Mergers n Acquisition

7/31/2019 Mergers n Acquisition

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Discuss the similarities and differences between the uk and us pattern of merger waves?

Ans 1- There have been five large merger waves in the UK and USA.

The first wave-, IN UK, it was characterized by multiform horizontal amalgamations. Some

industry concentration took place ( eg. Imperial tobacco, Lever Brothers etc), although most

companies remained fairly small. In US the merger wave was similar to the case in UK in that it

was dominated by horizontal mergers. The first major wave however took place slightly later in

the US, than in the UK, and the US merger wave tended to involve larger transactions than in

the UK.The first merger wave thus had more of an impact on market share and industrial

concentration in the US than in UK. Large companies such as Du Pont, Eastman Kodak, and

General Electric with near monopolistic market shares were created through mergers during this

wave.

The second merger- it was dominated by horizontal mergers in UK. Some of the transactions

were large, creating major companies with high market share (eg. ICI, Unilever, Cadbury,

Nobel etc.). There were few restrictions on takeovers. Whereas second merger wave took

place slightly earlier in the US than in the UK, and this pattern of the US merger waves leading

those of UK has held since. Horizontal mergers dominated both in US and in UK with US

companies merging to increase market share. The second US merger wave ended with the stock

market crash in October 1929.

The third wave In UK, it was characterized by large horizontal mergers (eg. British Steel, British

Leyland, NatWest bank etc.). Industry concentration occurred but regulation was still relatively

lax. Some of the mergers were initiated by the government, in attempt to create national

champions. Whereas in in USA, it showed different characteristics than in the UK. While the UK

continued to see mainly horizontal mergers, regulatory movements were strengthened in theUS with more stringent anti-monopoly rules. Horizontal transactions were less in the US and

now conglomerate mergers were the norm, which do not affect the industrial concentration.

Hostile takeovers were rare amongst large companies in this time period and reverse takeovers

emerged.

The fourth merger wave - in UK , Key characteristics of this wave were very large transactions,

increased used of debt (LBO), hostile bids being much more common, increased importance of

cross- border acquisitions, and several acquisitions by takeover specialists (eg. Hanson and

BTR ) aimed at asset stripping ( selling off the various parts of the company). Fourth merger

wave had relatively low number of transactions with high value. The merger wave in the UK andUS were similar, with increased number of hostile takeovers accounting to almost 25% of all

transactions and cross border acquisitions, increased use of innovative financing schemes

(such as junk bonds and LBOs), and asset-stripping acquisitions.


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The fifth UK merger wave - This wave is characterized by some very large deals, and cross

border acquisitions are increasingly dominating the takeover markets. During the early years

of merger wave hostile acquisitions were less common than during the fourth wave, although

there is some evidence to suggest that the level of hostile acquisitions is once again on the

increase. There is also some indication of the mergers being more focused on strategy rather

than financial asset stripping than during the fourth merger wave.

The merger wave started earlier in the US than in the UK, and once again the pattern of the

merger activity has been similar In the two markets, and several large acquisitions, less use of

hostile acquisitions, and acquisitions mainly being horizontal. Cross border acquisitions are

still important in both markets.

2 ) Explain what is meant by the term synergy and discuss how synergies may arise from

merger activity?

Synergy refers to a situation where the value (or the output) of the combined entity is greater

than the sum of its individual parts. It is on the occasions referred to as the 2 +2 = 5 effect. A

merger will create value to shareholders overall if the value of new merged company exceeds

the combined value of the target and biding companies as separate entities ( although the split

of this gain between bidding and target company shareholders depend on the price paid for the

target). This would be the case if the capitalized value of synergies exceeds the transactions

costs of the merger. Synergies which can arise from merging include: operating economies (

such as economies of scale, where the unit cost of production falls with increased production

volume) and economies of scope ( such as the benefit of combining complementary resources),

market power economies ( such as the ability to increase profit margin if the level ofcompetition falls), financial economies ( such as tax savings from sharing tax shields, tax loss

carry forwards, or economies of scale in the issuing of securities); and economies from

eliminating inefficiencies, such as incompetent target company management.

Revenue enhancement which explains marketing gains it is frequently claimed that, due to

improved marketing, mergers and acquisitions can increase the operating revenues.

Improvements can be made in the following areas

1) Previously ineffective media programming and advertising efforts2) A weak existing distribution network

3) An unbalanced product mix

Strategic benefits some acquisitions promise a strategic benefit, which is more like an option

than a standard investment opportunity. For example, imagine that a sewing machine company


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acquires a computer company. The firm will be well positioned if technological advances allow

computerdriven sewing machines in the future.

Market or monopoly power- one firm may acquire another to reduce competition. If so, prices

can be increased, generating monopoly profits. However, mergers that reduce competition do

not benefit society, and the US Department of justice or the federal trade commission maychallenge them.

1) Economies Of scale- By operating on a larger scale, companies may be able to achieveeconomies of scale. This refers to where the marginal cost of production falls with

increased volume of output. Savings can arise in any area of the operation, from scale

of economies in eg production or operations.

An example of a company successfully achieving operating economies is the German

car manufacturer Volkswagen. Developing and producing different chassis(framework) is hugely expensive, and most car manufacturers are trying to reduce the

number of different chassis used. Volkswagen has successfully managed this

rationalization, with different companies in the group (following the acquisition of

Seat and more recently Skoda) using the same chassis.

Such production economies of scale are most commonly associated with horizontal

mergers (where 2 emerging companies operate in the same line of business, and were

competitors prior to the merger).

2) Economies of Scope- Another closely related form of cost savings is found ineconomies of scope. This refers to savings or benefits arising from combining

complementary resources. Companies may choose to acquire a company with

specialized skills or other resources which may be necessary for the success of the

acquiring company. By combining complimentary resources, the 2 companies may be

worth more together than apart. One way to achieve economies of scope is through

vertical integration.

However, economies of vertical integration may prove hard to achieve, and although

some industries tend to maintain high levels of vertical integration (e.g., the major oil

companies which often control all stages from oil exploration to drilling, production,

refining and distribution), other industries have seen a general reduction in the level

of vertical integration( e.g, car manufacturers, where the production of components is

increasingly being done by sub-contractors rather than by the car manufacturers

themselves).

3) Market power economies- by merging with a former competitor, the acquiringcompany may be able to increase its market share and with its market power. This is


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also known as the economies of horizontal integration. With increased market power,

the company may be able to exercise some control over pricing.

In most developed economies, abuse of market power is illegal and regulators will

tend to ban mergers which are likely to reduce the level of competition significantly.

In the UK, mergers which cause concerns regarding their possible impact on

competition will be referred by the Office of Fair Trading( OFT) to the Monopolies and

Mergers Commission (MMC) for review.

For eg, the aggressive acquisition of market share by Scottish bus operator

Stagecoach has caused considerable concern with the British competition authorities.

During the decade from mid 1980s, stagecoach undertook over 50 acquisitions, of

which 30 were referred to OFT and 8 resulted in MMC inquiries. MMC has the power

to ban proposed mergers if the transaction will result in the merged company

dominating the industry.

4) Financial Economies- Tax savings may form a major motive for mergers andacquisitions. A company will receive tax credits on their investment in plant and

machinery; these tax credits can be used to reduce the companys corporation tax.

However, if the company is not making profits, it will not be able to take the full

benefit of these tax credits. While companies may be able to carry tax losses forward

and in this way reduce their tax liabilities in future yrs.

One way to take advtg of tax loss carry- forwards is for the company with the unused

tax credits to merge with a profitable firm. In this way it may be possible for the

profitable firm to reduce its tax liabilities by taking advtg of the other companys tax

loss carry-forwards. However, tax authorities in both UK and US have made it very

difficult to take advtg of such tax savings from mergers in the recent yrs.

5) Eliminating Economies- one of the key motives of many mergers and acquisitions is toeliminate inefficiencies. If a company is running inefficiently, one would expect the

performance of the company to be sub-optimal, and the share price to be

comparatively low. Due to the separation of ownership and control, there may be

scope for conflict of interest between the owners and the managers acting as their

agents. However, while mergers and acquisitions form an important part of the

corporate governance system in economies such as the UK or the US and are seen as

an important means for removing inefficient management.

Mergers and acquisitions are more likely to be carried out in order to maximize the wealth of

managers than the wealth of shareholders. Discuss

Mergers and acquisitions are prime examples of instances where agency conflict may occur. The

motives of managers and shareholders for undertaking mergers may diverge significantly. It is

generally assumed that the managers work towards the corporate goal of maximizing

shareholder wealth. Due to the separation of ownership and control , it is possible that

managers will undertake mergers and acquisitions in order to maximize their own personal


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utility rather than with the best interests of shareholders in mind.,.Assuming the objective ofthe firm is to maximize shareholders wealth, managers should only undertake acquisitions if the

transaction is expected to be a positive NPV investment. Given that the target company

shareholders will usually demand to be paid a significant premium, Positive NPV would at a

minimum require the two companies to be worth more together than apart. This would be the

case if synergies, such as operating economies (economies of scale or economies of scope),

market power economies, or financial economies are present, or where the merger allows for

the removal of inefficiencies.

However, managers may have reasons to undertake mergers even when such transactions are

not expected to benefit the companys shareholders. Mergers may result in increased level of

EPS. If managerial bonuses are linked to EPS; the merger may result in increased manager

remuneration even where no shareholder wealth has been created. Salaries may also rise

substantially after the merger.

Being in charge of a large company is also likely to give manager increased power and prestige (

particularly if the company is the part of main stock market index, such as FTSE100 IN UK , as

well as more perks such as, the use executive jet.

However, it is difficult to determine whether the acquisition was motivated by managerial self

interest or was aimed at increasing shareholders wealth. The evidence is consistent with

takeovers being motivated by managers wanting to maximize their own welfare. Shareholder

wealth maximization appears to be a weaker motivation in many acquisitions.

Discuss why the level of merger and acquisition activity may be related to the level of stockmarket index. ?

Empirical evidence suggest that the level of merger and acquisition activity ( or at least the level

of domestic transactions ) is positively correlated with the level of the stock market index. The

cause of the positive correlation between domestic acquisitions and level of the stock is not

clear. High share prices may make it easier for the acquiring company to raise the funds

required for the acquisition. However, if the price of the target company rises as well, additional

funds may be required, thus leaving no net benefit. If the price of the target company does not

rise with the generally rising stock market, this may indicate that the target company is

undervalued ( again, inconsistent with the market efficiency hypothesis), although alternatively

it may indicate that the target company is underperforming . If the acquiring company can

operate the target company better than the existing management, or achieve other operating or

financial benefits, value may be extracted.

A possible reason why the level of merger and acquisition rises with a rising stock market may

be managerial psychology. When the shares of a company are doing well, management may

believe they have superior managerial skills, which can be used to run an underperforming


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(target) company better than the existing management. Such confidence may not be warranted,

resulting in over confidence of hubris

In conclusion, while empirical evidence in both the UK and US has found merger and acquisition

activity to be positively related to the level of the stock market index, the cause of this

relationship is a subject of controversy

Discuss how the stock market size may act as a merger motive?

The stock market size affect, whereby shares in small companies on average tend to earn higher

rates of return than shares in companies with high market capitalizations may influence the

level of takeover activity in two main ways. First, if small companies are capitalized at a higher

required rate of shareholder return, their values will be relatively low. Companies with high

market values may benefit from acquiring small companies if, after the acquisition , the target

company will be capitalized by the market at the higher capitalization rate ( i.e, lower cost of

capital ) appropriate for large companies. For example, Banz(1981) found shares in small US

companies tending, on average, to earn higher rates of return than shares in larger

companies.

Second, it has been suggested that bull markets (periods with high or rising share prices) tend

to start with large companies, and that it take longer for shares in small companies to rise. If this

were to be the case, large companies may take advantage of the temporary overvaluation of

large companies and undervaluation of small companies by acquiring small firms. Such over or

under valuation would, however, imply some form of stock market inefficiency, and while there

is ample evidence to support the notion of a size change, the opportunity for such bargain-

buying opportunities may be limited

Would you expect target and bidding company shareholders to gain or lose from mergers and

acquisitions? explain clearly your reasoning ?

in order to obtain majority of the issued shares, the acquiring company will need to persuade a

large number of shareholders in the target company to part with their shares. Some of these

investors will believe the pre-bid share price was low (which was presumably why they owned

the shares at the time of the bid). Some of the target company shareholders are unlikely to part

with their shares unless a considerable premium is being offered, and in order to obtain

majority, acquiring companies usually offer target shareholders a price significantly higher than

the pre-bid value of the target firm. We can therefore expect target company shareholders, on

average, to gain significantly from mergers and acquisitions.

Conflicting theories exist as to whether the acquiring company shareholders will gain, come out

even, or lose. If managers act with the shareholders best interest at heart, we would expect

acquisitions only to take place if acquiring company shareholders are expected to benefit.

However, in competitive acquisitions market, the premium offered for the target company


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shares is likely to capture most of any synergies, resulting in small, if any, gains to the acquiring

company shareholders.

Finally, if acquisitions are driven by managers pursing the maximization of their personal wealth

and utility rather than the maximization of shareholder wealth, acquisitions may take place even

when they are negative NPV investments, with too high a price being offered for the targetcompany. A similar outcome may result if managers suffer from over confidence or hubris. In

such circumstances, acquiring company shareholders can be expected to lose

Are mergers and acquisitions positive net present value ( NPV) investments for the acquiring

firms ? discuss the empirical evidence

In order to assess whether mergers and acquisitions are positive NPV investments, we can

adopt 2 approaches. First, it may be possible to analyze the impact of the acquisition on the

cash flow (or the accounting performance) of the acquiring firm. The majority of theaccounting studies (eg, Singh 1975 for the UK, or Ravenscraft and Scherer 1987 for the US) find

no improvement in the accounting performance after the merger, although Healey et al, 1992

find some evidence of improved corporate performance after large US mergers. However,

such accounting studies tend not to separate out the impact of the transaction on the bidder

but rather analyze whether the merged entity is performing better than the bidder and target

combined pre-merger.

An alternative is to analyze the abnormal returns to the bidding companies at the time of bid

announcements. This measures the markets expectations regarding the NPV of the

acquisitions, as in efficient markets, the NPV of investments should immediately beincorporated in the market capitalization of the firm. The evidence on the bidding company

abnormal returns is mixed and inconclusive.

For example, for the UK, Firth 1980 and Gregory 1997 find bidders make large losses; Limmack

1991 uncovers small losses, while Franks and Harris 1989 find UK bidders gain at the time of

the bid. For the US, some of the evidence is slightly more positive than for the UK, with eg.,

Jensen and Ruback 1983, concluding from their view of prior US evidence that US bidders gain

or do at least not lose from mergers and acquisitions.

The evidence is thus overall rather mixed. While some UK studies find small gains to bidders

at the time of the bid, most uncover negative bidding company abnormal returns, whichbecome increasingly negative post-bid. The US evidence is also mixed, although there is at

least some evidence to suggest US acquirers gain from certain types of transactions.

Identify the different stages of the bid process and describe how a bidder prepares for each

stage.


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The pre-bid stages would be where the bidder made sure it was in good shape to enter the bid

process. The next stage would be to search for suitable candidates, either doing the search on

their own or with the help of an investment bank. This will vary from bidder to bidder on a case

by case basis. Some companies will go through extensive research and spend much time

analyzing targets, others, once they have broad criteria on board, know what they are looking

for and can move quickly to seal a deal if something comes up. To choose a target, an

acquisition company should draw broad acquisition criteria, along the line of: country, sector,

size, national coverage or local operator, profitable or loss making, stock market listed or private

company. For example, the target must be in the same line of business and have operations

that overlap geographically, so as to share distribution costs. The targets would be evaluated

and any candidates that did not fit the bidders acquisition criteria would be screened out. The

remaining potential targets would be valued, identifying any unique synergies that would help

the bidder. A key element of the takeover process is valuing the target company. The bidder will

not have all the information necessary to make a completely accurate valuation. There are many

ways to value a company such as relative valuation, earning valuation, stock market value and

other valuation mergers. Now the selective target would be approached and negotiation would

start. If the two companies are on agreement, a price would be set subject to the target passing

a due diligence investigation. This is done to ensure the target is worth the bidder is paying. A

thorough due diligence is vital to the deal being successful in the longer term. The two

companies would merge and the integration stage would then start. Communication and

leadership are essential in the early stages of integration. The bidder should have an integration

team which will ensure the smooth transfer of ownership. If the target refuses to be taken

over, a hostile bid would follow. The bidder and advisors have to work out the range of prices

that they would be willing to pay for the target, above which they would not bid. The

investment bank and public relations advisors will work together presenting the best

argument for the takeover. The investment banker and bidder executives will make

presentation to the key target shareholder. If the bidder gains 50.1% it wins and moves onto

the key implementation and integration stage. The bid timetable starts once the offer

document is posted to the target shareholders. There are strict guidelines as to what is

contained with the offer document.

Why do companies sometimes launch hostile takeovers?

The hostile takeover is an unwelcome bid that is made for the equity of a target company. It

does not have the recommendation of the target board. Companies are reluctant to enter into

hostile takeover. In seeking agreement, the bidder will enter into negotiations with the targetboard. Each side will have a clear idea of the value it feels the target company should

command. The aim of the bidder is not to pay too high a price to gain control, and of the

target board to get the best price for their shareholders if they agree to sell the company. It is

much easier in a hostile takeover to achieve cost cutting. The bid will usually have been

conducted in an atmosphere of hostility. Once the deal has been won, the bidder will not feel


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uneasy about cutting costs in the same way the bidder in a friendly deal would. The hostile

bidder does not need to worry as much over target sensitivities.

Advantages of hostile takeover-

1) Speed and surprise- the target can be taken unawares and the bidder may be able togain a decisive advantage.

2) May be able to take advantage of short-term misfortune (eg, profits warning) at thetarget company.

3) May give Target Company less chance to put defences in place.For example, Yahoo owns 30% of their stock with the other 70% being owned by individuals or

companies, where each entity only owns 1% or less. Microsoft can attempt a hostile takeover

by buying stock from all the individuals until they own more than the 30% of Yahoo stock.

What are the disadvantages of friendly mergers?

Friendly mergers may struggle to achieve the benefits that a similar but hostile deal

would achieve. Friendly deals have a few disadvantages-

1) May have to pay high premium to gain the recommendation of the target board.

2) To gain agreement may have to offer some key jobs to target executives.

3) Probably cannot cut costs as quickly compared to hostile bid, because of the

need to maintain friendly takeover atmosphere.

A good example is to compare the outcomes of Royal Bank of Scotland (RBS)hostile takeover of NatWest (2000) and the Bank of Scotland (BoS) merger with

Halifax(2001). In the year following RBS deal the share price more than doubled.

In the yr following BoS deal the share price remained exactly the same. RBS was

able to cut 18,000 jobs as a result of the takeover; huge financial cost savings

flowed as a result. The BoS deal resulted in 2000 job cuts; the synergies were

much smaller.

What are the considerations in deciding whether to use cash or shares to pay

for a target company?

This is a problem of asymmetric information. If the bidder feels its shares are

undervalued it will prefer to use cash. If it feels its shares are overvalued it will

use the shares.


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For the target company shareholders, if they feel the bidders shares are

overvalued, they will prefer cash. If cash is not being offered, they will demand

an extra premium for accepting the targets (overvalued ) shares.

What are the advantages of payment in equity for a target shareholder ?

the advantage for the target shareholder in receiving the bidders equity is that

they maintain an interest in the ongoing performance of their company. If the

bidder pays in shares it means that they will take the target shareholders with

them. This means any further gains from the merger will be shared with the

target shareholders. So the target shareholders could end up up with the a

takeover premium plus a share in the ongoing merger synergy benefits. ( they

could also share in the misery if it all goes wrong.

Evaluate the alternatives to growth by acquisition


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How should a company start preparing a defence against a possible future takeover?

When analyzing the defence of an existing strategy it is worth splitting the defending

companies into 2, those who have a successful strategy and those who do not.

A successful strategy would be one that has delivered consistently growing shareholders

wealth over a number of yrs. The other category would be where this no longer holds. It

may be that the company has been successful but has to run out of steam and needs a

change at the top. In many cases this can be done by replacement of the Chief

Executive. For example, the removal of Eckhard Pfieffer as CEO from Compaq by the life

president in 1999. It was felt that Pfieffer had done a very good job of driving Compaq

as far as it could go in computer hardware, but he had been unable to make a move into

the internet market. It was felt that he had become too risk averse and that

shareholders needed someone at the top willing to take risks for them again.

A company defending a takeover is in a much strong position if it is defending a

successful strategy. Shareholders will be happy with the performance of the company

and the returns that have been generated. In this situation shareholders are more likely

to be unwilling to side with the bidder.

Where a company is trying to defend a strategy that is no longer delivering the growth

in shareholder value that it used to, the company has a harder task to justify its

independence. When a strategy is failing to deliver, the company is in the weakest

position. Whether they survive largely depends on whether the bidder has the

credibility and track record to improve performance.

Do you think US companies have too much or too little protection from takeovers?

Compared to the defences available to UK companies, US companies seem to have

greater protection against takeovers. In any country defence tactics can be broken down

into 2 types, proactive and reactive. Proactive tactics would be defences put in place to

strengthen a companys defences ahead of a possible bid. Reactive tactics are measures

taken once the bid has been announced.


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PROACTIVE- Companies should be aware of their weaknesses, whether it is a temporary

downturn in their fortunes or no succession plan for replacing a long time chief

executive. If the company is aware of the weaknesses, it can plan a defence to counter

the attacks made on it.

(i) Corporate Strategy- one of the most effective defences for the company to

be highly valued by the stock market, leaving very little on the table for a

bidder to extract in the form of efficiencies and cost savings. If the company

itself is in control of costs and has a record that is as good as any in the

industry that is a strong foundation to building an effective defence.

(ii) Poison Pills- are designed to make hostile bids prohibitively costly. The poison

pill works by granting right to the shareholders, enabling them to buy shares

in the target company at a substantial discount. These rights are usually

triggered when a certain threshold is passed. For eg, a potential bidder buying

15% of the shares in the target company. All target shareholders except the

bidder have the right to buy new shares in the target company at a large

discount to the existing price.

The directors can withdraw poison pill if they agree to takeover. The rights are

issued to the shareholder on the triggering event as a dividend of one right

per share held.

(iii)Anti-greenmail Provisions- greenmail payments are payments for shares made

to a bidder at a premium to the underlying share price. What companies did

was to remove the ability of companies to make the greenmail payment.

Other shareholders in the company could not benefit from the greenmail

payment price for the shares, so there was not equality of treatment. The

passing of these anti-greenmail clauses has drastically reduced the incidence

of these attacks.

REACTIVE-

(i) White Knight- the company accepts that it is going to be taken over but it

would prefer taken over by a company of its own choosing. It may be that the

only effect of the pursuit of a white knight is the receipt of a higher bid from

the original bidder. A white knight (friendly rival bidder) may end up paying

high price for saving the company. The white knight may not be able to force

through the cuts predicted by the hostile bidder. Shareholder returns to white


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knight bidders have been negative, so it is not really in shareholders interests

for a company to act out the role of white knight defender. For eg, in Europe

in 1999, Telecom Italia (TI) was subject to an unwelcome bid from Olivetti. Ti

sought a friendly bidder, Deutsche Telekom came in as a white knight and was

ultimately unsuccessful (Olivetti took control of TI).

(ii) Pacman- a Pacman defence is a fairly desperate attempt to fend off being

taken over. The target company looks to turn the tables and bid for the

bidder. For eg, in 1999, the pacman defence came in France with TotalFina-Elf

bid battle. TotalFina-Elf launched a $43 billion bid for Elf, another French oil

company. Elf was bitterly opposed to the takeover and as a defence, launched

a $53 billion bid for TotalFina. The problem with the pacman defence is that,

once it is used, it is difficult to argue against the logic of the bid if the target is

making a bid.

(iii) Break fees-a risk companies faced when putting a merger together was that

someone else might come along and spoil the party. A new feature was the

insertion of breakfees into the merger agreements. If two companies agreed

a merger, they would usually include a fee that would be payable if one of the

parties broke off the merger agreement for any reason. For eg, $1.8 billion

break fee paid by Warner Lambert (WL) to American Home Products(AHP) in

late 1999 as a result of their merger agreement being terminated. The cause

of the termination is usually the approach of another bidder which puts a

higher bid on the table.

Difference between equity carve out and demerger

Equity Carve out (partial floatation)-When a parent company sells a

portion or all of its interest in a subsidiary to the public in an initial public

offer (IPO) it is called equity carve out. Thereby this creates a new legal

entity with its own management team and provides the company with cash

infusion. The proceeds(cash) are distributed to parent and subsidiary.

parents company needs to raise cash efficiently.

The cash is used to finance the projects of the parent company.

The parent retains a controlling interest in the subsidiary.


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Managers prefer carve out.

Examples - On October 22, at the height of the IPO drought, $45billion, Wilmington, Delaware-based DuPont raised $4.4 billion in apublic offering carving out roughly 30 percent of its oil subsidiary,Conoco Inc. of Houston. It was the biggest U.S. IPO and the biggestU.S. carve-out of all time, topping AT&T's $2.3 billion carve-out ofLucent Technologies in 1996.

On November 11, Rupert Murdoch's News Corp. went public with18.6 percent of Fox Entertainment, and raised $2.8 billion, the third-largest U.S. IPO.

On December 10, CBS Inc. went public with 16 percent of Infinity

Broadcasting and raised $2.97 billion, replacing Fox as the thirdlargest U.S. IPO. On February 5, General Motors Corp. went public with 18 percent of

its Delphi Automotive business, and raised $1.7 billion.

DEMERGERthe act of splitting off part of an existing company to

become a new company. The new company operates completely separate

from the original company. Shareholders of the original company are usually

given equal stake in the ownership of the company on pro rata basis.

Thereby helping each of the segment operate smoothly as they can nowfocus on more specific tasks.

no cash is raised however this aims to create shareholders value.

The parent company distributes shares in the subsidiary to its own

shareholder.

The parent company loses control of the subsidiary.

Stock market prefers demerger.

for example, in 2001 British Telecom carried out a de-merger of itsmobile phone arm, BT Wireless, in an attempt to boost the performance

of its stock. British Telecom took this action because it was struggling

under high debt levels from the wireless venture.


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Bajaj Auto Ltd (BAL) has been demerged. Consequently, shareholders of the erstwhileBAL will receive shares of the demerged new companies as per the provisions of the

demerger.

The historical demerger of DCM group where it split into four companies (DCMLtd., DCM shriram industries Ltd., Shriram Industrial Enterprise Ltd. and DCM

shriram consolidated Ltd.) is one example of family units splitting throughdemergers

Hanson trust example in text book pg 135 3rd para

Difference between spin off and tracking stock

Spin offis the creation of an independent company through the sale or

distribution of new shares of an existing business/division of a

parent company.

spin off can take 2 other forms

1. Split upparent company separates into different units and distributes

shares in pro rata basis. The parent company would cease to exist.

Example hanson trust . In text book page 135

2. Split offshareholders in parent company can exchange the shares in

parent to obtain shares of the subsidiary.

The parent company loses control of the subsidiary.

Shareholders of the original company are usually given equal stake in

the ownership of the company on pro rata basis.

Stock market prefer spin offs

Independent

Tracking stockis a form of equity that is issued by the company to reflect

the performance of a subsidiary. The tracking stock is like a separate class of

equity in the parent company. The parent company will have equity that

reflects all its business except the division that has the tracking stock and it

will also have the tracking record.


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The parent company retains full control of the division.

Shareholders of the tracking stock do not have direct claim on the

assets of the division.

Stock market reaction to tracking stock issue has been negative.

Division is not independent, as parent retains full control.

Examplegeneral motors issued the 1st tracking stock in 1985 based on the

performance of the EDS(electronic data systems) division.

Why do we have anti-trust take over regulation

From the mid 1800s onwards, the industry in the US faced cut-throat competition when

companies wages damaging price wars against each other. Result of it being that the companiesdid not make much of the return on their capital invested. Particularly in the railroad sector, the

companies began to suffer to the extend that they could not even pay their bond holders. A

solution to this was consolidation which was accomplished by the efforts of JP morgan an

investment banker. Through series of mergers the industry became concentrated, prices were

raised, profitability returned and boldholders were repaid.

Page 141, 2ndlast para. Copy the example

However the main industries had taken on monopoly type structures. Companies dominated the

markets and competed to maintain their dominance. This had further effected the other

companies in the industry as competition started to lessen and trade was restrained.

Hence the Anti trust law was regulated to protect the welfare of the weaker companies and

consumers.

Anti trust is the legislation enacted by the federal and Govt to regulate trade and commerce by

preventing unlawful restraints, price fixing, monopolies and mainly promoting competition.

Primary goal of Anti trust is to safeguard the companys welfare and seek to make all businesses

compete fairly.

There was a need to scrutinize the companies under the Anti Trust Regulations.


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What are the Benefits of regulation

What are the benefits of regulation?

Anti trust regulations are legal regulations in order to practice and address Globalisation,

Deregulation and changing technologies, thereby increasing economic efficiency. Anti trust

enforcement helps the economy grow and has a goal to make the markets operate more

competitively by eliminating monopolies.

The regulations included various acts.

1. Sherman Act 1890- the original anti trust act still forms the basis of US anti trust lawwhich aims to prohibit all those contracts, combinations and conspiracies that would

restraint trade.

and also prohibits attempts or conspiracies made to monopolize a particular industry.

All contracts that restraint trade were illegal according to shermans act. The act effected

merger regulations worldwide. The act aimed to prohibit mergers which would createmonopoly type companies and to stop companies that were already exhibiting

dominant behavior in their industries.

Example page 142 , under shermans act .. d last para.

2. Clayton Act 1914 - the act was passed to strengthen the provisions of the Sherman act.

The extra provisions stated that price discrimination was banned, tied contracts were

banned and buying shares in other companies was banned if this led to reduction in

competition. Also the act forbids companies to buy shares in other companies if the

result is lessening of competition.

(Choose any 1 example and write lol)

Example -In 1948, the Supreme Court upheld theFederal Trade Commission's

enforcement of the Act in the landmark case FTC v. Morton Salt.[3]The Commission

found thatMorton Saltviolated the act when it sold its finest "Blue Label" salt, on a

purportedly standard quantity discount available to all customers, but was really

available only to five national chain stores who bought sufficient quantities of

respondent's salt to obtain the discount price. According to the Court, "The

legislative history of the Robinson-Patman Act makes it abundantly clear that

Congress considered it to be an evil that a large buyer could secure a competitiveadvantage over a small buyer solely because of the large buyer's quantity

purchasing ability."[3]

In 1976, a dozen Texaco retailers inSpokane, Washingtonwho suedTexacoand

won damages of $449,000, which were trebled under antitrust law. Texaco and other

oil companies had made a practice of selling gasoline at one price to retailers, and a
http://en.wikipedia.org/wiki/Federal_Trade_Commissionhttp://en.wikipedia.org/wiki/Federal_Trade_Commissionhttp://en.wikipedia.org/wiki/Federal_Trade_Commissionhttp://en.wikipedia.org/wiki/Robinson%E2%80%93Patman_Act#cite_note-autogenerated1-2http://en.wikipedia.org/wiki/Robinson%E2%80%93Patman_Act#cite_note-autogenerated1-2http://en.wikipedia.org/wiki/Robinson%E2%80%93Patman_Act#cite_note-autogenerated1-2http://en.wikipedia.org/wiki/Morton_Salthttp://en.wikipedia.org/wiki/Morton_Salthttp://en.wikipedia.org/wiki/Morton_Salthttp://en.wikipedia.org/wiki/Robinson%E2%80%93Patman_Act#cite_note-autogenerated1-2http://en.wikipedia.org/wiki/Robinson%E2%80%93Patman_Act#cite_note-autogenerated1-2http://en.wikipedia.org/wiki/Robinson%E2%80%93Patman_Act#cite_note-autogenerated1-2http://en.wikipedia.org/wiki/Spokane,_Washingtonhttp://en.wikipedia.org/wiki/Spokane,_Washingtonhttp://en.wikipedia.org/wiki/Spokane,_Washingtonhttp://en.wikipedia.org/wiki/Texacohttp://en.wikipedia.org/wiki/Texacohttp://en.wikipedia.org/wiki/Texacohttp://en.wikipedia.org/wiki/Texacohttp://en.wikipedia.org/wiki/Spokane,_Washingtonhttp://en.wikipedia.org/wiki/Robinson%E2%80%93Patman_Act#cite_note-autogenerated1-2http://en.wikipedia.org/wiki/Morton_Salthttp://en.wikipedia.org/wiki/Robinson%E2%80%93Patman_Act#cite_note-autogenerated1-2http://en.wikipedia.org/wiki/Federal_Trade_Commission


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lower price to wholesalers. When some wholesalers went into the retail business,

they obtained gasoline for their retail stations at the wholesaler discount: resulting in

unlawful price discrimination.[4]The Supreme Court unanimously affirmed this

decision in 1990.

In 1994, theAmerican Booksellers Associationandindependent bookstoresfiled a

federal complaint in New York againstHoughton Mifflin Company,Penguin USA,St.

Martin's Pressand others, alleging that defendants had violated the Robinson-

Patman Act by offering "more advantageous promotional allowances and price

discounts" to "certain large national chains and buying clubs."[5]Later, complaints

were filed againstRandom HouseandPutnam Berkley Group, and these cases also

were later settled with the entry of similar consent decrees. Eventually, seven

publishers entered consent decrees to stop predatory pricing, and Penguin paid $25

million to independent bookstores when it continued the illegal practices.[6]In 1998,

the ABA (which represented 3500 bookstores) and 26 individual stores filed suit inNorthern California against chain storesBarnes & NobleandBorders Group, who

had reportedly pressured publishers into offering these price advantages.[7]

3. Federal trade commission act- prohibited acquisition of stocks that result in lessening of

competition. Example- Standard Oil .. the Court treated Standard oils 90 percent share

of refinery output as proof of monopoly.

4. Celler Kefauver act 1950 - the act acted to close the loopholes of the clayton act. Itforbade the acquisition of assets and shares if the result was lessening of competition.

The act aimed at merger control by banning asset or stock consolidations which fell

short of creating dominance.

Example - In Brown Shoe Co. v. United States (370 U.S. 294 [1962]), perhaps the mostfamous

case under the 1950 Act, the Supreme Court invalidated a merger that would have

yielded a horizontal market share of 5 percent and generated a vertical foreclosure

of under 2 percent. Brown Shoe ruled that the parties market share, though low

overall, could be deemed excessive in certain submarkets. The Court also held

that non-efficiency goals, such as preserving small firms, were relevant to applying

the statute.

5. Hart scott rodino antitrust improvements act 1976 (HSR act) intended to improve thepowers of the justice dept and the federal trade commission by giving them time toexamine merger proposals. The justice dept and the federal trade commission enforce

the anti trust laws in the US. Merger proposals have to be submitted to these bodies.

the authorities will do an initial review which would last 30 days. And they can request

further info from the companies thereby giving the authorities time to identify the

cases.
http://en.wikipedia.org/wiki/Robinson%E2%80%93Patman_Act#cite_note-3http://en.wikipedia.org/wiki/Robinson%E2%80%93Patman_Act#cite_note-3http://en.wikipedia.org/wiki/Robinson%E2%80%93Patman_Act#cite_note-3http://en.wikipedia.org/wiki/American_Booksellers_Associationhttp://en.wikipedia.org/wiki/American_Booksellers_Associationhttp://en.wikipedia.org/wiki/American_Booksellers_Associationhttp://en.wikipedia.org/wiki/Independent_bookstoreshttp://en.wikipedia.org/wiki/Independent_bookstoreshttp://en.wikipedia.org/wiki/Independent_bookstoreshttp://en.wikipedia.org/wiki/Houghton_Mifflin_Companyhttp://en.wikipedia.org/wiki/Houghton_Mifflin_Companyhttp://en.wikipedia.org/wiki/Houghton_Mifflin_Companyhttp://en.wikipedia.org/wiki/Penguin_Grouphttp://en.wikipedia.org/wiki/Penguin_Grouphttp://en.wikipedia.org/wiki/Penguin_Grouphttp://en.wikipedia.org/wiki/St._Martin%27s_Presshttp://en.wikipedia.org/wiki/St._Martin%27s_Presshttp://en.wikipedia.org/wiki/St._Martin%27s_Presshttp://en.wikipedia.org/wiki/St._Martin%27s_Presshttp://en.wikipedia.org/wiki/Robinson%E2%80%93Patman_Act#cite_note-4http://en.wikipedia.org/wiki/Robinson%E2%80%93Patman_Act#cite_note-4http://en.wikipedia.org/wiki/Random_Househttp://en.wikipedia.org/wiki/Random_Househttp://en.wikipedia.org/wiki/Random_Househttp://en.wikipedia.org/w/index.php?title=Putnam_Berkley_Group&action=edit&redlink=1http://en.wikipedia.org/w/index.php?title=Putnam_Berkley_Group&action=edit&redlink=1http://en.wikipedia.org/w/index.php?title=Putnam_Berkley_Group&action=edit&redlink=1http://en.wikipedia.org/wiki/Robinson%E2%80%93Patman_Act#cite_note-5http://en.wikipedia.org/wiki/Robinson%E2%80%93Patman_Act#cite_note-5http://en.wikipedia.org/wiki/Robinson%E2%80%93Patman_Act#cite_note-5http://en.wikipedia.org/wiki/Barnes_%26_Noblehttp://en.wikipedia.org/wiki/Barnes_%26_Noblehttp://en.wikipedia.org/wiki/Barnes_%26_Noblehttp://en.wikipedia.org/wiki/Borders_Grouphttp://en.wikipedia.org/wiki/Borders_Grouphttp://en.wikipedia.org/wiki/Borders_Grouphttp://en.wikipedia.org/wiki/Robinson%E2%80%93Patman_Act#cite_note-6http://en.wikipedia.org/wiki/Robinson%E2%80%93Patman_Act#cite_note-6http://en.wikipedia.org/wiki/Robinson%E2%80%93Patman_Act#cite_note-6http://en.wikipedia.org/wiki/Robinson%E2%80%93Patman_Act#cite_note-6http://en.wikipedia.org/wiki/Borders_Grouphttp://en.wikipedia.org/wiki/Barnes_%26_Noblehttp://en.wikipedia.org/wiki/Robinson%E2%80%93Patman_Act#cite_note-5http://en.wikipedia.org/w/index.php?title=Putnam_Berkley_Group&action=edit&redlink=1http://en.wikipedia.org/wiki/Random_Househttp://en.wikipedia.org/wiki/Robinson%E2%80%93Patman_Act#cite_note-4http://en.wikipedia.org/wiki/St._Martin%27s_Presshttp://en.wikipedia.org/wiki/St._Martin%27s_Presshttp://en.wikipedia.org/wiki/Penguin_Grouphttp://en.wikipedia.org/wiki/Houghton_Mifflin_Companyhttp://en.wikipedia.org/wiki/Independent_bookstoreshttp://en.wikipedia.org/wiki/American_Booksellers_Associationhttp://en.wikipedia.org/wiki/Robinson%E2%80%93Patman_Act#cite_note-3


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The bidder must file documents when they announce their offer of the target company.

The target company also has to file with the authorities. Effect of the HSR act is to delay

the implementation of takeovers, it gives the authorities and shareholders a waiting

time so they can evaluate the cases of the bidders and target.

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Mergers n Acquisition

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