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business
essentials corporate finance
Mergers Acquisitions And Other Restructuring Activities 5th Edition Donald DePamphilis - Solutions
13–9. Is it possible for an LBO to make sense to equity investors but not to other investors in the deal? If so, why? If not, why not?
13–10. How does the risk of an LBO change over time? How can the impact of changing risk be incorporated into the valuation of the LBO?
13–11. In an effort to take the firm private, Cox Enterprises announced on August 3, 2004, a proposal to buy the remaining 38 percent of Cox Communications’s shares that it did not already own. Cox Enterprises stated that the increasingly competitive cable industry environment makes investment
13–12. Following Cox Enterprises’ announcement on August 3, 2004, of its intent to buy the remaining 38 percent of Cox Communications’s shares that it did not already own, the Cox Communications board of directors formed a special committee of independent directors to consider the proposal.
13–15. Sony’s long-term vision has been to create synergy between its consumer electronics products business and its music, movies, and games. On September 14, 2004, a consortium, consisting of Sony Corp of America, Providence Equity Partners, Texas Pacific Group, and DLJ Merchant Banking
13–16. Assume that, based on similar transactions, an analyst believes that a buyout firm will be able to borrow about 5.5 times first year EBITDA of $200 million(i.e., about $1.1 billion) and that the buyout firm has a target senior to subordinated debt split of 75 to 25 percent. Further assume
13–17. By some estimates, as many as one fourth of the LBOs between 1987 and 1990(the first mega LBO boom) went bankrupt. The data in Table 13–12 illustrate the extent of the leverage associated with the largest completed LBOs of 2006 and 2007 (the most recent mega-LBO boom). Equity Office
1. What were the motivations for this deal from Cerberus’s perspective? From Daimler’s perspective?
2. What are the risks to this deal’s eventual success? Be specific.
3. Cite examples of potential economies of scale and scope.
4. Cerberus and Daimler would own 80.1 percent and 19.9 percent of Chrysler Holdings LLC, respectively. Why do you think the two parties agreed to this distribution of ownership?
5. Which of the leading explanations of why deals often fail to meet expectations(i.e., tendency to overpay, slow integration, and bad business plan) best explains why the combination of Daimler and Chrysler failed? Explain your answer.
6. The new company, Chrysler Holdings, is a limited liability company. Why do you think Cerberus chose this legal structure over a more conventional corporate structure?
1. What criteria did Pacific Investors (PI) use to select California Kool (CK) as target for an LBO? Why were these criteria employed?
2. Describe how PI financed the purchase price. Speculate as why each source of financing was selected. How did CK pay for fees incurred in closing the transaction?
3. What are the advantages and disadvantages of using enterprise cash flow in valuing CK? In what way might EBITDA have been a superior (inferior) measure of cash flow for valuing CK?
4. Compare and contrast the cost of capital method and the adjusted present value method of valuation.
14–1. Under what circumstances does a business alliance represent an attractive alternative to a merger or acquisition?
14–2. Compare and contrast a corporate and partnership legal structure.
14–3. What are the primary motives for creating a business alliance? How do they differ from the motives for a merger or acquisition?
14–4. What factors are critical to the success of a business alliance?
14–5. Why is a handshake agreement a potentially dangerous form of business alliance? Are there any circumstances under which such an agreement may be appropriate?
14–6. What is a limited liability company? What are its advantages and disadvantages?
14–7. Why is defining the scope of a business alliance important?
14–8. Discuss ways of valuing tangible and intangible contributions to a JV.
14–10. What are the common reasons for the termination of a business alliance?
14–11. In 2005, Google invested $1 billion for a 5 percent stake in Time Warner’s America Online unit as part of a partnership that expands the firm’s existing search engine deal to include collaboration on advertising, instant messaging, and video. Under the deal, Google would have the usual
14–12. In late 2004, Conoco Phillips (Conoco) announced the purchase of 7.6 percent of Lukoil’s (a largely government-owned Russian oil and gas company) stock for $2.36 billion during a government auction of Lukoil’s stock. Conoco would have one seat on Lukoil’s board. As a minority
14–14. In late 1999, General Motors (GM), the world’s largest auto manufacturer, agreed to purchase 20 percent of Japan’s Fuji Heavy Industries, Ltd., the manufacturer of Subaru vehicles, for $1.4 billion. Why do you believe that initially General Motors may have wanted to limit its
14–15. Through its alliance with Best Buy, Microsoft is selling its products—including Microsoft Network (MSN) Internet access services and hand-held devices such as digital telephones, hand-held organizers, and WebTV that connect to the Web—through kiosks in Best Buy’s 354 stores
1. What tactics do you think Anheuser-Busch might employ to exploit the predicted confusion during the integration of the SABMiller and Coors operations?
2. How did the combination of the U.S. operations of SABMiller and MolsonCoors meet the needs of the two parties? Why was a JV viewed as preferable to a merger of the two firm’s global operations?
3. How do you believe the ownership distribution for MillersCoors was determined?
4. Why do you believe that SAB and Coors agreed to equal board representation and voting rights in the new JV? What types of governance issues might arise in view of the governance structure of MillersCoors? What mechanisms might have been put in place by the partners prior to closing to resolve
1. In your opinion, what were the motivating factors for the Coke and P&G business alliance?
2. Why do you think the parents selected a limited liability corporate structure for the new company? What are the advantages and disadvantages of this structure over alternative legal structures?
3. The parents estimated that the new company would add at least $1.5–2.0 billion to their market values. How do you think this estimated incremental value was determined?
4. Why do you think the parents opted to form a 50–50 distribution of ownership?What are some possible challenges of operating the new company with this type of an ownership arrangement? What can the parents do to overcome these challenges?
5. Do you think it is likely that the new company would be highly entrepreneurial and innovative? Why or why not? What could the parents do to stimulate the development of this type of an environment within the new company?
6. What factors may have contributed to the decision to discontinue efforts to implement the joint venture? Consider control, scope, financial, and resource contribution issues.
15–1. How do tax and regulatory considerations influence the decision to exit a business?
15–2. How would you decide when to sell a business?
15–3. What are the major differences between a spin-off and an equity carve-out?
15–4. Under what conditions is a spin-off tax free to shareholders?
15–5. Why would a firm decide to voluntarily split up?
15–6. What are the advantages and disadvantages of tracking stocks to investors and the firm?
15–7. What factors contribute to the high positive abnormal returns to shareholders before the announcement of a voluntary bust-up?
15–8. What factors influence a parent firm’s decision to undertake a spin-off rather than a divestiture or equity carve-out?
15–9. How might the form of payment affect the abnormal return to sellers and buyers?
15–10. How might spin-offs result in a wealth transfer from bondholders to shareholders?
15–14. After months of trying to sell its 81-percent stake in Blockbuster Inc., Viacom undertook a spin-off in mid-2004. Why would Viacom choose to spin off rather than divest its Blockbuster unit? Explain your answer.
15–15. Since 2001, GE, the world’s largest conglomerate, had been underperforming the S&P 500 stock index. In late 2008, the firm announced that it was considering spinning off its consumer and industrial unit. What do you believe are GE’s motives for their proposed restructuring? Why do you
1. How did changes in Hughes’s external environment contribute to its dramatic 20-year restructuring effort? Cite specific influences in answering this question.(Hint: Consider the motivations discussed in this chapter for engaging in restructuring activities.) Cite examples of how Hughes took
2. Why did Hughes’s board and management seem to rely heavily on divestitures rather than other restructuring strategies discussed in this chapter to achieve the radical transformation of the firm? Be specific.
3. What risks did Hughes face in moving completely away from its core defense business and into a high-technology commercial business? In your judgment, did Hughes move too quickly or too slowly? Explain your answer.
4. Why did Hughes move so aggressively to hire employees from the cable TV and broadcast industry?
5. Speculate as to why News Corp, a major entertainment industry content provider, might have been interested in acquiring Hughes. Be specific.
1. What were the primary factors contributing to AT&T’s numerous restructuring efforts since 1984? How did they differ? How were they similar?
2. Why do you believe that AT&T chose to split off its wireless operations rather than divest the unit? What might you have done differently?
3. Was AT&T proactive or reactive in initiating its 2000 restructuring program?Explain your answer.
4. AT&Toverpaid for many of its largest acquisitions made during the 1990s. How might this have contributed to its subsequent restructuring efforts?
5. To what extent were AT&T’s ineffectual restructuring efforts a function of factors beyond management’s control and to what extent were they due to poor implementation? Be specific.
6. What challenges did AT&T face in trying to split up the company in 2000? What might you have done differently to overcome these obstacles?
16–1. Why are strong creditor rights important to an efficiently operating capital market? What is the purpose of bankruptcy in promoting capital market efficiency?
16–2. Of all possible stakeholders to the bankruptcy process, which are likely to benefit the most? Which are likely to benefit the least? Explain your answer.
16–3. What are the advantages to the lender and the debtor firm’s shareholders of reaching a negotiated settlement outside of bankruptcy court? What are the primary disadvantages?
16–4. How does the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 differ from the Bankruptcy Reform Act of 1978? It what ways do you feel that it represents an improvement? In what ways could the more recent legislation discourage reorganization in Chapter 11? Be specific.
16–5. What are prepackaged bankruptcies? In what ways do they represent streamlining of the credit recovery process?
16–6. Why would creditors make concessions to a debtor firm? Give examples of common types of concessions. Describe how these concessions affect the debtor firm.
16–8. What are the primary options available to a failing firm? What criteria might the firm use to select a particular option? Be specific.
16–9. Describe the probable trend in financial returns to shareholders of firms that emerge from bankruptcy. To what do you attribute these trends? Explain your answer.
16–10. Identify at least two financial or nonfinancial variables that have been shown to affect firm defaults and bankruptcies. Explain how each might affect the likelihood the firm will default or seek Chapter 11 protection.
16–13. What are the primary factors contributing to business failure? Be specific.
1. In your judgment, what were the major factors contributing to the demise of Enron? Of these factors, which were the most important? Explain your answer.
2. In what way was the Enron debacle a breakdown in corporate governance(oversight)? Explain your answer.
3. How were the Enron partnerships used to hide debt and inflate the firm’s earnings? Should partnership structures be limited in the future? If so, how?
4. What should (or can) be done to reduce the likelihood of this type of situation arising in the future? Assess the impact of your proposals on the willingness of corporate managers to take risks. Be specific.
1. To what extent do you believe the factors contributing to the airline’s bankruptcy were beyond the control of management? To what extent do you believe past airline mismanagement may have contributed to the bankruptcy?
2. Comment on the fairness of the bankruptcy process to shareholders, lenders, employees, communities, government, and so forth. Be specific.
3. Why would lenders be willing to lend to a firm emerging from Chapter 11? How did the lenders attempt to manage their risks? Be specific.
4. In view of the substantial loss of jobs, as well as wage and benefit reductions, do you believe that firms should be allowed to reorganize in bankruptcy? Explain your answer.
5. How does Chapter 11 potentially affect adversely competitors of those firms emerging from bankruptcy? Explain your answer.
17–3. Describe the circumstances under which a firm may find a merger or acquisition a more favorable market entry strategy than a joint venture with a firm in the local country.
17–5. Compare and contrast laws that might affect acquisitions by a foreign firm in the United States. In the European Union.
17–6. Discuss the circumstances under which a non-U.S. buyer may choose a U.S.corporate structure as its acquisition vehicle. A limited liability company? A partnership?
17–7. What factors influence the selection of which tax rate to use (i.e., the target’s or the acquirer’s) in calculating the weighted-average cost of capital in crossborder transactions?
17–8. Discuss adjustments commonly made in estimating the cost of debt in emerging countries.
17–9. Find an example of a recent cross-border transaction in the business section of a newspaper. Discuss the challenges an analyst might face in valuing the target firm.
17–10. Discuss the various types of adjustments for risk that might be made to the global CAPM before valuing a target firm in an emerging country. Be specific.
17–11. Do you see the growth in sovereign wealth funds as important sources of capital to the M&A market or as a threat to the sovereignty of the countries in which they invest? Explain your answer.
17–12. What primary factors contribute to the increasing integration of the global capital markets? Be specific.
17–13. Give examples of economic and political risk that you could reasonably expect to encounter in acquiring a firm in an emerging economy. Be specific.
17–14. During the 1980s and 1990s, changes in the S&P 500 (a broadly diversified index of U.S. stocks) were about 50 percent correlated with the MSCI EAFE Index (a broadly diversified index of European and other major industrialized countries’ stock markets). In recent years, the correlation
1. Should CNNOC have been permitted to buy Unocal? Why or why not?
2. How might the Chinese have been able to persuade U.S. regulatory authorities to approve the transaction?
3. The U.S. and European firms are making substantial investments (including M&As) in China. How should the Chinese government react to this rebuff?
1. Who do you think negotiated the best deal for their shareholders, Chris Gent or Klaus Esser? Explain your answer in terms of short- and long-term impacts.
2. Both firms were pursuing a similar strategy of expanding their geographic reach.Does this strategy make sense? Why or why not? What risks are associated with this strategy?
3. Do you think the use of all stock, rather than cash or a combination of cash and stock, to acquire Mannesmann helped or hurt Vodafone AirTouch’s shareholders?
4. Do you think that Vodafone AirTouch conceded too much to the labor unions and Mannesmann’s management to get the deal done? Explain your answer.
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