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The court must approve any plan accepted by the debtor's shareholders and creditors.
True of False
Answer:
Parent firms often exit businesses that consistently fail to meet or exceed the parent's
hurdle rate requirements. True or False
Answer:
The purpose of Chapter 15 of the U.S. Bankruptcy Code is to prioritize the payment of
creditors. True or False
Answer:
Overpayment is the leading factor contributing to the failure of M&As to meet
expectations. True or False
Answer:
Poison pills are a commonly used takeover tactic to remove the management and board
of the target firm.
True or False
Answer:
In a triangular cash merger, the target firm may either be merged into an acquirer's
operating or shell acquisition subsidiary with the subsidiary surviving or the acquirer's
subsidiary is merged into the target firm with the target surviving.
True or False
Answer:
A risk-free rate of return is one for which the expected return is certain. True or False
Answer:
All family owned businesses are small. True or False
Answer:
Target shareholders most often receive shares rather than cash in cross-border
transactions. True or False
Answer:
Planning in advance of a merger or an acquisition necessarily slows down decision
making. True or False
Answer:
Net debt is defined as all of the firm's interest bearing debt less the value of cash and
marketable securities. True or False
Answer:
When two companies with very different cultures merge, the new firm inevitably adopts
one of the two cultures that existed prior to the merger. True or False
Answer:
In setting up business alliances, the initial focus of the parties involved should be on
determining the appropriate legal structure. True or False
Answer:
Staffing plans should be postponed to relatively late in the integration process. True or
False
Answer:
Spin-offs are generally immediately taxable to shareholders. True or False
Answer:
Deregulated industries often experience an upsurge in M&A activity shortly after
regulations are removed. True or False
Answer:
In a taxable purchase of target stock with cash, the target firm does not restate (i.e.,
revalue) its assets and liabilities for tax purposes to reflect the amount that the acquirer
paid for the shares of common stock. Rather, the tax basis (i.e., their value on the
target's financial statements) of assets and liabilities of the target before the acquisition
carries over to the acquirer after the acquisition.
True or False
Answer:
The written contract is the simplest legal structure and most often is used in strategic
alliances. True or False
Answer:
An acquisition occurs when one firm takes a controlling interest in another firm, a legal
subsidiary of another firm, or selected assets of another firm. The acquired firm often
remains a subsidiary of the acquiring company. True or False
Answer:
Free cash flow to the firm is often called enterprise cash flow. True or False
Answer:
Closing is a phase of the acquisition process that usually occurs shortly after the target
has been fully integrated into the acquiring firm. True or False
Answer:
Before selling a business, an owner may increase advertising expenses in order to
inflate profits.
True or False
Answer:
Common size financial statements are useful for comparing businesses of different sizes
in the same industry at different points in time. True or False
Answer:
In deciding to sell a business, a parent firm should compare the business' after-tax value
in sale with its pre-tax value to the parent as part of the parent.
True or False
Answer:
Loan agreements commonly have cross-default provisions allowing a lender to collect
its loan immediately if the borrower is in default on a loan to another lender. True or
False
Answer:
Parent firms sometimes contribute a subsidiary to a partnership as a prelude to
eventually exiting that business. True or False
Answer:
The primary reason the Sarbanes-Oxly Act of 2002 was passed was to eliminate insider
trading. True or False
Answer:
U.S. antitrust regulators in determining if a proposed business combination is likely to
be anti-competitive consider only domestic competitors or foreign competitors with
domestic operations. True or False
Answer:
While the DCF approach often is more theoretically sound than the IRR approach
(which can have multiple solutions), IRR is more widely used in LBO analyses since
investors often find it more intuitively appealing, that is, the higher an investment's
IRR, the better the investment's return relative to its cost The IRR is the discount rate
that equates the projected cash flows and terminal value with the initial equity
investment. True or False
Answer:
Real options include the right to buy land, commercial property, and equipment. Such
assets can be valued as call options if its current value exceeds the difference between
the asset's current value and some predetermined level. True or False
Answer:
Break-up value assumes that individual businesses can be sold quickly without any
material loss of value. True or False
Answer:
In a consolidation, two or more companies join together to form a new firm. True or
False
Answer:
A cost leadership strategy can be highly destructive to the firm with the largest market
share if pursued concurrently by a number of firms with very different market shares.
True or False
Answer:
The form of payment does not affect whether a transaction is taxable to the seller's
shareholders. True or False
Answer:
The Williams Act of 1968 consists of a series of amendments to the Securities Act of
1933, and it is intended to protect target firm shareholders from lighting fast takeovers
in which they would not have enough time to adequately assess the value of an
acquirer's offer. True or False
Answer:
It is seldom important that the buyer and seller agree on the allocation of the sales price
among the assets being sold, since the allocation will determine the potential tax
liability that would be incurred by the seller but that could by passed on to the buyer
through to terms of the sales contract. True or False
Answer:
A common technique used during the 1990s was to wait for favorable periods in the
stock market to sell a portion of the LBO's equity to the public. The proceeds of the
issue would be used to repay debt, thereby reducing the LBO's financial risk. True or
False
Answer:
The newly integrated firm must be able to communicate a compelling vision to
investors. True or False
Answer:
All of the following are generally considered stakeholders in the integration process
except for
a. Suppliers
b. Employees
c. Competitors
d. Regulators
e. Customers
Answer:
All of the following represent commonly found components of a well-constructed
business plan except for
a. Mission statement
b. Strategy
c. Acquisition plan
d. Objectives
e. Tactical or implementation plans
Answer:
A corporate shell may have value because
a. It may enable the owner to avoid the costs of going public
b. The name is widely recognized
c. It could own the rights to various forms of intellectual property
d. All of the above
e. None of the above
Answer:
All of the following are considered business alliances except for
a. Joint ventures
b. Mergers
c. Minority investments
d. Franchises
e. Licensing agreements
Answer:
Which of the following is not true about the liquidation/break-up valuation methods?
a. Highly diversified companies are often valued in terms of the sum of the standalone
values of their operating units
b. The calculation of such values is heavily dependent on the skill of appraisers who are
intimately familiar with the operations to be liquidated.
c. Assets can sometimes be liquidated in an orderly fashion.
d. Legal, appraisal, and consulting fees may comprise a substantial share of the total
proceeds of the sale of the assets
e. The liquidation value of most of the firm's assets is about the same.
Answer:
All of the following are true of the bankruptcy process except for
a. The debtor firm may seek protection from its creditors by initiating bankruptcy or
may be forced into bankruptcy by its creditors.
b. When creditors file for bankruptcy on behalf of the debtor firm, the action is said to
be involuntary bankruptcy.
c. Once either a voluntary or involuntary petition is filed, the debtor firm is protected
from any further legal action related to its debts until the bankruptcy proceedings are
completed.
d. The filing of a petition triggers an automatic stay even before the court accepts the
request.
e. An automatic stay suspends all judgments, collection activities, foreclosures, and
repossessions of property by the creditors on any debt or claim that arose before the
filing of the bankruptcy petition
Answer:
Political Risk in Cross-Border TransactionsCNOOC's Aborted
Attempt to Acquire Unocal
In what may be the most politicized takeover battle in U.S. history, Unocal announced
on August 11, 2005, that its shareholders approved overwhelmingly the proposed
buyout by Chevron. The combined companies would produce the equivalent of 2.8
million barrels of oil per day and the acquisition would increase Chevron's reserves by
about 15 percent. With both companies owning assets in similar regions, it was easier to
cut duplicate costs. The deal also made Chevron the top international oil company in
the fast growing Southeast Asia market. Unocal is much smaller than Chevron. As a
pure exploration and production company, Unocal had operations in nine countries.
Chevron operated gas stations, drilling rigs, and refineries in 180 countries.
Sensing an opportunity, Chevron moved ahead with merger talks and made an all-stock
$16 billion offer for Unocal in late February 2005. Unocal rebuffed the offer as
inadequate and sought bids from China's CNOOC and Italy's ENI SPA. While CNOOC
offered $17 billion in cash, ENI was willing to offer only $16 billion. Chevron
subsequently raised its all-stock offer to $16.5 billion, in line with the board's maximum
authorization. Hours before final bids were due, CNOOC informed Unocal it was not
going to make any further bids. Believing that the bidding process was over, Unocal
and Chevron signed a merger agreement on April 4, 2005. The merger agreement was
endorsed by Unocal's board and cleared all regulatory hurdles. Despite its earlier
reluctance, CNOOC boosted its original bid to $18.5 billion in late June to counter the
Chevron offer. About three fourths of CNOOC's all-cash offer was financed through
below-market-rate loans provided by its primary shareholder, the Chinese government.
On July 22, 2005, Chevron upped its offer to $17.7 billion, of which about 60 percent
was in stock and 40 percent in cash. By the time Unocal shareholders actually approved
the deal, the appreciation in Chevron's stock boosted the value of the deal to more than
$18.1 billion.
CNOOC's all-cash offer of $67 per share in June sparked instant opposition from
members of Congress, who demanded a lengthy review by President George W. Bush
and introduced legislation to place even more hurdles in CNOOC's way. Hoping to
allay fears, CNOOC offered to sell Unocal's U.S. assets and promised to retain all of
Unocal's workers, something Chevron was not prone to do. CNOOC also argued that its
bid was purely commercial and not connected in any way with the Chinese government.
U.S. lawmakers expressed concern that Unocal's oil drilling might have military
applications and CNOOC's ownership structure (i.e., 70 percent owned by the Chinese
government) would enable the firm to secure low-cost financing that was unavailable to
Chevron. The final blow to CNOOC's bid was an amendment to an energy bill passed in
July requiring the Departments of Energy, Defense, and Homeland Security to spend
four months studying the proposed takeover before granting federal approval.
Perhaps somewhat naively, the Chinese government viewed the low-cost loans as a way
to "recycle" a portion of the huge accumulation of dollars it was experiencing. While
the Chinese remained largely silent through the political maelstrom, CNOOC's
management appeared to be greatly surprised and embarrassed by the public criticism
in the United States about the proposed takeover of a major U.S. company. Up to that
point, the only other major U.S. firm acquired by a Chinese firm was the 2004
acquisition of IBM's personal computer business by Lenovo, the largest PC
manufacturer in China. While the short-term effects of the controversy appear benign,
the long-term implications are less clear. It remains to be seen how well international
business and politics can coexist between the world's major economic and military
superpower and China, an emerging economic and military superpower in its own right.
Cross-border transactions often require considerable political risk. In emerging
countries, this is viewed as the potential for expropriation of property or disruption of
commerce due to a breakdown in civil order. However, as CNOOC's aborted effort to
takeover Unocal illustrates, foreign firms have to be highly sensitive to political and
cultural issues in any host country, developed or otherwise.
Discussion Questions:
1) Should CNNOC have been permitted to buy Unocal? Why? Why not?
2) How might the Chinese have been able to persuade U.S. regulatory authorities to
approve the transaction?
3) The U.S. and European firms are making substantial investments (including M&As)
in China. How should the Chinese government react to this rebuff?
Answer:
Determining how to compete requires a firm's management to consider which of the
following factors?
a. Factors critical to successfully competing in its targeted markets
b. An external market analysis
c. An evaluation of what criteria customers use to make buying decisions
d. Availability of product substitutes
e. All of the above
Answer:
All of the following are true for market based valuation methods except for which of
the following?
a. Assumes that markets are efficient such that current values reflect all the information
currently known about the business
b. Current values represent what a willing buyer and seller are willing to pay for a
business in the absence of full information
c. Market based methods are always superior to discounted cash flow techniques
d. Include comparable company and recent transactions methods
e. Include the tangible book value approach
Answer:
Which of the following is generally considered a motive for exiting businesses?
a. Changing corporate strategy or focus
b. Underperforming businesses
c. Regulatory concerns
d. Lack of fit
e. All of the above
Answer:
An acquisition plan entails all of the following except for
a. Identifies key management objectives for making an acquisition
b. Determines important resource constraints
c. Articulates management's preferences for acquiring stock or assets or considering
competitors as possible targets
d. Constitutes the firm's business plan
e. Defines roles and responsibilities of those on the acquisition team
Answer:
Business alliances typically use which of the following ways to finance ongoing capital
requirements?
a. Request participants to make a capital contribution
b. Issuing additional equity or partnership interests
c. Borrowing without partner guarantees
d. A and B only
e. A, B, and C
Answer:
Which of the following is not true about common size financial statements?
a. Such statements are used to uncover data irregularities.
b. Such statements are constructed by calculating the percentage each line item of the
income statement, balance sheet, and cash flow statement is of annual sales.
c. Such statements are useful for comparing businesses of different sizes in the same
industry at different moments in time.
d. Common size statements applied over a number of consecutive periods may be used
to determine if the target firm is deferring necessary spending.
e. Common size statements may be calculated for both quarterly and annual financial
data.
Answer:
Which of the following are commonly used to close the gap between what the seller
wants and what the buyer is willing to pay?
a. Consulting contracts offered to the seller
b. Earn-outs
c. Employment contracts offered to the seller
d. Giving seller rights to license a valuable technology or process
e. All of the above.
Answer:
Initial contact should be made through an intermediary as high up in the organization
for which of the following firms
a. Companies with annual revenue of less than $25 million
b. Medium sized companies between $25 and $100 million in annual revenue
c. Large, publicly traded firms
d. Small, privately owned firms
e. Small, privately owned competitors
Answer:
All of the following statements are true about letters of intent except for
a. Are always legally binding
b. Spells out the initial areas of agreement between the buyer and seller
c. Defines the responsibilities and rights of the buyer and seller while the letter of intent
is in force
d. Includes an expiration date
e. Includes a "no shop" provision
Answer:
Which of the following are true?
a. Taxes are important in any transaction.
b. Taxes should never be the overarching reason for the transaction.
c. Tax savings accruing to the buyer should simply reinforce the decision to acquire.
d. The sale of stock, rather than assets, is generally preferable to the target firm
shareholders to avoid double taxation, if the target firm is structured as a C corporation.
e. All of the above.
Answer:
All of the following are commonly used takeover tactics, except for
a. Poison pills
b. Bear hug
c. Tender offer
d. Proxy contest
e. Litigation
Answer:
Examples of relevant historical relationships that are useful for forecasting cash flows
include the relationship between fixed and variable expenses, and the impact on
revenue of changes in product prices and unit sales. If these relationships can
reasonably be expected to continue through the forecast period, they can be used to
project the earnings and cash flows used in the valuation process. However, it is
important to ignore cyclical movements in the data. True or False
Answer:
Which of the following is not true about real options?
a. All investment decisions contain identifiable and measurable real options.
b. Under certain circumstances, management may be able to delay their initial
investment in a project or M&A.
c. Real options may be valued as the expected value of various alternative cash flow
projections.
d. Real options can be valued using the Black-Sholes method.
e. None of the above
Answer:
Which of the following is not a typical characteristic of a licensing arrangement?
a. Obtaining the rights to use a particular type of technology.
b. Obtaining a controlling interest in another firm
c. Obtaining patent rights
d. Paying royalties in direct proportion to revenues generated by the agreement
e. Utilizing another firm's trademark to market your product
Answer:
Which of the following are commonly used strategic alternatives for failing firms?
a. Merge with another firm
b. Reach out of court voluntary settlement with creditors
c. File for protection from creditors from the U.S. bankruptcy court
d. A, B, and C
e. A and B only
Answer:
In a statutory merger,
a. Only known assets and liabilities are automatically transferred to the buyer.
b. Only known and unknown assets are transferred to the buyer.
c. All known and unknown assets and liabilities are automatically transferred to the
buyer except for those the seller agrees to retain.
d. The total consideration received by the target's shareholders is automatically taxable.
e. None of the above.
Answer:
Which of the following is not a typical question that must be addressed in defining
scope?
a. Which products are included
b. Which products are excluded
c. How are profits are losses to be allocated
d. Who receives rights to distribute, manufacture, acquire, or license or purchase future
products developed by the alliance
e. Which partner will sell which products in which markets
Answer:
Overcoming Regulatory Hurdles: Exelon Buys Constellation Energy
Key Points:
Rising costs associated with more stringent environmental laws and the need to
upgrade power grids are spurring consolidation in the fragmented U.S. electric utility
industry.
However, acquiring utilities often is particularly challenging due to the complex
regulatory approval process.
______________________________________________________________________
________
Reflecting increased demands for clean power, an aging electric power grid and other
infrastructure, and the rising cost of fuels to generate power, the highly fragmented U.S.
electric utility industry has undergone significant consolidation in recent years. By
achieving increased scale, electric utilities are hoping to lower operating costs and gain
the financial strength to finance the necessary investments in infrastructure and
alternative energy sources. Utilities also are increasingly confronted by a combination
of regulated and non-regulated electricity markets.
In most retail electricity markets in which electricity is sold directly to the end
customer, rates that can be charged are regulated by local public utility commissions.
While some utilities own their own generating capacity, others are dependent to varying
degrees on purchasing electric power in the wholesale power market. A wholesale
electricity market exists when competing generators offer their electricity output to
retailers. Increasingly, large end-users can bypass retail electric utility companies to buy
directly from wholesale power generators in a bid to access lower cost power by
eliminating the middleman. Some states allow competition in their electricity markets
while others do not. In competitive markets, power suppliers, including renewable and
conventional oil and gas power generators, compete against each other to provide the
best possible service at the lowest cost in order to attract and retain customers. In
contrast, in monopoly-regulated states, power providers have no incentive to innovate
or lower costs because ratepayers are captive to their monopoly-protected supplier.
Some utilities are attempting to shift to a mix of regulated and non-regulated electricity
markets. The latest illustration of this strategy is Exelon Corp's acquisition of
Constellation Energy for $7.9 billion in April 2011. The deal creates the largest electric
utility and power generator in the U.S. The combined firm will gain stakes in five
nuclear reactors and become the largest U.S. electricity marketer. Exelon is currently
the largest owner and operator of U.S. nuclear plants and owns electric utilities
Commonwealth Edison in Chicago and Peco Energy in Pennsylvania. Constellation
owns the utility Baltimore Gas & Electric. Most of its revenue comes from the retail
sale of electricity in states that allow competition. The merger creates the number one
competitive energy provider with one of the industry's cleanest and lowest cost power
generation plant systems in the country.
The combined company will keep the Exelon name and its headquarters in Chicago, as
well as own more than 34 gigawatts of power generation. The company's power
generation mix would be 55 percent nuclear, 24 percent natural gas, 6 percent hydro
and renewable, and 7 percent oil, and 6 percent coal. Exelon will add 1.2 million
electric customers in Constellation service areas.
This deal is Exelon's largest transaction. Exelon has tried unsuccessfully three times to
buy other electric power companies since 2003. Exelon was thwarted by regulators in
efforts to buy independent power producer NRG Energy in 2009, Public Service
Enterprise Group in 2006, and Illinois Power in 2003. Constellation has been the target
of two failed bids by other suitors. A $14.8 billion sale of Constellation to NextEra
Energy Inc., the largest U.S. wind-power generator and owner of Florida's largest
utility, collapsed in 2005.
Exelon announced on December 20, 2011 that it had received approval by the U.S.
Justice Department to buy Constellation Energy Group Inc. The approval was
contingent on Exelon selling three electricity generating plants in Maryland. The sale of
the three power plants in the Baltimore area will significantly reduce the combined
firm's market share in that region. The Justice Department believed that the
combination, as originally proposed, would have lessened competition in the wholesale
electricity market and increased prices for consumers in the Mid-Atlantic states (i.e.,
New York, Pennsylvania, and Maryland). Exelon and Constellation have also received
regulatory approval from the Maryland and New York regulators as well as the Nuclear
Regulatory Commission.
Discussion Questions:
1) What is anti-trust policy and why is it important? Why might its application be
particularly important in the utility industry?
2) How does the FTC define market share? In the electric utility market, to what extent
does this methodology apply? To what extent does it not apply?
3) What factors other than market share should be considered in determining whether a
potential merger might result in an increased pricing power? Of these factors, which do
you believe represent the most important justifications for the merger of Exelon and
Constellation?
Answer:
Which of the following represent taxable transactions?
a. Purchase of assets with cash
b. Purchase of stock with cash
c. Purchase of stock or assets with cash
d. Statutory cash merger or consolidation
e. All of the above
Answer:
Which of the following is generally not considered a common motive for exiting
businesses?
a. Changing strategy or focus
b. Desire to achieve economies of scale
c. Lack of fit with the parent's other businesses
d. Discarding unwanted businesses from prior acquisitions
e. All of the above
Answer:
A business owner may overstate revenue by
a. Failing to deduct from revenue products returned by customers
b. Billing customers for products not ordered
c. Booking the entire value of a multiyear contract in the current year
d. Counting interest income as revenue
e. All of the above
Answer:
First Union Buys Wachovia Bank: A Merger of Equals?
First Union announced on April 17, 2001, that an agreement had been reached to
acquire Wachovia Corporation for about $13 billion in stock, thus uniting two fiercely
independent rivals. With total assets of about $324 billion, the combination created the
fourth largest bank in the United States behind Citigroup, Bank of America, and J.P.
Morgan Chase. The merger also represents the joining of two banks with vastly
different corporate cultures. Because both banks have substantial overlapping
operations and branches in many southeastern U.S. cities, the combined banks are
expected to be able to add to earnings in the first 2 years following closing. Wachovia,
which is much smaller than First Union, agreed to the merger for only a small 6%
premium.
The deal is being structured as a merger of equals. That is a rare step given that the
merger of equals' framework usually is used when two companies are similar in size
and market capitalization. L. M. Baker, chair and CEO of Wachovia, will be chair of the
new bank and G. Kennedy Thompson, First Union's chair and CEO, will be CEO and
president. The name Wachovia will survive. Of the other top executives, six will be
from First Union and four from Wachovia. The board of directors will be evenly split,
with nine coming form each bank. Wachovia shareholders own about 27% of the
combined companies and received a special one-time dividend of $.48 per share
because First Union recently had slashed its dividend.
To discourage a breakup, First Union and Wachovia used a fairly common mechanism
called a "cross option," which gives each bank the right to buy a 19.9% stake in the
other using cash, stock, and other property including such assets as distressed loans,
real estate, or less appealing assets. (At less than 20% ownership, neither bank would
have to show the investment on its balance sheet for financial reporting purposes.)
Thus, the bank exercising the option would not only be able to get a stake in the merged
bank but also would be able to unload its least attractive assets. A hostile bidder would
have to deal with the idea that another big bank owned a chunk of the stock and that it
might be saddled with unattractive assets.
The deal structure also involved an unusual fee if First Union and Wachovia parted
ways. Each bank is entitled to 6% of the $13 billion merger value, or about $780
million in cash and stock. The 6% is about twice the standard breakup fee. The
cross-option and 6% fee were intended to discourage other last-minute suitors from
making a bid for Wachovia.
According to a First Union filing with the Securities and Exchange Commission,
Wachovia rebuffed an overture from an unidentified bank just 24 hours before
accepting First Union's offer. Analysts identified the bank as SunTrust Bank. SunTrust
had been long considered a likely buyer of Wachovia after having pursued Wachovia
unsuccessfully in late 2000. Wachovia's board dismissed the offer as not being in the
best interests of the Wachovia's shareholders.
The transaction brings together two regional banking franchises. In the mid-1980s, First
Union was much smaller than Wachovia. That was to change quickly, however. In the
late 1980s and early 1990s, First Union went on an acquisition spree that made it much
larger and better known than Wachovia. Under the direction of now-retired CEO
Edward Crutchfield, First Union bought 90 banks. Mr. Crutchfield became known in
banking circles as "fast Eddie." However, acquisitions of the Money Store and
CoreStates Financial Corporation hurt bank earnings in late 1990s, causing First
Union's stock to fall from $60 to less than $30 in 1999. First Union had paid $19.8
billion for CoreStates Financial in 1998 and then had trouble integrating the acquisition.
Customers left in droves. Ill, Mr. Crutchfield resigned in 2000 and was replaced by G.
Kennedy Thompson. He immediately took action to close the Money Store operation
and exited the credit card business, resulting in a charge to earnings of $2.8 billion and
the layoff of 2300 in 2000.
In contrast, Wachovia assiduously avoided buying up its competitors and its top
executives frequently expressed shock at the premiums that were being paid for rival
banks. Wachovia had a reputation as a cautious lender.
Whereas big banks like First Union did stumble mightily from acquisitions, Wachovia
also suffered during the 1990s. Although Wachovia did acquire several small banks in
Virginia and Florida in the mid-1990s, it remained a mid-tier player at a time when the
size and scope of its bigger competitors put it at a sharp cost disadvantage. This was
especially true with respect to credit cards and mortgages, which require the economies
of scale associated with large operations. Moreover, Wachovia remained locked in the
Southeast. Consequently, it was unable to diversify its portfolio geographically to
minimize the effects of different regional growth rates across the United States.
In the past, big bank deals prompted a rash of buying of bank stocks, as investors bet on
the next takeover in the banking sector. Banks such as First Union, Bank of America
(formerly NationsBank), and Bank One acquired midsize regional banks at lofty
premiums, expanding their franchises. They rationalized these premiums by noting the
need for economies of scale and bigger branch networks. Many midsize banks that were
obvious targets refused to sell themselves without receiving premiums bigger than
previous transactions. However, things have changed.
Back in 1995 buyers of banks paid 1.94 times book value and 13.1 times after-tax
earnings. By 1997, these multiples rose to 3.4 times book value and 22.2 times after-tax
earnings. However, by 2000, buyers paid far less, averaging 2.3 times book value and
16.3 times earnings. First Union paid 2.47 times book value and 15.7 times after-tax
earnings. The declining bank premiums reflect the declining demand for banks. Most of
the big acquirers of the 1990s (e.g., Wells Fargo, Bank of America, and Bank One) now
feel that they have reached an appropriate size.
Banking went through a wave of consolidation in the late 1990s, but many of the deals
did not turn out well for the acquirers' shareholders. Consequently, most buyers were
unwilling to pay much of a premium for regional banks unless they had some unique
characteristics. The First UnionWachovia deal is remarkable in that it showed how
banks that were considered prized entities in the late 1990s could barely command any
premium at all by early 2001.
Discussion Questions:
1) In your judgment, was this merger a true merger of equals? Why might this
framework have been used in this instance? Do you think it was a fair deal for
Wachovia stockholders? Explain your answer.
2) Do you believe the cross option and unusual fee structure in this transaction were in
the best interests of the Wachovia shareholders? Explain your answer.
3) How did big banks during the 1990s justify paying lofty premiums for smaller,
regional banks? Why do you think their subsequent financial performance was hurt by
these acquisitions?
4) What integration challenges do you believe these two banks will encounter as they
attempt to consolidate operations?
5) Speculate on why Wachovia's management rebuffed the offer from SunTrust Banks
with the ambiguous statement that it was not in the best interests of Wachovia's
shareholders?
Answer:
Which of the following are disadvantages of an asset purchase?
a. Asset write-up
b. May require consents to assignment of contracts
c. Potential for double-taxation of buyer
d. May be subject to sales, use, and transfer taxes
e. B and D
Answer:
