1&2 Title Page

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What is a Corporation?
An artificial legal being created by government charter
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Advantages of Organizing as a Corporation
Greater amounts of capital can be raised by the corporation (stocks and bonds).
Corporate owners liability is limited to the amount of investment.
Corporation ownership shares are easily transferred.
Corporations usually have longer lives than other forms of business ownership.
Professional management talent usually runs corporations.
Corporations lack mutual agency. (Only authorized individuals may bind the corporation to
contracts.
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Disadvantages of Being Organized as a Corporation
Double taxation
-Corporate earnings are taxed twice (earnings before taxes and stockholders dividends).
Subject to extensive government regulation (SECP etc.)
Corporate ownership is separated from control of operations.
6 Comparison
Board of Directors and Management Team
Board of Directors
Elected by stockholders.
Responsible for management of the corporation, establishing policy, specific decision making.
Management Team
Hired by board of directors.
Responsible for day-to-day operations of the corporation
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What is Corporate Restructuring?
Any change in a companys:
1.Capital structure,
2.Operations, or
3.Ownership
that is outside its ordinary course of business.
So where is the value coming from (why restructure)?
Slide 8 Picture Print
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Stockholders Equity
Common Stock
-Represents the primary ownership of stock in a corporation.
-Is the only issue form if only one class of stock is issued.
Preferred Stock
-Gives stockholders certain privileges not given to common stockholders (i.e. rights to dividends)
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Rights of Common Stockholders
Receive a certificate of ownership.
Transfer shares through sale or gift.
Vote at stockholder meeting (one vote per share owned).
Right to purchase a portion of any new shares issued to maintain their percentage ownership
(preemptive rights).
To receive dividends declared by the board of directors

To receive a portion of assets remaining when the corporation liquidates.

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CORPORATE CAPITAL
Owners equity in a corporation is identified as stockholders equity, shareholders equity, or
corporate capital
Two main sections of stockholders equity:
1. Paid-in (contributed) capital
-Investments contributed by stockholders (common stock, preferred stock).
2. Retained Earnings
-Earned capital retained by the corporation.
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Characteristics of Stock
Stock Outstanding (issued)
-Stock shares currently in the hands of stockholders.
Par Value
-Arbitrary monetary figure assigned by the corporation to a share of capital stock.
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PREFERRED STOCK
Preferred stock has contractual provisions that give a preference over common stockholders as
follows:
1.Dividends
2.Assets in the event of liquidation
Transactions are the same as for common stock transactions.
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CASH DIVIDENDS
A dividend is distribution by a corporation to its stockholders on a pro rata (equal) basis.
A cash dividend is a pro rata distribution of cash to stockholders.
For a cash dividend to occur, a corporation must have:
1retained earnings,
2adequate cash, and
3 declared dividends.

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STOCK DIVIDENDS
A stock dividend is a pro ratadistribution of the corporations own stock to stockholders.
A stock dividend results in a decrease in retained earningsand an increase in paid-in capital.
Corporations usually issue stock dividends for one or more of the following reasons:
1To satisfy stockholders dividend expectations without spending cash.
2To increase the marketability of its stock by increasing the number of shares outstanding and
thereby decreasing the market price per share.
3To emphasize that a portion of stockholders equity has been permanently reinvested in the business
and therefore is unavailable for cash dividends.

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Merger and Acquisition
Legal combination of two or more corporations (A & B) after which only A corporation remains. As
articles of incorporation are amended to include articles of merger.
After merger, A continues as the surviving corporation with all of Bs rights and obligations.
A

B
A

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Consolidation
Occurs when two or more corporations (A & B) combine such that both cease to exist and a
newcorporation emerges which has all the rights and obligations previously held by A and B.
Cs articles of consolidation take the place of the original articles of A and B.
A

C
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Takeovers
Alternative to merger or consolidation is the purchase of a controlling interest (e.g., 51%) of a
target corporations stock giving the purchaser corporation controlling interest in the target.
The aggressor deals entirely with the targets shareholders.
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M&A Terminology
Merger & Acquisition
Horizontal merger
Vertical merger
Vertical Integration
Congeneric mergers
Conglomerate mergers
Strategic Alliance
Joint venture
Outsourcing through Virtual companies
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M&A Terminology

Divestitures
Voluntary Corporate liquidation
Partial Sell offs
Corporate Spin off
Equity Carve outs
Ownership Structure
Going private
Leverage buyout
Restructuring changes to improve operations, policies, and strategies
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M&A Terminology
Merger
Negotiated deals
Mutuality of negotiations
Mostly friendly
Tender offers
Offer made directly to the shareholders
Hostile when offer made without approval of the board
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Types of Mergers

Horizontal mergers

Between firms in same business activity

Rationale
Economies of scale and scope
Synergies (ex. combining of best practices)
Government regulation due to potential anticompetitive effects
Vertical mergers
Combinations between firms at different stages
Goal is information and transaction efficiency
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Vertical Integration
Vertical Integration
Refers to the merger of two companies in the same industry that make products required at different stages
of the production cycle
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Vertical Integration (cont'd)
A major benefit of vertical integration is coordination.
For example, Apple Computers makes both the operating system and the hardware.
However, not all not all successful corporations are vertically integrated.
For example, Microsoft makes the operating system but not the computers.
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Types of Mergers
Congeneric mergers
merger where two companies are in the same or related industries but do not offer the same products. In a
congeneric merger, the companies may share similar distribution channels, providing synergies for the
merger

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Types of Mergers
Conglomerate mergers
Firms in unrelated business activities
Distinctions between conglomerate and non conglomerate firms
Investment companies diversify to reduce portfolio risk
Financial diversified provide funds and expertise on generic management functions of planning and
control
Concentric diversified combine with firms in less related activities to broaden potential markets
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Types of Mergers
Stock Swap
Target shareholders are swapping old stock for new stock in either the acquirer or a newly created merged
firm Term sheet
Summary of price and method of payment
Consideration paid to target shareholders can be very complex

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Joint Ventures
JV characteristics
Combination of assets from 2 or more parent firms place into a separate business entity
Limited scope and duration
May not affect competitive relationships
Examples: R&D, joint production of single product
JV timing similar to M&As (correlation over 0.95) driven by same factors affecting total investment
activity
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Joint Ventures
JVs and restructuring JVs can be used as transitional mechanism in broad restructuring (Nanda &
Williamson, 1995)
Buyer can better determine value of seller's brands, personnel, etc.
Risk of making mistakes is reduced through direct involvement with business
Customers moved to buyer over a period of time in which both firms are involved in JV
Buyer builds up expertise in JV
Seller is able to realize higher value from sale following JV due to increased buyer knowledge of assets
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Joint Ventures
Other benefits
Knowledge acquisition is goal of at least 50% of JVs best for learning by doing with complex processes
Risk reduction expansion of activities with smaller required investment
Tax aspects contribution of patent or technology may be more tax effective than licensing (depreciation
may offset revenues)
International aspects reduces risk of foreign expansion (some nations require firms to take a local partner)
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Joint Ventures
Reasons for failure (70% disbanded early)
Technology never developed
Inadequate preplanning
Disagreement over basic objectives
Managers refuse to share expertise with counterparts from other firm
Requirements for success
Participants have something of value to JV
JV should be carefully preplanned
Agreement should provide flexibility
Should include provisions for termination
Key executives involved in implementation
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Joint Ventures
Empirical tests
Business and economic patterns (Berg et al, 1982)
Industry JV participation increases with: firm size, capex, profitability
Technologically oriented JVs: substitute for long-term R&D more often than short-term
JVs and R&D are complements at industry level
Event returns (McConnell & Nantell, 1985)
Value of gains evenly divided between firms
No change of mgmt. gains must be from synergy

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Joint VenturesAuthors
McConnell, Nantell

Year
1985

JV Type
All

Return
0.73%

Koh, Venkatraman
Crutchley et al
Chen et al
Johnson, Houston

1991
1991
1991
2000

IT sector
Japan-US
China-US
WSJ announced

0.87%
1.05%
0.71%
1.67%

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Strategic Alliances
SA characteristics
Informal or formal agreement between two or more firms to cooperate in some way
Created due to industry uncertainty and ambiguity value chains, new technology, etc.
Need not create new entity
Relative size of firms may be highly unequal
Difficult to anticipate consequences relationships evolve, firm boundaries blur
Firms pool resources and expertise hoping for synergy from learning capabilities, etc.
Allow firms much flexibility
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Strategic Alliances
2.6% of SAs result in M&As more likely in mature industries (Hagedorn, Sadowski, 1999)
Types of alliances (Bleeke & Ernst, 1995)
Collisions between competitors tensions cause failure
Alliances of the weak weak grow weaker
Disguised sales strong competitor buys weak
Bootstrap alliances weak firm improved by strong until alliance becomes on equal footing
Evolution to a sale successful SA becomes sale when tension emerges
Alliances of complementary equals SA succeeds due to compatibility
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Strategic Alliances
Authors
Chan et al

Year
1997

SA Type
All
High tech
Low tech

Return
0.64%
1.12%
0.10%

Das et al

1998

Kale et al

2002

Chen et al

1991

Technology
Marketing
SA function
No SA func.
China-US

Over 1%
Negative
1.35%
0.18%
0.71%

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Strategic Alliances
Requirements for success
Well defined strategic themes
Organization relationships should facilitate communication to share decision making
SAs viewed in real options framework allows portfolio of potential growth opportunities
High level management should be involved
Must be positive incentive to overcome tension
SA governance must adapt to different types of alliances
SAs must seek out growth opportunities to augment core capabilities

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Tender Offers
Bidder seeks target's shareholders approval
Minority shareholders
Terms may be "crammed down"
May be subject to "freeze-in"
Minority may bring legal actions
2001-2002, many minority squeeze-outs
Usually reversing equity carve-out
Parents often make high bid to avoid shareholder lawsuits
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Tender Offers
Kinds of tender offers and provisions
Conditional vs. unconditional
Restricted vs. unrestricted
"Any-or-all" tender offer
Contested offers
Two-tier offers
Three-piece suitor
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Relative Roles
Acquisitions
Rapid augmentation of firm capabilities
Consequences are long lasting
Often costly due to takeover premium
Challenges of combining organizations
Joint ventures
Reduce relative size of investments and risks
Create new entities and relationships
Can develop learning and new opportunities
Strategic alliances
Broaden range of potential opportunities
Relationships are more ambiguous greater need for communication
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