Exam 11: Structuring the Deal:

From of payment refers only to the acquirer's common stock used to make up the purchase price paid to target shareholders.

In early 2008, a year marked by turmoil in the global credit markets, Mars Corporation was able to negotiate a reverse breakup fee structure in its acquisition of Wrigley Corporation. This structure allowed Mars to walk away from the transaction at any time by paying a $1 billion fee. Speculate as to the motivation behind Mars and Wrigley negotiating such a fee structure?

Swiss Pharmaceutical Giant Novartis Takes Control of Alcon Parent firms frequently find it appropriate to buy out minority shareholders to reduce costs and to simplify future decision making. Acquirers may negotiate call options with the target firm after securing a minority position to implement so-called “creeping takeovers.” In December 2010, Swiss pharmaceutical company Novartis AG completed its effort to acquire, for $12.9 billion, the remaining 23% of U.S.-listed eye care group Alcon Incorporated (Alcon) that it did not already own. This brought the total purchase price for 100% of Alcon to $52.2 billion. Novartis had been trying to purchase Alcon’s remaining publicly traded shares since January 2010, but its original offer of 2.8 Novartis shares, valued at $153 per Alcon share, met stiff resistance from Alcon’s independent board of directors, which had repeatedly dismissed the Novartis bid as “grossly inadequate.” Novartis finally relented, agreeing to pay $168 per share, the average price it had paid for the Alcon shares it already owned, and to guarantee that price by paying cash equal to the difference between $168 and the value of 2.8 Novartis shares immediately prior to closing. If the value of Novartis shares were to appreciate before closing such that the value of 2.8 shares exceeded $168, the number of Novartis shares would be reduced. By acquiring all outstanding Alcon shares, Novartis avoided interference by minority shareholders in making key business decisions, achieved certain operating synergies, and eliminated the expense of having public shareholders. In 2008, with global financial markets in turmoil, Novartis acquired, for cash, a minority position in food giant Nestlé’s wholly owned subsidiary Alcon. Nestlé had acquired 100% of Alcon in 1978 and retained that position until 2002, when it undertook an IPO of 23% of its shares. In April 2008, Novartis acquired 25% of Alcon for $143 per share from Nestlé. As part of this transaction, Novartis and Nestlé received a call and a put option, respectively, which could be exercised at $181 per Alcon share from January 2010 to July 2011. On January 4, 2010, Novartis exercised its call option to buy Nestlé’s remaining 52% ownership stake in Alcon that it did not already own. By doing so, Novartis increased its total ownership position in Alcon to about 77%. The total price paid by Novartis for this position amounted to $39.3 billion ($11.2 billion in 2008 plus $28.1 billion in 2010). On the same day, Novartis also offered to acquire the remaining publicly held shares that it did not already own in a share exchange valued at $153 per share in which 2.8 shares of its stock would be exchanged for each Alcon share. While the Nestlé deal seemed likely to receive regulatory approval, the offer to the minority shareholders was assailed immediately as too low. At $153 per share, the offer was well below the Alcon closing price on January 4, 2010, of $164.35. The Alcon publicly traded share price may have been elevated by investors’ anticipating a higher bid. Novartis argued that without this speculation, the publicly traded Alcon share price would have been $137, and the $153 per share price Novartis offered the minority shareholders would have represented an approximate 12% premium to that price. The minority shareholders, who included several large hedge funds, argued that they were entitled to $181 per share, the amount paid to Nestlé. Alcon’s publicly traded shares dropped 5% to $156.97 on the news of the Novartis takeover. Novartis’ shares also lost 3%, falling to $52.81. On August 9, 2010, Novartis received approval from European Union regulators to buy the stake in Alcon, making it easier for it to take full control of Alcon. With the buyout of Nestlé’s stake in Alcon completed, Novartis was now faced with acquiring the remaining 23% of the outstanding shares of Alcon stock held by the public. Under Swiss takeover law, Novartis needed a majority of Alcon board members and two-thirds of shareholders to approve the terms for the merger to take effect and for Alcon shares to convert automatically into Novartis shares. Once it owned 77% of Alcon’s stock, Novartis only needed to place five of its own nominated directors on the Alcon board to replace the five directors previously named by Nestlé to the board. Alcon’s independent directors set up an independent director committee (IDC), arguing that the price offered to minority shareholders was too low and that the new directors, having been nominated by Novartis, should abstain from voting on the Novartis takeover because of their conflict of interest. The IDC preferred a negotiated merger to a “cram down” or forced merger in which the minority shares convert to Novartis shares at the 2.8 share-exchange offer. Provisions in the Swiss takeover code require a mandatory offer whenever a bidder purchases more than 33.3% of another firm’s stock. In a mandatory offer, Novartis would also be subject to the Swiss code’s minimum-bid rule, which would require Novartis to pay $181 per share in cash to Alcon’s minority shareholders, the same bid offered to Nestlé. By replacing the Nestlé-appointed directors with their own slate of candidates and owning more than two-thirds of the Alcon shares, Novartis argued that they were not subject to mandatory-bid requirements. Novartis was betting on the continued appreciation of its shares, valued in Swiss francs, due to an ongoing appreciation of the Swiss currency and its improving operating performance, to eventually win over holders of the publicly traded Alcon shares. However, by late 2010, Novartis’ patience appears to have worn thin. While not always the case, the resistance of the independent directors paid off for those investors holding publicly traded shares. -Speculate as to why Novartis acquired only a 25 percent stake in Alcon in 2008.

A partnership or JV structure may be appropriate acquisition vehicle if the risk associated with the target firm is believed to be high.

Sanofi Acquires Genzyme in a Test of Wills Contingent value rights help bridge price differences between buyers and sellers when the target’s future earnings performance is dependent on the realization of a specific event. They are most appropriate when the target firm is a large publicly traded firm with numerous shareholders. Facing a patent expiration precipice in 2015, big pharmaceutical companies have been scrambling to find new sources of revenue to offset probable revenue losses as many of their most popular drugs lose patent protection. Generic drug companies are expected to make replacement drugs and sell them at a much lower price. Focusing on the biotechnology market, French-based drug company Sanofi-Aventis SA (Sanofi) announced on February 17, 2011, the takeover of U.S.-based Genzyme Corp. (Genzyme) for $74 per share, or $20.1 billion in cash, plus a contingent value right (CVR). The CVR could add as much as $14 a share or another $3.8 billion, to the purchase price if Genzyme is able to achieve certain performance targets. According to the terms of the agreement, Genzyme will retain its name and operate as a separate unit focusing on rare diseases, an area in which Genzyme has excelled. The purchase price represented a 48% premium over Genzyme’s share price of $50 per share immediately preceding the announcement. The acquisition represented the end of a nine-month effort that began on May 23, 2010, when Sanofi CEO Chris Viehbacher first approached Genzyme’s Henri Termeer, the firm’s founder and CEO. Sanofi expressed interest in Genzyme at a time when debt was cheap and when Genzyme’s share price was depressed, having fallen from a 2008 peak of $83.25 to $47.16 in June 2010. Genzyme’s depressed share price reflected manufacturing problems that had lowered sales of its best-selling products. Genzyme continued to recover from the manufacturing challenges that had temporarily shut down operations at its main site in 2009. The plant is the sole source of Genzyme’s top-selling products, Gaucher’s disease treatment Cerezyme and Fabry disease drug Fabrazyme. Both were in short supply throughout 2010 due to the plant’s shutdown. By yearend, the supply shortages were less acute. Sanofi was convinced that other potential bidders were too occupied with integrating recent deals to enter into a bidding war. In an effort to get Genzyme to engage in discussions and to permit Sanofi to perform due diligence, Sanofi submitted a formal bid of $69 per share on July 29, 2010. However, Sanofi continued to ignore the unsolicited offer. The offer was 38% above Genzyme’s price on July 1, 2010, when investors began to speculate that Genzyme was “in play.” Sanofi was betting that the Genzyme shareholders would accept the offer rather than risk seeing their shares fall to $50. The shares, however, traded sharply higher at $70.49 per share, signaling that investors were expecting Sanofi to have to increase its bid. Viehbacher said he might increase the bid if Genzyme would be willing to disclose more information about the firm’s ongoing manufacturing problems and the promising new market potential for its multiple sclerosis drug. In a letter made public on August 29, 2010, Sanofi indicated that it had been trying to engage Genzyme in acquisition talks for months and that its formal bid had been rejected by Genzyme without any further discussion on August 11, 2010. The letter concludes with a thinly disguised threat that “all alternatives to complete the transaction” would be considered and that “Sanofi is confident that Genzyme shareholders will support the proposal.” In responding to the public disclosure of the letter, the Genzyme board said it was not prepared to engage in merger negotiations with Sanofi based on an opportunistic proposal with an unrealistic starting price that dramatically undervalued the company. Termeer said publicly that the firm was worth at least $80 per share. He based this value on the improvement in the firm’s manufacturing operations and the revenue potential of Lemtrada, Genzyme’s experimental treatment for multiple sclerosis, which once approved for sale by the FDA was projected by Genzyme to generate billions of dollars annually. Despite Genzyme’s refusal to participate in takeover discussions, Sanofi declined to raise its initial offer in view of the absence of other bidders. Sanofi finally initiated an all-cash hostile tender offer for all of the outstanding Genzyme shares at $69 per share on October 4, 2010. Set to expire initially on December 16, 2010, the tender offer was later extended to January 21, 2011, when the two parties started to discuss a contingent value right (CVR) as a means of bridging their disparate views on the value of Genzyme. Initially, Genzyme projected peak annual sales of $3.5 billion for Lemtrada and $700 million for Sanofi. At the end of January, the parties announced that they had signed a nondisclosure agreement to give Sanofi access to Genzyme’s financial statements. The CVR helped to allay fears that Sanofi would overpay and that the drug Lemtrada would not be approved by the FDA. Under the terms of the CVR, Genzyme shareholders would receive $1 per share if Genzyme were able to meet certain production targets in 2011 for Cerezyme and Fabrazyme, whose output had been sharply curtailed by viral contamination at its plant in 2009. Each right would yield an additional $1 if Lemtrada wins FDA approval. Additional payments will be made if Lemtrada hits certain other annual revenue targets. The CVR, which runs until the end of 2020, entitles holders to a series of payments that could cumulatively be worth up to $14 per share if Lemtrada reaches $2.8 billion in annual sales. The Genzyme transaction was structured as a tender offer to be followed immediately with a back-end short-form merger. The short-form merger enables an acquirer, without a shareholder vote, to squeeze out any minority shareholders not tendering their shares during the tender offer period. To execute the short-form merger, the purchase agreement included a “top-up” option granted by the Genzyme board to Sanofi. The “top-up” option would be triggered when Sanofi acquired 75% of Genzyme’s outstanding shares through its tender offer. The 75% threshold could have been lower had Genzyme had more authorized but unissued shares to make up the difference between the 90% requirement for the short-form merger and the number of shares accumulated as a result of the tender offer. The deal also involved the so-called dual-track model of simultaneously filing a proxy statement for a shareholders’ meeting and vote on the merger while the tender offer is occurring to ensure that the deal closes as soon as possible. -The deal was structured as a tender offer coupled with a "top up" option to be followed by a backend short form merger. Why might this structure be preferable to a more common statutory merger deal or a tender offer followed by a backend merger requiring a shareholder vote?

Sanofi Acquires Genzyme in a Test of Wills Contingent value rights help bridge price differences between buyers and sellers when the target’s future earnings performance is dependent on the realization of a specific event. They are most appropriate when the target firm is a large publicly traded firm with numerous shareholders. Facing a patent expiration precipice in 2015, big pharmaceutical companies have been scrambling to find new sources of revenue to offset probable revenue losses as many of their most popular drugs lose patent protection. Generic drug companies are expected to make replacement drugs and sell them at a much lower price. Focusing on the biotechnology market, French-based drug company Sanofi-Aventis SA (Sanofi) announced on February 17, 2011, the takeover of U.S.-based Genzyme Corp. (Genzyme) for $74 per share, or $20.1 billion in cash, plus a contingent value right (CVR). The CVR could add as much as $14 a share or another $3.8 billion, to the purchase price if Genzyme is able to achieve certain performance targets. According to the terms of the agreement, Genzyme will retain its name and operate as a separate unit focusing on rare diseases, an area in which Genzyme has excelled. The purchase price represented a 48% premium over Genzyme’s share price of $50 per share immediately preceding the announcement. The acquisition represented the end of a nine-month effort that began on May 23, 2010, when Sanofi CEO Chris Viehbacher first approached Genzyme’s Henri Termeer, the firm’s founder and CEO. Sanofi expressed interest in Genzyme at a time when debt was cheap and when Genzyme’s share price was depressed, having fallen from a 2008 peak of $83.25 to $47.16 in June 2010. Genzyme’s depressed share price reflected manufacturing problems that had lowered sales of its best-selling products. Genzyme continued to recover from the manufacturing challenges that had temporarily shut down operations at its main site in 2009. The plant is the sole source of Genzyme’s top-selling products, Gaucher’s disease treatment Cerezyme and Fabry disease drug Fabrazyme. Both were in short supply throughout 2010 due to the plant’s shutdown. By yearend, the supply shortages were less acute. Sanofi was convinced that other potential bidders were too occupied with integrating recent deals to enter into a bidding war. In an effort to get Genzyme to engage in discussions and to permit Sanofi to perform due diligence, Sanofi submitted a formal bid of $69 per share on July 29, 2010. However, Sanofi continued to ignore the unsolicited offer. The offer was 38% above Genzyme’s price on July 1, 2010, when investors began to speculate that Genzyme was “in play.” Sanofi was betting that the Genzyme shareholders would accept the offer rather than risk seeing their shares fall to $50. The shares, however, traded sharply higher at $70.49 per share, signaling that investors were expecting Sanofi to have to increase its bid. Viehbacher said he might increase the bid if Genzyme would be willing to disclose more information about the firm’s ongoing manufacturing problems and the promising new market potential for its multiple sclerosis drug. In a letter made public on August 29, 2010, Sanofi indicated that it had been trying to engage Genzyme in acquisition talks for months and that its formal bid had been rejected by Genzyme without any further discussion on August 11, 2010. The letter concludes with a thinly disguised threat that “all alternatives to complete the transaction” would be considered and that “Sanofi is confident that Genzyme shareholders will support the proposal.” In responding to the public disclosure of the letter, the Genzyme board said it was not prepared to engage in merger negotiations with Sanofi based on an opportunistic proposal with an unrealistic starting price that dramatically undervalued the company. Termeer said publicly that the firm was worth at least $80 per share. He based this value on the improvement in the firm’s manufacturing operations and the revenue potential of Lemtrada, Genzyme’s experimental treatment for multiple sclerosis, which once approved for sale by the FDA was projected by Genzyme to generate billions of dollars annually. Despite Genzyme’s refusal to participate in takeover discussions, Sanofi declined to raise its initial offer in view of the absence of other bidders. Sanofi finally initiated an all-cash hostile tender offer for all of the outstanding Genzyme shares at $69 per share on October 4, 2010. Set to expire initially on December 16, 2010, the tender offer was later extended to January 21, 2011, when the two parties started to discuss a contingent value right (CVR) as a means of bridging their disparate views on the value of Genzyme. Initially, Genzyme projected peak annual sales of $3.5 billion for Lemtrada and $700 million for Sanofi. At the end of January, the parties announced that they had signed a nondisclosure agreement to give Sanofi access to Genzyme’s financial statements. The CVR helped to allay fears that Sanofi would overpay and that the drug Lemtrada would not be approved by the FDA. Under the terms of the CVR, Genzyme shareholders would receive $1 per share if Genzyme were able to meet certain production targets in 2011 for Cerezyme and Fabrazyme, whose output had been sharply curtailed by viral contamination at its plant in 2009. Each right would yield an additional $1 if Lemtrada wins FDA approval. Additional payments will be made if Lemtrada hits certain other annual revenue targets. The CVR, which runs until the end of 2020, entitles holders to a series of payments that could cumulatively be worth up to $14 per share if Lemtrada reaches $2.8 billion in annual sales. The Genzyme transaction was structured as a tender offer to be followed immediately with a back-end short-form merger. The short-form merger enables an acquirer, without a shareholder vote, to squeeze out any minority shareholders not tendering their shares during the tender offer period. To execute the short-form merger, the purchase agreement included a “top-up” option granted by the Genzyme board to Sanofi. The “top-up” option would be triggered when Sanofi acquired 75% of Genzyme’s outstanding shares through its tender offer. The 75% threshold could have been lower had Genzyme had more authorized but unissued shares to make up the difference between the 90% requirement for the short-form merger and the number of shares accumulated as a result of the tender offer. The deal also involved the so-called dual-track model of simultaneously filing a proxy statement for a shareholders’ meeting and vote on the merger while the tender offer is occurring to ensure that the deal closes as soon as possible. -Describe the antitakeover strategy employed by Genzyme. Discuss why each may have been employed. In your opinion, did the Genzyme strategy work?

Vivendi Universal and GE Combine Entertainment Assets to Form NBC Universal Ending a four-month-long auction process, Vivendi Universal SA agreed on October 5, 2003, to sell its Vivendi Universal Entertainment (VUE) businesses, consisting of film and television assets, to General Electric Corporation's wholly owned NBC subsidiary. Vivendi received a combination of GE stock and stock in the combined company valued at approximately $14 billion. Vivendi would combine the Universal Pictures movie studio, its television production group, three cable networks, and the Universal theme parks with NBC. The new company would have annual revenues of $13 billion based on 2003 pro forma statements. This transaction was among many made by Vivendi in its effort to restore the firm's financial viability. Having started as a highly profitable distributor of bottled water, the French company undertook a diversification spree in the 1990s, which pushed the firm into many unrelated enterprises and left it highly in debt. With its stock plummeting, Vivendi had been under considerable pressure to reduce its leverage and refocus its investments. Applying a multiple of 14 times estimated 2003 EBITDA of $3 billion, the combined company had an estimated value of approximately $42 billion. This multiple is well within the range of comparable transactions and is consistent with the share price multiples of television media companies at that time. Of the $3 billion in 2003 EBITDA, GE would provide $2 billion and Vivendi $1 billion. This values GE's assets at $28 billion and Vivendi's at $14 billion. This implies that GE assets contribute two thirds and Vivendi's one third of the total market value of the combined company. NBC Universal's total assets of $42 billion consist of VUE's assets valued at $14 billion and NBC's at $28 billion. Vivendi chose to receive an infusion of liquidity at closing consisting of $4.0 billion in cash by selling its right to receive $4 billion in GE stock and the transfer of $1.6 billion in debt carried by VUE's businesses to NBC Universal. Vivendi would retain an ongoing approximate 20 percent ownership in the new company valued at $8.4 billion after having received $5.6 billion in liquidity at closing. GE would have 80 percent ownership in the new company in exchange for providing $5.6 billion in liquidity (i.e., $4 billion in cash and assuming $1.6 billion in debt). Vivendi had the option to sell its 20 percent ownership interest in the future, beginning in 2006, at fair market value. GE would have the first right (i.e., the first right of refusal) to acquire the Vivendi position. GE anticipated that its 80 percent ownership position in the combined company would be accretive for GE shareholders beginning in the second full year of operation. -Based on a total valuation of $42 billion, Vivendi's assets contributed one-third and GE's two-thirds of the total value of NBC Universal. However, after the closing, Vivendi would only own a 20% equity position in the combined business. Why?

The seller's insistence that the buyer agree to purchase its stock may encourage the buyer to

Sanofi Acquires Genzyme in a Test of Wills Contingent value rights help bridge price differences between buyers and sellers when the target’s future earnings performance is dependent on the realization of a specific event. They are most appropriate when the target firm is a large publicly traded firm with numerous shareholders. Facing a patent expiration precipice in 2015, big pharmaceutical companies have been scrambling to find new sources of revenue to offset probable revenue losses as many of their most popular drugs lose patent protection. Generic drug companies are expected to make replacement drugs and sell them at a much lower price. Focusing on the biotechnology market, French-based drug company Sanofi-Aventis SA (Sanofi) announced on February 17, 2011, the takeover of U.S.-based Genzyme Corp. (Genzyme) for $74 per share, or $20.1 billion in cash, plus a contingent value right (CVR). The CVR could add as much as $14 a share or another $3.8 billion, to the purchase price if Genzyme is able to achieve certain performance targets. According to the terms of the agreement, Genzyme will retain its name and operate as a separate unit focusing on rare diseases, an area in which Genzyme has excelled. The purchase price represented a 48% premium over Genzyme’s share price of $50 per share immediately preceding the announcement. The acquisition represented the end of a nine-month effort that began on May 23, 2010, when Sanofi CEO Chris Viehbacher first approached Genzyme’s Henri Termeer, the firm’s founder and CEO. Sanofi expressed interest in Genzyme at a time when debt was cheap and when Genzyme’s share price was depressed, having fallen from a 2008 peak of $83.25 to $47.16 in June 2010. Genzyme’s depressed share price reflected manufacturing problems that had lowered sales of its best-selling products. Genzyme continued to recover from the manufacturing challenges that had temporarily shut down operations at its main site in 2009. The plant is the sole source of Genzyme’s top-selling products, Gaucher’s disease treatment Cerezyme and Fabry disease drug Fabrazyme. Both were in short supply throughout 2010 due to the plant’s shutdown. By yearend, the supply shortages were less acute. Sanofi was convinced that other potential bidders were too occupied with integrating recent deals to enter into a bidding war. In an effort to get Genzyme to engage in discussions and to permit Sanofi to perform due diligence, Sanofi submitted a formal bid of $69 per share on July 29, 2010. However, Sanofi continued to ignore the unsolicited offer. The offer was 38% above Genzyme’s price on July 1, 2010, when investors began to speculate that Genzyme was “in play.” Sanofi was betting that the Genzyme shareholders would accept the offer rather than risk seeing their shares fall to $50. The shares, however, traded sharply higher at $70.49 per share, signaling that investors were expecting Sanofi to have to increase its bid. Viehbacher said he might increase the bid if Genzyme would be willing to disclose more information about the firm’s ongoing manufacturing problems and the promising new market potential for its multiple sclerosis drug. In a letter made public on August 29, 2010, Sanofi indicated that it had been trying to engage Genzyme in acquisition talks for months and that its formal bid had been rejected by Genzyme without any further discussion on August 11, 2010. The letter concludes with a thinly disguised threat that “all alternatives to complete the transaction” would be considered and that “Sanofi is confident that Genzyme shareholders will support the proposal.” In responding to the public disclosure of the letter, the Genzyme board said it was not prepared to engage in merger negotiations with Sanofi based on an opportunistic proposal with an unrealistic starting price that dramatically undervalued the company. Termeer said publicly that the firm was worth at least $80 per share. He based this value on the improvement in the firm’s manufacturing operations and the revenue potential of Lemtrada, Genzyme’s experimental treatment for multiple sclerosis, which once approved for sale by the FDA was projected by Genzyme to generate billions of dollars annually. Despite Genzyme’s refusal to participate in takeover discussions, Sanofi declined to raise its initial offer in view of the absence of other bidders. Sanofi finally initiated an all-cash hostile tender offer for all of the outstanding Genzyme shares at $69 per share on October 4, 2010. Set to expire initially on December 16, 2010, the tender offer was later extended to January 21, 2011, when the two parties started to discuss a contingent value right (CVR) as a means of bridging their disparate views on the value of Genzyme. Initially, Genzyme projected peak annual sales of $3.5 billion for Lemtrada and $700 million for Sanofi. At the end of January, the parties announced that they had signed a nondisclosure agreement to give Sanofi access to Genzyme’s financial statements. The CVR helped to allay fears that Sanofi would overpay and that the drug Lemtrada would not be approved by the FDA. Under the terms of the CVR, Genzyme shareholders would receive $1 per share if Genzyme were able to meet certain production targets in 2011 for Cerezyme and Fabrazyme, whose output had been sharply curtailed by viral contamination at its plant in 2009. Each right would yield an additional $1 if Lemtrada wins FDA approval. Additional payments will be made if Lemtrada hits certain other annual revenue targets. The CVR, which runs until the end of 2020, entitles holders to a series of payments that could cumulatively be worth up to $14 per share if Lemtrada reaches $2.8 billion in annual sales. The Genzyme transaction was structured as a tender offer to be followed immediately with a back-end short-form merger. The short-form merger enables an acquirer, without a shareholder vote, to squeeze out any minority shareholders not tendering their shares during the tender offer period. To execute the short-form merger, the purchase agreement included a “top-up” option granted by the Genzyme board to Sanofi. The “top-up” option would be triggered when Sanofi acquired 75% of Genzyme’s outstanding shares through its tender offer. The 75% threshold could have been lower had Genzyme had more authorized but unissued shares to make up the difference between the 90% requirement for the short-form merger and the number of shares accumulated as a result of the tender offer. The deal also involved the so-called dual-track model of simultaneously filing a proxy statement for a shareholders’ meeting and vote on the merger while the tender offer is occurring to ensure that the deal closes as soon as possible. -What alternatives could Sanofi used instead of the CVR to bridge the difference in how the parties valued Genzyme? Discuss the advantages and disadvantages of each.

Sellers who are structured as C corporations generally prefer to sell assets for cash than acquirer stock because of more favorable tax treatment.

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 approve. 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. The Participants 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, thereby reducing the number of vendors that fiber 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, 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 lasers 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. The Deal Structure 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 postclosing 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. The Aftermath of Overpaying 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.

Earn-outs tend to shift risk from the seller to the buyer in that a higher price is paid only when the seller has met or exceeded certain performance criteria.

Stock purchases involve the exchange of the target's stock for cash, debt, stock of the acquiring company, or some combination.

The form of payment does not affect whether a transaction is taxable to the seller's shareholders.

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 acquisition vehicle used to acquire the target company, Upstart Corporation? Why was this legal structure used?

A "floating or flexible share exchange ratio is used primarily to

Buyer Consortium Wins Control of ABN Amro The biggest banking deal on record was announced on October 9, 2007, resulting in the dismemberment of one of Europe's largest and oldest financial services firms, ABN Amro (ABN). A buyer consortium consisting of The Royal Bank of Scotland (RBS), Spain's Banco Santander (Santander), and Belgium's Fortis Bank (Fortis) won control of ABN, the largest bank in the Netherlands, in a buyout valued at $101 billion. European banks had been under pressure to grow through acquisitions and compete with larger American rivals to avoid becoming takeover targets themselves. ABN had been viewed for years as a target because of its relatively low share price. However, rival banks were deterred by its diverse mixture of businesses, which was unattractive to any single buyer. Under pressure from shareholders, ABN announced that it had agreed, on April 23, 2007, to be acquired by Barclay's Bank of London for $85 billion in stock. The RBS-led group countered with a $99 billion bid consisting mostly of cash. In response, Barclay's upped its bid by 6 percent with the help of state-backed investors from China and Singapore. ABN's management favored the Barclay bid because Barclay had pledged to keep ABN intact and its headquarters in the Netherlands. However, a declining stock market soon made Barclay's mostly stock offer unattractive. While the size of the transaction was noteworthy, the deal is especially remarkable in that the consortium had agreed prior to the purchase to split up ABN among the three participants. The mechanism used for acquiring the bank represented an unusual means of completing big transactions amidst the subprime-mortgage-induced turmoil in the global credit markets at the time. The members of the consortium were able to select the ABN assets they found most attractive. The consortium agreed in advance of the acquisition that Santander would receive ABN's Brazilian and Italian units; Fortis would obtain the Dutch bank's consumer lending business, asset management, and private banking operations, and RBS would own the Asian and investment banking units. Merrill Lynch served as the sole investment advisor for the group's participants. Caught up in the global capital market meltdown, Fortis was forced to sell the ABN Amro assets it had acquired to its Dutch competitor ING in October 2008. -The same outcome could have been achieved if a single buyer had reached agreement with other banks to acquire selected pieces of ABN before completing the transaction. The pieces could then have been sold at the closing. Why might the use of the consortium been a superior alternative?

Chevron’s Acquisition of Unocal Unocal ceased to exist as an independent company on August 11, 2005 and its shares were de-listed from the New York Stock Exchange. The new firm is known as Chevron. In a highly politicized transaction, Chevron battled Chinese oil-producer, CNOOC, for almost four months for ownership of Unocal. A cash and stock bid by Chevron, the nation’s second largest oil producer, made in April valued at $61 per share was accepted by the Unocal board when it appeared that CNOOC would not counter-bid. However, CNOOC soon followed with an all-cash bid of $67 per share. Chevron amended the merger agreement with a new cash and stock bid valued at $63 per share in late July. Despite the significant difference in the value of the two bids, the Unocal board recommended to its shareholders that they accept the amended Chevron bid in view of the growing doubt that U.S. regulatory authorities would approve a takeover by CNOOC. In its strategy to win Unocal shareholder approval, Chevron offered Unocal shareholders three options for each of their shares: (1) $69 in cash, (2) 1.03 Chevron shares; or (3) .618 Chevron shares plus $27.60 in cash. Unocal shareholders not electing any specific option would receive the third option. Moreover, the all-cash and all-stock offers were subject to proration in order to preserve an overall per share mix of .618 of a share of Chevron common stock and $27.60 in cash for all of the 272 million outstanding shares of Unocal common stock. This mix of cash and stock provided a “blended” value of about $63 per share of Unocal common stock on the day that Unocal and Chevron entered into the amendment to the merger agreement on July 22, 2005. The “blended” rate was calculated by multiplying .618 by the value of Chevron stock on July 22nd of $57.28 plus $27.60 in cash. This resulted in a targeted purchase price that was about 56 percent Chevron stock and 44 percent cash. This mix of cash and stock implied that Chevron would pay approximately $7.5 billion (i.e., $27.60 x 272 million Unocal shares outstanding) in cash and issue approximately 168 million shares of Chevron common stock (i.e., .618 x 272 million of Unocal shares) valued at $57.28 per share as of July 22, 2005. The implied value of the merger on that date was $17.1 billion (i.e., $27.60 x 272 million Unocal common shares outstanding plus $57.28 x 168 million Chevron common shares). An increase in Chevron’s share price to $63.15 on August 10, 2005, the day of the Unocal shareholders’ meeting, boosted the value of the deal to $18.1 billion. Option (1) was intended to appeal to those Unocal shareholders who were attracted to CNOOC’s all cash offer of $67 per share. Option (2) was designed for those shareholders interested in a tax-free exchange. Finally, it was anticipated that option (3) would attract those Unocal shareholders who were interested in cash but also wished to enjoy any appreciation in the stock of the combined companies. The agreement of purchase and sale between Chevron and Unocal contained a “proration clause.” This clause enabled Chevron to limit the amount of total cash it would payout under those options involving cash that it had offered to Unocal shareholders and to maintain the “blended” rate of $63 it would pay for each share of Unocal stock. Approximately 242 million Unocal shareholders elected to receive all cash for their shares, 22.1 million opted for the all-stock alternative, and 10.1 million elected the cash and stock combination. No election was made for approximately .3 million shares. Based on these results, the amount of cash needed to satisfy the number shareholders electing the all-cash option far exceeded the amount that Chevron was willing to pay. Consequently, as permitted in the merger agreement, the all-cash offer was prorated resulting in the Unocal shareholders who had elected the all-cash option receiving a combination of cash and stock rather than $69 per share. The mix of cash and stock was calculated as shown in Exhibit 1. Exhibit 1. Prorating All-Cash Elections 1. Determine the available cash election amount (ACEA): Aggregate cash amount minus the amount of cash to be paid to Unocal shareholders selecting the combination of cash and stock (i.e., Option 3). ACEA = $27.60 x 272 million (Unocal shares outstanding) - 10.1 million (shares electing cash and stock option) x $27.60 = $7.5 - $.3 = $7.2 billion 2. Determine the elected cash amount (ECA): Amount equal to $69 multiplied by the number of shares of Unocal common stock electing the all-cash option. ECA = $69 x 242 million = $16.7 billion 3. Determine the cash proration factor (CPF): ACEA/ECA CPF = $7.2 / $16.7 = .4311 4. Determine the prorated cash merger consideration (PCMC): An amount in cash equal to $69 multiplied by the cash proration factor. PCMC = $69 x .4311 = $29.74 5. Determine the prorated stock merger consideration (PSMC): 1.03 multiplied by 1 – CPF. PSMC = 1.03 x (1- .4311) = .5860 6. Determine the stock and cash mix (SCM): Sum of the prorated cash (PCMC) and stock (PSMC) merger considerations exchanged for each share of Unocal common stock. SCM = $29.74 + .5860 of a Chevron share If too many Unocal shareholders had elected to receive Chevron stock, those making the all-stock election would not have received 1.03 shares of Chevron stock for each share of Unocal stock. Rather, they would have received a mix of stock and cash to help preserve the approximate 56 percent stock and 44 percent cash composition of the purchase price desired by Chevron. For illustration only, assume the number of Unocal shares to be exchanged for the all-cash and all-stock options are 22.1 and 242 million, respectively. This is the reverse of what actually happened. The mix of stock and cash would have been prorated as shown in Exhibit 2. Exhibit 12. Prorating All-Stock Elections 1. Determine the available cash election amount (ACEA): Same as step 1 above. ACEA = $7.2 billion 2. Determine the elected cash amount (ECA): Amount equal to $69 multiplied by the number of shares of Unocal common stock electing the all-cash option. ECA = $69 x 22.1 million = $1.5 billion 3. Determine the excess cash amount (EXCA): Difference between ACEA and ECA. EXCA = $7.2 - $1.5 = $5.7 4. Determine the prorated cash merger consideration (PCMC): EXCA divided by number of Unocal shares elected the all-stock option. PCMC = $5.7 / 242 million = $23.55 5. Determine the stock proration factor (SPF): $69 minus the prorated cash merger consideration divided by $69. SPF = ($69 - $23.55) / $69 = .$45.45 / $69 = .6587 6. Determine the prorated stock price consideration (PSPC): The number of shares of Chevron stock equal to 1.03 multiplied by the stock proration factor. PSPC = 1.03 x .6587 = .6785 7. Determine the stock and cash mix (SCM): Each Unocal share to be exchanged in an all-stock election is converted into the right to receive the prorated cash merger consideration and the prorated stock merger consideration. SCM = $23.55 + .6785 of a Chevron share for each Unocal share It is typical of large transactions in which the target has a large, diverse shareholder base that acquiring firms offer target shareholders a “menu” of alternative forms of payment. The objective is to enhance the likelihood of success by appealing to a broader group of shareholders. To the unsophisticated target shareholder, the array of options may prove appealing. However, it is likely that those electing all-cash or all-stock purchases are likely to be disappointed due to probable proration clauses in merger contracts. Such clauses enable the acquirer to maintain an overall mix of cash and stock in completing the transaction. This enables the acquirer to limit the amount of cash they must borrow or the number of new shares they must issue to levels they find acceptable. -Is the "proration clause" found in most merger agreements in which target shareholders are given several ways in which they can choose to be paid for their shares in the best interests of the target shareholders? In the best interests of the acquirer?

Comment of the following statement. A premium offered by a bidder over a target's share price is not necessarily a fair price; a fair price is not necessarily an adequate price?

A post-closing organization must always be a C corporation.