Pepsi and Coke Financial Management Mergers Lbos Divestitures and Business

MERGERS, LBOS, DIVESTITURES, AND BUSINESS FAILURE
Chapter 17
MERGER FUNDAMENTALS
Part 1
MERGER FUNDAMENTALS
TERMINOLOGIES:
Corporate Restructuring
Mergers, LBOs, Divestitures, and Business Failure
activities involving expansion or contraction of a firms operations or changes in its asset or financial (ownership) structure.
Merger
combination of two or more firms, in which the resulting firm maintains the identity of one of the firms, usually the larger one.
MERGER FUNDAMENTALS
TERMINOLOGIES:
Consolidation
combination of two or more firms to form a completely new corporation
Holding Company
corporation that has voting control of one or more other corporations.
Subsidiaries
the companies controlled by a holding company.

4
MERGER FUNDAMENTALS
TERMINOLOGIES:
Acquiring Company
firm in a merger transaction that attempts to acquire another firm.
Target Company
the firm in a merger transaction that the acquiring company is pursuing.
MERGER FUNDAMENTALS
TERMINOLOGIES:
Friendly Merger
A merger transaction endorsed by the target firms management (board of directors), approved by its stockholders, and easily consummated.
Hostile Merger (Unfriendly Merger)
a merger not supported by the target firms management, forcing the acquiring company to gain control of the firm by buying shares in the marketplace.
MERGER FUNDAMENTALS
TERMINOLOGIES:
Strategic Merger
a merger transaction undertaken to achieve economies of scale.
Financial Merger
a merger transaction undertaken with the goal of restructuring the acquired company to improve its cash flow and unlock its hidden value.
MERGER FUNDAMENTALS
MOTIVES FOR MERGING
1. 2. 3. 4. 5. 6.
Growth or Diversification Synergy of Mergers Fund Raising Increased Managerial Skill or Technology Tax Considerations
Tax loss carry forward
7.
Increased Ownership Liquidity Defense Against Takeover
MERGER FUNDAMENTALS
Types of Mergers
1.
Horizontal Merger
a merger of two firms in the same line of business.
2.
Vertical Merger
a merger in which a firm acquires a supplier or a customer.
MERGER FUNDAMENTALS
Types of Mergers
3.
Congeneric Merger
a merger in which one firm acquires another firm that is in the same general industry but neither in the same line of business nor a supplier or a customer.
4.
Conglomerate Merger
a merger combining firms in unrelated businesses.
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LBOS AND DIVESTITURES

Part 2
LEVERAGED BUYOUTS (LBOS)

o
An acquisition technique involving the use of large amount of debt to purchase a firm.
PURPOSE:
to allow companies to make large acquisition without having to commit a lot of capital. to create a high debt- private corporation with improved cash flow and value.
12

TYPICALLY FINANCED WITH ATLEAST 90% DEBT TO 10% EQUITY:
the assets of the firm are used to secure the borrowings of the acquiring company.
the loans are paid back from the acquired companies cash flow.
the lender take a portion of the firms equity.
13
CHARACTERISTICS:
Must have a good position in industry with a solid record of profitability. Must have a low level of debt, but high level of assets to use as collateral. Must have a stable and predictable cash flow that are adequate for meeting debt obligations and working capital needs.
14
it can increase management commitment and effort. It tends to improve the companys productivity and loyalty. act to revitalize a mature company and improve its market position. tends to create value for variety of parties. it enhances the value of firm.
15
the company may fail and go bankrupt. Dangerous for companies that are vulnerable to industry competition or volatility in the overall economy. it can cause significant problems for employees and suppliers.
It can damage a companies credit rating due to paying high interest rates.
16
DIVESTITURES
o
Selling of some of a firms assets for various strategic reasons.

MOTIVE:
To generate cash for expansion of other product lines, to get rid of a poorly performing operation, to streamline the corporation, or to restructure the corporations business in a manner consistent with its strategic goals.
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APPROACHES:
1. 2. 3. 4.
Sale of a product line to another firm Sale of the unit to existing management. Spin-off Liquidation of the operating units individual assets.
18
ANALYZING AND NEGOTIATING MERGERS

Part 3
VALUING THE TARGET COMPANY

Estimating the target value of the company by using Valuation and Capital Budgeting Techniques.
ACQUISITION OF ASSETS
o
Acquiring a firm for collection of assets (generally fixed assets) that the acquiring company needs. The methods of estimating expected cash flows from an acquisition are similar to those used in estimating capital budgeting cash flows. Typically, pro forma income statements reflecting the postmerger revenues and costs attributable to the target company are prepared.
ACQUISITIONS OF GOING CONCERNS

o
20
STOCK SWAP TRANSACTIONS

An acquisition method in which the acquiring firm exchanges its shares for shares of the target company according to a predetermined ratio. RATIO OF EXCHANGE (actual) = amount paid per share of the target company
market price per share of the acquiring firm
o o
21

EFFECT ON EARNINGS PER SHARE (EPS)
INITIAL EFFECT
1. 2.
If the following conditions are present the merged EPS will initially remain constant:
Ratio of Exchange = 1
Acquiring firm premerger EPS = Target firm premerger EPS P/E ratio of acquiring firm = P/E ratio of target firm.
3.
LONG-RUN EFFECT
Often, the effects are quite favorable when an initial decrease in the EPS of the stock held by the original owners of the acquiring firm is expected.
22

EFFECT ON MARKET PRICE PER SHARE
Factors that affect the Market Price per Share

1. 2. 3. 4.
Expected Earnings Dilution of Ownership Changes in risk
Other operating and Financial Changes
23

EFFECT ON MARKET PRICE PER SHARE
RATIO OF EXCHANGE IN MARKET PRICE
Indicates the market price per share of the acquiring firm paid for each dollar of market price per share of the target firm.
MPR = ( MPacquiring x RE ) / MPtarget
24
MERGER NEGOTIATION PROCESS
INVESTMENT BANKERS
Financial intermediaries who can be hired by acquirers in mergers to find suitable target companies and assist in negotiations. Once a target has been selected, the investment banker negotiates with its management or investment banker.
If negotiations break down, the acquirer will often make a direct appeal to the target firms
shareholders using a tender offer.
25
TENDER OFFER
a formal offer to purchase a given number of shares at a specified price.

The offer is made to all shareholders at a premium above the prevailing market price. In general, a desirable target normally receives more than one offer.
26
FIGHTING HOSTILE TAKEOVERS
Takeover Defenses
Strategies for fighting hostile takeovers.
White Knight
A takeover defense in which the target firm finds an acquirer more to its liking than the initial hostile acquirer and prompts the two to compete to take over the firm.
Poison Pill
A takeover defense in which a firm issues securities that give holders rights that become effective when a takeover is attempted. These rights make the target less desirable to acquirer.
27
Greenmail
A takeover defense in which a target firm repurchases a large block of its own stock at a premium to end a hostile takeover by those shareholders.
Leveraged Capitalization
a takeover defense in which the target firm pays a large debt-financed cash dividend, increasing the firms financial leverage in order to deter a takeover attempt.
28
Golden Parachutes
provisions in the employment contracts of key executives that provide them with sizeable compensation if the firm is taken over.
Shark Repellents
Antitakeover amendments to a corporate charter that constrain the firms ability to transfer managerial control of the firm as a result of a merger.
29
HOLDING COMPANIES
Holding Company
A
corporation that has control of one or more other corporations.
30
HOLDING COMPANIES
ADVANTAGES
1. 2.
3.
4. 5.
Easy to Organize Financial Benefits Centralized Benefits Risk Protection Tax Benefit
31
HOLDING COMPANIES
DISADVANTAGES
Complexity and Costly Management 2. Double Taxation 3. Inefficient Management 4. Exploitation
1.
32
BUSINESS FAILURE FUNDAMENTALS

Part 4
TYPES OF BUSINESS FAILURE

Negative or Low Returns 2. Technical Insolvency 3. Bankruptcy

1.
34
MAJOR CAUSES OF BUSINESS FAILURE

Mismanagement Economic Activity Corporate Maturity Lack of Skills Sales
1.
2. 3.
4.
5.
35
VOLUNTARY SETTLEMENTS
arrangements between a failed firm and its creditors that allow it to bypass some of the costs involved in legal bankruptcy proceedings normally initiated by the debtor firm.
36
ADVANTAGES

simplicity and relatively low cost no court proceedings as in bankruptcy general cost of administration are much lower than in a bankruptcy greater protection of confidential business matters less negative publicity in the legal and business community less time consuming and usually less expensive
37
DISADVANTAGES
no protection against secured parties inability to reject leases and other burdensome executory contracts no legal way to compel dissenting creditors to cooperate contracts no legal way to compel dissenting creditors to cooperate with settlements
38
STRATEGIES TO SUSTAIN THE FIRM:

Extension 2. Composition 3. Creditor Control 4. Combination of the three
1.
39
REORGANIZATION AND LIQUIDATION IN BANKRUPTCY

Part 5
BANKRUPTCY LEGISLATION
Bankruptcy
occurs when the firm cannot pay its bills or when its liabilities exceed the fair market value of its assets.
41
Bankruptcy Reform Act of 1978

Chapter 7. The portion that details the procedures to be followed when liquidating a failed firm. Chapter 11. The portion that outlines the procedures for reorganizing a failed or failing firm, whether its petition is filed voluntarily or involuntarily.
42
Reasons for Unethical Bankruptcy

1. Although bankruptcy may enable a company to survive by giving it time to rebuild liquidity, the company never has to make whole. 2. Bankruptcy proceedings take from others amounts that were agreed upon in good faith contracts and bargaining 3. When a company declares chapter 11 bankruptcy, non- bankrupt competitors are harmed.
43
REORGANIZATION IN BANKRUPTCY
Bankruptcy
Legally
declared inability or impairment of ability of an individual or organization to pay its creditors.
44
Allowing the debtor to maintain operating control, while restructuring debts and working out a repayment schedule acceptable to creditors.
45
Two types of Reorganization
1.
2.
Voluntary Reorganization a petition filed by a failed firm on its own behalf for reorganizing its structure and paying its creditors. Involuntary Reorganization a petition initiated by an outside party for the reorganization and payment of creditors of a failed firm.
46
Procedures for Reorganization
1. 2. 3.
4.
A Reorganization Petition is filed in court. A debtor in possession is appointed by the judge. Once the court approved the plan and disclosure of statement, these are given to the firms creditors and shareholders for their acceptance. Once accepted and confirmed by the court, the plan is put into effect as soon as possible.
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1.
2. 3.
Valuation of the firm. If: a). Value as a going concern < Liquidation Value b). Value as a going concern > Liquidation Value Recapitalization When determined the new capital structure and distribution of capital, it will submit the reorganization plan and disclosure statement to the court.
Role in Debtor in Possession
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LIQUIDATION IN BANKRUPTCY
TRUSTEE appointed by the Securities and Exchange Commission (SEC) to administer the bankruptcy.
RESPONSIBILITIES: 1. Liquidate the firm 2. Keep records 3. Examine the Creditors Claims 4. Disburse Money 5. Furnish information required 6. Make final reports on the liquidation
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Priority of Claims 1. Unsecured Liabilities with Priority a. Administering Expenses b. Unpaid interim expenses c. Unpaid salaries and wages d. Unpaid employee benefit plan e. Unsecured customer deposits f. Taxes 2. Creditors a. Secured b. Unsecured 3. Stockholders a. Preferred b. Common
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Example:
Assets: (@FMV) Cash Receivables Land Claims: Liquidation Expenses Unpaid Wages Notes Payable (secured by Land) Unsecured Liabilities
2,000 20,000 10,000 4,200 500 6,000 19, 000
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GROUP 2
Bang-ud, Abigail T. Balilit, Regine P. Capsuyen, Pennylyn S. Dangiw, Elva B. Dasalla, Roselyn O. Donato, Kristine Jean Lumagbas, Lovely Macayana, Angelica Yoko R. Maymaya, Connie Calay Marquez, Joma Panner, Rachell Quing-A, Remalyn A. Sab-it, Esther
52

Pepsi and Coke Financial Management Mergers Lbos Divestitures and Business

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MERGERS, LBOS, DIVESTITURES, AND BUSINESS FAILURE

Mergers, LBOs, Divestitures, and Business Failure

combination of two or more firms to form a completely new corporation

corporation that has voting control of one or more other corporations.

the companies controlled by a holding company.

Mergers, LBOs, Divestitures, and Business Failure

firm in a merger transaction that attempts to acquire another firm.

the firm in a merger transaction that the acquiring company is pursuing.

Mergers, LBOs, Divestitures, and Business Failure

Hostile Merger (Unfriendly Merger)

a merger transaction undertaken to achieve economies of scale.

Mergers, LBOs, Divestitures, and Business Failure

Mergers, LBOs, Divestitures, and Business Failure

Increased Ownership Liquidity Defense Against Takeover

LBOS AND DIVESTITURES

LEVERAGED BUYOUTS (LBOS)

LEVERAGED BUYOUTS (LBOS)

LEVERAGED BUYOUTS (LBOS)

Mergers, LBOs, Divestitures, and Business Failure

Mergers, LBOs, Divestitures, and Business Failure

Mergers, LBOs, Divestitures, and Business Failure

Selling of some of a firms assets for various strategic reasons.

LEVERAGED BUYOUTS (LBOS)

ANALYZING AND NEGOTIATING MERGERS

VALUING THE TARGET COMPANY

ACQUISITIONS OF GOING CONCERNS

STOCK SWAP TRANSACTIONS

Mergers, LBOs, Divestitures, and Business Failure

STOCK SWAP TRANSACTIONS

STOCK SWAP TRANSACTIONS

Factors that affect the Market Price per Share

Expected Earnings Dilution of Ownership Changes in risk

Other operating and Financial Changes

STOCK SWAP TRANSACTIONS

RATIO OF EXCHANGE IN MARKET PRICE

MPR = ( MPacquiring x RE ) / MPtarget

MERGER NEGOTIATION PROCESS

Mergers, LBOs, Divestitures, and Business Failure

shareholders using a tender offer.

MERGER NEGOTIATION PROCESS

a formal offer to purchase a given number of shares at a specified price.

MERGER NEGOTIATION PROCESS

FIGHTING HOSTILE TAKEOVERS

MERGER NEGOTIATION PROCESS

FIGHTING HOSTILE TAKEOVERS

MERGER NEGOTIATION PROCESS

FIGHTING HOSTILE TAKEOVERS

Mergers, LBOs, Divestitures, and Business Failure

corporation that has control of one or more other corporations.

Mergers, LBOs, Divestitures, and Business Failure

Mergers, LBOs, Divestitures, and Business Failure

BUSINESS FAILURE FUNDAMENTALS

TYPES OF BUSINESS FAILURE

Negative or Low Returns 2. Technical Insolvency 3. Bankruptcy

MAJOR CAUSES OF BUSINESS FAILURE

Mergers, LBOs, Divestitures, and Business Failure

Mergers, LBOs, Divestitures, and Business Failure

Mergers, LBOs, Divestitures, and Business Failure

Mergers, LBOs, Divestitures, and Business Failure

STRATEGIES TO SUSTAIN THE FIRM:

Mergers, LBOs, Divestitures, and Business Failure

REORGANIZATION AND LIQUIDATION IN BANKRUPTCY

Mergers, LBOs, Divestitures, and Business Failure

Bankruptcy Reform Act of 1978