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Bob Kelly, the new CEO of Mellon Financial, is considering the terms of a proposed "merger of equals" with The Bank of New York, just before the final Board meeting to approve the deal. The combination offers a great strategic fit, and the expected synergies are large. However, the proposed exchange ration values Mellon at a discount to its last closing price, even though it is the smaller and non-surviving bank. Kelly must consider the various dimensions of the deal--specifically the value of synergies, the form of consideration, and the deal's impact on the eps of both sides--and determine whether it is in the best interests of Mellon, the city of Pittsburgh, and Mellon's shareholders.

Spreadsheet Supplement for case 208129

Examines an acquisition in the highly competitive outdoor media advertising industry in China in late 2005. The transaction leads to eventual consolidation of the whole industry and positive stock reactions. Discusses equity consideration in the context of an M&A transaction, and the role of private equity and venture capital in the development and the eventual consolidation of the industry in emerging markets. Provides a context in which to discuss the impact of antitrust regulation, or lack thereof, on the industrial organization in China.

The announcement of merger or acquisition conveys new information to the capital markets. This note describes how the stock prices of a Buyer and Target behave after the announcement of a deal. First, for an all-stock deal that is certain to go through, the note defines accouchement effects and describes the fundamental arbitrage relationship between Target and Buyer stock prices. It shows how post-announcement prices may be used to infer the market's estimate of synergies. It then explains how the betas of the two companies change post-announcement and the arbitrage relationship between prices in a cash-and-stock deal. Finally, it defines event risk and explains how it affects the prices of the Buyer and the Target.

What the acquiring company pays for a target in a merger or acquisition is called "consideration." Consideration can be in the form of cash, shares, or a combination of the two. Lays out the basic mechanics of equity consideration. Derives formulas for the Deal NPV of an all-equity deal and shows how to calculate and interpret key parameters, including percentage ownership, the exchange ratio, the acquisition premium, the wealth transfer, and the target's downside protection. Explains how synergies and over-valued shares affect the Deal NPV. Also shows how to calculate critical break-even exchange ratios. Ends by looking at cash-and-stock deals.

When discussing the pros and cons of an acquisition, practitioners often talk about the impact of the deal on the buyer's earnings-per-share (eps). An acquisition is said to be "accretive" if the buyer's eps goes up post-deal; it is "dilutive" if the buyer's eps goes down. Describes why managers are concerned with accretion and dilution; how to tell if a deal is accretive; why high P-E buyers can pay a premium and still have an accretive deal; how accretive deals can be bad (and dilutive deals good); and how much accretion or dilution to expect based on the terms of a deal.

Introduces a framework for evaluating mergers and acquisitions. Assumes that the criterion of a good deal is that it creates value for shareholders; i.e., has a positive deal NPV. Looks at the deal NPV from both the buyer's and seller's point of view. Explains how a positive deal NPV leads to positive predicted cumulation of abnormal returns. It then presents a framework for calculating deal NPVs based on the consideration paid, the work to be done, the value of the target, and the value created through restructuring or synergy. Concludes by introducing the concept of 'fragility risk,' which is basically the risk that the buyer's plans will go awry.

The poison pill defense against hostile takeovers was invented in 1982 by Martin Lipton, of Wachtell, Lipton, Rosen and Katz. Pills are considered the most effective of all the normal defenses against a hostile bidder. Describes the two basic types of poison pills (flip-ins and flip-overs), and explains how the form of a tender offer changes the impact of a pill on the bidder. Also describes how bidders can set up tender offers to avoid poison pills.

Paul Walsh, CEO of Diageo, must evaluate bids received in an auction of the Burger King restaurant unit. Describes how Diageo came to own Burger King, the attempts to turn the unit around, the strategic reasons for its sale, the auction process, and various bidders' tactics to gain advantage in the auction. Four bids with quite complex terms arrive by the auction deadline. Walsh is facing the task of ranking the bids and determining what enhancements to the inferior bids would make them equivalent to the first-ranked bid.

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Describes four disguised deals with different characteristics from the perspective of the acquirer. Asks students to compare, contrast, and rank the opportunities.

Introduces students to the legal standards affecting officers and directors when selling or purchasing a company. Provides a practical understanding of the Revlon Standard, the Securities and Exchange Act of 1934, Rule 10b-5, and the legal criteria for a cause of action for securities fraud. Recounts three precedential cases decided by the Delaware Supreme Court.

Introduces students to the main tactical maneuvers used by hostile bidders, including bear hugs, proxy fights, tender offers, and toeholds. Also describes how, in the United States, tender offers are regulated by the federal government via the Williams Act.

In the fall of 1998, Dan Frye, member of IBM's emerging technologies and business team, is trying to decide whether to forge a strategic alliance with the Linux Development Community (LDC). Just two years earlier, IBM had its first exposure to an "open source" software program when it selected Apache as the web server program for the web site of the Atlanta Summer Olympic Games. Based on its success with Apache, and Frye's intuition that Linux could be a critical, strategic step in the new "network-centric" computing environment, Frye and his colleagues are trying to decide whether an alliance between IBM and LDC would serve their interests--and, if so, how IBM could manage the alliance with a loosely affiliated group of software developers.

Helps students understand the multiple forms M&A deals can take, while framing the underlying dimensions that managers must consider when designing or assessing a given deal. Begins by introducing students to the ways in which M&A activity creates value, proceeds by identifying challenges and responsibilities managers assume when planning and implementing M&A deals, then concludes by presenting a conceptual framework to depict the managerial spectrum spanning pure acquisitions to pure alliances.

Students are introduced to the basic framework for corporate governance. Begins by describing the complex role of the modern corporation, then proceeds by discussing the fiduciary duties to which a board of trustees is bound (duty of care, duty of loyalty, etc.), and concludes by proposing seven factors officers and directors should consider when overseeing the sale or purchase of a company. Recounts the precedential case Smith vs. Van Gorkom.

In 1997, Compaq Computer was locked in price competition with industry leader Dell. Although Compaq sought to escape difficulty by acquiring Digital Equipment Corp., a maker of more lucrative servers and minicomputers, in 1998 the simultaneous effort to remain a competitive PC maker while transforming itself into a full-service computer firm proved arduous.

The consideration paid by an acquiring company to a target can be a combination of cash and stock. During the 1980s and 1990s, for example, approximately 12% to 13% of all deals between public companies involved both cash and stock. This case series describes the basic mechanics of equity-linked consideration. Part 3 looks at the value and risk of cash-and-stock transactions to the shareholders of the acquiring and the target companies. The case also considers the announcement effects of such transactions and their impact on the post-announcement betas of the two companies.

What the acquiring company pays for a target in a merger or acquisition is called "consideration." Consideration can be in the form of cash, shares, or a combination of cash and shares. During the 1990s, equity-linked consideration became the dominant method of payment in the United States. This case series describes the basic mechanics of equity-linked consideration. Part 1 looks at the effects of all-stock consideration on the values realized by the shareholders of the target and acquiring companies.

On August 3, 2001, after a hotly contested proxy fight, Wachovia Corp.'s shareholders voted to merge with First Union Corp. The managers of the two banks then turned to face the challenges of integrating the two organizations. Their task was to implement a "merger of equals" that would preserve the best parts of the two former companies while realizing the potential cost savings, operational efficiencies, and revenue gains that justified the combination in the eyes of the shareholders.