Exam 12: Structuring the Deal:

How might the use of stock, as an acquisition "currency," have contributed to the sustained decline in JDS Uniphase's stock through mid-2001? In your judgment what is the likely impact of the glut of JDS Uniphase shares in the market on the future appreciation of the firm's share price? Explain your answer.

What are the advantages and disadvantages of a tax-free transaction for the buyer? Be specific.

Goodwill no longer has to be amortized over its projected life, but it must be written off if it is deemed to have been impaired. Impairment reviews are to be taken annually or whenever the firm has experienced an event which materially affects the value of its assets.

The major advantages of using a triangular structure are limitations of the voting rights of acquiring shareholders and that the acquirer gains control of the target through a subsidiary without being directly responsible for the target's known and unknown liabilities.

Tax-free reorganizations require that substantially all of the consideration received by the target's shareholders be paid in cash.

What is the form of payment and form of acquisition employed by SoftBank in its takeover of Sprint-Nextel? Is all or some of the total consideration paid to Sprint shareholders tax free?

Consolidation in the Wireless Communications Industry: Vodafone Acquires AirTouch . Deregulation of the telecommunications industry has resulted in increased consolidation. In Europe, rising competition is the catalyst driving mergers. In the United States, the break up of AT&T in the mid-1980s and the subsequent deregulation of the industry has led to key alliances, JVs, and mergers, which have created cellular powerhouses capable of providing nationwide coverage. Such coverage is being achieved by roaming agreements between carriers and acquisitions by other carriers. Although competition has been heightened as a result of deregulation, the telecommunications industry continues to be characterized by substantial barriers to entry. These include the requirement to obtain licenses and the need for an extensive network infrastructure. Wireless communications continue to grow largely at the expense of traditional landline services as cellular service pricing continues to decrease. Although the market is likely to continue to grow rapidly, success is expected to go to those with the financial muscle to satisfy increasingly sophisticated customer demands. What follows is a brief discussion of the motivations for the merger between Vodafone and AirTouch Communications. This discussion includes a description of the key elements of the deal structure that made the Vodafone offer more attractive than a competing offer from Bell Atlantic. Vodafone Company History Vodafone is a wireless communications company based in the United Kingdom. The company is located in 13 countries in Europe, Africa, and Australia/New Zealand. Vodafone reaches more than 9.5 million subscribers. It has been the market leader in the United Kingdom since 1986 and as of 1998 had more than 5 million subscribers in the United Kingdom alone. The company has been very successful at marketing and selling prepaid services in Europe. Vodafone also is involved in a venture called Globalstar, LP, a limited partnership with Loral Space and Communications and Qualcomm, a phone manufacturer. "Globalstar will construct and operate a worldwide, satellite-based communications system offering global mobile voice, fax, and data communications in over 115 countries, covering over 85% of the world's population". Strategic Intent Vodafone's focus is on global expansion. They are expanding through partnerships and by purchasing licenses. Notably, Vodafone lacked a significant presence in the United States, the largest mobile phone market in the world. For Vodafone to be considered a truly global company, the firm needed a presence in the Unites States. Vodafone's strategy is focused on maintaining high growth levels in its markets and increasing profitability; maintaining their current customer base; accelerating innovation; and increasing their global presence through acquisitions, partnerships, or purchases of new licenses. Vodafone's current strategy calls for it to merge with a company with substantial market share in the United States and Asia, which would fill several holes in Vodafone's current geographic coverage. Company Structure The company is very decentralized. The responsibilities of the corporate headquarters in the United Kingdom lie in developing corporate strategic direction, compiling financial information, reporting and developing relationships with the various stock markets, and evaluating new expansion opportunities. The management of operations is left to the countries' management, assuming business plans and financial measures are being met. They have a relatively flat management structure. All of their employees are shareowners in the company. They have very low levels of employee turnover, and the workforce averages 33 years of age. AirTouch Company History AirTouch Communications launched it first cellular service network in 1984 in Los Angeles during the opening ceremonies at the 1984 Olympics. The original company was run under the name PacTel Cellular, a subsidiary of Pacific Telesis. In 1994, PacTel Cellular spun off from Pacific Telesis and became AirTouch Communications, under the direction of Chair and Chief Executive Officer Sam Ginn. Ginn believed that the most exciting growth potential in telecommunications is in the wireless and not the landline services segment of the industry. In 1998, AirTouch operated in 13 countries on three continents, serving more than 12 million customers, as a worldwide carrier of cellular services, personal communication services (PCS), and paging services. AirTouch has chosen to compete on a global front through various partnerships and JVs. Recognizing the massive growth potential outside the United States, AirTouch began their global strategy immediately after the spin-off. Strategic Intent AirTouch has chosen to differentiate itself in its domestic regions based on the concept of "Superior Service Delivery." The company's focus is on being available to its customers 24 hours a day, 7 days a week and on delivering pricing options that meet the customer's needs. AirTouch allows customers to change pricing plans without penalty. The company also emphasizes call clarity and quality and extensive geographic coverage. The key challenges AirTouch faces on a global front is in reducing churn (i.e., the percentage of customers leaving), implementing improved digital technology, managing pressure on service pricing, and maintaining profit margins by focusing on cost reduction. Other challenges include creating a domestic national presence. Company Structure AirTouch is decentralized. Regions have been developed in the U.S. market and are run autonomously with respect to pricing decisions, marketing campaigns, and customer care operations. Each region is run as a profit center. Its European operations also are run independently from each other to be able to respond to the competitive issues unique to the specific countries. All employees are shareowners in the company, and the average age of the workforce is in the low to mid-30s. Both companies are comparable in terms of size and exhibit operating profit margins in the mid-to-high teens. AirTouch has substantially less leverage than Vodafone. Merger Highlights Vodafone began exploratory talks with AirTouch as early as 1996 on a variety of options ranging from partnerships to a merger. Merger talks continued informally until late 1998 when they were formally broken off. Bell Atlantic, interested in expanding its own mobile phone business's geographic coverage, immediately jumped into the void by proposing to AirTouch that together they form a new wireless company. In early 1999, Vodafone once again entered the fray, sparking a sharp takeover battle for AirTouch. Vodafone emerged victorious by mid-1999. Motivation for the Merger Shared Vision The merger would create a more competitive, global wireless telecommunications company than either company could achieve separately. Moreover, both firms shared the same vision of the telecommunications industry. Mobile telecommunications is believed to be the among the fastest-growing segment of the telecommunications industry, and over time mobile voice will replace large amounts of telecommunications traffic carried by fixed-line networks and will serve as a major platform for voice and data communication. Both companies believe that mobile penetration will reach 50% in developed countries by 2003 and 55% and 65% in the United States and developed European countries, respectively, by 2005. Complementary Assets Scale, operating strength, and complementary assets were given as compelling reasons for the merger. The combination of AirTouch and Vodafone would create the largest mobile telecommunication company at the time, with significant presence in the United Kingdom, United States, continental Europe, and Asian Pacific region. The scale and scope of the operations is expected to make the combined firms the vendor of choice for business travelers and international corporations. Interests in operations in many countries will make Vodafone AirTouch more attractive as a partner for other international fixed and mobile telecommunications providers. The combined scale of the companies also is expected to enhance its ability to develop existing networks and to be in the forefront of providing technologically advanced products and services. Synergy Anticipated synergies include after-tax cost savings of $340 million annually by the fiscal year ending March 31, 2002. The estimated net present value of these synergies is $3.6 billion discounted at 9%. The cost savings arise from global purchasing and operating efficiencies, including volume discounts, lower leased line costs, more efficient voice and data networks, savings in development and purchase of third-generation mobile handsets, infrastructure, and software. Revenues should be enhanced through the provision of more international coverage and through the bundling of services for corporate customers that operate as multinational businesses and business travelers. AirTouch's Board Analyzes Options Morgan Stanley, AirTouch's investment banker, provided analyses of the current prices of the Vodafone and Bell Atlantic stocks, their historical trading ranges, and the anticipated trading prices of both companies' stock on completion of the merger and on redistribution of the stock to the general public. Both offers were structured so as to constitute essentially tax-free reorganizations. The Vodafone proposal would qualify as a Type A reorganization under the Internal Revenue Service Code; hence, it would be tax-free, except for the cash portion of the offer, for U.S. holders of AirTouch common and holders of preferred who converted their shares before the merger. The Bell Atlantic offer would qualify as a Type B tax-free reorganization. Table 1 highlights the primary characteristics of the form of payment (total consideration) of the two competing offers. Table 1. Camparis an of Farm of PaymentTotal Consideration Vodafone Bell Atlantic 5 shares of Vodafone common plus \ 9 for each 1.54 shares of Bell Atlantic for each share of AirTouch common share of AirTouch common subject to the transaction being treated as a pooling of interest under U.S. GAAP. Share exchange ratio adjusted upward 9 months out to reflect the payment of dividends on the Bell Atlantic stock. A share exchange ratio collar would be used to ensure that Air Touch shareholders would receive shares valued at \ 80.08 . If the average closing price of Bell Atlantic stock were less than \ 48 , the exchange ratio would be increased to 1.6683 . If the price exceeded \ 52 the exchange rate would remain at 1.54. ${ }^{1}$ The collar guarantees the price of Bell Atlantic stock for the Air Touch shareholders because $\$ 48 \times 1.6683$ and $\$ 52 \times 1.54$ both equal $\$ 80.08$ . Morgan Stanley's primary conclusions were as follows: Morgan Stanley’s primary conclusions were as follows: 1. Bell Atlantic had a current market value of $83 per share of AirTouch stock based on the $53.81 closing price of Bell Atlantic common stock on January 14, 1999. The collar would maintain the price at $80.08 per share if the price of Bell Atlantic stock during a specified period before closing were between $48 and $52 per share. 2. The Vodafone proposal had a current market value of $97 per share of AirTouch stock based on Vodafone’s ordinary shares (i.e., common) on January 17, 1999. 3. Following the merger, the market value of the Vodafone American Depository Shares (ADSs) to be received by AirTouch shareholders under the Vodafone proposal could decrease. 4. Following the merger, the market value of Bell Atlantic’s stock also could decrease, particularly in light of the expectation that the proposed transaction would dilute Bell Atlantic’s EPS by more than 10% through 2002. In addition to Vodafone’s higher value, the board tended to favor the Vodafone offer because it involved less regulatory uncertainty. As U.S. corporations, a merger between AirTouch and Bell Atlantic was likely to receive substantial scrutiny from the U.S. Justice Department, the Federal Trade Commission, and the FCC. Moreover, although both proposals could be completed tax-free, except for the small cash component of the Vodafone offer, the Vodafone offer was not subject to achieving any specific accounting treatment such as pooling of interests under U.S. generally accepted accounting principles (GAAP). Recognizing their fiduciary responsibility to review all legitimate offers in a balanced manner, the AirTouch board also considered a number of factors that made the Vodafone proposal less attractive. The failure to do so would no doubt trigger shareholder lawsuits. The major factors that detracted from the Vodafone proposal were that it would not result in a national presence in the United States, the higher volatility of its stock, and the additional debt Vodafone would have to assume to pay the cash portion of the purchase price. Despite these concerns, the higher offer price from Vodafone (i.e., $97 to $83) won the day. Acquisition Vehicle and Post Closing Organization In the merger, AirTouch became a wholly owned subsidiary of Vodafone. Vodafone issued common shares valued at $52.4 billion based on the closing Vodafone ADS on April 20, 1999. In addition, Vodafone paid AirTouch shareholders $5.5 billion in cash. On completion of the merger, Vodafone changed its name to Vodafone AirTouch Public Limited Company. Vodafone created a wholly owned subsidiary, Appollo Merger Incorporated, as the acquisition vehicle. Using a reverse triangular merger, Appollo was merged into AirTouch. AirTouch constituted the surviving legal entity. AirTouch shareholders received Vodafone voting stock and cash for their AirTouch shares. Both the AirTouch and Appollo shares were canceled. After the merger, AirTouch shareholders owned slightly less than 50% of the equity of the new company, Vodafone AirTouch. By using the reverse merger to convey ownership of the AirTouch shares, Vodafone was able to ensure that all FCC licenses and AirTouch franchise rights were conveyed legally to Vodafone. However, Vodafone was unable to avoid seeking shareholder approval using this method. Vodafone ADS’s traded on the New York Stock Exchange (NYSE). Because the amount of new shares being issued exceeded 20% of Vodafone’s outstanding voting stock, the NYSE required that Vodafone solicit its shareholders for approval of the proposed merger. Following this transaction, the highly aggressive Vodafone went on to consummate the largest merger in history in 2000 by combining with Germany’s telecommunications powerhouse, Mannesmann, for $180 billion. Including assumed debt, the total purchase price paid by Vodafone AirTouch for Mannesmann soared to $198 billion. Vodafone AirTouch was well on its way to establishing itself as a global cellular phone powerhouse. -What are some of the challenges the two companies are likely to face while integrating the businesses?

Nontaxable transactions also are called tax-free reorganizations.

To qualify for a 1031 exchange, the property must be an investment property or one that is used in a trade or business (e.g., a warehouse, store, or commercial office building).

As a general rule, a transaction is taxable to the target company shareholders if they receive the acquiring firm's stock and non-taxable if they receive cash.

Empirical studies generally show that the tax shelter resulting from the ability of the acquiring firm to increase the value of acquired assets to their FMV is a highly important motivating factor for a takeover.

When does the IRS consider a transaction to be non-taxable to the target firm's shareholders? What is the justification for the IRS' position?

Tangible assets are often increased to fair market value following a transaction and depreciated faster than their economic lives. What is the potential impact on post-transaction EPS, cash flow, and balance sheet?

Determining Deal Structuring Components BigCo has decided to acquire Upstart Corporation, a leading supplier of a new technology believed to be crucial to the successful implementation of BigCo's business strategy. Upstart is a relatively recent start-up firm, consisting of about 200 employees averaging about 24 years of age. HiTech has a reputation for developing highly practical solutions to complex technical problems and getting the resulting products to market very rapidly. HiTech employees are accustomed to a very informal work environment with highly flexible hours and compensation schemes. Decision-making tends to be fast and casual, without the rigorous review process often found in larger firms. This culture is quite different from BigCo's more highly structured and disciplined environment. Moreover, BigCo's decision making tends to be highly centralized. While Upstart's stock is publicly traded, its six co-founders and senior managers jointly own about 60 percent of the outstanding stock. In the four years since the firm went public, Upstart stock has appreciated from $5 per share to its current price of $100 per share. Although they desire to sell the firm, the co-founders are interested in remaining with the firm in important management positions after the transaction has closed. They also expect to continue to have substantial input in both daily operating as well as strategic decisions. Upstart competes in an industry that is only tangentially related to BigCo's core business. Because BigCo's senior management believes they are somewhat unfamiliar with the competitive dynamics of Upstart's industry, BigCo has decided to create a new corporation, New Horizons Inc., which is jointly owed by BigCo and HiTech Corporation, a firm whose core technical competencies are more related to Upstart's than those of BigCo. Both BigCo and HiTech are interested in preserving Upstart's highly innovative culture. Therefore, they agreed during negotiations to operate Upstart as an independent operating unit of New Horizons. During negotiations, both parties agreed to divest one of Upstart's product lines not considered critical to New Horizon's long-term strategy immediately following closing. New Horizons issued stock through an initial public offering. While the co-founders are interested in exchanging their stock for New Horizon's shares, the remaining Upstart shareholders are leery about the long-term growth potential of New Horizons and demand cash in exchange for their shares. Consequently, New Horizons agreed to exchange its stock for the co-founders' shares and to purchase the remaining shares for cash. Once the tender offer was completed, New Horizons owned 100 percent of Upstart's outstanding shares. -What was the form of acquisition? How does this form of acquisition protect the acquiring company's rights to HiTech's proprietary technology?

Consolidation in the Wireless Communications Industry: Vodafone Acquires AirTouch . Deregulation of the telecommunications industry has resulted in increased consolidation. In Europe, rising competition is the catalyst driving mergers. In the United States, the break up of AT&T in the mid-1980s and the subsequent deregulation of the industry has led to key alliances, JVs, and mergers, which have created cellular powerhouses capable of providing nationwide coverage. Such coverage is being achieved by roaming agreements between carriers and acquisitions by other carriers. Although competition has been heightened as a result of deregulation, the telecommunications industry continues to be characterized by substantial barriers to entry. These include the requirement to obtain licenses and the need for an extensive network infrastructure. Wireless communications continue to grow largely at the expense of traditional landline services as cellular service pricing continues to decrease. Although the market is likely to continue to grow rapidly, success is expected to go to those with the financial muscle to satisfy increasingly sophisticated customer demands. What follows is a brief discussion of the motivations for the merger between Vodafone and AirTouch Communications. This discussion includes a description of the key elements of the deal structure that made the Vodafone offer more attractive than a competing offer from Bell Atlantic. Vodafone Company History Vodafone is a wireless communications company based in the United Kingdom. The company is located in 13 countries in Europe, Africa, and Australia/New Zealand. Vodafone reaches more than 9.5 million subscribers. It has been the market leader in the United Kingdom since 1986 and as of 1998 had more than 5 million subscribers in the United Kingdom alone. The company has been very successful at marketing and selling prepaid services in Europe. Vodafone also is involved in a venture called Globalstar, LP, a limited partnership with Loral Space and Communications and Qualcomm, a phone manufacturer. "Globalstar will construct and operate a worldwide, satellite-based communications system offering global mobile voice, fax, and data communications in over 115 countries, covering over 85% of the world's population". Strategic Intent Vodafone's focus is on global expansion. They are expanding through partnerships and by purchasing licenses. Notably, Vodafone lacked a significant presence in the United States, the largest mobile phone market in the world. For Vodafone to be considered a truly global company, the firm needed a presence in the Unites States. Vodafone's strategy is focused on maintaining high growth levels in its markets and increasing profitability; maintaining their current customer base; accelerating innovation; and increasing their global presence through acquisitions, partnerships, or purchases of new licenses. Vodafone's current strategy calls for it to merge with a company with substantial market share in the United States and Asia, which would fill several holes in Vodafone's current geographic coverage. Company Structure The company is very decentralized. The responsibilities of the corporate headquarters in the United Kingdom lie in developing corporate strategic direction, compiling financial information, reporting and developing relationships with the various stock markets, and evaluating new expansion opportunities. The management of operations is left to the countries' management, assuming business plans and financial measures are being met. They have a relatively flat management structure. All of their employees are shareowners in the company. They have very low levels of employee turnover, and the workforce averages 33 years of age. AirTouch Company History AirTouch Communications launched it first cellular service network in 1984 in Los Angeles during the opening ceremonies at the 1984 Olympics. The original company was run under the name PacTel Cellular, a subsidiary of Pacific Telesis. In 1994, PacTel Cellular spun off from Pacific Telesis and became AirTouch Communications, under the direction of Chair and Chief Executive Officer Sam Ginn. Ginn believed that the most exciting growth potential in telecommunications is in the wireless and not the landline services segment of the industry. In 1998, AirTouch operated in 13 countries on three continents, serving more than 12 million customers, as a worldwide carrier of cellular services, personal communication services (PCS), and paging services. AirTouch has chosen to compete on a global front through various partnerships and JVs. Recognizing the massive growth potential outside the United States, AirTouch began their global strategy immediately after the spin-off. Strategic Intent AirTouch has chosen to differentiate itself in its domestic regions based on the concept of "Superior Service Delivery." The company's focus is on being available to its customers 24 hours a day, 7 days a week and on delivering pricing options that meet the customer's needs. AirTouch allows customers to change pricing plans without penalty. The company also emphasizes call clarity and quality and extensive geographic coverage. The key challenges AirTouch faces on a global front is in reducing churn (i.e., the percentage of customers leaving), implementing improved digital technology, managing pressure on service pricing, and maintaining profit margins by focusing on cost reduction. Other challenges include creating a domestic national presence. Company Structure AirTouch is decentralized. Regions have been developed in the U.S. market and are run autonomously with respect to pricing decisions, marketing campaigns, and customer care operations. Each region is run as a profit center. Its European operations also are run independently from each other to be able to respond to the competitive issues unique to the specific countries. All employees are shareowners in the company, and the average age of the workforce is in the low to mid-30s. Both companies are comparable in terms of size and exhibit operating profit margins in the mid-to-high teens. AirTouch has substantially less leverage than Vodafone. Merger Highlights Vodafone began exploratory talks with AirTouch as early as 1996 on a variety of options ranging from partnerships to a merger. Merger talks continued informally until late 1998 when they were formally broken off. Bell Atlantic, interested in expanding its own mobile phone business's geographic coverage, immediately jumped into the void by proposing to AirTouch that together they form a new wireless company. In early 1999, Vodafone once again entered the fray, sparking a sharp takeover battle for AirTouch. Vodafone emerged victorious by mid-1999. Motivation for the Merger Shared Vision The merger would create a more competitive, global wireless telecommunications company than either company could achieve separately. Moreover, both firms shared the same vision of the telecommunications industry. Mobile telecommunications is believed to be the among the fastest-growing segment of the telecommunications industry, and over time mobile voice will replace large amounts of telecommunications traffic carried by fixed-line networks and will serve as a major platform for voice and data communication. Both companies believe that mobile penetration will reach 50% in developed countries by 2003 and 55% and 65% in the United States and developed European countries, respectively, by 2005. Complementary Assets Scale, operating strength, and complementary assets were given as compelling reasons for the merger. The combination of AirTouch and Vodafone would create the largest mobile telecommunication company at the time, with significant presence in the United Kingdom, United States, continental Europe, and Asian Pacific region. The scale and scope of the operations is expected to make the combined firms the vendor of choice for business travelers and international corporations. Interests in operations in many countries will make Vodafone AirTouch more attractive as a partner for other international fixed and mobile telecommunications providers. The combined scale of the companies also is expected to enhance its ability to develop existing networks and to be in the forefront of providing technologically advanced products and services. Synergy Anticipated synergies include after-tax cost savings of $340 million annually by the fiscal year ending March 31, 2002. The estimated net present value of these synergies is $3.6 billion discounted at 9%. The cost savings arise from global purchasing and operating efficiencies, including volume discounts, lower leased line costs, more efficient voice and data networks, savings in development and purchase of third-generation mobile handsets, infrastructure, and software. Revenues should be enhanced through the provision of more international coverage and through the bundling of services for corporate customers that operate as multinational businesses and business travelers. AirTouch's Board Analyzes Options Morgan Stanley, AirTouch's investment banker, provided analyses of the current prices of the Vodafone and Bell Atlantic stocks, their historical trading ranges, and the anticipated trading prices of both companies' stock on completion of the merger and on redistribution of the stock to the general public. Both offers were structured so as to constitute essentially tax-free reorganizations. The Vodafone proposal would qualify as a Type A reorganization under the Internal Revenue Service Code; hence, it would be tax-free, except for the cash portion of the offer, for U.S. holders of AirTouch common and holders of preferred who converted their shares before the merger. The Bell Atlantic offer would qualify as a Type B tax-free reorganization. Table 1 highlights the primary characteristics of the form of payment (total consideration) of the two competing offers. Table 1. Camparis an of Farm of PaymentTotal Consideration Vodafone Bell Atlantic 5 shares of Vodafone common plus \ 9 for each 1.54 shares of Bell Atlantic for each share of AirTouch common share of AirTouch common subject to the transaction being treated as a pooling of interest under U.S. GAAP. Share exchange ratio adjusted upward 9 months out to reflect the payment of dividends on the Bell Atlantic stock. A share exchange ratio collar would be used to ensure that Air Touch shareholders would receive shares valued at \ 80.08 . If the average closing price of Bell Atlantic stock were less than \ 48 , the exchange ratio would be increased to 1.6683 . If the price exceeded \ 52 the exchange rate would remain at 1.54. ${ }^{1}$ The collar guarantees the price of Bell Atlantic stock for the Air Touch shareholders because $\$ 48 \times 1.6683$ and $\$ 52 \times 1.54$ both equal $\$ 80.08$ . Morgan Stanley's primary conclusions were as follows: Morgan Stanley’s primary conclusions were as follows: 1. Bell Atlantic had a current market value of $83 per share of AirTouch stock based on the $53.81 closing price of Bell Atlantic common stock on January 14, 1999. The collar would maintain the price at $80.08 per share if the price of Bell Atlantic stock during a specified period before closing were between $48 and $52 per share. 2. The Vodafone proposal had a current market value of $97 per share of AirTouch stock based on Vodafone’s ordinary shares (i.e., common) on January 17, 1999. 3. Following the merger, the market value of the Vodafone American Depository Shares (ADSs) to be received by AirTouch shareholders under the Vodafone proposal could decrease. 4. Following the merger, the market value of Bell Atlantic’s stock also could decrease, particularly in light of the expectation that the proposed transaction would dilute Bell Atlantic’s EPS by more than 10% through 2002. In addition to Vodafone’s higher value, the board tended to favor the Vodafone offer because it involved less regulatory uncertainty. As U.S. corporations, a merger between AirTouch and Bell Atlantic was likely to receive substantial scrutiny from the U.S. Justice Department, the Federal Trade Commission, and the FCC. Moreover, although both proposals could be completed tax-free, except for the small cash component of the Vodafone offer, the Vodafone offer was not subject to achieving any specific accounting treatment such as pooling of interests under U.S. generally accepted accounting principles (GAAP). Recognizing their fiduciary responsibility to review all legitimate offers in a balanced manner, the AirTouch board also considered a number of factors that made the Vodafone proposal less attractive. The failure to do so would no doubt trigger shareholder lawsuits. The major factors that detracted from the Vodafone proposal were that it would not result in a national presence in the United States, the higher volatility of its stock, and the additional debt Vodafone would have to assume to pay the cash portion of the purchase price. Despite these concerns, the higher offer price from Vodafone (i.e., $97 to $83) won the day. Acquisition Vehicle and Post Closing Organization In the merger, AirTouch became a wholly owned subsidiary of Vodafone. Vodafone issued common shares valued at $52.4 billion based on the closing Vodafone ADS on April 20, 1999. In addition, Vodafone paid AirTouch shareholders $5.5 billion in cash. On completion of the merger, Vodafone changed its name to Vodafone AirTouch Public Limited Company. Vodafone created a wholly owned subsidiary, Appollo Merger Incorporated, as the acquisition vehicle. Using a reverse triangular merger, Appollo was merged into AirTouch. AirTouch constituted the surviving legal entity. AirTouch shareholders received Vodafone voting stock and cash for their AirTouch shares. Both the AirTouch and Appollo shares were canceled. After the merger, AirTouch shareholders owned slightly less than 50% of the equity of the new company, Vodafone AirTouch. By using the reverse merger to convey ownership of the AirTouch shares, Vodafone was able to ensure that all FCC licenses and AirTouch franchise rights were conveyed legally to Vodafone. However, Vodafone was unable to avoid seeking shareholder approval using this method. Vodafone ADS’s traded on the New York Stock Exchange (NYSE). Because the amount of new shares being issued exceeded 20% of Vodafone’s outstanding voting stock, the NYSE required that Vodafone solicit its shareholders for approval of the proposed merger. Following this transaction, the highly aggressive Vodafone went on to consummate the largest merger in history in 2000 by combining with Germany’s telecommunications powerhouse, Mannesmann, for $180 billion. Including assumed debt, the total purchase price paid by Vodafone AirTouch for Mannesmann soared to $198 billion. Vodafone AirTouch was well on its way to establishing itself as a global cellular phone powerhouse. -What are the potential risk factors related to the merger?

The IRS generally views forward triangular cash mergers as a purchase of target stock followed by a liquidation of the target for which target shareholders will recognize a taxable gain or loss as if they had sold their shares.

If a transaction involves a cash purchase of target stock, the target company's tax cost or basis in the acquired stock or assets is increased or "stepped up" automatically to their fair market value (FMV), which is equal to the purchase price paid by the acquirer.

Which one of the following statements is true?

Under purchase price accounting, the excess of the purchase price paid over the book value of equity of the target firm is assigned only to the tangible assets up to their fair market value or to goodwill.

Teva Pharmaceuticals Buys Barr Pharmaceuticals to Create a Global Powerhouse Foreign acquirers often choose to own U.S. firms in limited liability corporations. American Depository Shares (ADSs) often are used by foreign buyers, since their shares do not trade directly on U.S. stock exchanges. Despite a significant regulatory review, the firms employed a fixed share-exchange ratio in calculating the purchase price, leaving each at risk of Teva share price changes. _____________________________________________________________________________________ On December 23, 2008, Teva Pharmaceuticals Ltd. completed its acquisition of U.S.-based Barr Pharmaceuticals Inc. The merged businesses created a firm with a significant presence in 60 countries worldwide and about $14 billion in annual sales. Teva Pharmaceutical Industries Ltd. is headquartered in Israel and is the world's leading generic-pharmaceuticals company. The firm develops, manufactures, and markets generic and human pharmaceutical ingredients called biologics as well as animal health pharmaceutical products. Over 80% of Teva's revenue is generated in North America and Europe. Barr is a U.S.-headquartered global specialty pharmaceuticals company that operates in more than 30 countries. Barr's operations are based primarily in North America and Europe, with its key markets being the United States, Croatia, Germany, Poland, and Russia. With annual sales of about $2.5 billion, Barr is engaged primarily in the development, manufacture, and marketing of generic and proprietary pharmaceuticals and is one of the world's leading generic-drug companies. Barr also is involved actively in the development of generic biologic products, an area that Barr believes provides significant prospects for long-term earnings and profitability. Based on the average closing price of Teva American Depository Shares (ADSs) on NASDAQ on July 16, 2008, the last trading day in the United States before the merger's announcement, the total purchase price was approximately $7.4 billion, consisting of a combination of Teva shares and cash. Each ADS represents one ordinary share of Teva deposited with a custodian bank. As a result of the transaction, Barr shareholders owned approximately 7.3% of Teva after the merger. The merger agreement provides that each share of Barr common stock issued and outstanding immediately prior to the effective time of the merger was to be converted into the right to receive 0.6272 ordinary shares of Teva, which trade in the United States as American Depository Shares, and $39.90 in cash. The 0.6272 represents the share-exchange ratio stipulated in the merger agreement. The value of the portion of the merger consideration comprising Teva ADSs could have changed between signing and closing, because the share-exchange ratio was fixed, per the merger agreement. ADSs may be issued in uncertificated form or certified as an American Depositary Receipt, or ADR. ADRs provide evidence that a specified number of ADSs have been deposited by Teva commensurate with the number of new ADSs issued to Barr shareholders. By most measures, the offer price for Barr shares constituted an attractive premium over the value of Barr shares prior to the merger announcement. Based on the closing price of a Teva ADS on the NASDAQ Stock Exchange on July 16, 2008, the consideration for each outstanding share of Barr common stock for Barr shareholders represented a premium of approximately 42% over the closing price of Barr common stock on July 16, 2008, the last trading day in the United States before the merger announcement. Since the merger qualified as a tax-free reorganization under U.S. federal income tax laws, a U.S. holder of Barr common stock generally did not recognize any gain or loss under U.S. federal income tax laws on the exchange of Barr common stock for Teva ADSs. A U.S. holder generally would recognize a gain on cash received in exchange for the holder's Barr common stock. Teva was motivated to acquire Barr because of the desire to achieve increased economies of scale and scope as well as greater geographic coverage, with significant growth potential in emerging markets. Barr's U.S. generics drug offering in the United States is highly complementary with Teva's and extends Teva's product offering and product development pipeline into new and attractive product categories, such as a substantial women's healthcare business. The merger also is a response to the ongoing global trend of consolidation among the purchasers of pharmaceutical products as governments are increasingly becoming the primary purchaser of generic drugs. Under the merger agreement, a wholly owned Teva corporate subsidiary, the Boron Acquisition Corp. (i.e., acquisition vehicle), merged with Barr, with Barr surviving the merger as a wholly owned subsidiary of Teva. Immediately following the closing of the merger, Barr was merged into a newly formed limited liability company (i.e., postclosing organization), also wholly owned by Teva, which is the surviving company in the second step of the merger. As such, Barr became a wholly owned subsidiary of Teva and ceased to be traded on the New York Stock Exchange. The merger agreement contained standard preclosing covenants, in which Barr agreed to conduct its business only in the ordinary course (i.e., as it has historically, in a manner consistent with common business practices) and not to alter any supplier, customer, or employee agreements or declare any dividends or buy back any outstanding stock. Barr also agreed not to engage in one or more transactions or investments or assume any debt exceeding $25 million. The firm also promised not to change any accounting practices in any material way or in a manner inconsistent with generally accepted accounting principles. Barr also committed not to solicit alternative bids from any other possible investors between the signing of the merger agreement and the closing. Teva agreed that from the period immediately following closing and ending on the first anniversary of closing it would require Barr or its subsidiaries to maintain each compensation and benefit plan in existence prior to closing. All annual base salary and wage rates of each Barr employee would be maintained at no less than the levels in effect before closing. Bonus plans also would be maintained at levels no less favorable than those in existence before the closing of the merger. The key closing conditions that applied to both Teva and Barr included satisfaction of required regulatory and shareholder approvals, compliance with all prevailing laws, and that no representations and warranties were found to have been breached. Moreover, both parties had to provide a certificate signed by the chief executive officer and the chief financial officer that their firms had performed in all material respects all obligations required to be performed in accordance with the merger agreement prior to the closing date and that neither business had suffered any material damage between the signing and the closing. The merger agreement had to be approved by a majority of the outstanding voting shares of Barr common stock. Shareholders failing to vote or abstaining were counted as votes against the merger agreement. Shareholders were entitled to vote on the merger agreement if they held Barr common stock at the close of business on the record date, which was October 10, 2008. Since the shares issued by Teva in exchange for Barr's stock had already been authorized and did not exceed 20% of Teva's shares outstanding (i.e., the threshold on some public stock exchanges at which firms are required to obtain shareholder approval), the merger was not subject to a vote of Teva's shareholders. Teva and Barr each notified the U.S. Federal Trade Commission and the Antitrust Division of the U.S. Department of Justice of the proposed deal in order to comply with prevailing antitrust regulations. Each party subsequently received a "second request for information" from the FTC, whose effect was to extend the HSR waiting period another 30 days. Teva and Barr received FTC and Justice Department approval once potential antitrust concerns had been dispelled. Given the global nature of the merger, the two firms also had to file with the European Union Antitrust Commission as well as with other country regulatory authorities. -What it the importance of the pre-closing covenants signed by both Teva and Barr?