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Merger and Acquisitions
University of California, Davis School of Law
Afsharipour, Afra

Mergers and Acquisitions
Spring 2012
Merger and acquisition refers to a kind of business activity whereby one business decides to take control of the other business entity, in other words, it is a process of combining two corporations which usually refer to as constituent corporation, acquiring corp = bidder and corp to be acquired = target corp.
Pfizer corp deal:
It was one of the largest deal in 2002, in which Pzifer acquired Pharmacia, deal was announced in 2002, it was compelted in 2003. This deal was formulated at the time when there was a huge amount of shareholder criticisms especially related to the deal of AOL Time Warner in which the investor was disappointed with the dismal financial performance of the megamerger.
This deal was stock for stock with Pharmacia receiving 1.4 of Pzifer stock for each share of Pharmacia stock they own. The deal was valued at $60 billion, 36% premium over the current value of Pharmacia, i.e. 36% premium over the then trading price of Pharmacia common stock.
The goal was to create a global powerhouse in the pharma industry, specially, Pzifer was eyeing ‘Celebrex’ which was a drug – it was an arthritis drug that represented the crowned jewel[1] of Pharmacia business. There were two reasons given by Pharmacia CEO to merge with Pfizer:
(i)                  Better research involvement
(ii)                More resrouces to bring more products in the market quickly
 There was also an anti-trust issue in this deal. The reason for this is because it was anticipated that sicnce both Pharmacia and Pzifer were giants in this business, it would attract regulators (SEC).
The terms of the Pzifer acquisition of Pharmacia was that Pharmacia would complete the divesture of Mosanto to Pharmacia shareholder. Pzifer’s concern with regard to Pharmacia was to bring more efficiency in work, cutting costs substantially and better research involvement.
Nestle Deal:
Nestle offered to buy Chef America (‘CA’) in 2002. In 2002 Nestle offered to buy CA a closely held corp and this acquisition of CA was a part of string of acquisitions that Nestle was engaging in for a longtime especially in the year 2000.
Nestle was interested in the CA’s Hot Pockets and the deal was valued at $2.5 Billion and was a cash purchase.
Main street v. Wall Street deals:
Basically, main street deals = high profile deal and they are less publicized M&A deals. For e.g.: an established plumbing business is put up for sale when its founder retired. Those kinds of sales don’t often get limelight in the form of Wall Street deals but they are part of main street M&A deals and in no way their legal structure is different from the Wall Street deals.
Sale of VC – backed companies / PE:
Many publicly held companies like CA, approach investment funds from PE / VC in order to establish and grow their business. The goal of these financial investors is usually to get profit out of their invested capital and then selling the corp for profit to other corporation. This is also called the exit –strategy of PE / VC firms.
Divestures v/s Acquisitions (Differences):
Acquisition is another name for merger, but divesture is altogether different terminology – which means selling of those assets by the corporation which are no longer important to its line of business or in other words it is a means of spinning off the business back to the shareholder (in the form of dividends ).
Strategic v/s financial buyers:
Strategic buyers are those buyers who buy a particular corporation for integrating that corp into their line of business for several purposes such as efficiency and for long-term growth. But on the other hand, financial buyers focus on buying only the corporation for buying profit by selling it to another corporation. E.g. KKR case.
I.                    Deal flow process:
(i)                  Start of negotiations:
The deal gets started in a variety of different ways either by the financial advisor or the bidder corp who sees a potential target for the purpose of integration into bidder’s  line of business.
(ii)                Role of financial advisors:
(iii)               They are basically focused on two major issues – first, the structure of the deal and secondly, how much will the bidder corp will pay to acquire target.
The advantages of using outside advisors are experience, expertize, and resources (financial data) at their disposal. This helps in closing the deal.
(iv)              Use of confidentiality agreement:
Both the bidder and the target are concerned about maintaining confidentiality of their important business information. So then the confidentiality agreement also called as non – disclosure agreement is often used in the deal process to install confidence among the parties.
(v)                Who are deal players.
Target, bidder, financial advisors, banking institutes, lawyers, accountants, investment bankers.
(vi)              Use of non – cash consideration to finance the purchase price:
When bidder issues its stock in exchange for target business, the target shareholder will end owning bidder company stock and target company shareholder stock will be cancelled.
(vii)             Due diligence process:
Due Diligence process is a term of art used to describe the process of information gathering and analysis which will usually be undertaken by each party to business acquisition. This process is important for the target shareho

ii)               Valuation:
An important case for this is Weinburger v/s UOP. In this case DE S.C. held that u/s 262 of DGCL, the dissenting shareholder is entitled to pro-rata share of corporation as going concern. In this case, the S.C. raised the important point of fairness which includes fair dealing and fair dealing. 
There are several methods of valuation out of which is discounted cash flow (‘DCF’) method and other method is ‘block method’.
Another important case is Cavalier v/s Hornett.
Another important case is Cede and Co v/s Technicolor Incorp.
(iv)              Exclusivity:
An important case is Rapkin v/s Philip A Hunt in which it was decided by DE S.C. that appraisal remedy is not the exclusive remedy for the dissenting shareholder.
Major source of protection for those shareholders who object to proposed business combination is the law of fiduciary law which says that the BoD owes duty to corp itself. In that role, the BoD also owes a duty to shareholders including minority shareholders, senior security holders (preferred shareholders), debt holders, other business creditors and employees.
I.                    Duty of care:
BoD owes duty of care to corporation and the BoD must act in the corporation’s best interests.
II.                  Duty of loyalty:
There should be no conflict of interest thus increased reliance on outside directors. Outside Directors does not own anything in the company.
It is applicable to publicly – held corps. SEC comes under the radar of SOX and the basic purpose of this Act is to look at the decision – making process of the modern corporate boardroom. This is because the company would have now disclose all the meetings and reports (as regards the merger) which have taken place in the boardroom.
[1] The most valuable unit(s) of a corporation, as defined by characteristics such as profitability, asset value and  future prospects. The origins of this term are derived from the most valuable and important treasures that sovereigns possessed.
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