Exam 1: Introduction to Mergers, Acquisitions, and Other Restructuring Activities

Corporation of America announced its intention to purchase shares in another national newspaper chain. Which one of the following terms best describes this announcement?

Assessing Procter & Gamble’s Acquisition of Gillette The potential seemed almost limitless, as Procter & Gamble Company (P&G) announced that it had completed its purchase of Gillette Company (Gillette) in late 2005. P&G’s chairman and CEO, A.G. Lafley, predicted that the acquisition of Gillette would add one percentage point to the firm’s annual revenue growth rate, while Gillette’s chairman and CEO, Jim Kilts, opined that the successful integration of the two best companies in consumer products would be studied in business schools for years to come. Five years after closing, things have not turned out as expected. While cost savings targets were achieved, operating margins faltered due to lagging sales. Gillette’s businesses, such as its pricey razors, have been buffeted by the 2008–2009 recession and have been a drag on P&G’s top line rather than a boost. Moreover, most of Gillette’s top managers have left. P&G’s stock price at the end of 2010 stood about 12 percent above its level on the acquisition announcement date, less than one-fourth the appreciation of the share prices of such competitors as Unilever and Colgate-Palmolive Company during the same period. On January 28, 2005, P&G enthusiastically announced that it had reached an agreement to buy Gillette in a share-for-share exchange valued at $55.6 billion. This represented an 18 percent premium over Gillette's preannouncement share price. P&G also announced a stock buyback of $18 billion to $22 billion, funded largely by issuing new debt. The combined companies would retain the P&G name and have annual 2005 revenue of more than $60 billion. Half of the new firm's product portfolio would consist of personal care, healthcare, and beauty products, with the remainder consisting of razors and blades, and batteries. The deal was expected to dilute P&G's 2006 earnings by about 15 cents per share. To gain regulatory approval, the two firms would have to divest overlapping operations, such as deodorants and oral care. P&G had long been viewed as a premier marketing and product innovator. Consequently, P&G assumed that its R&D and marketing skills in developing and promoting women's personal care products could be used to enhance and promote Gillette's women's razors. Gillette was best known for its ability to sell an inexpensive product (e.g., razors) and hook customers to a lifetime of refills (e.g., razor blades). Although Gillette was the number 1 and number 2 supplier in the lucrative toothbrush and men's deodorant markets, respectively, it has been much less successful in improving the profitability of its Duracell battery brand. Despite its number 1 market share position, it had been beset by intense price competition from Energizer and Rayovac Corp., which generally sell for less than Duracell batteries. Suppliers such as P&G and Gillette had been under considerable pressure from the continuing consolidation in the retail industry due to the ongoing growth of Wal-Mart and industry mergers at that time, such as Sears and Kmart. About 17 percent of P&G's $51 billion in 2005 revenues and 13 percent of Gillette's $9 billion annual revenue came from sales to Wal-Mart. Moreover, the sales of both Gillette and P&G to Wal-Mart had grown much faster than sales to other retailers. The new company, P&G believed, would have more negotiating leverage with retailers for shelf space and in determining selling prices, as well as with its own suppliers, such as advertisers and media companies. The broad geographic presence of P&G was expected to facilitate the marketing of such products as razors and batteries in huge developing markets, such as China and India. Cumulative cost cutting was expected to reach $16 billion, including layoffs of about 4 percent of the new company's workforce of 140,000. Such cost reductions were to be realized by integrating Gillette's deodorant products into P&G's structure as quickly as possible. Other Gillette product lines, such as the razor and battery businesses, were to remain intact. P&G's corporate culture was often described as conservative, with a "promote-from-within" philosophy. While Gillette's CEO was to become vice chairman of the new company, the role of other senior Gillette managers was less clear in view of the perception that P&G is laden with highly talented top management. To obtain regulatory approval, Gillette agreed to divest its Rembrandt toothpaste and its Right Guard deodorant businesses, while P&G agreed to divest its Crest toothbrush business. The Gillette acquisition illustrates the difficulty in evaluating the success or failure of mergers and acquisitions for acquiring company shareholders. Assessing the true impact of the Gillette acquisition remains elusive, even after five years. Though the acquisition represented a substantial expansion of P&G’s product offering and geographic presence, the ability to isolate the specific impact of a single event (i.e., an acquisition) becomes clouded by the introduction of other major and often uncontrollable events (e.g., the 2008–2009 recession) and their lingering effects. While revenue and margin improvement have been below expectations, Gillette has bolstered P&G’s competitive position in the fast-growing Brazilian and Indian markets, thereby boosting the firm’s longer-term growth potential, and has strengthened its operations in Europe and the United States. Thus, in this ever-changing world, it will become increasingly difficult with each passing year to identify the portion of revenue growth and margin improvement attributable to the Gillette acquisition and that due to other factors. -Explain how actions required by antitrust regulators may hurt P&G's ability to realize anticipated synergy. Be specific.

Post-merger returns to shareholders often do not meet expectations. However, this is also true of such alternatives to M&As as joint ventures, alliances, and new product introductions.

An acquisition is the purchase of an entire company or a controlling interest in a company.

Lam Research Buys Novellus Systems to Consolidate Industry Industry consolidation is a common response to sharply escalating costs, waning demand, and increasing demands of new technologies. Customer consolidation often drives consolidation among suppliers. ______________________________________________________________________________________________ Highly complex electronic devices such as smartphones and digital cameras have become ubiquitous in our everyday lives. These devices are powered by sets of instructions encoded on wafers of silicon called semiconductor chips (semiconductors). Consumer and business demands for increasingly sophisticated functionality for smartphones and cloud computing technologies require the ongoing improvement of both the speed and the capability of semiconductors. This in turn places huge demands on the makers of equipment used in the chip-manufacturing process. To stay competitive, makers of equipment used to manufacture semiconductor chips were compelled to increase R&D spending sharply. Chip manufacturers resisted paying higher prices for equipment because their customers, such as PC and cellphone handset makers, were facing declining selling prices for their products. Chip equipment manufacturers were unable to recover the higher R&D spending through increasing selling prices. The resulting erosion in profitability due to increasing R&D spending was compounded by the onset of the 2008–2009 global recession. The industry responded with increased consolidation in an attempt to cut costs, firm product pricing, and gain access to new technologies. Industry consolidation began among chip manufacturers and later spurred suppliers to combine. In February 2011, chipmaker Texas Instruments bought competitor National Semiconductor for $6.5 billion. Three months later, Applied Materials, the largest semiconductor chip equipment manufacturer, bought Varian Semiconductor Equipment Associates for $4.9 billion to gain access to new technology. On December 21, 2011, Lam Research Corporation (Lam) agreed to buy rival Novellus Systems Inc. (Novellus) for $3.3 billion. Lam anticipates annual cost savings of $100 million by the end of 2013 due to the elimination of overlapping overhead. Under the terms of the deal, Lam agreed to acquire Novellus in a share exchange in which Novellus shareholders would receive 1.125 shares of Lam common stock for each Novellus share. The deal represented a 28% premium over the closing price of Novellus’s shares on the day prior to the deal’s public announcement. At closing, Lam shareholders owned about 51% of the combined firms, with Novellus shareholders controlling the rest. In comparison to earlier industry buyouts, the purchase seemed like a good deal for Lam’s shareholders. At 2.3 times Novellus’s annual revenue, the purchase price was almost one-half the 4.5 multiple paid by industry leader Applied Materials for Variant in May 2011. The purchase premium paid by Lam was one-half of that paid for comparable transactions between 2006 and 2010. Yet Lam shares closed down 4%, and Novellus’ shares closed up 28% on the announcement date. Lam and Novellus produce equipment that works at different stages of the semiconductor-manufacturing process, making their products complementary. After the merger, Lam’s product line would be considerably broader, covering more of the semiconductor-manufacturing process. Semiconductor-chip manufacturers are inclined to buy equipment from the same supplier due to the likelihood that the equipment will be compatible. Lam also is seeking access to cutting-edge technology and improved efficiency. Technology exchange between the two firms is expected to help the combined firms to develop the equipment necessary to support the next generation of advanced semiconductors. Customers of the two firms include such chip makers as Intel and Samsung. By selling complementary products, the firms have significant cross-selling opportunities as equipment suppliers to all 10 chip makers globally. Together, Lam and Novellus are able to gain revenue faster than they could individually by packaging their equipment and by developing their technologies in combination to ensure they work together. Lam has greater penetration with Samsung and Novellus with Intel. Lam also stated on the transaction announcement date that a $1.6 billion share repurchase program would be implemented within 12 months following closing. The buyback allows shareholders to sell some of their shares for cash such that, following completion of the buyback, the deal could resemble a half-stock, half-cash deal, depending on how many shareholders tender their shares during the buyback program. The share repurchase will be funded out of the firms’ combined cash balances and cash flow. Structuring the deal as an all-stock purchase at closing allows Novellus shareholders to have a tax-free deal. -Is this deal a horizontal or vertical transaction? What is the significance of this distinction?

Tax benefits, such as tax credits and net operating loss carry-forwards of the target firm, are often considered the primary reason for the acquisition of that firm.

Mattel Overpays for The Learning Company Despite disturbing discoveries during due diligence, Mattel acquired The Learning Company (TLC), a leading developer of software for toys, in a stock-for-stock transaction valued at $3.5 billion on May 13, 1999. Mattel had determined that TLC’s receivables were overstated because product returns from distributors were not deducted from receivables and its allowance for bad debt was inadequate. A $50 million licensing deal also had been prematurely put on the balance sheet. Finally, TLC’s brands were becoming outdated. TLC had substantially exaggerated the amount of money put into research and development for new software products. Nevertheless, driven by the appeal of rapidly becoming a big player in the children’s software market, Mattel closed on the transaction aware that TLC’s cash flows were overstated. For all of 1999, TLC represented a pretax loss of $206 million. After restructuring charges, Mattel’s consolidated 1999 net loss was $82.4 million on sales of $5.5 billion. TLC’s top executives left Mattel and sold their Mattel shares in August, just before the third quarter’s financial performance was released. Mattel’s stock fell by more than 35% during 1999 to end the year at about $14 per share. On February 3, 2000, Mattel announced that its chief executive officer (CEO), Jill Barrad, was leaving the company. On September 30, 2000, Mattel virtually gave away The Learning Company to rid itself of what had become a seemingly intractable problem. This ended what had become a disastrous foray into software publishing that had cost the firm literally hundreds of millions of dollars. Mattel, which had paid $3.5 billion for the firm in 1999, sold the unit to an affiliate of Gores Technology Group for rights to a share of future profits. Essentially, the deal consisted of no cash upfront and only a share of potential future revenues. In lieu of cash, Gores agreed to give Mattel 50 percent of any profits and part of any future sale of TLC. In a matter of weeks, Gores was able to do what Mattel could not do in a year. Gores restructured TLC’s seven units into three, set strong controls on spending, sifted through 467 software titles to focus on the key brands, and repaired relationships with distributors. Gores also has sold the entertainment division. -Why did Mattel disregard the warning signs uncovered during due diligence? Identify which motives for acquisitions discussed in this chapter may have been at work.

In a statutory merger, the acquiring company assumes the assets and liabilities of the target firm in accordance with the prevailing federal government statutes.

The acquisition of a coal mining business by a steel manufacturing company is an example of a vertical merger.

The hubris motive for M&As refers to which of the following?

Most M&A transactions in the United States are hostile or unfriendly takeover attempts.

Assessing Procter & Gamble’s Acquisition of Gillette The potential seemed almost limitless, as Procter & Gamble Company (P&G) announced that it had completed its purchase of Gillette Company (Gillette) in late 2005. P&G’s chairman and CEO, A.G. Lafley, predicted that the acquisition of Gillette would add one percentage point to the firm’s annual revenue growth rate, while Gillette’s chairman and CEO, Jim Kilts, opined that the successful integration of the two best companies in consumer products would be studied in business schools for years to come. Five years after closing, things have not turned out as expected. While cost savings targets were achieved, operating margins faltered due to lagging sales. Gillette’s businesses, such as its pricey razors, have been buffeted by the 2008–2009 recession and have been a drag on P&G’s top line rather than a boost. Moreover, most of Gillette’s top managers have left. P&G’s stock price at the end of 2010 stood about 12 percent above its level on the acquisition announcement date, less than one-fourth the appreciation of the share prices of such competitors as Unilever and Colgate-Palmolive Company during the same period. On January 28, 2005, P&G enthusiastically announced that it had reached an agreement to buy Gillette in a share-for-share exchange valued at $55.6 billion. This represented an 18 percent premium over Gillette's preannouncement share price. P&G also announced a stock buyback of $18 billion to $22 billion, funded largely by issuing new debt. The combined companies would retain the P&G name and have annual 2005 revenue of more than $60 billion. Half of the new firm's product portfolio would consist of personal care, healthcare, and beauty products, with the remainder consisting of razors and blades, and batteries. The deal was expected to dilute P&G's 2006 earnings by about 15 cents per share. To gain regulatory approval, the two firms would have to divest overlapping operations, such as deodorants and oral care. P&G had long been viewed as a premier marketing and product innovator. Consequently, P&G assumed that its R&D and marketing skills in developing and promoting women's personal care products could be used to enhance and promote Gillette's women's razors. Gillette was best known for its ability to sell an inexpensive product (e.g., razors) and hook customers to a lifetime of refills (e.g., razor blades). Although Gillette was the number 1 and number 2 supplier in the lucrative toothbrush and men's deodorant markets, respectively, it has been much less successful in improving the profitability of its Duracell battery brand. Despite its number 1 market share position, it had been beset by intense price competition from Energizer and Rayovac Corp., which generally sell for less than Duracell batteries. Suppliers such as P&G and Gillette had been under considerable pressure from the continuing consolidation in the retail industry due to the ongoing growth of Wal-Mart and industry mergers at that time, such as Sears and Kmart. About 17 percent of P&G's $51 billion in 2005 revenues and 13 percent of Gillette's $9 billion annual revenue came from sales to Wal-Mart. Moreover, the sales of both Gillette and P&G to Wal-Mart had grown much faster than sales to other retailers. The new company, P&G believed, would have more negotiating leverage with retailers for shelf space and in determining selling prices, as well as with its own suppliers, such as advertisers and media companies. The broad geographic presence of P&G was expected to facilitate the marketing of such products as razors and batteries in huge developing markets, such as China and India. Cumulative cost cutting was expected to reach $16 billion, including layoffs of about 4 percent of the new company's workforce of 140,000. Such cost reductions were to be realized by integrating Gillette's deodorant products into P&G's structure as quickly as possible. Other Gillette product lines, such as the razor and battery businesses, were to remain intact. P&G's corporate culture was often described as conservative, with a "promote-from-within" philosophy. While Gillette's CEO was to become vice chairman of the new company, the role of other senior Gillette managers was less clear in view of the perception that P&G is laden with highly talented top management. To obtain regulatory approval, Gillette agreed to divest its Rembrandt toothpaste and its Right Guard deodorant businesses, while P&G agreed to divest its Crest toothbrush business. The Gillette acquisition illustrates the difficulty in evaluating the success or failure of mergers and acquisitions for acquiring company shareholders. Assessing the true impact of the Gillette acquisition remains elusive, even after five years. Though the acquisition represented a substantial expansion of P&G’s product offering and geographic presence, the ability to isolate the specific impact of a single event (i.e., an acquisition) becomes clouded by the introduction of other major and often uncontrollable events (e.g., the 2008–2009 recession) and their lingering effects. While revenue and margin improvement have been below expectations, Gillette has bolstered P&G’s competitive position in the fast-growing Brazilian and Indian markets, thereby boosting the firm’s longer-term growth potential, and has strengthened its operations in Europe and the United States. Thus, in this ever-changing world, it will become increasingly difficult with each passing year to identify the portion of revenue growth and margin improvement attributable to the Gillette acquisition and that due to other factors. -Immediately following the announcement, P&G's share price dropped by 2 percent and Gillette's share price rose by 13 percent. Explain why this may have happened?

Pfizer Acquires Pharmacia to Solidify Its Top Position In 1990, the European and U.S. markets were about the same size; by 2000, the U.S. market had grown to twice that of the European market. This rapid growth in the U.S. market propelled American companies to ever increasing market share positions. In particular, Pfizer moved from 14th in terms of market share in 1990 to the top spot in 2000. With the acquisition of Pharmacia in 2002, Pfizer’s global market share increased by three percentage points to 11%. The top ten drug firms controlled more than 50 percent of the global market, up from 22 percent in 1990. Pfizer is betting that size is what matters in the new millennium. As the market leader, Pfizer was finding it increasingly difficult to sustain the double-digit earnings growth demanded by investors. Such growth meant the firm needed to grow revenue by $3-$5 billion annually while maintaining or improving profit margins. This became more difficult due to the skyrocketing costs of developing and commercializing new drugs. Expiring patents on a number of so-called blockbuster drugs (i.e., those with potential annual sales of more than $1 billion) intensified pressure to bring new drugs to market. Pfizer and Pharmacia knew each other well. They had been in a partnership since 1998 to market the world’s leading arthritis medicine and the 7th largest selling drug globally in terms of annual sales in Celebrex. The companies were continuing the partnership with 2nd generation drugs such as Bextra launched in the spring of 2002. For Pharmacia’s management, the potential for combining with Pfizer represented a way for Pharmacia and its shareholders to participate in the biggest and fastest growing company in the industry, a firm more capable of bringing more products to market than any other. The deal offered substantial cost savings, immediate access to new products and markets, and access to a number of potentially new blockbuster drugs. Projected cost savings are $1.4 billion in 2003, $2.2 billion in 2004, and $2.5 billion in 2005 and thereafter. Moreover, Pfizer gained access to four more drug lines with annual revenue of more than $1 billion each, whose patents extend through 2010. That gives Pfizer, a portfolio, including its own, of 12 blockbuster drugs. The deal also enabled Pfizer to enter three new markets, cancer treatment, ophthalmology, and endocrinology. Pfizer expects to spend $5.3 billion on R&D in 2002. Adding Pharmacia’s $2.2 billion brings combined company spending to $7.5 billion annually. With an enlarged research and development budget Pfizer hopes to discover and develop more new drugs faster than its competitors. On July 15, 2002, the two firms jointly announced they had agreed that Pfizer would exchange 1.4 shares of its stock for each outstanding share of Pharmacia stock or $45 a share based on the announcement date closing price of Pfizer stock. The total value of the transaction on the announcement was $60 billion. The offer price represented a 38% premium over Pharmacia’s closing stock price of $32.59 on the announcement date. Pfizer’s shareholders would own 77% of the combined firms and Pharmcia’s shareholders 23%. The market punished Pfizer, sending its shares down $3.42 or 11% to $28.78 on the announcement date. Meanwhile, Pharmacia’s shares climbed $6.66 or 20% to $39.25. -In your opinion, is this transaction likely to succeed or fail to meet investor expectations? Explain your answer.

V.F. Corp Buys Timberland Acquisitions often are used to change a firm’s product focus rapidly. Acquisitions of direct competitors often represent significant revenue growth and cost-saving opportunities. The timely realization of synergies is critical to recovering purchase price premiums. Widely recognized in the United States and Europe as a maker of rugged outdoor apparel, Timberland (TBL) had stumbled in recent years. Its failure to turn around its money-losing Yellow Boot brand, the limited success of its advertising campaign to encourage consumers to think of Timberland apparel as a year-round brand, and overly ambitious expansion plans in China caused earnings to deteriorate. Despite annual revenues growing to more than $1.6 billion in fiscal year 2011, the firm was losing market share to such competitors as the Gap and Sears Holdings. Timberland’s share price declined as investor confidence in management waned when the firm failed to meet its quarterly earnings forecasts. Timberland was ripe for takeover. With annual revenue of $7.7 billion, apparel maker V.F. Corporation (VFC), owner of such well-known brands as The North Face, Wrangler, and Lee, was always on the prowl for firms that fit its business strategy. VFC has grown historically by adding highly recognizable brands with significant market share. The strategy has been implemented largely through acquisition rather than through partnering with others or developing its own brands. Furthermore, the firm was shifting its product offering toward the rapidly growing outdoor-apparel business. With its focus on outdoor apparel, Timberland became a highly attractive target, especially as its share price declined. VFC pounced on the opportunity to add the highly recognizable Timberland trademark to its product portfolio. On June 13, 2011, VFC announced that it had reached an agreement to pay TBL shareholders $43 per share in an all-cash deal, a 43% premium over the prior day’s closing price. The deal valued TBL at about $2 billion. Including the Timberland acquisition, VFC’s outdoor and action sports product lines were expected to contribute about one-half of the firm’s total annual revenue in 2012, ultimately rising by more than 60% by 2015. In buying Timberland, VFC gained access to new retail outlets and the opportunity to better position TBL as a lifestyle brand in the apparel and accessories market. VFC also hoped to use TBL’s rapidly growing online business to help it achieve its online sales goal of more than $400 million by 2015, more than three times their 2011 total. VFC hoped to accelerate the growth in TBL product sales by expanding their availability through its own e-commerce site and through its international operations. Likewise, VFC expected to achieve substantially larger discounts on raw material purchases than TBL because of its larger bulk purchases and to reduce overhead expenses by eliminating redundant positions. Xerox Buys ACS to Satisfy Shifting Customer Requirements In anticipation of a shift from hardware and software spending to technical services by their corporate customers, IBM announced an aggressive move away from its traditional hardware business and into services in the mid-1990s. Having sold its commodity personal computer business to Chinese manufacturer Lenovo in mid-2005, IBM became widely recognized as a largely “hardware neutral” systems integration, technical services, and outsourcing company. Because information technology (IT) services have tended to be less cyclical than hardware and software sales, the move into services by IBM enabled the firm to tap a steady stream of revenue at a time when customers were keeping computers and peripheral equipment longer to save money. The 2008–2009 recession exacerbated this trend as corporations spent a smaller percentage of their IT budgets on hardware and software. These developments were not lost on other IT companies. Hewlett-Packard (HP) bought tech services company EDS in 2008 for $13.9 billion. On September 21, 2009, Dell announced its intention to purchase another IT services company, Perot Systems, for $3.9 billion. One week later, Xerox, traditionally an office equipment manufacturer announced a cash and stock bid for Affiliated Computer Systems (ACS) totaling $6.4 billion. Each firm was moving to position itself as a total solution provider for its customers, achieving differentiation from its competitors by offering a broader range of both hardware and business services. While each firm focused on a somewhat different set of markets, they all shared an increasing focus on the government and healthcare segments. However, by retaining a large proprietary hardware business, each firm faced challenges in convincing customers that they could provide objectively enterprise-wide solutions that reflected the best option for their customers. Previous Xerox efforts to move beyond selling printers, copiers, and supplies and into services achieved limited success due largely to poor management execution. While some progress in shifting away from the firm’s dependence on printers and copier sales was evident, the pace was far too slow. Xerox was looking for a way to accelerate transitioning from a product-driven company to one whose revenues were more dependent on the delivery of business services. With annual sales of about $6.5 billion, ACS handles paper-based tasks such as billing and claims processing for governments and private companies. With about one-fourth of ACS’s revenue derived from the healthcare and government sectors through long-term contracts, the acquisition gives Xerox a greater penetration into markets which should benefit from the 2009 government stimulus spending and 2010 healthcare legislation. More than two-thirds of ACS’s revenue comes from the operation of client back office operations such as accounting, human resources, claims management, and other business management outsourcing services, with the rest coming from providing technology consulting services. ACS would also triple Xerox’s service revenues to $10 billion. Xerox hopes to increases its overall revenue by bundling its document management services with ACS’s client back office operations. Only 20 percent of the two firms’ customers overlap. This allows for significant cross-selling of each firm’s products and services to the other firm’s customers. Xerox is also betting that it can apply its globally recognized brand and worldwide sales presence to expand ACS internationally. A perceived lack of synergies between the two firms, Xerox’s rising debt levels, and the firm’s struggling printer business fueled concerns about the long-term viability of the merger, sending Xerox’s share price tumbling by almost 10 percent on the news of the transaction. With about $1 billion in cash at closing in early 2010, Xerox needed to borrow about $3 billion. Standard & Poor’s credit rating agency downgraded Xerox’s credit rating to triple-B-minus, one notch above junk. Integration is Xerox’s major challenge. The two firms’ revenue mixes are very different, as are their customer bases, with government customers often requiring substantially greater effort to close sales than Xerox’s traditional commercial customers. Xerox intends to operate ACS as a standalone business, which will postpone the integration of its operations consisting of 54,000 employees with ACS’s 74,000. If Xerox intends to realize significant incremental revenues by selling ACS services to current Xerox customers, some degree of integration of the sales and marketing organizations would seem to be necessary. It is hardly a foregone conclusion that customers will buy ACS services simply because ACS sales representatives gain access to current Xerox customers. Presumably, additional incentives are needed, such as some packaging of Xerox hardware with ACS’s IT services. However, this may require significant price discounting at a time when printer and copier profit margins already are under substantial pressure. Customers are likely to continue, at least in the near term, to view Xerox, Dell, and HP more as product than service companies. The sale of services will require significant spending to rebrand these companies so that they will be increasingly viewed as service vendors. The continued dependence of all three firms on the sale of hardware may retard their ability to sell packages of hardware and IT services to customers. With hardware prices under continued pressure, customers may be more inclined to continue to buy hardware and IT services from separate vendors to pit one vendor against another. Moreover, with all three firms targeting the healthcare and government markets, pressure on profit margins could increase for all three firms. The success of IBM’s services strategy could suggest that pure IT service companies are likely to perform better in the long run than those that continue to have a significant presence in both the production and sale of hardware as well as IT services. -Discuss the advantages and disadvantages of Xerox's intention to operate ACS as a standalone business. As an investment banker supporting Xerox, would you have argued in support of integrating ACS immediately, at a later date, or to keep the two businesses separate indefinitely? Explain your answer.

Mattel Overpays for The Learning Company Despite disturbing discoveries during due diligence, Mattel acquired The Learning Company (TLC), a leading developer of software for toys, in a stock-for-stock transaction valued at $3.5 billion on May 13, 1999. Mattel had determined that TLC’s receivables were overstated because product returns from distributors were not deducted from receivables and its allowance for bad debt was inadequate. A $50 million licensing deal also had been prematurely put on the balance sheet. Finally, TLC’s brands were becoming outdated. TLC had substantially exaggerated the amount of money put into research and development for new software products. Nevertheless, driven by the appeal of rapidly becoming a big player in the children’s software market, Mattel closed on the transaction aware that TLC’s cash flows were overstated. For all of 1999, TLC represented a pretax loss of $206 million. After restructuring charges, Mattel’s consolidated 1999 net loss was $82.4 million on sales of $5.5 billion. TLC’s top executives left Mattel and sold their Mattel shares in August, just before the third quarter’s financial performance was released. Mattel’s stock fell by more than 35% during 1999 to end the year at about $14 per share. On February 3, 2000, Mattel announced that its chief executive officer (CEO), Jill Barrad, was leaving the company. On September 30, 2000, Mattel virtually gave away The Learning Company to rid itself of what had become a seemingly intractable problem. This ended what had become a disastrous foray into software publishing that had cost the firm literally hundreds of millions of dollars. Mattel, which had paid $3.5 billion for the firm in 1999, sold the unit to an affiliate of Gores Technology Group for rights to a share of future profits. Essentially, the deal consisted of no cash upfront and only a share of potential future revenues. In lieu of cash, Gores agreed to give Mattel 50 percent of any profits and part of any future sale of TLC. In a matter of weeks, Gores was able to do what Mattel could not do in a year. Gores restructured TLC’s seven units into three, set strong controls on spending, sifted through 467 software titles to focus on the key brands, and repaired relationships with distributors. Gores also has sold the entertainment division. -Why could Gores Technology do in a matter of weeks what the behemoth toy company, Mattel, could not do?

Only interest payments on ESOP loans are tax deductible by the firm sponsoring the ESOP.

Which of the following are often participants in the acquisition process?

Which of the following is not true of financial synergy?

Consolidation occurs when two or more companies join to form a new company.

Regulatory and political change seldom plays a role in increasing or decreasing the level of M&A activity.