Chapter 11: Structuring the Deal:
Payment and Legal Considerations
Answers to End of Chapter Discussion Questions
11.1 What are the advantages and disadvantages of a purchase of assets from the perspective of the buyer and seller?
Answer: The advantages of an asset purchase from the standpoint of the buyer are that it allows for the targeted
purchase of assets, asset write-up, allows for the possible re-negotiation of union contracts and benefits
11.2 What are the advantages and disadvantages of a purchase of stock from the perspective of the buyer and seller?
Answer: The advantages to the buyer of a stock purchase are that assets transfer automatically; it may avoid the
need to get consents to assignment for contracts, less documentation, the acquisition of NOLs and tax credits, and
11.3 What are the advantages and disadvantages of a statutory merger?
11.4 What are the reasons some acquirers choose to undertake a staged or multi-step takeover?
11.5 What forms of acquisition represent common alternatives to a merger? Under what circumstances might these
alternative structures be employed?
Answer: Direct purchases of target assets or stock represent common alternatives to a merger. A buyer may
choose to buy assets only in order to purchase those assets it wants and to avoid seller liabilities. Such a
11.6 Comment of the following statement. A premium offered by a bidder over a target’s share price is not necessarily
a fair price; a fair price is not necessarily an adequate price?
Answer: An offer price could objectively be viewed as fair based on such objective criteria as the premiums paid
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11.7 In early 2008, a year marked by turmoil in the global credit markets, Mars Corporation was able to negotiate a
reverse breakup fee structure in its acquisition of Wrigley Corporation. This structure allowed Mars to walk away
from the transaction at any time by paying a $1 billion fee. Speculate as to the motivation behind Mars and
Wrigley negotiating such a fee structure?
Answer: 2008 represented a period in which it often was difficult to get financing for transactions. The breakup
fee, which normally applies to the seller to discourage them from seeking another buyer once a contract is
11.8 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. Despite being aware of extensive problems, Mattel
proceeded to acquire The Learning Company. Why? What could Mattel to better protect its interests? Be specific.
Answer: Answer: Mattel was more focused on the trend toward software-based toys. Mattel thought the additional
`11.9 Describe the conditions under which an earnout may be most appropriate?
11.10 In late 2008, Deutsche Bank announced that would buy the commercial banking assets (including a number of
branches) of Netherland’s ABN Amro for $1.13 billion. What liabilities, if any, would Deutsche Bank have to (or
want to) assume? Explain your answer.
Answer: An asset purchase in theory enables the buyer to avoid assuming responsibility for any liabilities. In
Solutions to Chapter Case Study Questions
Disney’s Bold Move in the Direct to Consumer Video Business
Discussion Questions and Answers:
1. What is the form of acquisition used in this deal? What are the advantageous and disadvantageous of this deal structure?
Answer: From a legal perspective, the form of acquisition reflects what is being acquired (stock or assets) and how
ownership is conveyed. The form of acquisition employed by Disney is an asset purchase in exchange for cash and
stock which involved the purchase by Disney of selected Fox assets. Disney also assumed certain Fox liabilities.
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2. What is the form of payment used to acquire the Fox entertainment assets? Speculate why the form may have been
used in this instance.
Answer: The form of payment is the consideration offered by the acquirer to the target’s shareholders and in the
Disney-Fox deal it is a combination of cash and stock for Fox shares. Given the size of the purchase price, Disney may
3. Would you consider Disney’s purchase of Fox’s entertainment assets as a vertical or horizontal takeover? Explain your
answer.
4. What is the purpose of a collar arrangement? Is the collar employed by Disney a fixed share exchange ratio or a fixed
value agreement? How does the collar arrangement used in this deal impact Disney and Fox shareholders?
Answer: Unlike all cash deals, the purpose of a collar arrangement is to minimize, large fluctuations in the acquirer’s
share price which can threaten to change the terms of the deal or lead to its termination in share exchanges. Disney
Examination Questions and Answers
True/False Questions: Answer True or False to the following questions:
1. Deal structuring is fundamentally about satisfying as many of the primary objectives of the parties involved and
deciding how risk will be shared. True or False
2. The acquisition vehicle is the legal structure used to acquire the target. True or False
3. Such legal structures as holding company, joint venture, and limited liability corporations are suitable only for
acquisition vehicles but not post closing organizations. True or False
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4. Employee stock ownership plans cannot be legally used to acquire companies. True or False
5. Form of payment refers only to the acquirer’s common stock used to make up the purchase price paid to target
shareholders. True or False
6. The appropriate deal structure is that which satisfies, without regard to risk, as many of the primary objectives of
the parties involved as necessary to reach overall agreement. True or False
7. Form of payment may consist of something other than cash, stock, or debt such as tangible and intangible assets.
True or False
8. If the form of acquisition is a statutory merger, the seller retains all known, unknown or contingent liabilities.
True or False
9. The form of payment does not affect whether a transaction is taxable to the seller’s shareholders. True or False
10. The assumption of seller liabilities by the buyer in a merger may induce the seller to demand a higher selling price.
True or False
11. The acquirer may reduce the total cost of an acquisition by deferring some portion of the purchase price. True or
False
12. A holding company structure is the preferred post-closing organization if the acquiring firm is interested in
integrating the target firm immediately following acquisition. True or False
13. The acquired company should be fully integrated into the acquiring company if an earn-out is used to consummate
the transaction. True or False
14. When buyers and sellers cannot reach agreement on price, other mechanisms can be used to close the gap. These
include balance sheet adjustments, earn-outs, rights to intellectual property, and licensing fees. True or False
15. In a balance sheet adjustment, the buyer increases the total purchase price by an amount equal to the decrease in
net working capital or shareholders’ equity of the target company. True or False
16. Because they can be potentially so lucrative to sellers, earn-outs are sometimes used to close the gap between what
the seller wants and what the buyer might be willing to pay. True or False
17. Earn-outs tend to shift risk from the seller to the buyer in that a higher price is paid only when the seller has met or
exceeded certain performance criteria. True or False
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18. Rights to intellectual property, royalties from licenses and employment agreements are often used to close the gap
on price between what the seller wants and what the buyer is willing to pay because the income generated is tax
free to the recipient. True or False
19. Asset purchases require the acquiring company to buy all or a portion of the target company’s assets and to assume
at least some of the target’s liabilities in exchange for cash or stock. True or False
20. Stock purchases involve the exchange of the target’s stock for cash, debt, stock of the acquiring company, or some
combination. True or False
21. Sellers may find a sale of assets attractive because they are able to maintain their corporate existence and therefore
ownership of tangible assets not acquired by the buyer and intangible assets such as licenses, franchises, and
patents. True or False
22. In a statutory merger, only assets and liabilities shown on the target firm’s balance sheet automatically transfer to
the acquiring firm. True or False
23. Statutory mergers are governed by the statutory provisions of the state in which the surviving entity is chartered.
True or False
24. Staged transactions may be used to structure an earn-out, to enable the target to complete the development of a
technology or process, to await regulatory approval, to eliminate the need to obtain shareholder approval, and to
minimize cultural conflicts with the target. True or False
25. Decisions made in one area of a deal structure rarely affect other areas of the overall deal structure.
True or False
26. The acquisition vehicle refers to the legal structure created to acquire the target company. True or False
27. A post-closing organization must always be a C corporation. True or False
28. A holding company is an example of either an acquisition vehicle or post-closing organization. True or False
29. The forward triangular merger involves the acquisition subsidiary being merged with the target and the target
surviving. True or False
30. The reverse triangular merger involves the acquisition subsidiary being merged with the target and subsidiary
surviving. True or False
31. By acquiring the target firm through the JV, the corporate investor limits the potential liability to the extent of their
investment in the JV corporation. True or False
32. ESOP structures are rarely used vehicles for transferring the owner’s interest in the business to the employees in
small, privately owned firms. True or False
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33. Non-U.S. buyers intending to make additional acquisitions may prefer a holding company structure.
True or False
34. If the acquirer is interested in integrating the target business immediately following closing, the holding structure
may be most desirable. True or False
35. Decision-making in JVs and partnerships is likely to be faster than in a corporate structure. Consequently, JVs and
partnerships are more commonly used if speed is desired during the post-closing integration. True or False
36. A corporate structure is the preferred post-closing organization when an earn-out is involved in acquiring the
target firm. True or False
37. In an earnout agreement, the acquirer must directly control the operations of the target firm to ensure the target
firm adheres to the terms of the agreement. True or False.
38. When the target is a foreign firm, it is often appropriate to operate it separately from the rest of the acquirer’s
operations because of the potential disruption from significant cultural differences. True or False
39. 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
40. A partnership or JV structure may be appropriate acquisition vehicle if the risk associated with the target firm is
believed to be high. True or False
41. Sellers who are structured as C corporations generally prefer to sell assets for cash than acquirer stock because of
more favorable tax treatment. True or False
42. Whether cash is the predominant form of payment will depend on a variety of factors. These include the acquirer’s
current leverage, potential near-term earnings per share dilution of issuing new shares, the seller’s preference for
cash or acquirer stock, and the extent to which the acquirer wishes to maintain control over the combined firms.
True or False
43. Acquirer stock is a rarely used form of payment in large transactions. True or False
44. The seller’s preference for stock or cash will reflect their desire for liquidity, the attractiveness of the acquirer’s
shares, and whether the seller is organized as a joint venture corporation. True or False
45. A bidder may choose to use cash rather than to issue voting shares if the voting control of its dominant shareholder
is threatened as a result of the issuance of voting stock to acquire the target firm. True or False
46. Using stock as a form of payment is generally less complicated than using cash from the buyer’s point of view.
True or False
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47. The use of convertible preferred stock as a form of payment provides some downside protection to sellers in the
form of continuing dividends, while providing upside potential if the acquirer’s common stock price increases
above the conversion point. True or False
48. Bidders may use a combination of cash and non-cash forms of payment as part of their bidding strategies to
broaden the appeal to target shareholders. True or False
49. The risk to the bidder associated with bidding strategy of offering target firm shareholders multiple payment
options is that the range of options is likely to discourage target firm shareholders from participating in the
bidder’s tender offer for their shares. True or False.
50. The multiple option bidding strategy introduces a certain level of uncertainty in determining the amount of cash
the acquirer will have to ultimately pay out to target firm shareholders, since the number choosing the all cash or
cash and stock option is not known prior to the completion of the tender offer. True or False
51. Balance sheet adjustments most often are used in purchases of stock when the elapsed time between the agreement
on price and the actual closing date is short. True or False
52. Buyers and sellers generally view purchase price adjustments as a form of insurance against any erosion or
accretion in assets, such as plant and equipment. True or False.
53. An earnout agreement is a financial contract whereby a portion of the purchase price of a company is to be paid to
the buyer in the future contingent on the realization of a previously agreed upon future earnings level or some
other performance measure. True or False
54. The value of an earnout payment is never subject to a cap so as not to discourage the seller from working
diligently to exceed the payment threshold. True or False
55. Earnouts tend to shift risk from the seller to the acquirer in that a higher price is paid only when the seller or
acquired firm has met or exceeded certain performance criteria. True of False
56. Offering sellers consulting contracts to defer a portion of the purchase price is illegal in most states. True or False
57. Collar agreements provide for certain changes in the exchange ratio contingent on the level of the acquirer’s share
price around the effective date of the merger. True or False
58. A fixed exchange collar agreement may involve a fixed exchange ratio as long as the acquirer’s share price
remains within a narrow range, calculated as of the effective date of the signing of the agreement of purchase and
sale. True or False
59. Both the acquirer and target boards of directors have a fiduciary responsibility to demand that the merger terms be
renegotiated if the value of the offer made by the bidder changes materially relative to the value of the target’s
stock or if their has been any other material change in the target’s operations. True or False
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60. Stock purchases involve the exchange of the target’s stock for acquirer stock only. True or False.
61. If an acquirer buys most of the operating assets of a target firm, the target generally is forced to
liquidate its remaining assets and pay the after-tax proceeds to its shareholders. True or False
Multiple Choice (Circle only one)
1. Which of the following should be considered important components of the deal structuring process?
a. Legal structure of the acquiring and selling entities
b. Post closing organization
c. Tax status of the transaction
d. What is being purchased, i.e., stock or assets
e. All of the above
2. Which of the following may be used as acquisition vehicles?
a. Partnership
b. Limited liability corporation
c. Corporate shell
d. ESOP
e. All of the above
3. 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.
4. Which of the following is not a characteristic of a joint venture corporation?
a. Profits and losses can be divided between the partners disproportionately to their ownership shares.
b. New investors can become part of the JV corporation without having to dissolve the original JV corporate
structure.
c. The JV corporation can be used to acquire other firms.
d. Investors’ liability is limited to the extent of their investment.
e. The JV corporation may be subject to double taxation.
5. 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.
6. Which of the following is a disadvantage of balance sheet adjustments?
a. Protects buyer from eroding values of receivable before closing
b. Audit expense
c. Protects seller from increasing values of receivables before closing
d. Protects from decreasing values of inventories before closing
e. Protects seller from increasing values of inventories before closing
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7. 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
8. Which of the following is not true of mergers?
a. Liabilities and assets transfer automatically
b. May be subject to transfer taxes.
c. No minority shareholders remain.
d. May be time consuming due to need for shareholder approvals.
e. May have to pay dissenting shareholders appraised value of stock
9. Which of the following is true of collar arrangements?
a. A fixed or constant share exchange ratio is one in which the number of acquirer shares exchanged for
each target share is unchanged between the signing of the agreement of purchase and sale and closing.
b. Collar agreements provide for certain changes in the exchange ratio contingent on the level of the
acquirer’s share price around the effective date of the merger.
c. A fixed exchange collar agreement may involve a fixed exchange ratio as long as the acquirer’s share
price remains within a narrow range, calculated as of the effective date of merger.
d. A fixed payment collar agreement guarantees that the target firm shareholder receives a certain dollar
value in terms of acquirer stock as long as the acquirer’s stock remains within a narrow range, and a fixed
exchange ratio if the acquirer’s average stock price is outside the bounds around the effective date of the
merger.
e. All of the above.
10. Which of the represent disadvantages of a cash purchase of target stock?
a. Buyer responsible for known and unknown liabilities.
b. Buyer may avoid need to obtain consents to assignments on contracts.
c. NOLs and tax credits pass to the buyer.
d. No state sales transfer, or use taxes have to be paid.
e. Enables circumvention of target’s board in the event a hostile takeover is initiated.
11. The form of acquisition refers to which of the following:
a. Tax status of the transaction
b. Acquisition vehicle
c. What is being acquired, i.e., stock or assets
d. Form of payment
e. How the transaction will be displayed for financial reporting purposes
12. The tax status of the transaction may influence the purchase price by
a. Raising the price demanded by the seller to offset potential tax liabilities
b. Reducing the price demanded by the seller to offset potential tax liabilities
c. Causing the buyer to lower the purchase price if the transaction is taxable to the target firm’s shareholders
d. Forcing the seller to agree to defer a portion of the purchase price
e. Forcing the buyer to agree to defer a portion of the purchase price
13. The seller’s insistence that the buyer agree to purchase its stock may encourage the buyer to
a. offer a lower purchase price because it is assuming all of the target firm’s liabilities
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b. offer a higher purchase price because it is assuming all of the target firm’s liabilities
c. offer a lower purchase price because it is receiving all of the target’s tax benefits
d. use its stock rather than cash to purchase the target firm
e. use cash rather than its stock to purchase the target firm
14. A holding company may be used as a post-closing organizational structure for all but which of the following
reasons?
a. A portion of the purchase price for the target firm included an earn-out
b. The target firm has a substantial amount of unknown liabilities
c. The acquired firm’s culture is very different from that of the acquiring firm
d. Profits from operations are not taxable
e. The transaction involves a cross border transaction
15. Form of payment can involve which of the following:
a. Cash
b. Stock
c. Cash and stock
d. Rights, royalties and fees
e. All of the above
16. A “floating or flexible share exchange ratio is used primarily to
a. Protect the value of the transaction for the acquirer’s shareholders
b. Protect 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 for the acquiring firm
e. Increase the value for the target firm
Case Study Short Essay Examination Questions
GETTING TO YES ON PRICE
___________________________________________________________________________
Key Points:
• A well-managed auction can maximize the target’s shareholder value.
• Multiple well financed and committed bidders can drive up the purchase price substantially, especially when the
initial bidder is clearly eager to make the deal.
• Common bidder and target firm negotiating tactics are to make bids public and to pressure the other party to act
quickly.
• Multiple rounds of offers as well as changes in the composition of the offer between cash and stock are often
necessary to get the deal done.
______________________________________________________________________
After a grueling six months, Houston Texas based Westlake Chemical (Westlake) sealed the deal it had so aggressively
sought by acquiring polyvinyl chloride (PVC) producer Axiall Corp (Axiall). The combination created the second largest
PVC manufacturer in North America and the third largest chlor-alkali producer. At $33 per share, the all-cash deal valued
Axiall’s equity at $2.4 billion; including assumed debt of $1.4 billion, the enterprise value rose to $3.8 billion. Westlake
saw Axiall as key to its growth strategy by giving Westlake greater scale, cost and revenue synergies, and a better balance
between its olefins and vinyl’s businesses. Anticipated synergies are expected to reach $100 million annually by the fourth
year following closing.
When Westlake’s initial merger proposal was rejected on January 22, 2016, the friendly bid deteriorated into a hostile
takeover attempt. Westlake threatened a proxy battle to remove Axiall’s entire board, as Axiall searched for a White Knight
to counter Westlake. The negotiation was characterized by a series of bids and counterbids amid an auction atmosphere.
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Axiall shareholders saw the January 21st closing price for their stock balloon by almost 250% by the time an agreement
was reached on June 10th.
On January 21, 2016, Albert Chao, Westlake’s President and CEO, contacted Mr. Mann requesting a meeting in which
Westlake offered to acquire Axiall for $20 per share consisting of $11 in cash and .1967 of a share of Westlake common
stock. Westlake confirmed its proposal in a letter requesting a response by January 28th.
Axiall’s board met on January 27th along with their financial and legal advisors. The board instructed Mr. Mann to tell
Westlake’s Mr. Chao that they would not engage in further talks on the basis of Westlake’s initial proposal. Within two
weeks, Westlake notified Axiall and publicly disclosed that it had nominated a slate of directors to replace Axiall’s entire
board. In early March, Axiall instructed its financial advisors to contact other potential bidders. At the same time, the board
authorized Mr. Mansfield, Axiall’s Chairman of the Board, and an independent board member to contact Westlake’s Mr.
Chao for a meeting to outline a process for further discussing Westlake’s proposal. In that meeting, Axiall’s representatives
informed Mr. Chao that their board was willing to sign a confidentiality agreement and provide Westlake with proprietary
information. The intent of the release of such information was to convince Westlake that Axiall was worth more, much
more.
By mid-March, the two firms signed a confidentiality agreement with standstill provisions permitting Westlake to make
acquisition proposals and to pursue the election of individuals it had nominated to serve on Axial’s board. However, the
agreement prohibited Westlake from acquiring Axiall stock or making a tender offer for Axiall shares before September 15,
2016. For the next two weeks, Westlake conducted limited due diligence on Axiall.
PORTFOLIO REVIEW REDEFINES BREAKUP STRATEGY
FOR NEWLY FORMED DOWDUPONT CORPORATTION
Case Study Objectives: To illustrate
• The role activist investors play in forcing boards to restructure their firms,
1 The source for this information is found in Axiall’s Definitive Proxy Statement (Schedule 14A) filed with the SEC in June
2016.
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• The challenges of implementing complex breakup strategies, and
• That simply splitting a firm apart does not ensure improved financial performance for the parent or the spun off
units.
U.S. based chemical conglomerates Dow Chemical Inc. (Dow) and E. I. du Pont de Nemours and Company (DuPont)
merged to form DowDuPont on September 1, 2017. DowDuPont is the second largest chemical company in the world,
behind BASF of Germany, with more than $92 billion in annual revenue. Originally announced on December 11, 2015, the
ultimate goal of the merger was to restructure the combined firms into three focused businesses, achieve billions in cost
savings, and to subsequently spin them off tax-free to shareholders.
The motivation for combining Dow and DuPont reflected a combination of factors including the effects of slumping
commodity prices, weak demand for agricultural chemicals, and headwinds from a stronger dollar. By combining the firms,
a common board and management could reorganize the various product lines into businesses that were more clearly focused
on a common set of target markets, realizing substantial ongoing cost savings by eliminating duplicate overhead, and
growing sales by increasing penetration in targeted markets.
Dow is known for plastics and agricultural chemicals and DuPont for technical innovations as Kevlar and Teflon.
DuPont has suffered from intense competition in agriculture from Monsanto, especially in its corn seed business. In
addition to agriculture, the firm’s business portfolio included electronics and communication, and complex materials. Dow
Chemical’s business portfolio was divided into two groups: specialty and basic chemicals. The firm has increased its focus
on specialty chemicals which carry higher prices than basic chemicals whose profitability is subject to the volatility of the
energy markets.
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transition period leading up to the spinoffs, the resulting uncertainty, stress, anger, frustration, and confusion are likely to
result in significant attrition. While such attrition may be desired from a cost savings standpoint, some of those employees
leaving will be critical for the ongoing operations of the business. In businesses that have been as integrated as Dow and
DuPont, layers of management will be stripped away. Management turnover typically tends to be substantially higher
during this period leading to confusion among reporting relationships and disjointed communication. Also, it is likely that
management will be stretched thin as executives are asked to maintain or improve the performance of their business units
while implementing the logistics required for the spinoffs.
Complexities arise when the unit has formal relationships with other operating units including sharing common support
functions such as finance, human resources, and accounting and intra-company purchase or sale arrangements. No one unit
should be overburdened with debt and each business should have sufficient cash on hand to remain solvent. A common
strategy is for the spin-off company to issue new debt prior to the spin-off with the cash proceeds use to pay off any long-
term debt and liabilities not allocated to any of the three businesses.
When a subsidiary has been operated as a standalone business, its current management usually becomes the management
team after the spin-off and its employees generally remain with the spin-off company. In spin-offs of divisions that have not
been operated on a standalone basis, management issues are more challenging. Existing managers of the spin-off company
often have responsibilities that overlap with operations that have been allocated to other spin-off companies.
Ultimately, the success or failure of the DowDuPont breakup strategy may rest on the competitive conditions and
growth outlook for the markets served by each of the three businesses. Each business competes in commodity markets:
those characterized by cyclical demand and intense price competition. Enabling each of the businesses to cut costs will
allow for some margin improvement, assuming unchanged selling prices. More focused businesses can enable management
Discussion Questions and Answers:
1. In what way have activist investors assumed the role of hostile takeovers in influencing underperforming
managers?
Answer: Hostile takeovers in years past were undertaken to replace boards and management of firms that were not
living up to investor expectations. However, they tended to be costly and problematic if contested by the target
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2. Do you think that the restructuring strategy set in motion with the creation of DowDuPont makes sense? What
alternative was available to both Dow and DuPont had they remained independent? Be specific.
Answer: The strategy to maximize shareholder value has been lengthy and complicated involving the
following steps: a. Merger of equals of Dow and DuPont and b. the subsequent breakup into three separate
3. Speculate as to why the deal was structured as a merger of equals. What are the advantages and disadvantages of
such a structure? Be specific.
Answer: While relatively rare, the use of a merger of equals’ structure may have been the only way for the two
firms to get the deal done. Senior management often is loath to admit publicly that they have ceded
4. What are the key assumptions DowDuPont is making in arguing the merger followed by the spin-off of three
businesses makes sense?
Answer: Key assumptions with respect to the merger include the ability to realize $3 billion in cost
synergies within two years following closing and another $1 billion in revenue related synergies and that
regulatory approval could be obtained without having to divest substantial portions of the firm. The latter factor
5. What is the form of payment and the form of acquisition used in this deal? What are the advantageous and
disadvantageous of the form of payment and acquisition used in this deal?
Answer: The form of payment is the exchange of stock in the new company for Dow and DuPont shares. The form
of acquisition is a merger in which all assets and liabilities, known and unknown, automatically transfer to the new
company by rule of law. The use of stock also makes the deal tax-free to shareholders (until they sell their shares)
6. In the deal, Dow shareholders will receive a fixed exchange ratio of 1.00 share of DowDuPont for each Dow
share, and DuPont shareholders will receive a fixed exchange ratio of 1.28 shares in DowDuPont for each
DuPont share. Dow and DuPont shareholders will each own approximately 50 percent of the combined
company, excluding preferred shares. Common shares outstanding at Dow and DuPont at the time of the
announcement were 1.160 billion and .876 billion respectively. Using this information, show how the postclosing
ownership distribution can be determined. How might these fixed share exchange ratios have been determined
during the negotiation of the deal?
Answer:
Total new DowDuPont Shares outstanding after closing = 1.00 x 1.160 + 1.28 x .876
= 1.160 + 1.121
7. Dow’s price per share on December 11, 2015 was $54.91 and DuPont’s was $74.55. Dow shares outstanding were
1.16 billion and DuPont’s outstanding shares were .876 billion. Assume anticipated annual cost synergies are $ 3.0
billion in perpetuity and DowDuPont’s cost of capital is 10%. What is DowDuPont’s total market cap excluding
synergy? What is the market cap including synergy using the zero growth method of valuation (see Chapter 7)?
Answer:
Dow’s market cap on 12.11.15 without synergy = $54.91 x 1.16 = $63.70billion
DOW CHEMICAL AND DUPONT COMBINE IN A MERGER OF EQUALS
Key Points:
• Successful deal structures reflect the highest priority needs of the parties involved
• Activist investors often play a key role in forcing boards and senior management to restructure their firms
• Financial engineering often is used to restructure underperforming firms
Two of the largest and oldest firms in the U.S. chemical industry announced that they had reached an agreement to merge
on December 11, 2015. The merger would result in the new firm having a combined market value of more than $130
billion. Postclosing, the new firm would be named DowDuPont. The all-stock deal was motivated by a combination of
factors including the effects of slumping commodity prices, weak demand for agricultural chemicals, and headwinds from a
stronger dollar.
DowDuPont would be the second largest chemical company in the world, behind BASF of Germany, with more than
$92 billion in annual revenue. In an unusual display of financial restructuring linked to the merger, the deal is to be
followed by a breakup of the new company into three businesses: agricultural chemicals, specialty products, and materials.
The split-up of the new firm into three publicly traded companies is expected to increase their focus on their served markets
and in turn improve their competitiveness, sales growth, and profit margins due to expense reduction.
that the firms needed to trim costs and improve operating efficiency as well as to buy back shares and increase dividends.
Win or lose, the activists had made their voices heard.
The combination of Dow and DuPont was billed as a merger of equals. Under the terms of the transaction, Dow
shareholders are to receive a fixed exchange ratio of one share of DowDuPont for each Dow share, and DuPont
shareholders would receive a fixed exchange ratio of 1.282 shares in DowDuPont for each DuPont share. At closing, Dow
and DuPont shareholders would each own approximately 50% of the combined company. DuPont’s Chair and CEO
Edward Breen would retain his title at the new firm, while Dow’s CEO Andrew N. Liveris would become Executive
If approved by the regulators, postclosing implementation will be enormously challenging. Within two years following
closing, DowDuPont is expected to realize cost synergies annually totaling $3 billion in expenses. During the same
timeframe, the new firm must undergo extensive reorganization in order to create the proposed new subsidiaries that are to
be spun off to shareholders. Given the probable interrelationships between and among the various operations, this is likely
to prove to be a gargantuan task.
Reorganization involves moving people around, trimming overhead, allocating debt, renegotiating customer and supply
agreements, disentangling jointly used information technology systems, and ensuring that the eventual spun off units will
Tax considerations are a primary driver of the deal. The tax-free treatment of the spin-offs is viewed as a highly tax
efficient alternative to selling selected businesses which could result in significant taxable gains to Dow and DuPont.
Structured as a merger of equals in a share for share exchange, the DowDuPont deal also is tax free to shareholders.
Typically, companies that have been through a change of control are liable to pay capital gains taxes on subsequent spin-
offs, under section 355 of the U.S. Internal Revenue Code (see Chapter 16 for more detail). If both companies, however, do
not formally undergo a change of control, the spin-offs can be tax-free. After their merger, Dow and DuPont plan to argue
that no change of control will have occurred by structuring their initial deal as a merger of equals. Bolstering their view that
a change of control has not occurred is that the two companies have many shareholders in common. Vanguard Group Inc.,
State Street Global Advisors, Capital World Investors and BlackRock Inc. are, in that order, the top holders of both
companies’ stock.3
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Discussion Questions and Answers:
1. Speculate as to why the deal was structured as a merger of equals. What are the advantages and disadvantages of such a
structure? Be specific.
Answer: While relatively rare, the use of a merger of equals structure may have been the only way for the two firms to
2. What are the key assumptions DowDuPont is making in arguing the merger followed by the spin-off of three
businesses makes sense?
Answer: Key assumptions with respect to the merger include the ability to realize $3 billion in cost synergies within
two years following closing and another $1 billion in revenue related synergies and that regulatory approval could be
3. What is the form of payment and the form of acquisition used in this deal? What are the advantageous and
disadvantageous of the form of payment and acquisition used in this deal?
Answer: The form of payment is the exchange of stock in the new company for Dow and DuPont shares. The form of
acquisition is a merger in which all assets and liabilities, known and unknown, automatically transfer to the new
4. In the deal, Dow shareholders will receive a fixed exchange ratio of 1.00 share of DowDuPont for each Dow share, and
DuPont shareholders will receive a fixed exchange ratio of 1.282 shares in DowDuPont for each DuPont share. Dow
and DuPont shareholders will each own approximately 50 percent of the combined company, excluding preferred
shares. Common shares outstanding at Dow and DuPont at the time of the announcement were 1.160 billion and .876
billion respectively. Using this information, show how the postclosing ownership distribution can be determined How
might these fixed share exchange ratios have been determined during the negotiation of the deal?
Answer:
Total new DowDuPont Shares outstanding after closing = 1.00 x 1.160+ 1.28 x .876
AmerisourceBergen Corp and Kindred Healthcare Inc. Once the merger took place the new company spun off its pharmacy
businesses tax free to shareholders.
5. Dow’s price per share on December 11, 2015 was $54.91 and DuPont’s was $74.55. Dow shares outstanding were 1.16
billion and DuPont’s outstanding shares were .876 billion. Assume anticipated annual cost synergies are $ 3.0 billion in
perpetuity and DowDuPont’s cost of capital is 10%. What is DowDuPont’s total market cap excluding synergy? What
is the market cap including synergy using the zero growth method of valuation (see Chapter 7)?
Answer:
Dow’s market cap on 12.11.15 without synergy = $54.91 x 1.16 = $63.75billion
THE ELUSIVE ISSUE OF PRICE
Key Points:
• The acquirer’s cost often is more than what it pays target investors per share
• Additional costs include liabilities assumed by the buyer
• Assumed liabilities can be especially onerous if their future cost is difficult to estimate
• Negotiators often focus on minimizing such risk
______________________________________________________________________
The growth of cloud computing and the growing connectivity in our lives have pressured semiconductor4 makers to
achieve greater economies of scale to drive down costs and to offer a broader array of products ranging from commodity-
like to highly complex chips. These market forces have resulted in an ongoing consolidation within the industry. A recent
example of such consolidation is Intel’s (the world’s largest chipmaker) acquisition of Altera, an integrated circuits
manufacturer, for $16.7 billion. Intel’s interest centered on Altera’s programmable chips, a higher margin product whose
sales would help offset the declining personal computer market. Altera faced substantial capital expenditures to remain
competitive and being acquired represented a reasonable way to maximize shareholder wealth.
What follows is a description of events that transpired between Altera and Intel beginning in late 2014 and ending in
mid-2015 in a signed merger agreement. These events illustrate common negotiating tactics used by potential acquirers and
target boards and senior managers to hammer out M&A agreements.5
Given their long standing business relationship dating back to the late 1980s, it was easy for Intel’s CEO, Brian M.
Krazanich, to approach Altera’s CEO, John P. Daane, in late 2014 to discuss a commercial licensing deal. During the
conversation, Mr. Krazanich expressed Intel’s interest in acquiring the firm but he refrained from discussing a price range.
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performing “adequate” due diligence. The start date, length, and intrusiveness of due diligence often becomes a means for
both parties to leverage their positions. Sellers routinely move aggressively to get the buyer to state as high an offer price
with as few caveats as possible before granting the buyer the right to examine detailed financial statements, operations, etc.
Buyers use the absence of proprietary information as a reason for giving a price estimate as a range or formula or subject to
conditions allowing for revision of the initial offer price based on the outcome of due diligence.
Three weeks had passed before the two CEOs talked again. In the interim, Altera’s board hired financial advisor
share, again on the condition Altera would allow an appropriate due diligence. The Altera CEO countered that at that price
his firm would not allow due diligence to begin. The Intel CEO agreed to have his board reconsider their offer and would
counter with a revised offer if his board felt comfortable with the potential synergies.
All previous offers made by Intel had been verbal. On January 27, 2015, Intel submitted to the Altera Board a legally
non-binding written proposal authorized by the Intel board to acquire Altera for $50 per share based on publicly available
for $58.00 per share. Mr. Daane also indicated that Altera wanted Intel to include wording in the contract that Intel would
use reasonable best efforts to gain regulatory approval and that it would agree to a meaningful reverse termination fee (a
fee paid by the buyer to the seller) if the deal could not get regulatory approval.6
The following week Mr. Krazanich emailed Mr. Daane a letter confirming that the Intel Board had approved an
acquisition of Altera at $58.00 per share subject to completion of due diligence, negotiation of a definitive merger
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At the end of March, Altera submitted a draft merger agreement containing the restatement of Altera’s proposal that
Intel should agree to use reasonable best efforts to get regulatory approval and that Altera should be compensated if the deal
was not completed over failure to get regulatory approval. At this point, the talks stalled and the media speculated that the
deal might not happen.
On May 7, 2015, Intel sent a letter to the Altera Board containing a new acquisition proposal stating that, if Intel and
Altera did not reach an agreement by June, Intel would abandon discussions. Intel’s proposal included a price of $50 per
Illustrating Bidding Strategies—Appollo’s Takeover of CEC Entertainment
In a deal designed for a speedy conclusion, Richard M. Frank, Executive Chairman of CEC Entertainment announced on
January 16, 2014 that the firm had entered into a definitive merger agreement with private equity firm Apollo Global
Management. The deal was valued at $1.3 billion including the assumption of $70 million in debt. AT $54 per share, the
deal represented a 25% premium over the firm’s closing price on January 7, 2014 when first reports of the deal surfaced.
The bid was structured to include an accelerated means of obtaining shareholder approval, an exceptionally short time
period for CEC to solicit higher bids, and a poison pill intended to deter activist hedge funds and other potential bidders
from entering the fray.
While the board had agreed to the deal, CEC shareholders had not yet done so. Recent developments showed that
reaching closing quickly was critical. In 2013, Carl Icahn bought a stake in Dell Inc. after the firm had agreed to a $24.4
billion buyout and subsequently lobbied against the proposal to take the firm private. While the buyout eventually
succeeded, it did so only after the purchase price was increased. Hedge funds also managed to delay closing in such deals
as Sprint’s buyout of Clearwire and MetroPCS’s merger with T-Mobile. Both deals eventually closed but only after their
initial purchase prices were increased. According to FactSet, between 2005 and 2010, bidders were forced to raise their
initial offer prices to close the deal in about one-half of the transactions in which the initial offer prices were challenged as
too low. Since 2010, initial bidders in virtually all deals facing such challenges were forced to either raise their offer prices,
improve the terms (e.g., go to all cash), or to withdraw their bids.