Exam 11: Structuring the Deal:

Acquisition Vehicle and Post Closing Organization In the merger, AirTouch became a wholly owned subsidiary of Vodafone. Vodafone issued common shares valued at $52.4 billion based on the closing Vodafone ADS on April 20, 1999. In addition, Vodafone paid AirTouch shareholders $5.5 billion in cash. On completion of the merger, Vodafone changed its name to Vodafone AirTouch Public Limited Company. Vodafone created a wholly owned subsidiary, Appollo Merger Incorporated, as the acquisition vehicle. Using a reverse triangular merger, Appollo was merged into AirTouch. AirTouch constituted the surviving legal entity. AirTouch shareholders received Vodafone voting stock and cash for their AirTouch shares. Both the AirTouch and Appollo shares were canceled. After the merger, AirTouch shareholders owned slightly less than 50% of the equity of the new company, Vodafone AirTouch. By using the reverse merger to convey ownership of the AirTouch shares, Vodafone was able to ensure that all FCC licenses and AirTouch franchise rights were conveyed legally to Vodafone. However, Vodafone was unable to avoid seeking shareholder approval using this method. Vodafone ADS’s traded on the New York Stock Exchange (NYSE). Because the amount of new shares being issued exceeded 20% of Vodafone’s outstanding voting stock, the NYSE required that Vodafone solicit its shareholders for approval of the proposed merger. Following this transaction, the highly aggressive Vodafone went on to consummate the largest merger in history in 2000 by combining with Germany’s telecommunications powerhouse, Mannesmann, for $180 billion. Including assumed debt, the total purchase price paid by Vodafone AirTouch for Mannesmann soared to $198 billion. Vodafone AirTouch was well on its way to establishing itself as a global cellular phone powerhouse. -What are the potential risk factors related to the merger?

Acquisition Vehicle and Post Closing Organization In the merger, AirTouch became a wholly owned subsidiary of Vodafone. Vodafone issued common shares valued at $52.4 billion based on the closing Vodafone ADS on April 20, 1999. In addition, Vodafone paid AirTouch shareholders $5.5 billion in cash. On completion of the merger, Vodafone changed its name to Vodafone AirTouch Public Limited Company. Vodafone created a wholly owned subsidiary, Appollo Merger Incorporated, as the acquisition vehicle. Using a reverse triangular merger, Appollo was merged into AirTouch. AirTouch constituted the surviving legal entity. AirTouch shareholders received Vodafone voting stock and cash for their AirTouch shares. Both the AirTouch and Appollo shares were canceled. After the merger, AirTouch shareholders owned slightly less than 50% of the equity of the new company, Vodafone AirTouch. By using the reverse merger to convey ownership of the AirTouch shares, Vodafone was able to ensure that all FCC licenses and AirTouch franchise rights were conveyed legally to Vodafone. However, Vodafone was unable to avoid seeking shareholder approval using this method. Vodafone ADS’s traded on the New York Stock Exchange (NYSE). Because the amount of new shares being issued exceeded 20% of Vodafone’s outstanding voting stock, the NYSE required that Vodafone solicit its shareholders for approval of the proposed merger. Following this transaction, the highly aggressive Vodafone went on to consummate the largest merger in history in 2000 by combining with Germany’s telecommunications powerhouse, Mannesmann, for $180 billion. Including assumed debt, the total purchase price paid by Vodafone AirTouch for Mannesmann soared to $198 billion. Vodafone AirTouch was well on its way to establishing itself as a global cellular phone powerhouse. -How valid are the reasons for the proposed merger?

Boston Scientific Overcomes Johnson & Johnson to Acquire Guidant—A Lesson in Bidding Strategy Johnson & Johnson, the behemoth American pharmaceutical company, announced an agreement in December 2004 to acquire Guidant for $76 per share for a combination of cash and stock. Guidant is a leading manufacturer of implantable heart defibrillators and other products used in angioplasty procedures. The defibrillator market has been growing at 20 percent annually, and J&J desired to reenergize its slowing growth rate by diversifying into this rapidly growing market. Soon after the agreement was signed, Guidant's defibrillators became embroiled in a regulatory scandal over failure to inform doctors about rare malfunctions. Guidant suffered a serious erosion of market share when it recalled five models of its defibrillators. The subsequent erosion in the market value of Guidant prompted J&J to renegotiate the deal under a material adverse change clause common in most M&A agreements. J&J was able to get Guidant to accept a lower price of $63 a share in mid-November. However, this new agreement was not without risk. The renegotiated agreement gave Boston Scientific an opportunity to intervene with a more attractive informal offer on December 5, 2005, of $72 per share. The offer price consisted of 50 percent stock and 50 percent cash. Boston Scientific, a leading supplier of heart stents, saw the proposed acquisition as a vital step in the company's strategy of diversifying into the high-growth implantable defibrillator market. Despite the more favorable offer, Guidant’s board decided to reject Boston Scientific's offer in favor of an upwardly revised offer of $71 per share made by J&J on January 11, 2005. The board continued to support J&J's lower bid, despite the furor it caused among big Guidant shareholders. With a market capitalization nine times the size of Boston Scientific, the Guidant board continued to be enamored with J&J's size and industry position relative to Boston Scientific. Boston Scientific realized that it would be able to acquire Guidant only if it made an offer that Guidant could not refuse without risking major shareholder lawsuits. Boston Scientific reasoned that if J&J hoped to match an improved bid, it would have to be at least $77, slightly higher than the $76 J&J had initially offered Guidant in December 2004. With its greater borrowing capacity, Boston Scientific knew that J&J also had the option of converting its combination stock and cash bid to an all-cash offer. Such an offer could be made a few dollars lower than Boston Scientific's bid, since Guidant investors might view such an offer more favorably than one consisting of both stock and cash, whose value could fluctuate between the signing of the agreement and the actual closing. This was indeed a possibility, since the J&J offer did not include a collar arrangement. Boston Scientific decided to boost the new bid to $80 per share, which it believed would deter any further bidding from J&J. J&J had been saying publicly that Guidant was already "fully valued." Boston Scientific reasoned that J&J had created a public relations nightmare for itself. If J&J raised its bid, it would upset J&J shareholders and make it look like an undisciplined buyer. J&J refused to up its offer, saying that such an action would not be in the best interests of its shareholders. Table 1 summarizes the key events timeline. Table 1 Boston Scientific and Johnson \& Johnson Bidding Chronology Date Comments December 15,2004 J\&J reaches agreement to buy Guidant for \ 25.4 billion in stock and cash. November 15,2005 Value of J\&J deal is revised downward to \ 21.5 billion. December 5,2005 Boston Scientific offers \ 25 billion. January 11,2006 Guidant accepts a J\&J counteroffer valued at \ 23.2 billion. January 17,2006 Boston Scientific submits a new bid valued at \ 27 billion. January 25,2006 Guidant accepts Boston Scientific's bid when J\&J fails to raise its offer. A side deal with Abbott Labs made the lofty Boston Scientific offer possible. The firm entered into an agreement with Abbott Laboratories in which Boston Scientific would divest Guidant's stent business while retaining the rights to Guidant's stent technology. In return, Boston Scientific received $6.4 billion in cash on the closing date, consisting of $4.1 billion for the divested assets, a loan of $900 million, and Abbott's purchase of $1.4 billion of Boston Scientific stock. The additional cash helped fund the purchase price. This deal also helped Boston Scientific gain regulatory approval by enabling Abbott Labs to become a competitor in the stent business. Merrill Lynch and Bank of America each would lend $7 billion to fund a portion of the purchase price and provide the combined firms with additional working capital. To complete the transaction, Boston Scientific paid $27 billion, consisting of cash and stock, to Guidant shareholders and another $800 million as a breakup fee to J&J. In addition, the firm is burdened with $14.9 billion in new debt. Within days of Boston Scientific's winning bid, the firm received a warning from the U.S. Food and Drug Administration to delay the introduction of new products until the firm's safety procedures improved. Between December 2004, the date of Guidant's original agreement with J&J, and January 25, 2006, the date of its agreement with Boston Scientific, Guidant's stock rose by 16 percent, reflecting the bidding process. During the same period, J&J's stock dropped by a modest 3 percent, while Boston Scientific's shares plummeted by 32 percent. As a result of product recalls and safety warnings on more than 50,000 Guidant cardiac devices, the firm's sales and profits plummeted. Between the announcement date of its purchase of Guidant in December 2005 and year-end 2006, Boston Scientific lost more than $18 billion in shareholder value. In acquiring Guidant, Boston Scientific increased its total shares outstanding by more than 80 percent and assumed responsibility for $6.5 billion in debt, with no proportionate increase in earnings. In early 2010, Boston Scientific underwent major senior management changes and spun off several business units in an effort to improve profitability. Ongoing defibrillator recalls could shave the firm’s revenue by $0.5 billion during the next two years. In 2010, continuing product-related problems forced the firm to write off $1.8 billion in impaired goodwill associated with the Guidant acquisition. At less than $8 per share throughout most of 2010, Boston Scientific’s share price is about one-fifth of its peak of $35.55 on December 5, 2005, the day the firm announced its bid for Guidant. -What were the key differences between J&J's and Boston Scientific's bidding strategy? Be specific.

The risk to the bidder associated with bidding strategy of offering target firm shareholders multiple payment options is that the range of options is likely to discourage target firm shareholders from participating in the bidder's tender offer for their shares.

From of payment may consist of something other than cash, stock, or debt such as tangible and intangible assets.

The forward triangular merger involves the acquisition subsidiary being merged with the target and the target surviving.

In a statutory merger,

What are the advantages and disadvantages of a purchase of assets from the perspective of the buyer and seller?

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. -What was the form of payment employed by both bidders for Unocal? In your judgment, why were they different? Be specific.

Stock purchases involve the exchange of the target's stock for acquirer stock only.

The use of convertible preferred stock as a form of payment provides some downside protection to sellers in the form of continuing dividends, while providing upside potential if the acquirer's common stock price increases above the conversion point.

The acquirer may reduce the total cost of an acquisition by deferring some portion of the purchase price.

If the acquirer is interested in integrating the target business immediately following closing, the holding structure may be most desirable.

The value of an earnout payment is never subject to a cap so as not to discourage the seller from working diligently to exceed the payment threshold.

A holding company structure is the preferred post-closing organization if the acquiring firm is interested in integrating the target firm immediately following acquisition.

Which of the following is true of collar arrangements?

A holding company is an example of either an acquisition vehicle or post-closing organization.

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. -From a legal standpoint, identify the acquirer and the target firms?

Collar agreements provide for certain changes in the exchange ratio contingent on the level of the acquirer's share price around the effective date of the merger.

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 is goodwill? How is it estimated? Why did JDS Uniphase write down the value of its goodwill in 2001? Why does this reflect a series of poor management decisions with respect to mergers completed between 1999 and early 2001?