Mergers, Acquisitions and Corporate Restructuring Attempt all the questions. All questions carry equal marks.

(5 * 10 = 50 Marks)

1) Write short notes on the following: a. Carve Out b. Due Diligence c. Insider Trading d. Downsizing e. ESOPs 2) Distinguish between: a. Target Vs Acquirer b. Product Vs Portfolio Restructuring c. Brand Value Vs Enterprise Value d. Merger Vs Acquisition e. Concentration Vs Diversification 3) What are the different approaches to valuation of business? 4) Detail the varied takeover defenses practiced by Target companies in the Indian context. 5) Prodded by the Fed and the U.S. Treasury Department, J.P. Morgan Chase (JPM), the nations third largest bank, announced, on March 17, 2008, that it had reached an agreement to buy 100 percent of Bear Stearnss outstanding equity for $2 per share. As one of the nations larger investment banks, Bear Stearns had a reputation for being aggressive in the financial derivatives markets. Hammered out in two days, the agreement called for the Fed to guarantee up to $30 billion of Bear Stearnss less liquid assets. In an effort to avoid what was characterized as a systemic meltdown, regulatory approval was obtained at a breakneck pace. The Office of the Comptroller of Currency and the Federal Reserve approvals were in place at the time of the announcement. The SEC elected not to review the deal. Federal and state antitrust regulatory approvals were obtained in record time. With investors fleeing mortgage-backed securities, the Fed was hoping to prevent any further deterioration in the value of such investments. The concern was that a bankruptcy at Bear Stearns could trigger a run on the assets of other financial services firms. The fear was that the financial crisis that beset Bear Stearns could spread to other companies and ultimately test the Feds resources after it had said publicly that it would lend up to $200 billion to banks in exchange for their holdings of mortgages. Interestingly, Bear Stearns was not that big among investment banks when measured by asset size. However, it was theoretically liable for as much as $10 trillion due to its holdings of such financial derivatives as credit default swaps, in which it agreed to pay lenders in the event of a borrower defaulting. If credit defaults became widespread, Bear Stearns would not have been able

to honor its contractual commitments, and the ability of other investment banks in similar positions would have been questioned and the panic could have spread. With Bear Stearnss shareholders threatening not to approve what they viewed as a fire sale, JPM provided an alternative bid, within several days of the initial bid, in which it offered $2.4 billion for about 40 percent of the stock, or about $10 per share. In exchange for the higher offer, Bear Stearns agreed to sell 95 million newly issued shares to JPM, giving JPM a 39.5 percent stake and an almost certain majority in any shareholder vote, effectively discouraging any alternative bids. Under the new offer, JPM assumed responsibility for the first $1 billion in asset losses, before the Feds guarantee of up to $30 billion takes effect. For JPM, the deal provides a major entry to the so-called prime brokerage market, which provides financing to hedge funds. The deal also gives the firm a much larger presence in the mortgage securities business. However, the risks are significant. Combining the firms investment banking businesses could result in a serious loss of talent. The prime brokerage business requires a sizeable investment to upgrade technology. There also are potentially severe cultural issues and management overlap. In addition, JPM is acquiring assets whose future market value is in doubt; however, the Feds guarantee promises to offset a major portion of future asset-related losses. 1. Why do you believe government regulators encouraged a private firm (J.P. Morgan Chase) to acquire Bear Stearns rather than have the government take control? Do you believe this was the appropriate course of action? Explain your answer. 2. By facilitating the merger, the Fed sent a message to Wall Street that certain financial institutions are too big to fail. What effect do you think the merger will have on the future investment activities of investment banks? 3. Do you believe JPMs management and board were acting in the best interests of their shareholders?