1. MERGERS & ACQUISITIONS Business Finance 335 Supplemental Material

2. Dr. David P. EchevarriaAll Rights ReservedSlide 2 MERGERS & ACQUISITIONS W Why do firms merge or acquire other firms? Several possibilities. l Increase market power l Acquire financial strength l Acquire financial strength, l Tax loss carry forwards l Acquire specific product lines l Achieve synergies l Gain economies of scale W Strategies subject to debate: Prevalent belief is that M&A result in increased profits, competitiveness, & increased stockholder wealth. Evidence reveals this is not necessarily so…

3. Dr. David P. EchevarriaAll Rights ReservedSlide 3 I. BASIC DEFINITIONS A. Merger; combination of two firms into one. B. Acquisition; one business buys another. 1.Cash. 2.Securities. 3.Combination of cash and securities.

4. Dr. David P. EchevarriaAll Rights ReservedSlide 4 I. BASIC DEFINITIONS C. General Process; Acquisitions 1. Initial contacts between management teams. acquirertarget 2. Tender offer by acquirer to target company stockholders. 3. Stockholders required to vote approval. 4. Acquirer purchases majority or complete interest.

5. Dr. David P. EchevarriaAll Rights ReservedSlide 5 I. BASIC DEFINITIONS D. General Process; Merger 1. Initial contacts between management teams. 2. Negotiations as to new name, management team. 3. Stock exchange details negotiated. 4. Merger proposal goes to stockholders for vote. 5. If stockholders approve, deal consummated when stock changes hands.

6. Dr. David P. EchevarriaAll Rights ReservedSlide 6 II. TERMINOLOGY OF M&A A. "BEAR HUG"  Acquirer mails letter to directors of target firm announcing intentions and requiring a quick decision on bid. B. "SATURDAY NIGHT SPECIAL"  Offer made to stockholders just before the market’s close on Friday. Takes maximum advantage of stockholder greed

7. Dr. David P. EchevarriaAll Rights ReservedSlide 7 II. TERMINOLOGY OF M&A C. “HOSTILE TAKEOVER” 1. When the target firm's management fights the tender offer. 2. Acquiring firm must carry offer to stockholders of target firm. 3. This strategy is generally nasty and expensive - an effort frequently carried out to a questionable conclusion. u Good deal for stockholders of target firm. u Bad deal for stockholders of acquiring firm.

8. Dr. David P. EchevarriaAll Rights ReservedSlide 8 II.TERMINOLOGY OF M&A D. “WHITE NIGHT”  When target firm cannot defend itself against the hostile acquirer, it will seek another firm to firm to acquire it (one more acceptable to management). E.“Shark Repellant”  Slang term for any one of a number of measures taken by a company to fend off an unwanted or hostile takeover attempt  Examples: poison pills, scorched earth policies, leveraged recapitalization

9. Dr. David P. EchevarriaAll Rights ReservedSlide 9 II.TERMINOLOGY OF M&A F. "PAC-MAN"; 1. A form of defense in which the target tenders for shares of acquirer: u e.g., Martin-Marietta - Bendix. 2. The standoff is usually resolved when one of the parties finds a "white knight" to help. u In the case of Martin-Marietta, it was Allied Corp

10. Dr. David P. EchevarriaAll Rights ReservedSlide 10 II.TERMINOLOGY OF M&A G. "POISON PILL"; 1. Another anti-takeover defense; a. target company threatens to load the balance sheet with debt b. the acquirer effectively gets more debt than the business can handle. 2. Effectiveness is not always guaranteed.

11. Dr. David P. EchevarriaAll Rights ReservedSlide 11 III. RESTRUCTURING FIRMS. W After the M&A activity in the 1980's, many companies were left with large amounts of debt. Many deals went “south”. A. The most prevalent response was to restructure the resulting reorganizations. 1. Spinoff: create new independent company via sale or distribution of new shares 2. Carve-outs: selling minority interest in a subsidiary: 3. Tracking stock: stock issued by parent to track fortunes of a particular division or group.