Exam 5: Implementation: Search Through Closing: Phases 3 to 10 of the Acquisition Process

Total consideration refers to what is to be paid for the target firm and usually only consists of cash or stock,exclusively.

Rumors of impending acquisition can have a substantial deleterious impact on the target firm.

Buyers routinely perform due diligence on sellers,but sellers rarely perform due diligence on buying firms.

Case Study Short Essay Examination Questions Cingular Acquires AT&T Wireless in a Record-Setting Cash Transaction Cingular outbid Vodafone to acquire AT&T Wireless, the nation's third largest cellular telephone company, for $41 billion in cash plus $6 billion in assumed debt in February 2004. This represented the largest all-cash transaction in history. The combined companies, which surpass Verizon Wireless as the largest U.S. provider, have a network that covers the top 100 U.S. markets and span 49 of the 50 U.S. states. While Cingular's management seemed elated with their victory, investors soon began questioning the wisdom of the acquisition. By entering the bidding at the last moment, Vodafone, an investor in Verizon Wireless, forced Cingular's parents, SBC Communications and BellSouth, to pay a 37 percent premium over their initial bid. By possibly paying too much, Cingular put itself at a major disadvantage in the U.S. cellular phone market. The merger did not close until October 26, 2004, due to the need to get regulatory and shareholder approvals. This gave Verizon, the industry leader in terms of operating margins, time to woo away customers from AT&T Wireless, which was already hemorrhaging a loss of subscribers because of poor customer service. By paying $11 billion more than its initial bid, Cingular would have to execute the integration, expected to take at least 18 months, flawlessly to make the merger pay for its shareholders. With AT&T Wireless, Cingular would have a combined subscriber base of 46 million, as compared to Verizon Wireless's 37.5 million subscribers. Together, Cingular and Verizon control almost one half of the nation's 170 million wireless customers. The transaction gives SBC and BellSouth the opportunity to have a greater stake in the rapidly expanding wireless industry. Cingular was assuming it would be able to achieve substantial operating synergies and a reduction in capital outlays by melding AT&T Wireless's network into its own. Cingular expected to trim combined capital costs by $600 to $900 million in 2005 and $800 million to $1.2 billion annually thereafter. However, Cingular might feel pressure from Verizon Wireless, which was investing heavily in new mobile wireless services. If Cingular were forced to offer such services quickly, it might not be able to realize the reduction in projected capital outlays. Operational savings might be even more difficult to realize. Cingular expected to save $100 to $400 million in 2005, $500 to $800 million in 2006, and $1.2 billion in each successive year. However, in view of AT&T Wireless's continued loss of customers, Cingular might have to increase spending to improve customer service. To gain regulatory approval, Cingular agreed to sell assets in 13 markets in 11 states. The firm would have six months to sell the assets before a trustee appointed by the FCC would become responsible for disposing of the assets. SBC and BellSouth, Cingular's parents, would have limited flexibility in financing new spending if it were required by Cingular. SBC and BellSouth each borrowed $10 billion to finance the transaction. With the added debt, S&P put SBC, BellSouth, and Cingular on credit watch, which often is a prelude in a downgrade of a firm's credit rating. : -How might the amount and composition of the purchase price affect Cingular's,SBC's,and BellSouth's cost of capital?

A letter of intent formally stipulates the reason for the agreement,major terms and conditions,the responsibilities of both parties while the agreement is in force,a reasonable expiration date,and how all fees associated with the transaction will be paid.

The buyer's ability to obtain adequate financing is a closing condition common to most agreements of purchase and sale.

Closing is a phase of the acquisition process that usually occurs shortly after the target has been fully integrated into the acquiring firm.

The letter of intent often specifies the type of information to be exchanged as well as the scope and duration of the potential buyer's due diligence.

Oracle's Efforts to Consolidate the Software Industry Key Points: •Industry-wide trends, coupled with the recognition of its own limitations, compelled Oracle to alter radically its business strategy. •A rapid series of acquisitions of varying sizes enabled the firm to respond rapidly to the dynamically changing business environment. •Increasingly, the major software competitors seem to be pursuing very similar strategies. •The long-term winner often is the firm most successfully executing its chosen strategy. _____________________________________________________________________________________________ Oracle 's completion of its $7.4 billion takeover of Sun Microsystems on January 28, 2010 illustrated how in somewhat more than five years the firm has been able to dramatically realign its focus. Once viewed as the premier provider of proprietary database and middleware services (accounting for about three-fourths of the firm's revenue), Oracle is now seen as a leader in enterprise resource planning, customer relationship management, and supply chain management software applications. What spawned this rapid and dramatic transformation? The industry in which Oracle competes has undergone profound and lasting changes. In the past, the corporate computing market was characterized by IBM selling customers systems that included most of the hardware and software in a single package. Later, minicomputer manufacturers pursued a similar strategy in which they would build all of the crucial pieces of a large system, including its chips, main software, and networking technology. The traditional model was upended by the rise of more powerful and standardized computers based on readily available chips from Intel and an innovative software market. Customers could choose the technology they preferred (i.e., "best of breed") and assemble those products in their own data centers networks to support growth in the number of users and the growing complexity of user requirements. Such enterprise-wide software (e.g., human resource and customer relationship management systems) became less expensive as prices of hardware and software declined under intensifying competitive pressure as more and more software firms entered the fray. Although the enterprise software market grew rapidly in the 1990s, by the early 2000s, market growth showed signs of slowing. This market consists primarily of large Fortune 500 firms with multiple operations across many countries. Such computing environments tend to be highly complex and require multiple software applications that must work together on multiple hardware systems. In recent years, users of information technology have sought ways to reduce the complexity of getting the disparate software applications to work together. Although some buyers still prefer to purchase the "best of breed" software, many are moving to purchase suites of applications that are compatible. In response to these industry changes and the maturing of its database product line, which accounted for three-fourths of its revenue, Oracle moved into enterprise applications with its 2004 $10.3 billion purchase of PeopleSoft. From there, Oracle proceeded to acquire 55 firms, with more than one-half focused on strengthening the firm's software applications business. Revenues almost doubled by 2009 to $23 billion, growing through the 2008-2009 recession. Oracle, like most successful software firms, generates substantial and sustainable cash flow as a result of the way in which business software is sold. Customers buy licenses to obtain the right to utilize a vendor's software and periodically renew the license in order to receive upgrades. Healthy cash flow minimized the need for Oracle to borrow. Consequently, it was able to sustain its acquisitions by borrowing and paying cash for companies rather than having to issue stock and potentially diluting existing shareholders. In helping to satisfy its customers' challenges, Oracle has had substantial experience in streamlining other firms' supply chains and in reducing costs. For most software firms, the largest single cost is the cost of sales. Consequently, in acquiring other software firms, Oracle has been able to apply this experience to achieve substantial cost reduction by pruning unprofitable products and redundant overhead during the integration of the acquired firms. Oracle's existing overhead structure would then be used to support the additional revenue gained through acquisitions. Consequently, most of the additional revenue would fall to the bottom line. For example, since acquiring Sun, Oracle has rationalized and consolidated Sun's manufacturing operations and substantially reduced the number of products the firm offers. Fewer products results in less administrative and support overhead. Furthermore, Oracle has introduced a "build to order" mentality rather than a "build to inventory" marketing approach. With a focus on "build to order," hardware is manufactured only when orders are received rather than for inventory in anticipation of future orders. By aligning production with actual orders, Oracle is able to reduce substantially the cost of carrying inventory; however, it does run the risk of lost sales from customers who need their orders satisfied immediately. Oracle has also pared down the number of suppliers in order to realize savings from volume purchase discounts. While lowering its cost position in this manner, Oracle has sought to distinguish itself from its competitors by being known as a full-service provider of integrated software solutions. Prior to the Sun acquisition, Oracle's primary competitor in the enterprise software market was the German software giant SAP. However, the acquisition of Sun's vast hardware business pits Oracle for the first time against Hewlett-Packard, IBM, Dell Computer, and Cisco Systems, all of which have made acquisitions of software services companies in recent years, moving well beyond their traditional specialties in computers or networking equipment. In 2009, Cisco Systems diversified from its networking roots and began selling computer servers. Traditionally, Cisco had teamed with hardware vendors HP, Dell, and IBM. HP countered Cisco by investing more in its existing networking products and by acquiring the networking company 3Com for $2.7 billion in November 2009. HP had purchased EDS in 2008 for $13.8 billion in an effort to sell more equipment and services to customers often served by IBM. Each firm seems to be pursuing a "me too" strategy in which they can claim to their customers that they and they alone have all the capabilities to be an end-to-end service provider. Which firm is most successful in the long run may well be the one that successfully integrates their acquisitions the best. Investors' concern about Oracle's strategy is that the frequent acquisitions make it difficult to measure how well the company is growing. With many of the acquisitions falling in the $5 million to $100 million range, relatively few of Oracle's acquisitions have been viewed as material for financial reporting purposes. Consequently, Oracle is not obligated to provide pro forma financial data about these acquisitions, and investors have found it difficult to ascertain the extent to which Oracle has grown organically (i.e., grown the revenue resulting from prior acquisitions) versus simply by acquiring new revenue streams. Ironically, in the short run, Oracle's acquisition binge has resulted in increased complexity as each new acquisition means more products must be integrated. The rapid revenue growth from acquisitions may indeed simply be masking underlying problems brought about by this growing complexity. and Answers: -How would you characterize the Oracle business strategy (i.e.,cost leadership,differentiation,niche,or some combination of all three)? Explain your answer.

Discretionary assets are undervalued or redundant assets not required to run the acquired business and which can be used by the buyer to recover a portion of the purchase price.

Banks are commonly used to provide bridge or temporary financing to pay all or a portion of the purchase price and meet possible working capital requirements until permanent financing can be found.

What other benefits for Oracle,and for the remaining competitors such as SAP,do you see from further industry consolidation? Be specific.

Case Study Short Essay Examination Questions Bank of America Acquires Merrill Lynch Against the backdrop of the Lehman Brothers' Chapter 11 bankruptcy filing, Bank of America (BofA) CEO Kenneth Lewis announced on September 15, 2008, that the bank had reached agreement to acquire mega-retail broker and investment bank Merrill Lynch. Hammered out in a few days, investors expressed concern that the BofA's swift action on the all-stock $50 billion transaction would saddle the firm with billions of dollars in problem assets by pushing BofA's share price down by 21 percent. BofA saw the takeover of Merrill as an important step toward achieving its long-held vision of becoming the number 1 provider of financial services in its domestic market. The firm's business strategy was to focus its efforts on the U.S. market by expanding its product offering and geographic coverage. The firm implemented its business strategy by acquiring selected financial services companies to fill gaps in its product offering and geographic coverage. The existence of a clear and measurable vision for the future enabled BofA to make acquisitions as the opportunity arose. Since 2001, the firm completed a series of acquisitions valued at more than $150 billion. The firm acquired FleetBoston Financial, greatly expanding its network of branches on the East Coast, and LaSalle Bank to improve its coverage in the Midwest. The acquisitions of credit card-issuing powerhouse MBNA, U.S. Trust (a major private wealth manager), and Countrywide (the nation's largest residential mortgage loan company) were made to broaden the firm's financial services offering. The acquisition of Merrill makes BofA the country's largest provider of wealth management services to go with its current status as the nation's largest branch banking network and the largest issuer of small business, home equity, credit card, and residential mortgage loans. The deal creates the largest domestic retail brokerage and puts the bank among the top five largest global investment banks. Merrill also owns 45 percent of the profitable asset manager BlackRock Inc., worth an estimated $10 billion. BofA expects its retail network to help sell Merrill and BlackRock's investment products to BofA customers. The hurried takeover encouraged by the U.S. Treasury and Federal Reserve did not allow for proper due diligence. The extent of the troubled assets on Merrill's books was largely unknown. While the losses at Merrill proved to be stunning in the short run-$15 billion alone in the fourth quarter of 2008-the acquisition by Bank of America averted the possible demise of Merrill Lynch. By the end of the first quarter of 2009, the U.S. government had injected $45 billion in loans and capital into BofA in an effort to offset some of the asset write-offs associated with the acquisition. Later that year, Lewis announced his retirement from the bank. Mortgage loan losses and foreclosures continued to mount throughout 2010, with a disproportionately large amount of such losses attributable to the acquisition of the Countrywide mortgage loan portfolio. While BofA's vision and strategy may still prove to be sound, the rushed execution of the Merrill acquisition, coupled with problems surfacing from other acquisitions, could hobble the financial performance of BofA for years to come. Case Study Short Essay Examination Questions When Companies Overpay-Mattel Acquires The Learning Company Mattel, Inc. is the world's largest designer, manufacturer, and marketer of a broad variety of children's products selling directly to retailers and consumers. Most people recognize Mattel as the maker of the famous Barbie, the best-selling fashion doll in the world, generating sales of $1.7 billion annually. The company also manufactures a variety of other well-known toys and owns the primary toy license for the most popular kids' educational program "Sesame Street." In 1988, Mattel revived its previous association with The Walt Disney Company and signed a multiyear deal with them for the worldwide toy rights for all of Disney's television and film properties Business Plan Mission Statement and Strategy Mattel's mission is to maintain its position in the toy market as the largest and most profitable family products marketer and manufacturer in the world. Mattel will continue to create new products and innovate in their existing toy lines to satisfy the constant changes of the family-products market. Its business strategy is to diversify Mattel beyond the market for traditional toys at a time when the toy industry is changing rapidly. This will be achieved by pursuing the high-growth and highly profitable children's technology market, while continuing to enhance Mattel's popular toys to gain market share and increase earnings in the toy market. Mattel believes that its current software division, Mattel Interactive, lacks the technical expertise and resources to penetrate the software market as quickly as the company desires. Consequently, Mattel seeks to acquire a software business that will be able to manufacture and market children's software that Mattel will distribute through its existing channels and through its Website (Mattel.com). Defining the Marketplace The toy market is a major segment within the leisure time industry. Included in this segment are many diverse companies, ranging from amusement parks to yacht manufacturers. Mattel is one of the largest manufacturers within the toy segment of the leisure time industry. Other leading toy companies are Hasbro, Nintendo, and Lego. Annual toy industry sales in recent years have exceeded $21 billion. Approximately one-half of all sales are made in the fourth quarter, reflecting the Christmas holiday. Customers. Mattel's major customers are the large retail and e-commerce stores that distribute their products. These retailers and e-commerce stores in 1999 included Toys "R" Us Inc., Wal-Mart Stores Inc., Kmart Corp., Target, Consolidated Stores Corp., E-toys, ToyTime.com, Toysmart.com, and Toystore.com. The retailers are Mattel's direct customers; however, the ultimate buyers are the parents, grandparents, and children who purchase the toys from these retailers. Competitors. The two largest toy manufacturers are Mattel and Hasbro, which together account for almost one-half of industry sales. In the past few years, Hasbro has acquired several companies whose primary products include electronic or interactive toys and games. On December 8, 1999, Hasbro announced that it would shift its focus to software and other electronic toys. Traditional games, such as Monopoly, would be converted into software. Potential Entrants. Potential entrants face substantial barriers to entry in the toy business. Current competitors, such as Mattel and Hasbro, already have secured distribution channels for their products based on longstanding relationships with key customers such as Wal-Mart and Toys "R" Us. It would be costly for new entrants to replicate these relationships. Moreover, brand recognition of such toys as Barbie, Nintendo, and Lego makes it difficult for new entrants to penetrate certain product segments within the toy market. Proprietary knowledge and patent protection provide additional barriers to entering these product lines. The large toymakers have licensing agreements that grant them the right to market toys based on the products of the major entertainment companies. Product Substitutes. One of the major substitutes for traditional toys such as dolls and cars are video games and computer software. Other product substitutes include virtually all kinds of entertainment including books, athletic wear, tapes, and TV. However, these entertainment products are less of a concern for toy companies than the Internet or electronic games because they are not direct substitutes for traditional toys. Suppliers. An estimated 80% of toy production is manufactured abroad. Both Mattel and Hasbro own factories in the Far East and Mexico to take advantage of low labor costs. Parts, such as software and microchips, often are outsourced to non-Mattel manufacturing plants in other countries and then imported for the assembly of such products as Barbie within Mattel-owned factories. Although outsourcing has resulted in labor cost savings, it also has resulted in inconsistent quality. Opportunities and Threats Opportunities New Distribution Channels. Mattel.com represents 80 separate toy and software offerings. Mattel hopes to spin this operation off as a separate company when it becomes profitable. Mattel.com lost about $70 million in 1999. The other new channel for distributing toys is directly to consumers through catalogs. The so-called direct channels offered by the internet and catalog sales help Mattel reduce its dependence on a few mass retailers. Aging Population. Grandparents accounted for 14% of U.S. toy purchases in 1999. The number of grandparents is expected to grow from 58 million in 1999 to 76 million in 2005. Interactive Media. As children have increasing access to computers, the demand for interactive computer games is expected to accelerate. The "high-tech" toy market segment is growing 20% annually, compared with the modest 5% growth in the traditional toy business. International Growth. In 1999, 44% of Mattel's sales came from its international operations. Mattel already has redesigned its Barbie doll for the Asian and the South American market by changing Barbie's face and clothes. Threats Decreasing Demand for Traditional Toys. Children's tastes are changing. Popular items are now more likely to include athletic clothes and children's software and video games rather than more traditional items such as dolls and stuffed animals. Distributor Returns. Distributors may return toys found to be unsafe or unpopular. A quality problem with the Cabbage Patch Doll could cost Mattel more than $10 million in returns and in settling lawsuits. Shrinking Target Market. Historically, the toy industry has considered their prime market to be children from birth to age 14. Today, the top toy-purchasing years for a child range from birth to age 10. Just-In-Time Inventory Management. Changing customer inventory practices make it difficult to accurately forecast reorders, which has resulted in lost sales as unanticipated increases in orders could not be filled from current manufacturer inventories. Internal Assessment Strengths Mattel's key strengths lie in its relatively low manufacturing cost position, with 85% of its toys manufactured in low-labor-cost countries like China and Indonesia, and its established distribution channels. Moreover, licensing agreements with Disney enable Mattel to add popular new characters to its product lines. Weaknesses Mattel's Barbie and Hot Wheels product lines are mature, but the company has been slow to reposition these core brands. The lack of technical expertise to create software-based products limits Mattel's ability to exploit the shift away from traditional toys to video or interactive games. Acquisition Plan Objectives and Strategy Mattel's corporate strategy is to diversify Mattel beyond the mature traditional toys segment into high-growth segments. Mattel believed that it had to acquire a recognized brand identity in the children's software and entertainment segment of the toy industry, sometimes called the "edutainment" segment, to participate in the rapid shift to interactive, software-based toys that are both entertaining and educational. Mattel believed that such an acquisition would remove some of the seasonality from sales and broaden their global revenue base. Key acquisition objectives included building a global brand strategy, doubling international sales, and creating a $1 billion software business by January 2001. Defining the Target Industry The "edutainment" segment has been experiencing strong growth predominantly in the entertainment segment. Parents are seeing the importance of technology in the workplace and want to familiarize their children with the technology as early as possible. In 1998, more than 40% of households had computers and, of those households with children, 70% had educational software. As the number of homes with PCs continues to increase worldwide and with the proliferation of video games, the demand for educational and entertainment software is expected to accelerate. Management Preferences Mattel was looking for an independent children's software company with a strong brand identity and more than $400 million in annual sales. Mattel preferred not to acquire a business that was part of another competitor (e.g., Hasbro Interactive). Mattel's management stated that the target must have brands that complement Mattel's business strategy and the technology to support their existing brands, as well as to develop new brands. Mattel preferred to engage in a stock-for-stock exchange in any transaction to maintain manageable debt levels and to ensure that it preserved the rights to all software patents and licenses. Moreover, Mattel reasoned that such a transaction would be more attractive to potential targets because it would enable target shareholders to defer the payment of taxes. Potential Targets Game and edutainment development divisions are often part of software conglomerates, such as Cendant, Electronic Arts, and GT Interactive, which produce software for diverse markets including games, systems platforms, business management, home improvement, and pure educational applications. Other firms may be subsidiaries of large book, CD-ROM, or game publishers. The parent firms showed little inclination to sell these businesses at what Mattel believed were reasonable prices. Therefore, Mattel focused on five publicly traded firms: Acclaim Entertainment, Inc., Activision, Inc., Interplay Entertainment Corp, The Learning Company, Inc. (TLC), and Take-Two Interactive Software. Of these, only Acclaim, Activision, and The Learning Company had their own established brands in the games and edutainment sectors and the size sufficient to meet Mattel's revenue criterion. In 1999, TLC was the second largest consumer software company in the world, behind Microsoft. TLC was the leader in educational software, with a 42% market share, and in-home productivity software (i.e., home improvement software), with a 44% market share. The company has been following an aggressive expansion strategy, having completed 14 acquisitions since 1994. At 68%, TLC also had the highest gross profit margin of the target companies reviewed. TLC owned the most recognized titles and appeared to have the management and technical skills in place to handle the kind of volume that Mattel desired. Their sales were almost $1 billion, which would enable Mattel to achieve its objective in this "high-tech" market. Thus, TLC seemed the best suited to satisfy Mattel's acquisition objectives. Completing the Acquisition Despite disturbing discoveries during due diligence, Mattel acquired TLC in a stock-for-stock transaction valued at $3.8 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 billion 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. Epilogue 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% 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 and is seeking buyers for the remainder of TLC. Discussion Questions: -What are the primary barriers to entering the toy industry?

Which of the following are commonly used sources of financing for M&A transactions?

Shrewd sellers often negotiate a break-up clause in an agreement of purchase and sale requiring the buyer to pay the seller an amount at least equal to the seller's cost associated with the transaction.

Case Study Short Essay Examination Questions McKesson HBOC Restates Revenue McKesson Corporation, the nation's largest drug wholesaler, acquired medical software provider HBO & Co. in a $14.1 billion stock deal in early 1999. The transaction was touted as having created the country's largest comprehensive health care services company. McKesson had annual sales of $18.1 billion in fiscal year 1998, and HBO & Co. had fiscal 1998 revenue of $1.2 billion. HBO & Co. makes information systems that include clinical, financial, billing, physician practice, and medical records software. Charles W. McCall, the chair, president, and chief executive of HBO & Co., was named the new chair of McKesson HBOC. As one of the decade's hottest stocks, it had soared 38-fold since early 1992. McKesson's first attempt to acquire HBO in mid-1998 collapsed following a news leak. However, McKesson's persistence culminated in a completed transaction in January 1999. In its haste, McKesson closed the deal even before an in-depth audit of HBO's books had been completed. In fact, the audit did not begin until after the close of the 1999 fiscal year. McKesson was so confident that its auditing firm, Deloitte & Touche, would not find anything that it released unaudited results that included the impact of HBO shortly after the close of the 1999 fiscal year on March 31, 1999. Within days, indications that contracts had been backdated began to surface. By May, McKesson hired forensic accountants skilled at reconstructing computer records. By early June, the accountants were able to reconstruct deleted computer files, which revealed a list of improperly recorded contracts. This evidence underscored HBO's efforts to deliberately accelerate revenues by backdating contracts that were not final. Moreover, HBO shipped software to customers that they had not ordered, while knowing that it would be returned. In doing so, they were able to boost reported earnings, the company's share price, and ultimately the purchase price paid by McKesson. In mid-July, McKesson announced that it would have to reduce revenue by $327 million and net income by $191.5 million for the past 3 fiscal years to correct for accounting irregularities. The company's stock had fallen by 48% since late April when it first announced that it would have to restate earnings. McKesson's senior management had to contend with rebuilding McKesson's reputation, resolving more than 50 lawsuits, and attempting to recover $9.5 billion in market value lost since the need to restate earnings was first announced. When asked how such a thing could happen, McKesson spokespeople said they were intentionally kept from the due diligence process before the transaction closed. Despite not having adequate access to HBO's records, McKesson decided to close the transaction anyway. : -Assume an audit had been conducted and HBO's financial statements had been declared to be in accordance with GAAP.Would McKesson have been justified in believing that HBO's revenue and profit figures were 100% accurate?

The appropriate approach for initiating contact with a target firm is essentially the same for large or small,public or private companies.

An excessively long list of screening criteria used to develop a list of potential acquisition targets can severely limit the number of potential candidates.

Case Study Short Essay Examination Questions The Downside of Earnouts In the mid-1980s, a well-known aerospace conglomerate acquired a high-growth systems integration company by paying a huge multiple of earnings. The purchase price ultimately could become much larger if certain earnout objectives, including both sales and earnings targets, were achieved during the 4 years following closing. However, the buyer's business plan assumed close cooperation between the two firms, despite holding the system integrator as a wholly owned but largely autonomous subsidiary. The dramatic difference in the cultures of the two firms was a major impediment to building trust and achieving the cooperation necessary to make the acquisition successful. Years of squabbling over policies and practices tended to delay the development and implementation of new systems. The absence of new systems made it difficult to gain market share. Moreover, because the earnout objectives were partially defined in terms of revenue growth, many of the new customer contracts added substantial amounts of revenue but could not be completed profitably under the terms of these contracts. The buyer was slow to introduce new management into its wholly owned subsidiary for fear of violating the earnout agreement. Finally, market conditions changed, and what had been the acquired company's unique set of skills became commonplace. Eventually, the aerospace company wrote off most of the purchase price and merged the remaining assets of the acquired company into one of its other product lines after the earnout agreement expired. : -In your opinion,are earnouts more appropriate for firms in certain types of industries than for others? If so,give examples.Explain your answer.

"No shop" provisions are seldom found in letters of intent.