stock through a tender offer. Post-closing, Sprint continues to trade as a public company: 70% owned by SoftBank
and 30% owned by former Sprint shareholders.
_________________ _________________ ______________________________________ ________________
Pre-Transaction
Shares Outstanding:
Step 1: SoftBank
invests $3.1 billion
in convertible debt
converting into 590
million shares
@$5.25 per share3
Step 2A: SoftBank
invests $4.9 billion
in exchange for
933 million newly
issued shares
@$5.25 per share
and a warrant to
Step 2B: SoftBank
initiates $12.1
billion tender offer
for up to 1.7 billion
Sprint shares
Pre-Transaction Immediately After At Close Post-Transaction
Ownership Signing Ownership
70%
SoftBank
(3.2 billion
Shares)
Table 12.7 Calculating Shares Outstanding for Steps 1, 2A and 2B
Announcement Date
At Closing
5-Year Warrants
($ in Billions and Shares in
Millions)
Sprint
Conversion
Step 1
Sprint
Common
Issuance
Step 2A
Sprint
$12.1
Tender
Offer
Step 2B
Sprint
Warrants
to Buy
55M
shares
Step 2C
Sprint
Pre-Transaction Common Sh.
Issued to SoftBank1
Tender Offer2
Total Common
Dilution3
3,004
—
— __
3,004
37
—
—
— _
—
—
3,004
—
— __
3,004
39
—
933
— __
933
—
3,004
933
—___
3,938
39
(1,663)
—
1,663
—
—
1,341
933
1,663
3,938
48
—
—
—
—
—
1,341
933
1,663
3,938
48
SoftBank
(Japan)
HoldCo U.S.
(100% Owned by
SoftBank)
55% of Pre-Transaction Sprint Stock
SoftBank
(Japan)
HoldCo U.S.
(100% Owned by
SoftBank)
Former Sprint
Shareholders
U.S. Post
Merger
U.S. Merger
Structure
Figure 12.8 SoftBank-Sprint Merger
$8 Billion (Incl. $3.1 B
Convertible Bond)
HoldCo
Shares
$20.1 B
in Cash
Japanese Banking
Syndicate
$19.1 B Loan
New Sprint
Shares
$20.1 B
in
Japan
Discussion Questions:
1. What is the form of payment and form of acquisition employed by SoftBank in its takeover of Sprint–
Nextel? Is all or some of the total consideration paid to Sprint shareholders tax free?
2. What is the purpose of the holding company structure adopted by SoftBank in this transaction?
3. Would you characterize this as a reverse or forward merger? Based on your answer why was this type of
reorganization selected by SoftBank? Will this takeover require a vote by Softbank shareholders?
4. The convertible debt is described as a “stock lockup.” How does the convertible debt discourage other
interested parties from bidding on Sprint?
5. What are the arguments for and against the proposed takeover being approved by U.S. regulators?
6. Why did SoftBank use New Sprint shares as part of the tender offer to Sprint shareholders rather than its
own shares?
7. What is the purpose of the reverse termination and termination fees employed in the transaction?
Energy Transfer Outbids Williams Companies for Southern Union—Alternative Bidding Strategies
_____________________________________________________________________________
Key Points
Higher bids involving stock and cash may be less attractive than a lower all-cash bid due to the uncertain nature of the value of the
acquirer’s stock.
Master limited partnerships represent an alternative means for financing a transaction in industries in which cash flows are relatively
predictable.
______________________________________________________________________________
Energy pipeline company Southern Union (Southern) offered significant synergistic opportunities for competitors Energy Transfer Equity
(ETE) and The Williams Companies (Williams). Increasing interest in natural gas as a less polluting but still affordable alternative to coal
and oil motivated both ETE and Williams to pursue Southern in mid-2011. Williams, already the nation’s largest pipeline company,
accounting for about 12% of the nation’s natural gas distribution by volume, viewed the acquisition as a means of solidifying its premier
position in the energy distribution industry. ETE saw Southern as a way of doubling its pipeline capacity and catapulting itself into the
number-one position in the industry.
ETE is a publicly traded partnership and is the general partner and owns 100% of the incentive distribution rights of Energy Transfer
Partners, L.P. ( ETP), consisting of approximately 50.2 million ETP limited partnership units. The firm also is the general partner and
owns 100% of the distribution rights of Regency Energy Partners (REP), consisting of approximately 26.3 million REP limited
partnership units. Williams manages most of its pipeline assets through its primary publicly traded master limited partnership known as
Williams Partners. Southern owns and operates more than 20,000 miles of pipelines in the United States (Southeast, Midwest, and Great
lakes regions as well as Texas and New Mexico). It also owns local gas distribution companies that serve more than half a million end
users in Missouri and Massachusetts.
While both ETE and Williams were attracted to Southern because the firm’s shares were believed to be undervalued, the potential
synergies also are significant. ETE would transform the firm by expanding its business into the Midwest and Florida and offers a very
good complement to ETE’s existing Texas-focused operations. For Williams, it would create the dominant natural gas pipeline system for
the Midwest and Northeast and give it ownership interests in two pipelines running into Florida.
Despite the transition of exploration and production companies to liquids for distribution, Southern continued to trade, largely as an
annuity offering a steady, predictable financial return. During the six–month period prior to the start of the bidding war, Southern’s stock
was caught in a trading range between $27 and $30 per share. That changed in mid-June, when a $33-per-share bid from ETE, consisting
of both cash and stock valued by Southern at $4.2 billion, put Southern in “play.” The initial ETE offer was immediately followed by a
series of four offers and counteroffers, resulting in an all-cash counteroffer of $44 per share from The Williams Companies, valuing
Southern at $5.5 billion. This bid was later topped with an ETE offer of $44.25 per Southern share, boosting Southern’s valuation to
approximately $5.6 billion.
Williams’s $44 all-cash offer did not include a financing contingency, but it did include a “hell or high water” clause that would
commit the company to taking all necessary steps to obtain regulatory approval; later ETE added a similar provision to their proposal. The
clause is meant to assuage Southern shareholder concerns that a deal with Williams or ETE could lead to antitrust lawsuits in states like
Florida. The bidding boosted Southern’s shares from a prebid share price of $28 to a final purchase price of $44.25 per share.
Williams argued, to no avail, that its bid was superior to ETE’s, in that its value was certain, in contrast to ETE’s, which gave
Southern’s shareholders a choice to receive $40 per share or 0.903 ETE common units whose value was subject to fluctuations in the
demand for energy. ETE pointed out not only that their bid was higher than Williams’ but also that shareholders could choose to make
their payout tax free if they are paid in stock. The final ETE bid quickly received the backing of Southern’s two biggest shareholders, the
firm’s founder and chairman, George Lindemann, and its president, Eric D. Herschmann.
ETE removed any concerns about the firm’s ability to finance the cash portion of the transaction when it announced on August 5,
2011, that it had received financing commitments for $3.7 billion from a syndicate consisting of 11 U.S. and foreign banks. The firm also
announced that it had received regulatory approval from the Federal Trade Commission to complete the transaction.
As part of the agreement with ETE, Southern contributed its 50% interest in Citrus Corporation to Energy Transfer Partners for $2
billion. The cash proceeds from the transfer will be used to repay a portion of the acquisition financing and to repay existing Southern
Union debt in order for Southern to maintain its investment-grade credit rating. Following completion of the deal, ETE moved Southern’s
27
pipeline assets into Energy Transfer Partners and Regency Energy Partners, eliminating their being subject to double taxation. These
actions helped to offset a portion of the purchase price paid to acquire Southern Union.
In retrospect, ETE may have invited the Williams bid because of the confusing nature of its initial bid. According to the firm’s first
bid, Southern shareholders would receive Series B units that would yield at least 8.25%. However, depending on the outcome of a series
of subsequent events, they could end up getting a combination of cash, ETE common, and Energy Transfer Partners’ common or
continuing to hold those Series B units. Some of the possible outcomes would be tax free to Southern shareholders and some taxable. In
contrast, The Williams bid is a straightforward all-cash bid whose value is unambiguous and represented an 18% premium for Southern
shareholders. The disadvantage of the Williams bid is that it would be taxable; furthermore, it was contingent on Williams’ completing
full due diligence.
Discussion Questions
1. If you were a Southern shareholder, would you have found the Williams or the Energy Transfer Equity bid more attractive?
Explain your answer.
2. The all-cash Williams bid was contingent on the firm completing full due diligence on Southern Union. Why would this
represent a potential risk to Southern Union shareholders?
3. Energy Transfer Equity transferred Southern Union’s pipeline assets into its primary master limited partnerships in order to
finance a portion of the purchase price. In what way could this action be viewed as a means of offsetting a portion of the
purchase price? In what way may this action have created a tax liability for Energy Transfer Equity?
4. What do you believe are the key assumptions underlying either the Energy Transfer Equity or the Williams valuations of
Southern Union?
Teva Pharmaceuticals Buys Barr Pharmaceuticals to Create a Global Powerhouse
Key Points
Foreign acquirers often choose to own U.S. firms in limited liability corporations.
American Depository Shares (ADSs) often are used by foreign buyers, since their shares do not trade directly on U.S. stock exchanges.
28
Despite a significant regulatory review, the firms employed a fixed share-exchange ratio in calculating the purchase price, leaving each at
risk of Teva share price changes.
_____________________________________________________________________________________
On December 23, 2008, Teva Pharmaceuticals Ltd. completed its acquisition of U.S.-based Barr Pharmaceuticals Inc. The merged
businesses created a firm with a significant presence in 60 countries worldwide and about $14 billion in annual sales. Teva
Pharmaceutical Industries Ltd. is headquartered in Israel and is the world’s leading generic-pharmaceuticals company. The firm develops,
manufactures, and markets generic and human pharmaceutical ingredients called biologics as well as animal health pharmaceutical
products. Over 80% of Teva’s revenue is generated in North America and Europe.
Barr is a U.S.-headquartered global specialty pharmaceuticals company that operates in more than 30 countries. Barr’s operations are
based primarily in North America and Europe, with its key markets being the United States, Croatia, Germany, Poland, and Russia. With
annual sales of about $2.5 billion, Barr is engaged primarily in the development, manufacture, and marketing of generic and proprietary
pharmaceuticals and is one of the world’s leading generic–drug companies. Barr also is involved actively in the development of generic
biologic products, an area that Barr believes provides significant prospects for long-term earnings and profitability.
Based on the average closing price of Teva American Depository Shares (ADSs) on NASDAQ on July 16, 2008, the last trading day in
the United States before the merger’s announcement, the total purchase price was approximately $7.4 billion, consisting of a combination
of Teva shares and cash. Each ADS represents one ordinary share of Teva deposited with a custodian bank.2 As a result of the transaction,
Barr shareholders owned approximately 7.3% of Teva after the merger. The merger agreement provides that each share of Barr common
stock issued and outstanding immediately prior to the effective time of the merger was to be converted into the right to receive 0.6272
ordinary shares of Teva, which trade in the United States as American Depository Shares, and $39.90 in cash. The 0.6272 represents the
share-exchange ratio stipulated in the merger agreement. The value of the portion of the merger consideration comprising Teva ADSs
could have changed between signing and closing, because the share–exchange ratio was fixed, per the merger agreement.
By most measures, the offer price for Barr shares constituted an attractive premium over the value of Barr shares prior to the merger
announcement. Based on the closing price of a Teva ADS on the NASDAQ Stock Exchange on July 16, 2008, the consideration for each
outstanding share of Barr common stock for Barr shareholders represented a premium of approximately 42% over the closing price of
Barr common stock on July 16, 2008, the last trading day in the United States before the merger announcement. Since the merger
qualified as a tax-free reorganization under U.S. federal income tax laws, a U.S. holder of Barr common stock generally did not recognize
any gain or loss under U.S. federal income tax laws on the exchange of Barr common stock for Teva ADSs. A U.S. holder generally
would recognize a gain on cash received in exchange for the holder’s Barr common stock.
Teva was motivated to acquire Barr because of the desire to achieve increased economies of scale and scope as well as greater
geographic coverage, with significant growth potential in emerging markets. Barr’s U.S. generics drug offering in the United States is
highly complementary with Teva’s and extends Teva’s product offering and product development pipeline into new and attractive product
categories, such as a substantial women’s healthcare business. The merger also is a response to the ongoing global trend of consolidation
among the purchasers of pharmaceutical products as governments are increasingly becoming the primary purchaser of generic drugs.
Under the merger agreement, a wholly owned Teva corporate subsidiary, the Boron Acquisition Corp. (i.e., acquisition vehicle),
merged with Barr, with Barr surviving the merger as a wholly owned subsidiary of Teva. Immediately following the closing of the
merger, Barr was merged into a newly formed limited liability company (i.e., postclosing organization), also wholly owned by Teva,
which is the surviving company in the second step of the merger. As such, Barr became a wholly owned subsidiary of Teva and ceased to
be traded on the New York Stock Exchange.
The merger agreement contained standard preclosing covenants, in which Barr agreed to conduct its business only in the ordinary
course (i.e., as it has historically, in a manner consistent with common business practices) and not to alter any supplier, customer, or
employee agreements or declare any dividends or buy back any outstanding stock. Barr also agreed not to engage in one or more
transactions or investments or assume any debt exceeding $25 million. The firm also promised not to change any accounting practices in
any material way or in a manner inconsistent with generally accepted accounting principles. Barr also committed not to solicit alternative
bids from any other possible investors between the signing of the merger agreement and the closing.
Teva agreed that from the period immediately following closing and ending on the first anniversary of closing it would require Barr or
its subsidiaries to maintain each compensation and benefit plan in existence prior to closing. All annual base salary and wage rates of each
2 ADSs may be issued in uncertificated form or certified as an American Depositary Receipt, or ADR. ADRs provide evidence that a
specified number of ADSs have been deposited by Teva commensurate with the number of new ADSs issued to Barr shareholders.
29
Barr employee would be maintained at no less than the levels in effect before closing. Bonus plans also would be maintained at levels no
less favorable than those in existence before the closing of the merger.
The key closing conditions that applied to both Teva and Barr included satisfaction of required regulatory and shareholder approvals,
compliance with all prevailing laws, and that no representations and warranties were found to have been breached. Moreover, both parties
had to provide a certificate signed by the chief executive officer and the chief financial officer that their firms had performed in all
material respects all obligations required to be performed in accordance with the merger agreement prior to the closing date and that
neither business had suffered any material damage between the signing and the closing.
The merger agreement had to be approved by a majority of the outstanding voting shares of Barr common stock. Shareholders failing
to vote or abstaining were counted as votes against the merger agreement. Shareholders were entitled to vote on the merger agreement if
they held Barr common stock at the close of business on the record date, which was October 10, 2008. Since the shares issued by Teva in
exchange for Barr’s stock had already been authorized and did not exceed 20% of Teva’s shares outstanding (i.e., the threshold on some
public stock exchanges at which firms are required to obtain shareholder approval), the merger was not subject to a vote of Teva’s
shareholders.
Teva and Barr each notified the U.S. Federal Trade Commission and the Antitrust Division of the U.S. Department of Justice of the
proposed deal in order to comply with prevailing antitrust regulations. Each party subsequently received a “second request for
information” from the FTC, whose effect was to extend the HSR waiting period another 30 days. Teva and Barr received FTC and Justice
Department approval once potential antitrust concerns had been dispelled. Given the global nature of the merger, the two firms also had to
file with the European Union Antitrust Commission as well as with other country regulatory authorities.
Discussion Questions
1. Why do you believe that Teva chose to acquire the outstanding stock of Barr rather than selected assets? Explain your answer.
2. Mergers of businesses with operations in many countries must seek approval from a number of regulatory agencies. How might
this affect the time between the signing of the agreement and the actual closing? How might the ability to realize synergy
following the merger of the two businesses be affected by actions required by the regulatory authorities before granting their
approval? Be specific.
3. What it the importance of the pre-closing covenants signed by both Teva and Barr?
30
4. What is the importance of the closing conditions in the merger agreement? What could happen if any of the closing conditions
are breached (i.e., violated)?
5. Speculate as to why Teva offered Barr shareholders a combination of Teva stock and cash for each Barr share outstanding and
why Barr was willing to accept a fixed share exchange ratio rather than some type of collar arrangement.
Johnson & Johnson Uses Financial Engineering to Acquire Synthes Corporation
_____________________________________________________________________________
Key Points
While tax considerations rarely are the primary motivation for takeovers, they make transactions more attractive.
Tax considerations may impact where and when investments such as M&As are made.
Foreign cash balances give multinational corporations flexibility in financing M&As.
_____________________________________________________________________________________
United States–based Johnson & Johnson (J&J), the world’s largest healthcare products company, employed creative tax strategies in
undertaking the biggest takeover in its history. When J&J first announced that it would acquire Swiss medical device maker Synthes for
$19.7 million in stock and cash, the firm indicated that the deal would dilute its current shareholders due to the issuance of 204 million
new shares. Investors expressed their dismay by pushing the firm’s share price down immediately following the announcement. J&J
looked for a way to make the deal more attractive to investors while preserving the composition of the purchase price paid to Synthes’
shareholders (two-thirds stock and the remainder in cash). They could defer the payment of taxes on that portion of the purchase price
received in J&J shares until such shares were sold; however, they would incur an immediate tax liability on any cash received.
Having found a loophole in the IRS’s guidelines for utilizing funds held in foreign subsidiaries, J&J was able to make the deal’s
financing structure accretive to earnings following closing. In 2011, the IRS had ruled that cash held in foreign operations repatriated to
the United States would be considered a dividend paid by the subsidiary to the parent, subject to the appropriate tax rate. Because the
United States has the highest corporate tax rate among developed countries, U.S. multinational firms have an incentive to reinvest
earnings of their foreign subsidiaries abroad.
With this in mind, J&J used the foreign earnings held by its Irish subsidiary to buy 204 million of its own shares, valued at $12.9
billion, held by Goldman Sachs and JPMorgan, which had previously acquired J&J shares in the open market. The buyback of J&J shares
held by these investment banks increased the consolidated firm’s earnings per share. These shares, along with cash, were exchanged for
outstanding Synthes’ shares to fund the transaction. J&J also avoided a hefty tax payment by not repatriating these earnings to the United
States, where they would have been taxed at a 35% corporate rate rather than the 12% rate in Ireland. Investors reacted favorably,
boosting J&J’s share price by more than 2% in mid-2012, when the firm announced the deal would be accretive rather than dilutive.
Presumably, the IRS will move to prevent future deals from being financed in a similar manner.
31
Merck and Schering-Plough Merger: When Form Overrides Substance
If it walks like a duck and quacks like a duck, is it really a duck? That is a question Johnson & Johnson might ask about a 2009
transaction involving pharmaceutical companies Merck and Schering-Plough. On August 7, 2009, shareholders of Merck and Company
(“Merck”) and Schering–Plough Corp. (Schering-Plough) voted overwhelmingly to approve a $41.1 billion merger of the two firms. With
annual revenues of $42.4 billion, the new Merck will be second in size only to global pharmaceutical powerhouse Pfizer Inc.
At closing on November 3, 2009, Schering-Plough shareholders received $10.50 and 0.5767 of a share of the common stock of the
combined company for each share of Schering-Plough stock they held, and Merck shareholders received one share of common stock of
the combined company for each share of Merck they held. Merck shareholders voted to approve the merger agreement, and Schering–
Plough shareholders voted to approve both the merger agreement and the issuance of shares of common stock in the combined firms.
Immediately after the merger, the former shareholders of Merck and Schering-Plough owned approximately 68 percent and 32 percent,
respectively, of the shares of the combined companies.
The motivation for the merger reflects the potential for $3.5 billion in pretax annual cost savings, with Merck reducing its workforce
by about 15 percent through facility consolidations, a highly complementary product offering, and the substantial number of new drugs
under development at Schering-Plough. Furthermore, the deal increases Merck’s international presence, since 70 percent of Schering–
Plough’s revenues come from abroad. The combined firms both focus on biologics (i.e., drugs derived from living organisms). The new
firm has a product offering that is much more diversified than either firm had separately.
The deal structure involved a reverse merger, which allowed for a tax-free exchange of shares and for Schering-Plough to argue that it
was the acquirer in this transaction. The importance of the latter point is explained in the following section.
The multi-step process for implementing this transaction is illustrated in the following diagrams. From a legal perspective, all these
actions occur concurrently.
Step 1: Schering-Plough renamed Merck (denoted in the diagrams as “New Merck”)
a. Schering-Plough creates two wholly-owned merger subs
b. Schering-Plough transfers cash provided by Merck and newly issued “New Merck” stock
into Merger Sub 1 and only “New Merck” stock into Merger Sub 2.
“New Merck”
(Schering Plough)
Merger Sub 2 (Holds “New
Merck” Stock only)
Merger Sub 1 (Holds Cash
and “New Merck” Stock)