Download Business Combinations - Financial Statement Analysis - Lecture Notes and more Study notes Financial Statement Analysis in PDF only on Docsity!
Financial Analysis Chapter 9 Page 1 of 7
Financial Analysis: A User Approach
Chapter 10
Business Combinations
Motivations for a Combination:
Economies of scale
Horizontal Integration
Vertical Integration
Conglomerates
Accounting for Combinations:
Ignore all the pooling of interests material in the chapter
(this is too old to be important for us) – only focus on
Purchase Method material
Basic idea – compare the value given in the acquisition
(cash, equity, debt) to the fair value of the net assets
received (A-L) and record goodwill for the difference
Financial Analysis Chapter 9 Page 2 of 7
Example: On January 1, 2008 Ortiz Corporation
purchased Santiago Company by paying $350,000 cash.
On that day Santiago had the following balance sheet:
Santiago Company
Balance Sheet
January 1, 2008
Cash $50,000 Accounts Payable $200,
Receivables 90,000 Stockholders’ Equity 235,
Inventory 100,
Land 40,
Buildings, net 75,
Equipment, net 70,
Trademarks 10,
Total Assets $435,000 Total Liab. & SHE $435,
All amounts are at fair value except the following:
Account Fair Value
Inventory 125,
Land 60,
Trademarks 15,
Accounts Debit Credit
Cash 50,
Receivables 90,
Inventory 125,
Land 60,
Buildings 75,
Equipment 70,
Trademarks 15,
Goodwill *65,
Accounts Payable 200,
Cash 350,
Financial Analysis Chapter 9 Page 4 of 7
Google purchased YouTube, Postini, DoubleClick,
FeedBurner (53 deals in less than 10 years)
o Failures
Daimler/Chrysler
AOL/Time Warner
Wachovia/Golden West
Spring/Nextel
Regulatory Issues
o In the U.S. all major mergers and acquisitions must pass
regulatory muster
Federal Trade Commission review
Other regulatory reviews
o European Union
o Other Countries Including China
Financial Analysis Chapter 9 Page 5 of 7
Example: STX Acquisition of Maxtor
8-K dated 12-20-
Entry into a Material Definitive Agreement.
On December 20, 2005, Maxtor Corporation, a Delaware corporation (“Maxtor”), entered into an Agreement and Plan of Merger (the “Merger Agreement”) with Seagate Technology, an exempted company incorporated with limited liability under the laws of the Cayman Islands (“Seagate”), and MD Merger Corporation, a Delaware corporation and a direct wholly-owned subsidiary of Seagate (“Merger Sub”), by which Seagate has agreed to acquire Maxtor (the “Merger”). The Merger Agreement has been unanimously approved by the Boards of Directors of both Maxtor and Seagate.
Subject to the terms and conditions of the Merger Agreement, at the effective time of the Merger, each issued and outstanding share of common stock of Maxtor would be converted into the right to receive 0.37 shares of Seagate common stock. The merger is intended to qualify as a tax-free reorganization under Section 368(a) of the Internal Revenue Code of 1986, as amended.
Consummation of the Merger is subject to several closing conditions, including the adoption of the Merger Agreement by the stockholders of Maxtor, the approval of the issuance of shares of Seagate common stock in the Merger by the stockholders of Seagate, the receipt of antitrust approvals or the expiration of applicable waiting periods in certain jurisdictions set forth in Exhibit A to the Merger Agreement, the absence of certain governmental restraints, and effectiveness of a Form S-4 registration statement to be filed by Seagate.
The Merger Agreement contains certain termination rights for both Maxtor and Seagate and provides that a specified fee must be paid by one party to the other in connection with certain termination events. In certain specified circumstances, Seagate must pay Maxtor a termination fee of $300 million (generally in the event necessary antitrust approval is not obtained or governmental regulatory restraints prevent the transaction, or the transaction has not been consummated prior to March 20, 2007, with certain exceptions if the Maxtor stockholders have not adopted the Merger Agreement). In other specified circumstances, Maxtor must pay Seagate a termination fee of $53 million (generally in the event the Board of Directors of Maxtor changes its recommendation that its stockholders adopt the Merger Agreement, or elects to pursue an alternative acquisition proposal from a third party).
8-K Dated 5-17-06 Item 8.01. Other Events
On May 17, 2006, we issued a press release to announce that the shareholders of Seagate Technology (the “Company”) and Maxtor Corporation (“Maxtor”) have approved a previously announced definitive merger agreement under which Seagate will acquire Maxtor in an all stock transaction. With all required regulatory and shareholder approvals now secured, it is expected that the transaction will close in 2- business days and that Maxtor shares will cease to be listed on the New York Stock Exchange at that time. A copy of this press release is attached to this Current Report on Form 8-K as Exhibit 99.1.
Financial Analysis Chapter 9 Page 7 of 7
Under the terms of the Merger Agreement, each share of Maxtor common stock was exchanged for 0. of our common shares. We issued approximately 96.9 million of our common shares to Maxtor’s stockholders. Based on the average closing price of our common shares on the NYSE for the two days prior to, including, and two days subsequent to the public announcement of the merger (December 21,
- of $20.02 and including capitalized acquisition-related costs and the fair value of options assumed and nonvested shares exchanged, the transaction was valued for accounting purposes at approximately $2.0 billion. We also assumed all outstanding options to purchase Maxtor common stock with a weighted-average exercise price of $16.10 per share. Each option assumed was converted into an option to purchase one of our common shares after applying the 0.37 exchange ratio. In total, we assumed and converted Maxtor options into options to purchase approximately 7.1 million of our common shares. In addition, we assumed and converted all outstanding Maxtor nonvested stock into approximately 1. million of our nonvested shares, based on the exchange ratio. The fair value of options assumed and nonvested shares exchanged had a fair value of approximately $86 million. See Note 10 of the Notes to Consolidated Financial Statements elsewhere in this report.
We have identified and recorded the assets, including specifically identifiable intangible assets, and liabilities assumed from Maxtor at their estimated fair values as at May 19, 2006, the date of acquisition and allocated the residual value of approximately $2.5 billion to goodwill. The values assigned to certain acquired assets and liabilities are preliminary, are based on information available as of June 30, 2006, and may be adjusted as further information becomes available during the allocation period of up to 12 months from the acquisition date. Maxtor is now a wholly-owned subsidiary of ours and the results of Maxtor’s operations have been included in our consolidated financial statements after the May 19, 2006 acquisition date.
