. The m

6、ain reason why they do not lies in failures to integrate two companies after a merger. Intellectual capital often walks out the door when acquisitions arent handled carefully. Traditionally, acquisitions deliver value when they allow for scale economies or market power, better products and services

7、in the market, or learning from the new firms.,30.5 Source of Synergy from Acquisitions,Revenue Enhancement Cost Reduction Including replacing ineffective managers. Tax Gains Net Operating Losses Unused Debt Capacity The Cost of Capital Economies of Scale in Underwriting.,30.6 Calculating the Value

8、of the Firm after an Acquisition,Avoiding Mistakes Do not Ignore Market Values Estimate only Incremental Cash Flows Use the Correct Discount Rate Dont Forget Transactions Costs,30.7 A Cost to Stockholders from Reduction in Risk,The Base Case If two all-equity firms merge, there is no transfer of syn

9、ergies to bondholders, but if One Firm has Debt The value of the levered shareholders call option falls. How Can Shareholders Reduce their Losses from the Coinsurance Effect? Retire debt pre-merger.,30.8 Two Bad Reasons for Mergers,Earnings Growth Only an accounting illusion. Diversification Shareho

10、lders who wish to diversify can accomplish this at much lower cost with one phone call to their broker than can management with a takeover.,30.9 The NPV of a Merger,Typically, a firm would use NPV analysis when making acquisitions. The analysis is straightforward with a cash offer, but gets complica

11、ted when the consideration is stock.,The NPV of a Merger: Cash,NPV of merger to acquirer =,Synergy Premium,Premium = Price paid for B - VB,NPV of merger to acquirer = Synergy - Premium,The NPV of a Merger: Common Stock,The analysis gets muddied up because we need to consider the post-merger value of

12、 those shares were giving away.,Cash versus Common Stock,Overvaluation If the target firm shares are too pricey to buy with cash, then go with stock. Taxes Cash acquisitions usually trigger taxes. Stock acquisitions are usually tax-free. Sharing Gains from the Merger With a cash transaction, the tar

13、get firm shareholders are not entitled to any downstream synergies.,30.10 Defensive Tactics,Target-firm managers frequently resist takeover attempts. It can start with press releases and mailings to shareholders that present managements viewpoint and escalate to legal action. Management resistance m

14、ay represent the pursuit of self interest at the expense of shareholders. Resistance may benefit shareholders in the end if it results in a higher offer premium from the bidding firm or another bidder.,Divestitures,The basic idea is to reduce the potential diversification discount associated with co

15、mmingled operations and to increase corporate focus, Divestiture can take three forms: Sale of assets: usually for cash Spinoff: parent company distributes shares of a subsidiary to shareholders. Shareholders wind up owning shares in two firms. Sometimes this is done with a public IPO. Issuance if t

16、racking stock: a class of common stock whose value is connected to the performance of a particular segment of the parent company.,The Corporate Charter,The corporate charter establishes the conditions that allow a takeover. Target firms frequently amend corporate charters to make acquisitions more d

17、ifficult. Examples Staggering the terms of the board of directors. Requiring a supermajority shareholder approval of an acquisition,Repurchase Standstill Agreements,In a targeted repurchase the firm buys back its own stock from a potential acquirer, often at a premium. Critics of such payments label

18、 them greenmail. Standstill agreements are contracts where the bidding firm agrees to limit its holdings of another firm. These usually leads to cessation of takeover attempts. When the market decides that the target is out of play, the stock price falls.,Exclusionary Self-Tenders,The opposite of a

19、targeted repurchase. The target firm makes a tender offer for its own stock while excluding targeted shareholders.,Going Private and LBOs,If the existing management buys the firm from the shareholders and takes it private. If it is financed with a lot of debt, it is a leveraged buyout (LBO). The ext

20、ra debt provides a tax deduction for the new owners, while at the same time turning the pervious managers into owners. This reduces the agency costs of equity,Other Devices and the Jargon of Corporate Takeovers,Golden parachutes are compensation to outgoing target firm management. Crown jewels are t

21、he major assets of the target. If the target firm management is desperate enough, they will sell off the crown jewels. Poison pills are measures of true desperation to make the firm unattractive to bidders. They reduce shareholder wealth. One example of a poison pill is giving the shareholders in a

22、target firm the right to buy shares in the merged firm at a bargain price, contingent on another firm acquiring control.,30.11 Some Evidence on Acquisitions: The Short Run,TakeoverSuccessfulUnsuccessful TechniqueTargetsBiddersTargetsBidders,Tender offer30%4%-3%-1% Merger20%0%-3%-5% Proxy contest8%NA

23、8%NA,30.11 Some Evidence on Acquisitions: The Long Run,In the long run, the shareholders of acquiring firms experience below average returns. Cash-financed mergers are different than stock-financed mergers. Acquirers can be friendly or hostile. The shares of hostile cash acquirers outperformed those

24、 of friendly cash acquirers. One explanation is that unfriendly cash bidders are more likely to replace poor management.,30.12 The Japanese Keiretsu,Keiretsu are reciprocal shareholding and trading agreements between firms. Usually a group of firms affiliated around a large bank, industrial firm, or

25、 trading firm. Nobody knows for sure if forming a keiretsu pays off or not.,30.13 Summary and Conclusions,The three legal forms of acquisition are Merger and consolidation Acquisition of stock Acquisition of assets M the value of the firms assets is less than the value of the debt.,Debt,Insolvency,F

26、low-base insolvency occurs when the firms cash flows are insufficient to cover contractually required payments.,Firm cash flow,The Largest U.S. Bankruptcies,31.2 What Happens in Financial Distress?,Financial distress does not usually result in the firms death. Firms deal with distress by Selling maj

27、or assets. Merging with another firm. Reducing capital spending and research and development. Issuing new securities. Negotiating with banks and other creditors. Exchanging debt for equity. Filing for bankruptcy.,What Happens in Financial Distress,Financialdistress,Source: Karen H. Wruck, “Financial

28、 Distress: Reorganization and Organizational Efficiency,” Journal of Financial Economics27 (1990), Figure 2. See also Stuart C. Gilson; Kose John, and Larry N.P. Lang, “Troubled Debt Restructurings: An EmpiricalStudy of Private Reorganization in Firms in Defaults,” Journal of Financial Economics 27

29、(1990); and Lawrence A. Weiss,“Bankruptcy Resolution: Direct Costs and Violation of Priority Claims,” Journal of Financial Economics 27 (1990).,Responses to Financial Distress,Think of the two sides of the balance sheet. Asset Restructuring: Selling major assets. Merging with another firm. Reducing

30、capital spending and R&D spending. Financial Restructuring: Issuing new securities. Negotiating with banks and other creditors. Exchanging debt for equity. Filing for bankruptcy.,31.3 Bankruptcy Liquidation and Reorganization,Firms that cannot meet their obligations have two choices: liquidation or

31、reorganization. Liquidation (Chapter 7) means termination of the firm as a going concern. It involves selling the assets of the firm for salvage value. The proceeds, net of transactions costs, are distributed to creditors in order of priority. Reorganization (Chapter 11) is the option of keeping the

32、 firm a going concern. Reorganization sometimes involves issuing new securities to replace old ones.,Bankruptcy Liquidation,Straight liquidation under Chapter 7 usually involves: A petition is filed in a federal court. The debtor firm could file a voluntary petition or the creditors could file an in

33、voluntary petition against the firm. A trustee-in-bankruptcy is elected by the creditors to take over the assets of the debtor firm. The trustee will attempt to liquidate the firms assets. After the assets are sold, after payment of the costs of administration, money is distributed to the creditors.

34、 If any money is left over, the shareholders get it.,Bankruptcy Liquidation: Priority of Claims,The distribution of the proceeds of liquidation occurs according to the following priority: Administration expenses associated with liquidation. Unsecured claims arising after the filing of an involuntary

35、 bankruptcy petition. Wages earned within 90 days before the filing date, not to exceed $2,000 per claimant. Contributions to employee benefit plans arising with 180 days before the filing date. Consumer claims, not exceeding $900. Tax claims. Secured and unsecured creditors claims. Preferred stockh

36、olders claims. Common stockholders claims.,APR Example,Suppose the B.O. Drug Co. decides to liquidate under Chapter 7. Assume that the liquidation value is $2.7 million. Bonds worth $1.5 million are secured by a mortgage on the corporate headquarters building, which is sold for $1 million. $200,000

37、is used to cover administrative costs and other claimsafter paying this, $2.5 million is available to pay creditors. The only problem is that the unpaid debt is $4 million.,APR Example,Under APR, all creditors are paid before shareholders, and the mortgage bondholders are first in line. The trustee

38、proposes the following distribution:,Bankruptcy Reorganization: Chapter 11,A typical sequence: A voluntary petition or an involuntary petition is filed. A federal judge either approves or denies the petition. In most cases the debtor continues to run the business. The firm is given 120 days to submi

39、t a reorganization plan. Creditors and shareholders are divided into classes. Requires only approval by 1/2 of creditors owning 2/3 of outstanding debt After acceptance by the creditors, the plan is confirmed by the court. Payments in cash, property, and securities are made to creditors and sharehol

40、ders.,Reorganization Example,Suppose the B.O. Drug Co. decides to reorganize under Chapter 11. Assume that the “going concern” value is $3 million and its balance sheet is shown.,Reorganization Example,The firm has proposed the following reorganization plan:,Reorganization Example,And a distribution

41、 of new securities under a new claim with the reorganization plan:,Absolute Priority Rule in Practice,Reasons for APR Violations,Creditors want to avoid the expense of litigation. Debtors are given a 120-day window of opportunity to cause delay and harm value. Managers often own equity and demand to

42、 be compensated. They are in charge for at least the next 120 days. Bankruptcy judges like consensual plans (they dont clog the court calendar with appeals) and pressure parties to compromise.,Vultures,“Vultures” are money managers that specialize in the securities of distressed and defaulted compan

43、ies. There are between 50 and 60 institution vulture specialists, actively managing over $25 billion in 1998. Distressed debt investors have target annual rates of return of 2025 percent. Although some years are better than others, the overall annual rate of return from 1978-1997 has been about 12 p

44、ercentsimilar to junk bonds but less than the stock market.,31.4 Private Workout or Bankruptcy: Which is Best?,Both formal bankruptcy and private workouts involve exchanging new financial claims for old financial claims. Usually senior debt is replaced with junior debt and debt is replaced with equity. When they work, private workouts are better than a formal bankruptcy. Complex capital structures and lack of information make private work

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