Chapter 4 Three Basic Forms of Acquisitions: 1) Merger or Consolidation not clear 2) Acquisition of Stock No vote 3) Acquisition of Assets formal

al vote required by stockholders Classification Scheme: 1) Horizontal Scheme same industry 2) Vertical Scheme different steps 3) Conglomerate NOT RELATED Merger Waves 1960s Conglomerate (buy) 1980s Bust up take over (sell) 1990s Strategic mergers (global) Synergy (Good) 1) 2) 3) 4) Revenue Enhancement Cost Reduction Tax Gains Reduced Capital Requirement

Synergy (Bad) 1) Earnings Growth 2) Diversification Merger Regulation 1) If 5% of company held 10 days 2) 20 days to tender shares (must be open) Defensive Tactics Before 1) Classified Board Only fraction of board elected each year 2) Poison Pills Sale of stock to existing stockholders at discounted price 3) Golden Parachutes Generous severance package paid to managers After 1) Greenmail Buy back shares from hostile owner at a premium 2) White Knight Acquired by friendly suitor 3) Exclusionary self-tenders buy back shares from stockholders and not hostile Anti-Trust: Sherman Anti Trust (1890) No monopolies Clayton Act (1914) Strengthen Sherman Act Fed Trade Comm Act (1914) FTC

Celler-Kefauver Act (1950) Severely limited possibility of obtaining approval for a horizontal merger Hart-Scott-Rodino Act (1976) Allowed FTC to rule on mergers Herfindahl-Hirschman Index (HHI) HHI> 1800 Highly Concentrated (challenged if increase greater than 50) 1800> HHI> 1000 Moderately Concentrated (challenged if increase greater than 100) 1000<HHI Not Concentrated (never challenged) Role of Investment Banks 1) Arrange mergers 2) Financing mergers 3) Establish a fair view 4) Develop defensive tactics 5) Arbitrage operations Eval methods 1) Discount cash flow method 2) Market multiple method Arbitrage mispricing Target shareholders reap benefits (mergers) Warren Buffet, Berkshire Hathaway Inc. Annual Report 1981 Leveraged Buyout use a large amount of debt to buy shares of a company Divestitures divorce KNOW EVERYTHING -Sale of companies operating assets Reasons: 1) Defense against hostile takeover 2) Provide cash and more liquidity 3) Makes firm easier to value 4) Focus on core business 5) For lawsuit settlement Types: NO MONEY INVOLVED 1) Spin-off - Turn division into separate entitydistribute shares to parent company stockholders MONEY INVOLVED 2) Carve-out - sell new shares to public 3) Sale of a division, business unit, etc.. to another firm

Chapter 5 Raising Equity for Private Companies 1) Angel Investors Individuals that invest in small private firms 2) Venture Capital Firms Limited partnerships invest in young private firms 3) Institutional Investors Pension funds, insurance companies, endowments 4) Corporate Investors Corporations that invest in private companies Advantages of going public: 1) Easier to get money 2) Liquidity 3) Firm value 4) Customer recognition 5) Diversify Disadvantages: 1) Regulations (SEC) 2) Operating data must be disclosed 3) Managing investor relations is time consuming 85% of venture capital exits from 2001-05 occurred through mergers/acquisitions IPO First offering of stock to public SEO- Sale of stock by firm that is already publicly traded Primary Offering- new shares (raise capital) Secondary Offering- shares owned by existing shareholders (no capital) Mixed offering for both IPO AND SEO Red Herring Preliminary prospectus Step of an IPO: 1) Approval of Board of Directors 2) Select investment banker 3) Pre-underwrite conference 4) File registration statements 5) Choose price range 6) SEC studies statement 7) Roadshow 8) Set final offer price in final prospectus 9) Public offering and sale Blue Sky laws State investor law (cant sell blue sky to our people) Direct Costs of IPO: 1) Underwriter Charges 7%

2) Lawyers, accountants, etc Firm commitment most IPOs agree to underwriter Best efforts Investment bank do its best to sell, but doesnt have to sell all (newer companies) Dutch auction closed bids, try to buy shares (ex. Google) Lock up period No buying/selling stock for typically 6 months (after IPO) Tombstone IPO in newspaper advertisement aka birth announcement Indirect Costs of IPO: 1) Money left on table (end price of first day offer price) * number of shares sold 2) Preparing it is time consuming Bookrunner head underwriter for a company (sync with other investment banks to insure fair price) Underpricing (first day close price-offer price) / offer price Flotation costs costs associated with issuance of new securities (math example in notes packet) Reverse merger private company merges with public company to become public NOT AN IPO KEEP COMPANY SHELL **Holding period return worksheet **Market share notes on board **A buys C worksheet