Despite the lack of public exchanges for privately held firms, Wall Street analysts have
ample incentive to analyze such firms in search of emerging companies. True or False
Answer:
In the adjusted present value method, the levered cost of equity is used for discounting
cash flows during the period in which the capital structure is changing and the
weighted-average cost of capital for discounting during the terminal period. True or
False
Answer:
Value drivers are factors such as product volume, selling price, and cost of sales that
have a significant impact on the value of the firm whenever they are altered. True or
False
Answer:
Even though time is critical, it is always critical to build a relationship with the CEO of
the target firm before approaching her with an acquisition proposal. True or False
Answer:
According to Section 338 of the U.S. tax code, a purchaser of 80% or more of the assets
of the target may elect to treat the acquisition as if it were an acquisition of the target’s
assets for tax purposes.
True or False
Answer:
The acquiring firm’s existing loan covenants need not be considered in determining the
feasibility of acquiring the target firm. True or False
Answer:
An equity carve-out is often a prelude to a complete divestiture of a business by the
parent. True or False
Answer:
Although there is substantial evidence that mergers pay off for target firm shareholders
around the time the takeover is announced, shareholder wealth creation in the 3-5 years
following a takeover is often limited.
True or False
Answer:
Investors in LBOs are frequently referred to as financial buyers, because they are
primarily focused on relatively short-to-intermediate-term financial returns. True or
False
Answer:
A firm’s beta is affected by the amount of debt a firm maintains relative to its equity.
True or False
Answer:
Restricted stock is often issued to employees of privately held firms as a significant
portion of their total compensation. Such stock is similar to other types of common
stock except that its sale on the open market is prohibited for a period of time. True or
False
Answer:
Like globally integrated capital markets, segmented capital markets exhibit different
bond and equity prices in different geographic areas for different assets in terms of risk
and maturity. True or False
Answer:
Following an acquisition, long-term contracts with suppliers can generally be broken
without redress. True or False
Answer:
In building a new organization for the combined firms, it is important to start with a
clean sheet of paper and ignore the organizational structures that existed prior to the
merger or acquisition.
True or False
Answer:
U.S. antitrust regulators may approve a horizontal transaction even if it results in the
combined firms having substantial market share if it can be shown that significant cost
efficiencies would result. True or False
Answer:
Growth is often cited as an important factor in acquisitions. The underlying assumption
is that that bigger is
better to achieve scale, critical mass, globalization, and integration. True or False
Answer:
Prior to the Bankruptcy Abuse Protection and Consumer Protection Act of 2005, the
debtor had the exclusive right to file a plan of reorganization for the first 120 days after
it filed the case.
Answer:
Operating synergy consists of economies of scale and scope. Economies of scale refer
to the spreading of variable costs over increasing production levels, while economies of
scope refer to the use of a specific asset to produce multiple related products or
services. True or False
Answer:
Many firms reduce their outstanding debt relative to equity and such changes in the
capital structure distort valuation estimates based on traditional DCF methods. True or
False
Answer:
Transactions involving firms in different countries are complicated by having to deal
with multiple regulatory jurisdictions in specific countries or regions. True or False
Answer:
Resource limitations in developing the acquisition plan include money, borrowing
capacity, as well as management time and skills. True or False
Answer:
While management’s upfront involvement in the acquisition process is crucial,
management should largely disengage from the process until the transaction is
completed. True or False
Answer:
Tangible book value is widely used for valuing financial services companies, where
tangible book value is primarily cash or liquid assets. True or False
Answer:
A leveraged buyout initiated by a firm’s management is called a management buyout.
True or False
Answer:
For simplicity, the market value of common equity can be assumed to grow in line with
the projected growth in a firm’s account receivables. True or False
Answer:
Common size financial statements are among the most commonly used tools to uncover
data irregularities. True or False
Answer:
A merger or acquisition is generally not considered an example of an implementation
strategy. True or False
Answer:
According to fraudulent conveyance laws, if a new company is found by the court to
have been inadequately capitalized to remain viable, the lender could be stripped of its
secured position in the assets of the company or its claims on the assets could be made
subordinate to those of the general creditors. True or False
Answer:
Like divestitures or equity carve-outs, the spin-off generally results in an infusion of
cash to the parent company. True or False
Answer:
A financial buyer may use a holding company structure because they expect to sell the
firm within a relatively short time period. True or False
Answer:
The extent to which compensation plans are integrated depends on whether the two
companies are going to be managed separated or integrated. True or False
Answer:
All of the following are conditions most favorable for reaching settlement outside of
bankruptcy court except for
a. The debtor firm is willing to share all necessary information with its creditors
b. Creditors have confidence in the debtor firm’s management.
c. The debtor firm has relatively few creditors.
d. The debtor firm has many creditors.
e. The period of economic distress afflicting the firm is expected to be short-lived.
Answer:
Which one of the following is generally not a reason for issuing tracking stocks?
a. To give investors a “pure play” in a specific business owned by the parent
b. To create a currency for the business to acquire other firms
c. To enhance the likelihood that the business will be acquired
d. To create an incentive for management receiving the stock
e. To raise capital for the parent or for the business for which the tracking stock is
created
Answer:
ESOPs may be used for which of the following?
a. As an alternative to divestiture
b. To consummate management buyouts
c. As an anti-takeover defense
d. A, B, and C
e. A and B only
Answer:
Which of the following is generally not true of a business alliance?
a. Tax considerations are often the primary motivation for forming the alliance
b. The events triggering dissolution of the alliance are generally spelled out
c. Remaining partners have a right of first refusal if one partner chooses to exit the
partnership
d. One partner is generally responsible for day-to-day operations
e. Allocation of profits and losses follow from the allocation of shares or partnership
interests
Answer:
All of the following are often true of privately held firms except for
a. Financial data is often inaccurate and out of date
b. Internal controls are ineffective
c. Have limited access to capital markets and product distribution channels
d. Are more easily valued than public companies
e. Have limited ability to influence customers, suppliers, unions, and regulators
Answer:
All of the following are true of closing except for
a. Consists of obtaining all necessary shareholder, regulatory, and third party consents
b. Requires significant upfront planning
c. Is rarely subject to last minute disagreements
d. Involves the final review and signing of such documents as the agreement of
purchase and sale, loan agreements (if borrowing is involved), security agreements, etc.
e. Fulfillment of the so-called closing conditions
Answer:
All of the following is true about proxy contests except for
a. Proxy materials must be filed with the SEC immediately following their distribution
to investors
b. The names and interests of all parties to the proxy contest must be disclosed in the
proxy materials
c. Proxy materials may be distributed by firms seeking to change the composition of a
target firm’s board of directors
d. Proxy materials may be distributed by the target firm seeking to influence how their
shareholders vote on a particular proposal
e. Target firm proxy materials must be filed with the SEC.
Answer:
Which of the following is true about purchase accounting?
a. Cash and accounts receivable, reduced for bad debt and returns, are valued at their
values on
the books of the target before the acquisition..
b. Marketable securities are valued at their realizable value after transactions costs.
c. Property, plant and equipment are valued at fair market value.
d. Intangible assets are booked at their appraised values.
e. All of the above.
Answer:
European antitrust policies differ from those in the U.S. in what important way?
a. They focus on the impact on competitors
b. They focus on the impact on consumers
c. They focus on both consumers and competitors
d. They focus on suppliers
e. They focus on consumers, suppliers, and competitors
Answer:
The most important element(s) in selecting a business valuation professional include
which of the following: (Select only one)
a. Overall experience
b. Demonstrated ability in the industry in which the firm to valued competes
c. Degree of specialization
d. Number of professional degrees
e. A and B only
Answer:
Which of the following is not true about the variable growth valuation model?
a. Assumes a high growth period followed by a stable growth period.
b. Assumes that the discount rate during the high and stable growth periods is the same.
c. Is used primarily to evaluate firms in high growth industries.
d. Involves the calculation of a terminal value.
e. The terminal value often comprises a substantial percentage of the total present value
of the firm.
Answer:
Which of the following represent limitations of real options?
a. Key assumptions often are very difficult to quantify, especially volatility
b. Project delays may incur significant opportunity costs
c. Options often are not independent; therefore, selecting one option may foreclose
other options
d. Often requires complex modeling
e. All of the above
Answer:
Which of the following is not true of strategic realignment?
a. May be a result of industry deregulation
b. Is rarely a result of technological change
c. Is a common motive for M&As
d. A and C only
e. Is commonly a result of technological change
Answer:
Firms are likely to achieve significant diversification by investing in all of the following
except for
a. Different but uncorrelated industries in the same country
b. Different companies in the same industry in the same country
c. The same industries in different countries
d. Different industries in different countries.
e. Different companies in different industries in the different countries
Answer:
A “floating or flexible” share exchange ratio is used to
a. Protect the value of the transaction for the acquirer’s shareholders
b. Preserve the value of the transaction for the target’s shareholders
c. Minimize the number of new acquirer shares that must be issued.
d. Increase the value of the transaction for the acquiring firm
e. Increase the value of the transaction for the target firm
Answer:
The tangible book value or equity per share method is applicable primarily to the
following industries:
a. Steel and financial services
b. Distribution and financial services
c. Electric and natural gas utilities
d. Coal and copper mining
e. Space and defense
Answer:
Security provisions and protective covenants are included in loan documents to increase
the likelihood that the interest and principal of outstanding loans will be repaid in a
timely fashion. Which of the following is not true about security provisions and
protective covenants?
a. Security features include the assignment of payments due under a specific contract to
the lender.
b. Negative covenants include limits on the amount of dividends that might be paid
c. Limitations on the amount of working capital that the borrower can maintain.
d. Periodically, financial statements must be sent to lenders.
e. Automatic loan repayment acceleration if the borrower is in default on any loans
outstanding
Answer:
Which one of the following statements accurately describes a merger?
a. A merger transforms the target firm into a new entity which necessarily becomes a
subsidiary of the acquiring firm
b. A new firm is created from the assets and liabilities of the acquirer and target firms
c. The acquiring firm absorbs only the assets of the target firm
d. The target firm is absorbed entirely into the acquiring firm and ceases to exist as a
separate legal entity.
e. A new firm is created holding the assets and liabilities of the target firm and its
former assets only.
Answer:
All of the following are true of the Williams Act except for
a. Consists of a series of amendments to the 1934 Securities Exchange Act
b. Facilitates rapid takeovers over target companies
c. Requires investors acquiring 5% or more of a public company to file a 13(d) with the
SEC
d. Firms undertaking tender offers are required to file a 14(d)-1 with the SEC
e. Acquiring firms initiating tender offers must disclose their intentions and business
plans
Answer:
The following takeover defenses are generally put in place by a firm after a takeover
attempt is
underway.
a. Staggered board
b. Standstill agreement
c. Supermajority provision
d. Fair price provision
e. Reincorporation
Answer:
All of the following are true about the marginal tax rate for the firm except for
a. The marginal tax rate in the U.S. is usually about 40%.
b. The effective tax rate is usually less than the marginal tax rate.
c. Once tax credits have been used and the ability to further defer taxes exhausted, the
effective rate can exceed the
marginal rate at some point in the future.
d. It is critical to use the effective tax rate in calculating after-tax operating income in
perpetuity.
e. It is critical to use the marginal rate in calculating after-tax operating income in
perpetuity.
Answer:
Some of Acme Inc.’s shareholders are very dissatisfied with the performance of the
firm’s current management team and want to gain control of the board. To do so, these
shareholders offer their own slate of candidates for open spaces on the firm’s board of
directors. Lacking the necessary votes to elect these candidates, they are contacting
other shareholders and asking them to vote for their slate of candidates. The firm’s
existing management and board is asking shareholders to vote for the candidates they
have proposed to fill vacant seats on the board. Which of the following terms best
describes this scenario?
a. Leveraged buyout
b Proxy contest
c. Merger
d. Divestiture
e. None of the above
Answer:
Buyers often prefer “friendly” takeovers to hostile ones because of all of the following
except for:
a. Can often be consummated at a lower price
b. Avoid an auction environment
c. Facilitate post-merger integration
d. A shareholder vote is seldom required
e. The target firm’s management recommends approval of the takeover to its
shareholders
Answer:
Which of the following represent common political and economic risks in entering an
emerging market?
a. Excessive local government regulation
b. Confiscatory tax rates
c. Lack of enforcement of contracts
d. Fluctuating exchange rates
e. All of the above
`
Answer:
The first step in establishing a search plan for potential acquisition or merger targets is
to identify the primary screening or selection criteria. True or False
Answer:
BofA Acquires Countrywide Financial Corporation
On July 1, 2008, Bank of America Corp (BofA) announced that it had completed its
acquisition of mortgage lender Countrywide Financial Corp (Countrywide) for $4
billion, a 70 percent discount from the firm’s book value at the end of 2007.
Countrywide originates, purchases, and securitizes residential and commercial loans;
provides loan closing services, such as appraisals and flood determinations; and
performs other residential real estaterelated services. This marked another major (but
risky) acquisition by Bank of America’s chief executive Kenneth Lewis in recent years.
BofA’s long-term intent has been to become the nation’s largest consumer bank, while
achieving double-digit earnings growth. The acquisition would help the firm realize that
vision and create the second largest U.S. bank. In 2003, BofA paid $48 billion for
FleetBoston Financial, which gave it the most branches, customers, and checking
deposits of any U.S. bank. In 2005, BofA became the largest credit card issuer when it
bought MBNA for $35 billion.
The purchase of the troubled mortgage lender averted the threat of a collapse of a major
financial institution because of the U.S. 20072008 subprime loan crisis. U.S. regulators
were quick to approve the takeover because of the potentially negative implications for
U.S. capital markets of a major bank failure. Countrywide had lost $1.2 billion in the
third quarter of 2007. Countrywide’s exposure to the subprime loan market (i.e.,
residential loans made to borrowers with poor or nonexistent credit histories) had
driven its shares down by almost 80 percent from year-earlier levels. The bank was
widely viewed as teetering on the brink of bankruptcy as it lost access to the short-term
debt markets, its traditional source of borrowing.
Bank of America deployed 60 analysts to Countrywide’s headquarters in Calabasas,
California. After four weeks of analyzing Countrywide’s legal and financial challenges
and modeling how its loan portfolio was likely to perform, BofA offered an all-stock
deal valued at $4 billion. The deal valued Countrywide at $7.16 per share, a 7.6
discount to its closing price the day before the announcement. BofA issued 0.18 shares
of its stock for each Countrywide share. The deal could have been renegotiated if
Countrywide experienced a material change that adversely affected the business
between the signing of the agreement of purchase and sale and the closing of the deal.
BofA made its initial investment of $2 billion in Countrywide in August 2007,
purchasing preferred shares convertible to a 16 percent stake in the company. By the
time of the announced acquisition in early January 2008, Countrywide had a $1.3 billon
paper loss on the investment.
The acquisition provided an opportunity to buy a market leader at a distressed price.
The risks related to the amount of potential loan losses, the length of the U.S. housing
slump, and potential lingering liabilities associated with Countrywide’s questionable
business practices. The purchase made BofA the nation’s largest mortgage lender and
servicer, consistent with the firm’s business strategy, which is to help consumers meet
all their financial needs. BofA has been one of the relatively few major banks to be
successful in increasing revenue and profit following acquisitions by “cross-selling” its
products to the acquired bank’s customers. Countrywide’s extensive retail distribution
network enhances BofA’s network of more than 6,100 banking centers throughout the
United States. BofA had anticipated almost $700 million in after-tax cost savings in
combining the two firms. Almost two-thirds of these savings had been realized by the
end of 2010. In mid-2010, BofA agreed to pay $108 million to settle federal charges
that Countrywide had incorrectly collected fees from 200,000 borrowers who had been
facing foreclosure.
Discussion Questions:
1) How did the acquisition of Countrywide fit BofA’s business strategy? Be specific.
What were the key assumptions implicit the BofA’s business strategy? How did the
existence of BofA’s mission and business strategy help the firm move quickly in
acquiring Countrywide?
2) How would you classify the BofA business strategy (cost leadership, differentiation,
focus or some combination)? Explain your answer.
3) Describe what the likely objectives of the BofA acquisition plan might have been. Be
specific. What are the key assumptions implicit in BofA’s acquisition plan? What are
some of the key risks associated with integrating the Countrywide? In addition to the
purchase price, how would you determine BofA’s potential resource commitment in
making this acquisition?
4) What capabilities did the acquisition of FleetBoston Financial and MBNA provide
BofA? How did the Countrywide acquisition complement previous acquisitions?
5) What options to outright acquisition did BofA have? Why do you believe BofA chose
to acquire Countrywide rather than to pursue an alternative strategy?
Answer:
Which of the following is not true of financial synergy?
a. Tends to reduce the firm’s cost of capital
b. Results from a better matching of investment opportunities available to the firm with
internally generated funds
c. Enables larger firms to experience lower average security underwriting costs than
smaller firms
d. Tends to spread the firm’s fixed expenses over increasing levels of production
e. A and B
Answer:
Which of the following are commonly considered alternative models of corporate
governance?
a. Market model
b. Control model
c. Takeover model
d. A & B only
e. A & C only
Answer:
The most common form of payment involving non-U.S. firms engaged in M&As is
a. Stock
b. Cash
c. Cash and stock
d. Debt
e. Cash, stock and debt
Answer:
Which one of the following factors is not considered in calculating the firm’s cost of
equity?
a. risk free rate of return
b. beta
c. interest rate on corporate debt
d. expected return on equities
e. difference between expected return on stocks and the risk free rate of return
Answer:
Answer:
Case Study: Mattel Overpays for the Learning Company
Despite disturbing discoveries during due diligence, Mattel acquired The Learning
Company (TLC), a leading developer of software for toys, in a stock-for-stock
transaction valued at $3.5 billion on May 13, 1999. Mattel had determined that TLC’s
receivables were overstated because product returns from distributors were not
deducted from receivables and its allowance for bad debt was inadequate. A $50 million
licensing deal also had been prematurely put on the balance sheet. Finally, TLC’s brands
were becoming outdated. TLC had substantially exaggerated the amount of money put
into research and development for new software products. Nevertheless, driven by the
appeal of rapidly becoming a big player in the children’s software market, Mattel closed
on the transaction aware that TLC’s cash flows were overstated.
For all of 1999, TLC represented a pretax loss of $206 million. After restructuring
charges, Mattel’s consolidated 1999 net loss was $82.4 million on sales of $5.5 billion.
TLC’s top executives left Mattel and sold their Mattel shares in August, just before the
third quarter’s financial performance was released. Mattel’s stock fell by more than 35%
during 1999 to end the year at about $14 per share. On February 3, 2000, Mattel
announced that its chief executive officer (CEO), Jill Barrad, was leaving the company.
On September 30, 2000, Mattel virtually gave away The Learning Company to rid itself
of what had become a seemingly intractable problem. This ended what had become a
disastrous foray into software publishing that had cost the firm literally hundreds of
millions of dollars. Mattel, which had paid $3.5 billion for the firm in 1999, sold the
unit to an affiliate of Gores Technology Group (GTG) for rights to a share of future
profits. Essentially, the deal consisted of no cash upfront and only a share of potential
future revenues. In lieu of cash, GTG agreed to give Mattel 50 percent of any profits
and part of any future sale of TLC. In a matter of weeks, GTG was able to do what
Mattel could not do in a year. GTG restructured TLC’s seven units into three, put strong
controls on spending, sifted through 467 software titles to focus on the key brands, and
repaired relationships with distributors. GTG also sold the entertainment division.
Discussion Questions:
1) Despite being aware of extensive problems, Mattel proceeded to acquire The
Learning Company. Why? What could Mattel to better protect its interests? Be specific.
2) Why was Gore Technology Group able to do what Mattel could not do in a year.?
Answer:
Cantel Medical Acquires Crosstex International
On August 3, 2005, Cantel Medical Corporation (Cantel), as part of its strategic plan to
expand its infection prevention and control business, announced that it had completed
the acquisition of Crosstex International Incorporated (Crosstex). Cantel is a leading
provider of infection prevention and control products. Crosstex is a privately owned
manufacturer and reseller of single-use infection control products used primarily in the
dental market.
As a consequence of the transaction, Crosstex became a wholly owned subsidiary of
Cantel, a publicly traded firm. For the fiscal year ended April 30, 2005, Crosstex
reported revenues of approximately $47.4 million and pretax income of $6.3 million.
The purchase price, which is subject to adjustment for the net asset value at July 31,
2005, was $74.2 million, comprising $67.4 million in cash and 384,821 shares of Cantel
stock (valued at $6.8 million). Furthermore, Crosstex shareholders could earn another
$12 million payable over three years based on future operating income. Each of the
three principal executives of Crosstex entered into a three-year employment agreement.
James P. Reilly, president and CEO of Cantel, stated, “We continue to pursue our
strategy of acquiring branded niche leaders and expanding in the burgeoning area of
infection prevention and control. Crosstex has a reputation for quality branded products
and seasoned management.” Richard Allen Orofino, Crosstex’s president, noted, “We
have built Crosstex over the past 50 years as a family business and we continue
growing with our proven formula for success. However, with so many opportunities in
our sights, we believe Cantel is the perfect partner to aid us in accelerating our growth
plans.”
Discussion Questions and Answers:
1) What were the primary reasons Cantel wants to acquire Crosstex? Be specific.
2) What do you believe could have been the primary factors causing Crosstex to accept
Cantel’s offer?
3) What factors might cause Crosstex’s net asset value to change between signing and
closing of the agreement of purchase and sale?
4) Speculate why Cantel may have chosen to operate Crosstex as a wholly-owned
subsidiary following closing. Be specific
5) The purchase price consisted of cash, stock, and an earnout. What are some of the
factors that might have determined the purchase price from the seller’s perspective?
From the buyer’s perspective?
Answer:
Vodafone AirTouch Acquires Mannesmann in a Record-Setting Deal
On February 4, 2000, Vodafone AirTouch PLC, the world’s largest wireless
communications company, agreed to buy Mannesmann AG in a $180.0 billion stock
swap. At that time, the deal was the largest transaction in M&A history. The value of
this transaction exceeded the value of the AOL Time Warner merger at closing by an
astonishing $74 billion. Including $17.8 billion in assumed debt, the total value of the
transaction soared to $198 billion. After a protracted and heated contest with
Mannesmann’s management as well as German labor unions and politicians, the deal
finally closed on March 30, 2000. In this battle of titans, Klaus Esser, CEO of
Mannesmann, the German cellular phone giant, managed to squeeze nearly twice as
much money as first proposed out of Vodafone, the British cellular phone powerhouse.
This transaction illustrates the intricacies of international transactions in countries in
which hostile takeovers are viewed negatively and antitakeover laws generally favor
target companies. (See Chapter 3 for a more detailed discussion of antitakeover laws.)
Vodafone AirTouch Corporate Profile
Vodafone AirTouch, itself the product of a $60 billion acquisition of U.S.-based
AirTouch Communications in early 1999, is focused on becoming the global leader in
wireless communication. Although it believes the growth opportunities are much
greater in wireless than in wired communication systems, Vodafone AirTouch has
pursued a strategy in which customers in certain market segments are offered a package
of integrated wireless and wired services. Vodafone AirTouch is widely recognized for
its technological innovation and pioneering creative new products and services.
Vodafone has been a global leader in terms of geographic coverage since 1986 in terms
of the number of customers, with more than 12 million at the end of Vodafone
AirTouch’s operations cover the vast majority of the European continent, as well as
potentially high-growth areas such as Eastern Europe, Africa, and the Middle East.
Vodafone AirTouch’s geographic coverage received an enormous boost in the United
States by entering into the joint venture with Bell Atlantic. Vodafone AirTouch has a 45
percent interest in the joint venture. The JV has 23 million customers (including 3.5
million paging customers). Covering about 80 percent of the U.S. population, the joint
venture offers cellular service in 49 of the top 50 U.S. markets and is the largest
wireless operator in the United States.
Mannesmann’s Corporate Profile
Mannesmann is an international corporation headquartered in Germany and focused on
the telecommunications, engineering, and automotive markets. Mannesmann
transformed itself during the 1990s from a manufacturer of steel pipes, auto
components, and materials-handling equipment into Europe’s biggest mobile-phone
operator. Rapid growth in its telecom activities accounted for much of the growth in the
value of the company in recent years.
Strategic Rationale for the Merger
With Mannesmann, Vodafone AirTouch intended to consolidate its position in Europe
and undertake a global brand strategy. In Europe, Vodafone and Mannesmann would
have controlling stakes in 10 European markets, giving the new company the most
extensive European coverage of any wireless carrier. Vodafone AirTouch would benefit
from the additional coverage provided by Mannesmann in Europe, whereas
Mannesmann’s operations would benefit from Vodafone AirTouch’s excellent U.S.
geographic coverage. The merger would create a superior platform for the development
of mobile data and Internet services.
Mannesmann’s “Just-Say-No” Strategy
What supposedly started on friendly terms soon turned into a bitter battle, involving a
personal duel between Chris Gent, Vodafone’s CEO, and Klaus Esser, Mannesmann’s
CEO. In November 1999, Vodafone AirTouch announced for the first time its intention
to make a takeover bid for Mannesmann. Mannesmann’s board rebuked the overture as
inadequate, noting its more favorable strategic position. After the Mannesmann
management had refused a second, more attractive bid, Vodafone AirTouch went
directly to the Mannesmann shareholders with a tender offer. A central theme in
Vodafone AirTouch’s appeal to Mannesmann shareholders was what it described as the
extravagant cost of Mannesmann’s independent strategy. Relations between Chris Gent
and Klaus Esser turned highly contentious. The decision to undertake a hostile takeover
was highly risky. Numerous obstacles stood in the way of foreign acquirers of German
companies.
Culture Clash
Hostile takeovers of German firms by foreign firms are rare. It is even rarer when it
turns out to be one of the nation’s largest corporations. Vodafone AirTouch’s initial offer
immediately was decried as a job killer. The German tabloids painted a picture of a
pending bloodbath for Mannesmann and its 130,000 employees if the merger took
place. Vodafone AirTouch had said that it was interested in only Mannesmann’s
successful telecommunications operations and it was intending to sell off the company’s
engineering and automotive businesses, which employ about 80 percent of
Mannesmann’s total workforce. The prospect of what was perceived to be a less caring
foreign firm doing the same thing led to appeals from numerous political factions for
government protection against the takeover.
German law at the time also stood as a barrier to an unfriendly takeover. German
corporate law required that 75 percent of outstanding shares be tendered before control
is transferred. In addition, the law allows individual shareholders to block deals with
court challenges that can drag on for years. In a country where hostile takeovers are
rare, public opinion was squarely behind management.
To defuse the opposition from German labor unions and the German government, Chris
Gent said that the deal would not result in any job cuts and the rights of the employees
and trade unions would be fully preserved. Moreover, Vodafone would accept fully the
Mannesmann corporate culture including the principle of codetermination through
employee representation on the Mannesmann supervisory board. Because of these
reassurances, the unions decided to support the merger.
The Offer Mannesmann Couldn’t Refuse
When it became clear that Vodafone’s attempt at a hostile takeover might succeed, the
Mannesmann management changed its strategy and agreed to negotiate the terms for a
friendly takeover. The final agreement was based on an improved offer for
Mannesmann shareholders to exchange their shares in the ratio of 58.96 Vodafone
AirTouch shares for 1 Mannesmann share, an improvement over the previous offer of
53.7 to Furthermore, the agreement defined terms for the integration of the two
companies. For example, Dusseldorf was retained as one of two European headquarters
with responsibility for Mannesmann’s existing continental European mobile and
fixed-line telephone business. Moreover, with the exception of Esser, all Mannesmann’s
top managers would remain in place.
Epilogue
Throughout the hostile takeover battle, Vodafone AirTouch said that it was reluctant to
offer Mannesmann shareholders more than 50 percent of the new company; in sharp
contrast, Mannesmann said all along that it would not accept a takeover that gives its
shareholders a minority interest in the new company. Esser managed to get
Mannesmann shareholders almost 50 percent ownership in the new firm, despite
Mannesmann contributing only about 35 percent of the operating earnings of the new
company.
Vodafone, currently the world’s largest (by revenue) cell phone service provider, has
experienced continuing share price erosion amidst intensifying price erosion from
competition in western European markets and new technologies, such as Internet
calling, that are slowing revenue growth and shrinking profit margins. Shares in
Vodafone have underperformed the UK market by 40 percent since the firm acquired
Mannesmann. In 2006, the company recorded an impairment charge of $49 billion. This
charge reflected the lower current value of the Mannesmann assets acquired by
Vodafone in 2000, effectively making it official that the firm substantially overpaid for
Mannesmann.
While hostile bids were relatively rare at the time of the VodafoneMannesmann
transaction, they have become increasingly more common in recent years. Since 2002,
Europe has seen more hostile or unsolicited deals than in the United States. In part,
Europe is simply catching up to the United States after many years in which there were
virtually no hostile bids. For years, national governments and regulators in Europe had
been able to deter easily cross-border deals that they felt could threaten national
interests, even though European Union rules are supposed to allow a free and fair
market within its jurisdiction. However, the rise of big global rivals, as well as a rising
tide of activist investors, is making companies more assertive.
Case Study Discussion Questions:
1) Who do you think negotiated the best deal for their shareholders, Chris Gent or Klaus
Esser? Explain your answer in terms of short and long-term impacts.
2) Both firms were pursuing a similar strategy of expanding their geographic reach.
Does this strategy make sense? Why/why not? What are the risks associated with this
strategy?
3) Do you think the use of all stock, rather than cash or a combination of cash and
stock, to acquire Mannesmann helped or hurt Vodafone AirTouch’s shareholders?
Explain your answer.
4) Do you think that Vodafone AirTouch conceded too much to the labor unions and
Mannesmann’s management to get the deal done? Explain your answer.
5) What problems do you think Vodafone AirTouch might experience if they attempt to
introduce what they view as “best operating practices” to the Mannesmann culture?
How might these challenges be overcome? Be specific.
Answer:
Case Study. Sony Buys MGM
Sony’s long-term vision has been to create synergy between its consumer electronics
products and music, movies, and games. Sony, which bought Columbia Pictures in
1989 for $3.4 billion, had wanted to control Metro-Goldwyn-Mayer’s film library for
years, but it did not want to pay the estimated $5 billion it would take to acquire it. On
September 14, 2004, a consortium, consisting of Sony Corp of America, Providence
Equity Partners, Texas Pacific Group, and DLJ Merchant Banking Partners, agreed to
acquire MGM for $4.8 billion, consisting of $2.85 billion in cash and the assumption of
$2 billion in debt. The cash portion of the purchase price consisted of about $1.8 billion
in debt and $1 billion in equity capital. Of the equity capital, Providence contributed
$450 million, Sony and Texas Pacific Group $300 million, and DLJ Merchant Banking
$250 million.
The combination of Sony and MGM will create the world’s largest film library of about
7,600 titles, with MGM contributing about 54 percent of the combined libraries. Sony
will control MGM and Comcast will distribute the films over cable TV. Sony will shut
down MGM’s film making operations and move all operations to Sony. Kirk Kerkorian,
who holds a 74 percent stake in MGM, will make $2 billion because of the transaction.
The private equity partners could cash out within three-to-five years, with the
consortium undertaking an initial public offering or sale to a strategic investor. Major
risks include the ability of the consortium partners to maintain harmonious relations and
the problematic growth potential of the DVD market.
Sony and MGM negotiations had proven to be highly contentious for almost five
months when media giant Time Warner Inc. emerged to attempt to satisfy Kerkorian’s
$5 billion asking price. The offer was made in stock on the assumption that Kerkorian
would want a tax-free transaction. MGM’s negotiations with Time Warner stalled
around the actual value of Time Warner stock, with Kerkorian leery about Time
Warner’s future growth potential. Time Warner changed its bid in late August to an all
cash offer, albeit somewhat lower than the Sony consortium bid, but it was more
certain. Sony still did not have all of its financing in place. Time Warner had a
“handshake agreement” with MGM by Labor Day for $11 per share, about $.25 less
than Sony’s.
The Sony consortium huddled throughout the Labor Day weekend to put in place the
financing for a bid of $12 per share. What often takes months to work out in most
leveraged buyouts was hammered out in three days of marathon sessions at law firm
Davis Polk & Wardwell. In addition to getting final agreement on financing
arrangements including loan guarantees from J.P. Morgan Chase & Company, Sony was
able to reach agreement with Comcast to feature MGM movies in new cable and
video-on-demand TV channels. This distribution mechanism meant additional revenue
for Sony, making it possible to increase the bid to $12 per share. Sony also offered to
make a $150 non-refundable cash payment to MGM. As a testament to the adage that
timing is everything, the revised Sony bid was faxed to MGM just before the beginning
of a board meeting to approve the Time Warner offer.
Discussion Questions:
1) Do you believe that MGM is an attractive LBO candidate? Why? Why not?
2) In what way do you believe that Sony’s objectives might differ from those of the
private equity investors making up the remainder of the consortium? How might such
differences affect the management of MGM? Identify possible short-term and long-term
effects.
3) How did Time Warner’s entry into the bidding affect pace of the negotiations and the
relative bargaining power of MGM, Time Warner, and the Sony consortium?
4) What do you believe were the major factors persuading the MGM board to accept the
Revised Sony bid? In
your judgment, do these factors make sense? Explain your answer.
Answer: