book

Mergers and Acquisitions

by William Gole, Joseph Morris

April 2007

Intermediate to advanced

416 pages

9h 53m

English

Wiley

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IntroductionCentral Role of Strategic Planning in the Merger and Acquisition ProcessGeneralInvestment ConsiderationsStrategic FitSpeed of ImplementationCost of ImplementationSynergistic BenefitsImpact of GlobalizationEnhanced RiskTypes of M&A ActivityGeneralMergers versus AcquisitionsLarge Public versus Small Private AcquisitionsStrategic ImpactRegulatory RequirementsStock or Asset PurchasesLeverage of the Parties to the TransactionRisk Profile of the TransactionStrategic versus Financial AcquisitionsPortfolio Acquisitions of Holding CompaniesOther Characterizations of AcquisitionsDivestitures versus Sales of an Entire BusinessTransaction OverviewsGeneralAcquisition ProcessFrom Process Initiation through Target QualificationFrom Valuation through Preliminary AgreementFrom Due Diligence to Approval to Proceed to ContractContract and ClosePostacquisition IntegrationSales ProcessPrenegotiation PreparationNegotiationDue DiligenceContract and CloseDivestiture ProcessDivestiture PlanningTransaction PreparationTransaction ExecutionImportance of Proper Planning and Disciplined ImplementationRole of the Financial Manager in Mergers and AcquisitionsGeneralCoordinationInternal CoordinationCoordination of External ExpertsFinancial AnalysisFinancial Criteria and MetricsValuationDetermination of Deal StructureAssets versus StockEarn‐OutsWorking Capital AdjustmentsDue DiligenceEstablishing Due Diligence ObjectivesManaging the Due Diligence ProcessReporting on Results
IntroductionStrategic ConsiderationsPhases of the Acquisition ProcessOverview of the Search and Qualification ProcessGeneralEarly Identification of an Acquisition CandidateImportance of Structure and DisciplineContinuous EvaluationCreation of a Core Acquisition TeamGeneralRole of the CEONeed for the Involvement of the CFORole of the M&A AttorneySearch EffortGeneralResearchUse of the InternetNetworkingConclusionCandidate ScreeningBasic CriteriaAvailabilityStrategic FitLiabilitiesSizeGrowth CharacteristicsProfitabilityPotential Synergies and EfficienciesIdentificationContact with the Target CompanyConfidentialityMeeting with the Principals of the Target CompanyQualificationMutual AgreementAcquisition CharterAcquisition CharterXYZ CorporationFebruary 2007Targeting ObjectivesProfile DataAcquisition Criteria
IntroductionValuation OverviewConceptual FrameworkPublicly Traded Acquisition TargetsSynergyRevenue SynergiesCost SynergiesImpact of Synergies on Purchase PricePrivately Held Acquisition TargetsValuation Approaches and MethodologiesIncome ApproachAsset‐Based ApproachMarket ApproachValuation ModelingGeneralPreliminary Information RequestNormalization of Historical ResultsEstablishing Stand‐alone and Investment ValueValidation of Value by Use of MultiplesComparing Valuations to Investment CriteriaUse of a Comprehensive ModelAcquirer's Internal Approval to ProceedEstablish a Mutual Understanding of Broad Terms of the TransactionDocumentation of the Broad Terms of the TransactionGeneralContent of Letter of IntentRequest for Information to Be Used in Due DiligenceA Survey of Valuation Methodology and TechniquesValuation ModelStandard of ValueOperational AnalysisFinancial AnalysisValuation ApproachIncome ApproachAsset‐Based (Cost) ApproachMarket ApproachValuation MethodologyCapitalization of EarningsDiscounted Earnings MethodPrice/Earnings Ratio MethodDividend‐Paying Capacity MethodNet Asset MethodExcess Earnings (Return on Assets) Treasury MethodExcess Earnings (Return on Assets) Reasonable Rate MethodGuideline MethodDirect Market Data MethodRule of Thumb and Formula MethodAnalysis of Discounts and PremiumsDiscount for a Minority InterestPremiumsDiscount for Lack of MarketabilityEstimate of ValueSynthesizing the Estimate of Value: Final CommentsIllustration of Letter of IntentIllustrative Information RequestXYZ Software COGeneralFinancialHuman ResourcesLegal/Real EstateCustomer Information, Order Entry, and Billing SystemsShipping/ProductionSales and MarketingBusiness Planning and DevelopmentProduct/TechnologyMiscellaneous OperationsEndnotes
IntroductionCreation of the Due Diligence TeamGeneralComposition of the Due Diligence TeamOther ConsiderationsDevelopment of the Due Diligence ProgramGeneralKey Aspects of the Due Diligence ProgramPlanning Due DiligenceConducting Due DiligenceComponents of the Due Diligence ReviewOther ConsiderationsReporting on Due DiligenceGeneralSummary ReportFinal Approval DocumentVariation on the Theme: AuctionsGeneralAuction ProcessAcquisition Due Diligence ChecklistBusiness OverviewCompany Background and OrganizationReview of Proposed TransactionManagementRelated Party TransactionsLabor ForceProduct Development and ProductionResearch and DevelopmentMarketingLegal and Regulatory MattersContractsInsuranceFinancial ReviewGeneralCashAccounts ReceivableMiscellaneous ReceivablesInventoriesProperty, Plant, and EquipmentPrepaid Expenses, Deferred Charges, and Other AssetsLong‐Term InvestmentsIntangible AssetsCurrent Liabilities (Other than Income Taxes)Deferred RevenueIncome TaxesLong‐Term DebtContingent LiabilitiesCommitmentsLeases, Franchise, and Royalty AgreementsCapital StockIncome Statement AccountsBudgeted and Forecasted DataSystemsAcquisition Candidate InformationCorporateGeneralFinancialCurrent Year and Historical ResultsRevenueOperating ExpensesBalance Sheet AccountsOther Accounting MattersTechnologyGeneralProductsGeneralMarketing and SalesGeneralLegalGeneralRegulatory MattersMaterial AgreementsFacilitiesTaxesInsuranceGeneralHuman ResourcesGeneralManagementSignificant Agreements: NonmanagementEmployeesDemographicsIssues ManagementSafety MattersDevelopmentEmployment CostsBenefit Plans
IntroductionAgreement and Supporting DocumentsSimultaneous versus Delayed CloseContract NegotiationsElements of the AgreementProperty Transfer and Purchase Price InformationRepresentations and WarrantiesRepresentations and Warranties Common to Buyer and SellerAdditional Buyer Representations and WarrantiesAdditional Seller Representations and WarrantiesCovenantsConditionsIndemnificationSchedules to the AgreementSupporting DocumentsNoncompete AgreementsGeneralLegal StatusEnforcementTax AspectsOther LimitationsNegotiationEmployment/Consulting AgreementsTransition Services AgreementIllustration of Stock Purchase AgreementIllustration of Stock Purchase AgreementArticle I Purchase and SaleArticle II Purchase Price and Noncompetition PaymentCash PaymentNoncompetition PaymentPromissory NoteSecurityArticle III Representations and Warranties of the Seller and the CompanyOrganization and Good StandingCorporate AuthorityCapitalization of the CompanyNo Violation of ObligationsFinancial Statements of the CompanyAssetsLiabilitiesOperations since the Financial StatementsLegal ProceedingsMaterial AgreementsEmployeesCompliance with LawEnvironmental ComplianceTax ReturnsInsuranceComplete DisclosureArticle IV Representations and Warranties of BuyerOrganization and Qualification of the BuyerCorporate AuthorityNo Violation of ObligationsFinancial StatementsLiabilitiesCompliance with LawLegal ProceedingsLiensSecurities ComplianceComplete DisclosureArticle V Information and ConfidentialityProvision of Information Relating to CompanyConfidentialityProvision of Information Relating to BuyerContacts with Third PartiesArticle VI Consulting and Noncompetition AgreementsConsulting AgreementNoncompetition CovenantArticle VII Conditions to ClosingSeller's ConditionsBuyer's ConditionsArticle VIII ClosingCertificatesCompany's Legal OpinionEndorsement of Stock CertificatesResignation of SellerElection of New Officers and DirectorsIssuance of New Stock CertificatePurchase PriceSecurity for Purchase PriceConsulting AgreementNoncompetition CovenantNoncompetition PaymentOther ActsArticle IX TerminationFailure to CloseFailure of ConditionTermination by AgreementArticle X Mutual IndemnificationArticle XI Postclosing OperationsRelease of SellerOperations in Ordinary CourseReportsArticle XII General ProvisionsSurvival of AgreementNoticesSuccessors and AssignsMergerGoverning LawObligations to BrokersModification or SeveranceCaptionsIllustration of Assets Purchase AgreementIllustration of Assets Purchase AgreementArticle I Purchase and Sale of AssetsArticle II Purchase Price and Noncompetition PaymentCash PaymentNoncompetition PaymentPromissory NoteSecurityArticle III Assumption of LiabilitiesArticle IV Representations and Warranties of the Shareholder and the SellerOrganization and Good StandingCorporate AuthorityNo Violation of ObligationsFinancial Statements of the SellerAssetsLiabilitiesOperations Since the Financial StatementsLegal ProceedingsMaterial AgreementsEmployeesCompliance with LawEnvironmental ComplianceTax ReturnsInsuranceComplete DisclosureArticle V Representations and Warranties of the BuyerOrganization and Qualification of the BuyerCorporate AuthorityNo Violation of ObligationsFinancial StatementsLiabilitiesCompliance with LawLegal ProceedingsLiensComplete DisclosureArticle VI Information and ConfidentialityProvision of Information Relating to SellerConfidentialityProvision of Information Relating to BuyerContacts with Third PartiesArticle VII Consulting and Noncompetition AgreementsConsulting AgreementNoncompetition CovenantArticle VIII Conditions to ClosingShareholder's and Seller's ConditionsBuyer's ConditionsArticle IX ClosingCertificatesSeller's Legal OpinionAssignment and Bill of SaleAssignment of Intangibles and ContractsAssumption of Assumed LiabilitiesPurchase PriceSecurity AgreementNoncompetition CovenantNoncompetition PaymentCorporate AuthorizationTax AllocationsSubordination AgreementConsulting AgreementOther ActsArticle X TerminationFailure to CloseFailure of ConditionTermination by AgreementArticle XI Mutual IndemnificationArticle XII Postclosing OperationsRelease of ShareholderOperations in Ordinary CourseReportsArticle XIII General ProvisionsSurvival of AgreementNoticesSuccessors and AssignsMergerGoverning LawObligations to BrokersModification or SeveranceCaptions
GeneralIntegration and SynergiesOperational IntegrationImportance of Speed of ImplementationPre–Due Diligence PhaseIntegration LeadershipThe TeamPreliminary PlanCultural EvaluationDue Diligence PhasePost–Close PhaseOverview of the ProcessAreas of FocusHuman ResourcesFacilitiesInformation TechnologyResearch and Development and Product DevelopmentSalesMarketingAccounting and Reporting SystemsConclusionGuidelines for Managers and ExecutivesGuidelines for Managers and Executives in the Acquiring FirmGuidelines for Managers and Executives in the Acquired Organization
IntroductionBusiness Plans and Their UsesImportance of ProjectionsCash Flow ProjectionsBusiness Plan as Validation of the Acquisition RationaleFinancing ResourcesUse of Internal AssetsLeveraged TransactionsSeller FinancingEquity and Debt FinancingAllocation of RiskImportance of EquityShopping for DebtLender LeverageGuaranteesSubordinationForms and Types of EquityPublic Offerings

IntroductionSale of an Entire BusinessAcquisitions or Mergers of Public CompaniesAcquisitions of Privately Held BusinessesUnsolicited SalesPreparing a Business for SaleDivestituresStrategic DivestituresFinancial DivestituresPredivestiture Issues and ConsiderationsDelayUndercommitment of ResourcesInfrastructure IntegrationPersonnel IssuesHart‐Scott‐Rodino ActConclusionDivestiture PlanningApproval DocumentRetention PlanCreation of the Divestiture TeamDevelopment of the Divestiture PlanDevelopment of a Communication PlanPreparing for the TransactionEngagement of BrokerEngagement of Accounting FirmDevelopment of Management PresentationsDevelopment of an Offering DocumentIdentification of Potential BuyersPreparation of a Data RoomExecution of the TransactionAnnouncement of the Prospective SaleSolicitation of Initial BidsManaging Due DiligenceFinalization of the Bid ProcessContract Negotiations and CloseIllustrative Divestiture Timeline
GeneralOverviewOrdinary versus Capital Gain or LossNontaxable TransactionsIRS PowersBuyer‐Seller ConflictNote of CautionTaxable AcquisitionsGeneralStructures of Taxable Asset AcquisitionsCorporate LiquidationsAllocation of Purchase Price in Asset AcquisitionsGain or Loss of the Seller in Asset AcquisitionsDetermining Amount and Character of Gain or LossRecaptureEffect on Shareholders of Complete Liquidation after Sale of Assets by a CorporationTaxable Stock AcquisitionsIRC Section 338GeneralRegular Section 338 ElectionSection 338(h)(10) ElectionTax‐Free Mergers and AcquisitionsGeneral Concepts and RequirementsTypes of Tax‐Free ReorganizationsType A Reorganization–Statutory MergersType B ReorganizationsCreeping ControlType C ReorganizationsType D ReorganizationsAcquisitive Type D ReorganizationsDivisive Type D ReorganizationHybrid Reorganizations: Triangular Mergers and Reverse Triangular MergersTriangular MergerReverse Triangular MergerContinuity Requirement in a Reverse AcquisitionTaking a Corporation Private Qualified as a Reverse Acquisition in Technical Advice Memorandum 9806003Tax Losses and Tax Credit Carryovers of Acquired CorporationsGeneralIRC Section 381IRC Sections 269 and 482IRC Section 382GeneralIRC Section 382 LimitationIRC Section 383IRC Section 384Miscellaneous Tax ConsiderationsInstallment Method of Reporting Gain Not Available to Accrual Method TaxpayersExpenses of Taxable AcquisitionsSmall Business Stock
General Principles of Purchase AccountingDetermining the Cost of an AcquisitionGeneralStock Issued in Payment of Purchase PriceDirect Costs of Acquisitions Other than Purchase PricePremium or DiscountAssets ExchangedContingent ConsiderationPreacquisition ContingenciesStock Option ExchangesRecording Assets Acquired and Liabilities AssumedGeneralAppraisalsGuidelines for Allocating Acquisition Cost to Individual Assets and LiabilitiesGeneralMarketable SecuritiesReceivablesInventoriesPlant and EquipmentIntangible AssetsOther AssetsAccounts and Notes PayableAccrued LiabilitiesPension CostsVacation Pay and Compensated AbsencesOther LiabilitiesCosts to Exit an Activity of an Acquired CompanyInvoluntary Employee Termination Benefits and Relocation CostsDisclosurePurchase Accounting in Special AreasInventoriesAllocation of Acquisition Cost Including Seller's ProfitInventory Purchased in Separate ContractLast‐in, First‐Out InventoryLeasesUnfavorable LeasesFavorable LeasesLease ClassificationAssumption of a Leveraged Lease as LessorPreacquisition ContingenciesForeign Currency TranslationMinority InterestsPurchased In‐Process R&D CostsAccounting for Acquired Assets That Are to Be Disposed OfIntangible Assets and Goodwill at Acquisition DateIntangible Assets and Goodwill after Acquisition DateReporting UnitsEffective Dates and Transition for Statements 141 and 142Income Tax AccountingGeneralDeferred TaxesGeneralDeferred Taxes in Goodwill SituationsDeferred Taxes in Negative Goodwill SituationsPostacquisition Recognition of Net Operating Loss and Tax Credit CarryforwardsGoodwillAggressive Tax PositionsMiscellaneousIdentifiable IntangiblesLIFO InventoriesTax RatesEffects of Consolidated Tax ImplicationsRecord Keeping for Purchase Accounting AcquisitionsFinancial Reporting of a Purchase AcquisitionIllustrations of Purchase AccountingPositive Goodwill SituationNegative Goodwill Situation
Overview of Regulatory EnvironmentSecurities Law Requirements upon Merger or AcquisitionPrimary Filing RequirementsPrivate Sale ExemptionsSize of OfferRelationship to IssuerSecondary DistributionForm S‐1 FilingsForm S‐4 FilingsSolicitation and Preparation of ProxiesGeneralInformation Included in Proxy StatementsTender OffersGeneralPurchase of Own SecuritiesPurchase during a Third‐Party Tender OfferOther Self‐TendersFinancial Statement RequirementsThird‐Party Tender OffersTender Offer CommencementFinancial Statements of Certain BiddersSEC Financial Reporting RequirementsHistorical Financial Statements of RegistrantsHistorical Financial Statements of Acquired EntitiesProbable AcquisitionsPeriods to Be PresentedAcquisitions of Individually Insignificant SubsidiariesWhat Constitutes a BusinessStock Exchange RequirementsPro Forma Financial StatementsArticle 11 Presentation of Pro Forma InformationMultiple Presentation for Some TransactionsUnique Situations Involving IPOsSignificant Foreign Equity Investees and Acquired Foreign Businesses of Domestic IssuersForeign Private IssuersSEC Staff Position on Financial Statements of Businesses Acquired or to Be AcquiredAntitrust RegulationsOther RegulationsBlue Sky LawsERISA FilingsIRS RulingsOther FilingsSignificant SEC Regulatory and Accounting Pronouncements

Overview

Supplemented annually to keep accountants up-to-date with the latest SEC requirements, this completely revised edition focuses on the entire process of Mergers and Acquisitions-—from planning through post-acquisition integration. Readers will find helpful step-by-step guidance on reviewing an acquisition candidate, setting up and implementing computer system transactions, accounting for the business combination, and tax compliance and regulatory considerations.