Mergers, Acquisitions, and Corporate Restructurings. Gaughan Patrick А.

bidders, began to decline. In turn, the percentage of shares in the hands of more financially oriented parties, such as money managers, began to rise. Another factor that played a role in facilitating hostile deals is that banks had often played a defensive role for target management. They often held shares in the target and even maintained seats on the target's board and opposed hostile bidders while supporting management. One of the first signs of this change was apparent when WestLB bank supported Krupp in its takeover of Hoesch in 1991. In the case of Mannesmann, Deutsche Bank, which had been the company's bank since the late 1800s,2 had a representative on Mannesmann's board but he played no meaningful role in resisting Vodafone's bid. Other parties who often played a defensive role, such as representatives of labor, who often sit on boards based on what is known as codetermination policy, also played little role in this takeover.

      The position of target shareholders is key in Germany, as antitakeover measures such as poison pills (to be discussed at length in Chapter 5) are not as effective due to Germany's corporate law and the European Union (EU) Takeover Directive, which requires equal treatment of all shareholders. However, German takeover law includes exceptions to the strict neutrality provisions of the Takeover Directive, which gives the target's board more flexibility in taking defensive measures.

      It is ironic that Vodafone was able to take over Mannesmann as the latter was much larger than Vodafone in terms of total employment and revenues. However, the market, which was at that time assigning unrealistic values to telecom companies, valued Mannesmann in 1999 at a price/book ratio of 10.2 (from 1.4 in 1992), while Vodafone had a price/book ratio of 125.5 in 1999 (up from 7.7 in 1992).3 This high valuation gave Vodafone “strong currency” with which to make a stock-for-stock bid that was difficult for Mannesmann to resist.

      The takeover of Mannesmann was a shock to the German corporate world. Parties that were passive began to become more active in response to a popular outcry against any further takeover of German corporations. It was a key factor in steeling the German opposition to the EU Takeover Directive, which would have made such takeovers easier.

Figure 1.3 Central America and South America, 1985–2014. Source: Thomson Financial Securities Data, March 6, 2015.

      In Central America the larger deals are attributable to Mexico. Mexico has been undergoing something of an economic resurgence, which has been boosted by recent attempts to deregulate major industries, such as petroleum and telecommunications, while fostering greater competition. It is too early to determine the outcome of these efforts, but they imply a higher volume of M&A in the future.

      Terminology

      A merger differs from a consolidation, which is a business combination whereby two or more companies join to form an entirely new company. All of the combining companies are dissolved and only the new entity continues to operate. One classic example of a consolidation occurred in 1986 when the computer manufacturers Burroughs and Sperry combined to form Unisys. A more recent example of a consolidation occurred in 2014 when Kinder Morgan consolidated its large oil and gas empire. It had Kinder Morgan, Inc., acquire Kinder Morgan Energy Part LP, Kinder Morgan Management LLC, and El Paso Pipeline Partners LP. The acquired entities were master limited partnerships that provided certain tax benefits but that limited the ability of the overall business to grow and do larger M&As.

Table 1.4 Top 5 Central American M&A by Value of Transaction, Top 5 South American M&A by Value of Transaction

      Source: Thomson Financial Securities Data, February 19, 2015.

      In a consolidation, the original companies cease to exist and their stockholders become stockholders in the new company. One way to look at the differences between a merger and a consolidation is that with a merger, A + B = A, where company B is merged into company A. In a consolidation, A + B = C, where C is an entirely new company. Despite the differences between them, the terms merger and consolidation, as is true of many of the terms in the M&A field, are sometimes used interchangeably. In general, when the combining firms are approximately the same size, the term consolidation applies; when the two firms differ significantly in size, merger is the more appropriate term. In practice, however, this distinction is often blurred, with the term merger being broadly applied to combinations that involve firms of both different and similar sizes.

      Valuing a Transaction

      Throughout this book we cite various merger statistics on deal values. The method used by Mergerstat is the most common method relied on to value deals. Enterprise value is defined as the base equity price plus the value of the target's debt (including both short- and long-term) and preferred stock less its cash. The base equity price is the total price less the value of the debt. The buyer is defined as the company with the larger market capitalization or the company that is issuing shares to exchange for the other company's shares in a stock-for-stock transaction.

      Types of Mergers

      Mergers are often categorized as horizontal, vertical, or conglomerate. A horizontal merger occurs when two competitors combine. For example, in 1998, two petroleum companies, Exxon and Mobil, combined in a $78.9 billion megamerger. Another example was the 2009 megamerger that occurred when Pfizer acquired Wyeth for $68 billion. If a horizontal merger causes the combined firm to experience an increase in market power that will have anticompetitive effects, the merger may be opposed on antitrust grounds. In recent years, however, the U.S. government has been somewhat liberal in allowing many horizontal mergers to go unopposed. That stance, however, appeared to toughen slightly when new leadership was put in place at the Justice Department following the election of Barack Obama. In Europe the European Commission has traditionally been somewhat cautious when encountering mergers that may have anticompetitive effects.

      Vertical mergers are combinations of companies that have a buyer-seller relationship. A good example is the U.S. eyeglasses industry. One company, an Italian manufacturer, Luxottica, expanded into the U.S. market through a series of acquisitions. It was able to acquire retailers such as Lenscrafters and Sunglasses Hut, as well as major brands such as Ray-Ban and Oakley. It is surprising to some that the company was allowed by regulators to assume the large vertical position it enjoys in the U.S. eyeglasses market.4

      A conglomerate merger occurs when the companies are not competitors and do not have a buyer-seller relationship. One example would be Philip Morris, a tobacco company, acquiring General Foods in 1985 for $5.6 billion, Kraft in 1988 for $13.44 billion, and Nabisco in 2000 for $18.9 billion. Interestingly, Philip Morris, which later changed its name to Altria, had used the cash flows from its food and tobacco businesses to become less of a domestic tobacco company and more of a food business. This is because the U.S. tobacco industry has been declining at an average rate of 2 % per year (in shipments), although the international tobacco business has not been experiencing such a decline. The company eventually concluded that the litigation problems of its U.S. tobacco unit, Philip Morris USA, were a drag on the stock price of the overall corporation and disassembled the conglomerate.

      Another major example of a conglomerate is General Electric (GE). This company has done what many others have not been able to do successfully – manage a diverse portfolio of companies in a way that creates shareholder wealth (most of the time). GE is a serial acquirer and a highly successful one at that. As we will discuss in Chapter 4, the track record of diversifying and conglomerate acquisitions is not good. We will explore why a few companies have been able to do this while many others have not.

      Merger Consideration

      Mergers may be paid for in several ways. Transactions may use all cash, all securities, or a combination of cash and securities. Securities transactions may use the stock of the acquirer as well as other securities, such as debentures. The stock may be

2

Martin Hopner and Gregory Jackson, “More In-Depth Discussion of the Mannesmann Takeover,” Max Planck Institut für Gesellschaftsforschung, Cologne, Germany, January 2004.