Exam 12: Structuring the Deal:

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. -How would you characterize the post-closing organization? Why was this organizational structure used?

In a triangular cash merger, the target firm may either be merged into an acquirer's operating or shell acquisition subsidiary with the subsidiary surviving or the acquirer's subsidiary is merged into the target firm with the target surviving.

A forward triangular merger is the most commonly used form of reorganization for tax-free stock acquisitions in which the form of payment is acquirer stock. It involves three parties: the acquiring firm, the target firm, and a shell subsidiary of the target firm.

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 is the form of payment? Why was it used?

Which of the following is not true of purchase accounting?

Taxable transactions usually involve the purchase of the target's voting stock, because the purchase of assets automatically will trigger a taxable gain for the target if the fair market value of the acquired assets exceeds the target firm's tax basis in the assets.

What are the arguments for and against the proposed takeover being approved by U.S. regulators?

If the acquirer invokes a 338 election no taxes will have to be paid on any gains on assets written up to their fair market value.

Since the IRS requires that target shareholders continue to hold a substantial equity interest in the acquiring company, the tax code defines what constitutes a substantial equity interest.

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

What are some of the important tax-related issues the boards of the acquirer and target companies may need to address prior to entering negotiations? How might the resolution of these issues impact the form of payment and form of acquisition?

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 is the importance of the closing conditions in the merger agreement? What could happen if any of the closing conditions are breached (i.e., violated)?

Cablevision Uses Tax Benefits to Help Justify the Price Paid for Bresnan Communications In mid-2010, Cablevision Systems announced that it had reached an agreement to buy privately owned Bresnan Communications for $1.37 billion in a cash for stock deal. CVS’ motivation for the deal reflected the board’s belief that the firm’s shares were undervalued and their desire to expand coverage into the western United States. CVS is the most profitable cable operator in the industry in terms of operating profit margins, due primarily to the firm’s heavily concentrated customer base in the New York City area. Critics immediately expressed concern that the acquisition would provide few immediate cost savings and relied almost totally on increasing the amount of revenue generated by Bresnan’s existing customers. CVS saw an opportunity to gain market share from satellite TV operators providing services in BC’s primary geographic market. Bresnan, the nation’s 13th largest cable operator, serves Colorado, Montana, Wyoming, and Utah. CVS believes it can sell bundles of services, including Internet and phone services, to current Bresnan customers. Bresnan’s primary competition comes from DirecTV and DISH Network, which cannot offer phone and Internet access services. In order to gain shareholder support, CVS announced a $500 million share repurchase to placate shareholders seeking a return of cash. The deal was financed by a $1 billion nonrecourse loan and $370 in cash from Cablevision. CVS points out that the firm’s direct investment in BC will be more than offset by tax benefits resulting from the structure of the deal in which both Cablevision and Bresnan agreed to treat the purchase of Bresnan’s stock as an asset purchase for tax reporting purposes (i.e., a 338 election). Consequently, CVS will be able to write up the net acquired Bresnan assets to their fair market value and use the resulting additional depreciation to generate significant future tax savings. Such future tax savings are estimated by CVS to have a net present value of approximately $400 million Discussion Question: 1. How is the 338 election likely to impact Cablevision System’s earnings per share immediately following closing? Why? 2. As an analyst, how would you determine the impact of the anticipated tax benefits on the value of the firm? 3. What is the primary risk to realizing the full value of the anticipated tax benefits? Teva Pharmaceuticals Buys Ivax Corporation Teva Pharmaceutical Industries’, a manufacturer and distributor of generic drugs, takeover of Ivax Corp for $7.4 billion created the world's largest manufacturer of generic drugs. For Teva, based in Israel, and Ivax, headquartered in Miami, the merger eliminated a large competitor and created a distribution chain that spans 50 countries. To broaden the appeal of the proposed merger, Teva offered Ivax shareholders the option to receive for each of their shares either 0.8471 of American depository receipts (ADRs) representing Teva shares or $26 in cash. ADRs represent the receipt given to U.S. investors for the shares of a foreign-based corporation held in the vault of a U.S. bank. Ivax shareholders wanting immediate liquidity chose to exchange their shares for cash, while those wanting to participate in future appreciation of Teva stock exchanged their shares for Teva shares. At closing, each outstanding share of Ivax common stock was cancelled. Each cancelled share represented the right to receive either of these two previously mentioned payment options. The merger agreement also provided for the acquisition of Ivax by Teva through a merger of Merger Sub, a newly formed and wholly-owned subsidiary of Teva, into Ivax. As the surviving corporation, Ivax would be a wholly-owned subsidiary of Teva. The merger involving the exchange of Teva ADRs for Ivax shares was considered as tax-free for those Ivax shareholders receiving Teva stock under U.S. law as it consisted of predominately acquirer shares. Case Study. JDS Uniphase–SDL Merger Results in Huge Write-Off What started out as the biggest technology merger in history up to that point saw its value plummet in line with the declining stock market, a weakening economy, and concerns about the cash-flow impact of actions the acquirer would have to take to gain regulatory approval. The $41 billion mega-merger, proposed on July 10, 2000, consisted of JDS Uniphase (JDSU) offering 3.8 shares of its stock for each share of SDL’s outstanding stock. This constituted an approximate 43% premium over the price of SDL’s stock on the announcement date. The challenge facing JDSU was to get Department of Justice (DoJ) approval of a merger that some feared would result in a supplier (i.e., JDS Uniphase–SDL) that could exercise enormous pricing power over the entire range of products from raw components to packaged products purchased by equipment manufacturers. The resulting regulatory review lengthened the period between the signing of the merger agreement between the two companies and the actual closing to more than 7 months. The risk to SDL shareholders of the lengthening of the time between the determination of value and the actual receipt of the JDSU shares at closing was that the JDSU shares could decline in price during this period. Given the size of the premium, JDSU’s management was unwilling to protect SDL’s shareholders from this possibility by providing a “collar” within which the exchange ratio could fluctuate. The absence of a collar proved particularly devastating to SDL shareholders, which continued to hold JDSU stock well beyond the closing date. The deal that had been originally valued at $41 billion when first announced more than 7 months earlier had fallen to $13.5 billion on the day of closing. JDSU manufactures and distributes fiber-optic components and modules to telecommunication and cable systems providers worldwide. The company is the dominant supplier in its market for fiber-optic components. In 1999, the firm focused on making only certain subsystems needed in fiber-optic networks, but a flurry of acquisitions has enabled the company to offer complementary products. JDSU’s strategy is to package entire systems into a single integrated unit. This would reduce the number of vendors that fiber optic network firms must deal with when purchasing systems that produce the light that is transmitted over fiber. SDL’s products, including pump lasers, support the transmission of data, voice, video, and internet information over fiber-optic networks by expanding their fiber-optic communications networks much more quickly and efficiently than would be possible using conventional electronic and optical technologies. SDL had approximately 1700 employees and reported sales of $72 million for the quarter ending March 31, 2000. As of July 10, 2000, JDSU had a market value of $74 billion with 958 million shares outstanding. Annual 2000 revenues amounted to $1.43 billion. The firm had $800 million in cash and virtually no long-term debt. Including one-time merger-related charges, the firm recorded a loss of $905 million. With its price-to-earnings (excluding merger-related charges) ratio at a meteoric 440, the firm sought to use stock to acquire SDL, a strategy that it had used successfully in eleven previous acquisitions. JDSU believed that a merger with SDL would provide two major benefits. First, it would add a line of lasers to the JDSU product offering that strengthened signals beamed across fiber-optic networks. Second, it would bolster JDSU’s capacity to package multiple components into a single product line. Regulators expressed concern that the combined entities could control the market for a specific type of pump laser used in a wide range of optical equipment. SDL is one of the largest suppliers of this type of laser, and JDS is one of the largest suppliers of the chips used to build them. Other manufacturers of pump lasers, such as Nortel Networks, Lucent Technologies, and Corning, complained to regulators that they would have to buy some of the chips necessary to manufacture pump lasers from a supplier (i.e., JDSU), which in combination with SDL, also would be a competitor. As required by the Hart–Scott–Rodino (HSR) Antitrust Improvements Act of 1976, JDSU had filed with the DoJ seeking regulatory approval. On August 24 th, the firm received a request for additional information from the DoJ, which extended the HSR waiting period. On February 6, JDSU agreed as part of a consent decree to sell a Swiss subsidiary, which manufactures pump laser chips, to Nortel Networks Corporation, a JDSU customer, to satisfy DoJ concerns about the proposed merger. The divestiture of this operation set up an alternative supplier of such chips, thereby alleviating concerns expressed by other manufacturers of pump lasers that they would have to buy such components from a competitor. On July 9, 2000, the boards of both JDSU and SDL unanimously approved an agreement to merge SDL with a newly formed, wholly owned subsidiary of JDS Uniphase, K2 Acquisition, Inc. K2 Acquisition, Inc. was created by JDSU as the acquisition vehicle to complete the merger. In a reverse triangular merger, K2 Acquisition Inc. was merged into SDL, with SDL as the surviving entity. The post-closing organization consisted of SDL as a wholly owned subsidiary of JDS Uniphase. The form of payment consisted of exchanging JDSU common stock for SDL common shares. The share exchange ratio was 3.8 shares of JDSU stock for each SDL common share outstanding. Instead of a fraction of a share, each SDL stockholder received cash, without interest, equal to dollar value of the fractional share at the average of the closing prices for a share of JDSU common stock for the 5 trading days before the completion of the merger. Under the rules of the NASDAQ National Market, on which JDSU’s shares are traded, JDSU is required to seek stockholder approval for any issuance of common stock to acquire another firm. This requirement is triggered if the amount issued exceeds 20% of its issued and outstanding shares of common stock and of its voting power. In connection with the merger, both SDL and JDSU received fairness opinions from advisors employed by the firms. The merger agreement specified that the merger could be consummated when all of the conditions stipulated in the agreement were either satisfied or waived by the parties to the agreement. Both JDSU and SDL were subject to certain closing conditions. Such conditions were specified in the September 7, 2000 S4 filing with the SEC by JDSU, which is required whenever a firm intends to issue securities to the public. The consummation of the merger was to be subject to approval by the shareholders of both companies, the approval of the regulatory authorities as specified under the HSR, and any other foreign antitrust law that applied. For both parties, representations and warranties (statements believed to be factual) must have been found to be accurate and both parties must have complied with all of the agreements and covenants (promises) in all material ways. The following are just a few examples of the 18 closing conditions found in the merger agreement. The merger is structured so that JDSU and SDL’s shareholders will not recognize a gain or loss for U.S. federal income tax purposes in the merger, except for taxes payable because of cash received by SDL shareholders for fractional shares. Both JDSU and SDL must receive opinions of tax counsel that the merger will qualify as a tax-free reorganization (tax structure). This also is stipulated as a closing condition. If the merger agreement is terminated as a result of an acquisition of SDL by another firm within 12 months of the termination, SDL may be required to pay JDSU a termination fee of $1 billion. Such a fee is intended to cover JDSU’s expenses incurred as a result of the transaction and to discourage any third parties from making a bid for the target firm. Despite dramatic cost-cutting efforts, the company reported a loss of $7.9 billion for the quarter ending June 31, 2001 and $50.6 billion for the 12 months ending June 31, 2001. This compares to the projected pro forma loss reported in the September 9, 2000 S4 filing of $12.1 billion. The actual loss was the largest annual loss ever reported by a U.S. firm up to that time. The fiscal year 2000 loss included a reduction in the value of goodwill carried on the balance sheet of $38.7 billion to reflect the declining market value of net assets acquired during a series of previous transactions. Most of this reduction was related to goodwill arising from the merger of JDS FITEL and Uniphase and the subsequent acquisitions of SDL, E-TEK, and OCLI.. The stock continued to tumble in line with the declining fortunes of the telecommunications industry such that it was trading as low as $7.5 per share by mid-2001, about 6% of its value the day the merger with SDL was announced. Thus, the JDS Uniphase–SDL merger was marked by two firsts—the largest purchase price paid for a pure technology company and the largest write-off (at that time) in history. Both of these infamous “firsts” occurred within 12 months. -What are the primary differences between a forward and a reverse triangular merger? Why might JDS Uniphase have chosen to merge its K2 Acquisition Inc. subsidiary with SDL in a reverse triangular merger? Explain your answer.

Higher bids involving stock and cash may be less attractive than a lower all-cash bid due to the uncertain nature of the value of the acquirer’s stock. Master limited partnerships represent an alternative means for financing a transaction in industries in which cash flows are relatively predictable. Energy pipeline company Southern Union (Southern) offered significant synergistic opportunities for competitors Energy Transfer Equity (ETE) and The Williams Companies (Williams). Increasing interest in natural gas as a less polluting but still affordable alternative to coal and oil motivated both ETE and Williams to pursue Southern in mid-2011. Williams, already the nation’s largest pipeline company, accounting for about 12% of the nation’s natural gas distribution by volume, viewed the acquisition as a means of solidifying its premier position in the energy distribution industry. ETE saw Southern as a way of doubling its pipeline capacity and catapulting itself into the number-one position in the industry. ETE is a publicly traded partnership and is the general partner and owns 100% of the incentive distribution rights of Energy Transfer Partners, L.P. ( ETP), consisting of approximately 50.2 million ETP limited partnership units. The firm also is the general partner and owns 100% of the distribution rights of Regency Energy Partners (REP), consisting of approximately 26.3 million REP limited partnership units. Williams manages most of its pipeline assets through its primary publicly traded master limited partnership known as Williams Partners. Southern owns and operates more than 20,000 miles of pipelines in the United States (Southeast, Midwest, and Great lakes regions as well as Texas and New Mexico). It also owns local gas distribution companies that serve more than half a million end users in Missouri and Massachusetts. While both ETE and Williams were attracted to Southern because the firm’s shares were believed to be undervalued, the potential synergies also are significant. ETE would transform the firm by expanding its business into the Midwest and Florida and offers a very good complement to ETE’s existing Texas-focused operations. For Williams, it would create the dominant natural gas pipeline system for the Midwest and Northeast and give it ownership interests in two pipelines running into Florida. Despite the transition of exploration and production companies to liquids for distribution, Southern continued to trade, largely as an annuity offering a steady, predictable financial return. During the six-month period prior to the start of the bidding war, Southern’s stock was caught in a trading range between $27 and $30 per share. That changed in mid-June, when a $33-per-share bid from ETE, consisting of both cash and stock valued by Southern at $4.2 billion, put Southern in “play.” The initial ETE offer was immediately followed by a series of four offers and counteroffers, resulting in an all-cash counteroffer of $44 per share from The Williams Companies, valuing Southern at $5.5 billion. This bid was later topped with an ETE offer of $44.25 per Southern share, boosting Southern’s valuation to approximately $5.6 billion. Williams’s $44 all-cash offer did not include a financing contingency, but it did include a “hell or high water” clause that would commit the company to taking all necessary steps to obtain regulatory approval; later ETE added a similar provision to their proposal. The clause is meant to assuage Southern shareholder concerns that a deal with Williams or ETE could lead to antitrust lawsuits in states like Florida. The bidding boosted Southern’s shares from a prebid share price of $28 to a final purchase price of $44.25 per share. Williams argued, to no avail, that its bid was superior to ETE’s, in that its value was certain, in contrast to ETE’s, which gave Southern’s shareholders a choice to receive $40 per share or 0.903 ETE common units whose value was subject to fluctuations in the demand for energy. ETE pointed out not only that their bid was higher than Williams’ but also that shareholders could choose to make their payout tax free if they are paid in stock. The final ETE bid quickly received the backing of Southern’s two biggest shareholders, the firm’s founder and chairman, George Lindemann, and its president, Eric D. Herschmann. ETE removed any concerns about the firm’s ability to finance the cash portion of the transaction when it announced on August 5, 2011, that it had received financing commitments for $3.7 billion from a syndicate consisting of 11 U.S. and foreign banks. The firm also announced that it had received regulatory approval from the Federal Trade Commission to complete the transaction. As part of the agreement with ETE, Southern contributed its 50% interest in Citrus Corporation to Energy Transfer Partners for $2 billion. The cash proceeds from the transfer will be used to repay a portion of the acquisition financing and to repay existing Southern Union debt in order for Southern to maintain its investment-grade credit rating. Following completion of the deal, ETE moved Southern’s pipeline assets into Energy Transfer Partners and Regency Energy Partners, eliminating their being subject to double taxation. These actions helped to offset a portion of the purchase price paid to acquire Southern Union. In retrospect, ETE may have invited the Williams bid because of the confusing nature of its initial bid. According to the firm’s first bid, Southern shareholders would receive Series B units that would yield at least 8.25%. However, depending on the outcome of a series of subsequent events, they could end up getting a combination of cash, ETE common, and Energy Transfer Partners’ common or continuing to hold those Series B units. Some of the possible outcomes would be tax free to Southern shareholders and some taxable. In contrast, The Williams bid is a straightforward all-cash bid whose value is unambiguous and represented an 18% premium for Southern shareholders. The disadvantage of the Williams bid is that it would be taxable; furthermore, it was contingent on Williams’ completing full due diligence. -What do you believe are the key assumptions underlying either the Energy Transfer Equity or the Williams valuations of Southern Union?

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. -Why do you believe that Teva chose to acquire the outstanding stock of Barr rather than selected assets? Explain your answer.

In a cash purchase of assets. the target's shareholders could be taxed twice, once when the firm pays taxes on any gains and a second time when the proceeds from the sale are paid to the shareholders either as a dividend or distribution following liquidation of the corporation.

To demonstrate continuity of interests (COI), target shareholders must continue to own a substantial part of the value of the combined target and acquiring firms.

Acquirers and targets planning to enter into a tax-free transaction seldom seek to get an advance ruling from the IRS to determine its tax-free status.

Would you characterize this as a reverse or forward merger? Based on your answer why was this type of reorganization selected by SoftBank? Will this takeover require a vote by Softbank shareholders?

It is seldom important that the buyer and seller agree on the allocation of the sales price among the assets being sold, since the allocation will determine the potential tax liability that would be incurred by the seller but that could by passed on to the buyer through to terms of the sales contract.