1. Mergers--Background Mergers are capital budgeting problems, but:  Benefits like “strategic fits” hard to quantify  Accounting, tax, and regulatory issues can be very complex  Corporate control issues arise  Sometimes involve “unfriendly” transactions Mergers--legal forms  Merger or consolidation  Acquisition of stock  Acquisition of assets Mergers--jargon  Firm seeking to buy or merge is the “bidder”  Firm that is sought is the “target”  Payment (cash or securities) is the “consideration”

2. How to Make a Merger Work Are there any rules of thumb for merger success? Consider the following. 1. Don’t rush the wedding - do your homework carefully to prevent morning-after surprises. 2. Know what you’re buying - not just the financials, but the corporate culture. 3. Adopt each partner’s best practices - don’t assume the bigger company or the acquirer has all the answers. 4. Be honest with employees about how a merger will affect them - start early and communicate honestly with them. 5. Take the time to do internal recruiting - make sure the managers you want to keep don’t go wandering off to a competitor. Adapted from “How to Make a Merger Work”, Fortune magazine, January 24, 1994.

3. The Mechanics of Mergers & Acquisitions Merger  Advantages Simplicity (buyer assumes all assets and liabilities)  Disadvantages All liabilities assumed (including potential litigation) Two thirds of shareholders (most states) of both firms must approve Dissenting shareholders can sue to receive their “fair” value Management cooperation needed

4. The Mechanics of Mergers & Acquisitions (concluded) II.Acquisition of Assets  Advantages Buyer acquires assets with no minority shareholders Only 50% of seller’s shareholders need approve  Disadvantages Individual transfer of assets may be costly in legal fees III.Acquisition of Stock (Tender Offer)  Advantage No shareholder (or even management) approval necessary  Disadvantage Integration difficult without 100% of shares Resistance can raise price Minority holdouts

5. What is a “Takeover?” Acquisition Proxy contest Going private Merger or consolidation Acquisition of stock Acquisition of assets Takeovers

6. Classifying acquisitions Horizontal  same industry Vertical  different steps in production/distribution process Conglomerate  unrelated lines of business

7. Taxes and acquisitions Sale of shares (taxable) versus exchange (non-taxable) For tax-free status, in general:  Must be a continuation of equity interest  Must be a business (i.e., non-tax) reason for acquisition Which is better--Taxable or tax-exempt?  Capital gains effect  Write-up effect Tax status versus accounting treatment  Purchase accounting  Pooling of interests

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