Sunday, December 18, 2011

Popular Posts of the Blog - Mergers and Acquisitions

Case Study: The General Motors Bankruptcy - 2009

Donald DePamphilis
Clinical Professor of Finance
Article available on Google Knol under Creative Commons 3.0 Licence.


Rarely has a firm fallen as far and as fast as General Motors (GM). Founded in 1908, GM dominated the car industry through the early 1950s with its share of the U.S. car market reaching 54 percent in 1954. However, this proved to be the firm’s high water mark. Efforts in the 1980s to cut cost by building brands on common platforms blurred their distinctiveness. Following increasing healthcare and pension benefits paid to employees, concessions made to unions in the early 1990s to pay workers even when their plants were shutdown reduced the ability of the firm to adjust to changes in the cyclical car market. GM was increasingly burdened by so-called legacy costs, i.e., healthcare and pension obligations to increasing large retiree population. Over time, GM’s labor costs soared compared to the firm’s major competitors. To cover these costs, GM continued to make higher margin medium to full size cars and trucks, which in the wake of higher gas prices could only be sold with the help of highly attractive incentive programs. Forced to support an escalating array of brands, the firm was unable to provide sufficient marketing funds for any one of its brands.
With the onset of one of the worst global recessions in the post World War II, auto sales worldwide collapsed by the end of 2008. All auto makers’ sales and cash flows plummeted. Unlike Ford, GM and Chrysler were unable to satisfy their financial obligations. The U.S. government, in an unprecedented move, agreed to lend GM and Chrysler $13 billion and $4 billion, respectively. The intent was to buy time to develop an appropriate restructuring plan. 
Having essentially ruled out liquidation of GM and Chrysler, continued government financing was contingent on gaining major concessions from all major stakeholders such as lenders, suppliers, and labor unions.  With car sales continuing to show harrowing double-digit year over year declines during the first half of 2009, the threat of bankruptcy was used to motivate the disparate parties to come to an agreement. With available cash running perilously low, Chrysler entered bankruptcy in early May and GM on June 1st, with the government providing debtor in possession financing during their time in bankruptcy.  In its bankruptcy filing for its U.S. and Canadian operations only, GM listed $82.3 billion in assets and $172.8 billion in liabilities. In less than 45 days each, both GM and Chrysler emerged from government sponsored sales in bankruptcy court, a feat that many thought impossible.
Judge Robert E. Gerber of the United States Bankruptcy court of New York approved the sale in view of the absence of alternatives considered more favorable to the government’s option.  GM emerged from the protection of the court on July 10, 2009 in an economic environment characterized by escalating unemployment and eroding consumer income and confidence.  Even with less debt and liabilities, fewer employees, the elimination of most “legacy costs,” a reduced number of dealerships and brands, GM found itself operating in an environment in 2009 in which U.S. vehicle sales totaled an anemic 9.2 million units.  This compared to more than 16 million in 2008. GM’s 2009 market share slipped to a post-World War II low of 19 percent. Only the government’s “cash for clunkers” program during the summer months offered some respite from the largely unremitting downturn in U.S. auto sales. However, with the cessation of the program in late August, the boost in sales proved temporary.

Developing a Bankruptcy Strategy

While the bankruptcy option had been under consideration for several months, its attraction grew as it became increasingly apparent that time was running out for the cash strapped firm. Having determined from the outset that liquidation of GM either inside or outside of the protection of bankruptcy would not be considered, the government initially considered a prepackaged bankruptcy in which agreement is obtained among major stakeholders prior to filing for bankruptcy. The presumption is that since agreement with many parties had already been obtained, developing a plan of reorganization to emerge from Chapter 11 would move more quickly. However, this option was not pursued because of the concern that the public would simply view the post-Chapter 11 GM as simply a smaller version of its former self. The government in particular was seeking to position GM as a wholly new firm capable of profitably designing and building cars that the public wanted.
However, time was of the essence. The concern was that consumers would not buy GM vehicles while the firm was in bankruptcy. Consequently, a strategy in which GM would be divided into two firms: “old GM” containing the firm unwanted assets and “new GM” owning the most attractive assets. New GM would then emerge from bankruptcy in a sale to a new company owned by various stakeholder groups including the U.S. and Canadian Governments, a union trust fund, and to bond holders.
Buying distressed assets can be accomplished through a Chapter 11 plan of reorganization or a post-confirmation trustee. Alternatively, a 363 sale transfers the acquired assets free and clear of any liens, claims and encumbrances. The sale was ultimately completed under Section 363 of the U.S. bankruptcy code. Historically, firms used this tactic to sell failing plants and redundant equipment. In recent years, so-called 363 sales have been used to completely restructure businesses, including the 363 sales of entire companies. A 363 sale requires only the approval of the bankruptcy Judge while a plan of reorganization in Ch 11 must be approved by a substantial number of creditors and meet certain other requirements to be “confirmed.” A plan or reorganization is much more comprehensive than a 363 sale in addressing the overall financial situation of the debtor and how its exit strategy from bankruptcy will affect creditors.
Under Section 363, the bankrupt firm must file a motion with the bankruptcy court in which the case is pending seeking the bankruptcy court’s approval of the terms and conditions of the proposed sale. Opponents of the proposed sale will have a designated response period determined by the pertinent bankruptcy court (often 10-20 days) in which to file written objections to the proposed sale. Frequently, this time period will be shortened by the court to as little as a few days. Depending upon the degree of opposition to the sale and how many parties are interested in purchasing the assets being offered, the process could be completed in a matter of weeks. Once a 363 sale has been consummated and the purchase price paid, the bankruptcy court will decide how the proceeds of sale ware allocated among secured creditors with liens on the asses sold.

Terms of the Deal

GM’s U.S. and Canadian assets and liabilities were split between two companies under the protection of the bankruptcy court. GM’s exit from Chapter 11 involved the sale of its most attractive assets to a new company (dubbed the New GM) owned primarily by the American and Canadian governments and a healthcare trust for the UAW union.  The unattractive assets were transferred to the other company referred to as the “Old GM.”  The old GM which will be known as Motors Liquidation Company and includes various properties, including facilities already slated to be closed. Such properties will be sold to the highest bidder under court supervision.  Other assets to be filed under the old GM include the brands Hummer, Saturn, and Saab for which GM already has buyers. 
Total financing provided by the U.S. and Canadian (including the province of Ontario) governments amounted to $69.5 billion. U.S. taxpayer provided financing totaled $60 billion consisting of $10 billion in loans and the remainder in equity. The government decided to contribute $50 billion in the form of equity to reduce the burden on GM of paying interest and principal on its outstanding debt. Nearly $20 billion was provided prior to the bankruptcy, $11 billion to finance the firm during the bankruptcy proceedings, and an additional $19 billion was to be provided before the end of 2009. In exchange for these funds, the U.S. government will own 60.8 percent of the new GM’s common shares, while the Canadian and Ontario governments own 11.7 percent in exchange for their investment of $9.5 billion. The United Auto Workers (UAW) new voluntary employee beneficiary association (VEBA) received a 17.5 percent stake in exchange for assuming responsibility for retiree medical and pension obligations. Finally, bondholders and other unsecured creditors received a 10 percent ownership position. There will be $2.1 billion in preferred shares held by the Treasury and $6.5 billion in preferred shares which will be issued to the new VEBA.

Profiling the New GM

The new firm, which employs 244,000 workers in 34 countries, will further reduce its headcount of salaried employees to 27,200. The firm will also have shed 21,000 union workers from the 54,000 UAW workers it now employs in the U.S. and close 12 to 20 plants. GM did not include its foreign operations in Europe, Latin America, Africa, the Middle East or Asia Pacific in the Chapter 11 filing. Annual vehicle volume for the firm will decline to 10 million vehicles, compared with 15 to 17 million annual vehicle sales from 1995 through 2007. Consolidated debt for the firm will be $17 billion. The firm also will have $9 billion in 9% preferred stock, which is payable on a quarterly basis. GM will have a new board. Canada and UAW health care trust will each get a seat on the board.
GM will focus on its core brands Chevrolet, Cadillac, Buick and GMC through 3600 dealerships from its existing 5969 dealer network. The business plan calls for an IPO as early as the second quarter of 2010 depending upon stock market condition.
By offloading worker health care liabilities to the VEBA trust and seeding it mostly with stock instead of cash, GM has eliminated the need to pay more than $4 billion annually in medical costs. Concessions made by the UAW before GM entered bankruptcy have made GM more competitive in terms of labor costs with Toyota.
GM’s new cars in 2010 include the Chevrolet Volt, a plug-in hybrid electric car.  However, with a price tag of $40,000, the car is likely to be only a niche brand. Other small car models include the Chevrolet Cruz and Spark which may fare well but will face intense competition from models such as Honda’s Insight and the Toyota Prius as well as Ford’s Fiesta.

Future Challenges

New products must be introduced as scheduled and they must meet or exceed the expectations of potential customers. Success in this area would represent a substantial departure from past experience. New more energy efficient models must compete against brands long-established in the marketplace such as Honda’s Insight and Toyota’s Prius.
The need to buyout and workers who will lose their jobs as a result of the eleven pending plant closings will constitute a significant drain on operating cash flow during the next several years.  If the firm’s stock does not do well, the UAW will have to further cut medical benefits for workers covered by the union’s own trust. Bankruptcy allows GM to break dealer franchise contracts. Consequently, GM car owners may have to travel much further to get their cars maintained under warranty as the number of dealerships shrinks.
Finally, GM’s greatest challenge may be in changing the firm’s corporate culture which some have accused of being slow to innovate, risk adverse, and bureaucratic. The firm intends to eliminate as many as one-third of their current managers. While this may go a long way in changing the firm’s culture, it also will represent a loss of substantial expertise and experience.

Source article in Knol

Tuesday, November 29, 2011

Case Study: Xerox Buys Affiliated Computer Systems

Donald DePamphilis
Clinical Professor of Finance
Article available on Google Knol under Creative Commons 3.0 Licence.

This case study is representative of those found in Mergers, Acquisitions, and Other Restructuring Activities, 5th edition, 2010 by Donald M. DePamphilis. For more information or to buy this book online, click here.

Changing Customer Requirements Force an Industry Shift

Reflecting the increasing cost and complexity of computing, many corporations have outsourced their information technology (IT) operations in an effort to streamline various business activities. These activities include procurement, customer tracking, record handling, and product design. Advances in technology enable IT vendors to more easily provide computing services delivered over the Internet from remote data centers (i.e., through the so-called “cloud computing”). Software such as word processing, spreadsheet, and customer management systems could be moved from desktop personal computers to become a Web-based service, accessible from anywhere.

In anticipation of a shift from hardware and software spending to technical services by their corporate customers, IBM announced an aggressive move away from its traditional hardware business and into services in the mid-1990s. Having sold its largely commodity personal computer business to Chinese manufacturer Lenovo in mid-2005, IBM became widely recognized as a largely hardware neutral systems integration, technical services, and outsourcing company whose services could be enlisted by corporations to assemble internal computer networks using the most effective hardware and software rather than only those proprietary to IBM. As part of its branding process, IBM became viewed as largely “hardware neutral” by its customers in that it offered the best possible solutions through its alliances with other IT vendors for its customers rather than favoring a particular IBM product or service offering.

As IT services have tended to be less cyclical than hardware and software sales, the move into services by IBM enabled the firm to tap a steady stream of revenue at a time when customers were keeping computers and peripheral equipment longer to save money. The 2008-09 recession exacerbated this trend as corporations spent a smaller percentage of their IT budgets on hardware and software. Software and hardware expenditures as a percent of total corporate IT budgets fell from 36 percent in 2004 to 28 percent in 2009 according to the Gartner Group, a market research firm. The remainder of corporate IT budgets were spent on operations and services provided by outside consultants.
Playing Catch Up

These developments were not lost on other IT companies. Hewlett-Packard (HP) bought tech services company EDS in 2008 for $13.9 billion. On September 21, 2009, Dell announced its intention to purchase another IT services company, Perot Systems, for $3.9 billion, a whopping 68 percent premium. One week later, Xerox announced a cash and stock bid for Affiliated Computer Systems (ACS) totaling $6.4 billion, a 34 percent premium to ACS’s closing price on September 25, 2009.

Each firm was moving to position itself as a total solution provider for its customers, achieving differentiation from its competitors by offering a broader range of both hardware and business services. While each firm focused on a somewhat different set of markets, they all shared an increasing focus on the government and healthcare segments. Consequently, these markets were likely to become increasingly competitive. However, by containing to retain a large proprietary hardware business, each firm faced challenges in convincing customers that they could provide objectively enterprise-wide solutions that reflected the best option for its customers.
The Xerox Strategy

Historically known as “the Document Imaging Company,” Xerox intends to move into providing technology services such as into the outsourcing business with a major focus on healthcare and government. Services contracts tend to provide a more recurring revenue stream than hardware sales. Xerox increasingly believes its customers wanted a stronger connection with vendors who could provide both back office (e.g., application and claims processing) and front office (e.g., customer service) information technology product and services.

Previous Xerox efforts to move beyond selling printers, copiers, and supplies and into services achieved limited success due largely to poor management execution. In an effort to expand into services, Xerox bought Amici for $174 million in 2006 to enter the business of helping lawyers organize digital documents created during the legal discovery process. In 2007, the firm acquired Advectis, which helps banks and consumers electronically manage mortgage documents for $32 million. While some progress in shifting away from the firm’s dependence on printers and copier sales was evident, the pace was far too slow. Xerox was looking for a way to accelerate the transition from a largely product driven company to one whose revenues were more dependent on the delivery of business services.
Why ACS?

With annual sales of about $6.5 billion, ACS handles paper-based tasks such as billing and claims processing for governments and private companies. With about one-fourth of ACS’ revenue derived from the healthcare and government sectors through long-term contracts, the acquisition gives Xerox a greater penetration into markets which should benefit from the 2009 government stimulus spending and healthcare legislation. More than two-thirds of ACS’ revenue comes from the operation of client back office operations, with the rest coming from providing technology consulting services. ACS would also triple Xerox’s service revenues to $10 billion, with almost 80 percent due to recurring revenue based on services and equipment leases.

Xerox is betting that it can apply its globally recognized brand and worldwide sales presence to expand ACS into Britain, Germany, Spain, and other geographic areas. Currently, about 92 percent of ACS’s revenue comes from the U.S. ACS technologies could also benefit from Xerox’s research in imaging and text recognition.

Xerox expects to save $300 million to $400 million in the first three years after the deal closes in early 2010. Most of the cost savings will come from ACS providing services to Xerox operations that would allow for some internal staff reduction.
Investor Reaction Mixed

The cash and stock offer for ACS was valued at $63.11 a share. ACS shares rose by 14 percent to $53.86 while Xerox shares dropped 14 percent to $7.68. Xerox also will assume $2 billion of ACS debt and issue $300 million in convertible preferred Xerox stock to ACS’s founder Darwin Deason to acquire his super-voting shares (i.e., those having multiple voting rights) which give him about 42 percent of total voting rights in ACS.

A perceived lack of synergies between the two firms, Xerox’s rising debt levels, and the firm’s struggling printer business fueled concerns about the long-term viability of the merger. Xerox has about $1 billion in cash and expects to borrow another $3 billion. Standard & Poor’s put Xerox’s credit on the “watch list,” with a credit downgrade to triple-B-minus, one notch above junk, likely.

Integration is Xerox’s major challenge as the firm has not done a lot of large deals. The two firms revenue mixes are very different as are their customer bases, with government customers often requiring substantially greater effort to close sales than Xerox’s traditional commercial customers. Xerox intends to operate ACS as a standalone business which will postpone the integration of its operations consisting of 54,000 employees with ACS’ 74,000. If Xerox intends to realize significant incremental revenues by selling ACS services to current Xerox customers, some degree of integration of the sales and marketing organizations would seem to be necessary.

With little experience in managing a services company, the acquisition will put Xerox in head-to-head competition with a variety of U.S. and foreign competitors. These include HP, Accenture, and Computer Sciences Corporation, as well as Indian service providers such as Satyam Computer Services, Infosys Consulting, and Wipro Technologies.
Concluding Comments

Operating ACS as a separate business could significantly reduce the ability of Xerox to realize the anticipated revenue gains due to cross selling. While Xerox notes that only 20 percent of the customers of the two firms overlap, it is hardly a foregone conclusion that customers will buy ACS services simply because the ACS sales representatives gain access to current Xerox customers. Presumably, additional incentives are needed such as some packaging of Xerox hardware with ACS IT services. However, this may require significant price discounting at a time when printer and copier profit margins already are under substantial pressure.

Dell, HP, and Xerox are primarily hardware firms desirous of moving increasingly into services. The presumption seems to be that the distinction between selling product and services is becoming blurred, particularly as “cloud computing” makes it increasingly attractive to deliver services from remote locations. Nonetheless, given their long histories, customers are likely to continue, at least in the near term, to view these firms more as product than service companies. The sale of services will require significant spending to rebrand these companies so that they will be increasingly viewed as service vendors.

The continued dependence of all three firms on the sale of hardware may retard their ability to sell packages of hardware and IT services to customers. With hardware prices under continued pressure, customers may be more inclined to continue to buy hardware and IT services from separate vendors to pit one vendor against another. Moreover, with all three firms targeting the healthcare and government markets, pressure on profit margins could increase for all three firms. The success of IBM’s services strategy could suggest that pure IT service companies are likely to perform better in the long-run than those that continue to have a significant presence in both the production and sale of hardware as well as IT services.


Monday, November 28, 2011

Enron - Breakdown of Corporate Governance - Case Study

Donald DePamphilis
Clinical Professor of Finance
(Article available on Knol under creative commons 3.0 license)

This article is taken from Mergers, Acquisitions, and Other Restructuring Activities, 5th edition, 2009 by Donald M. DePamphilis. For more information or to buy this book online, click here.


What started in the mid-1980s as essentially a staid "old-economy" business became the poster child in the late 1990s for companies wanting to remake themselves into "new-economy" powerhouses. Unfortunately, what may have started with the best of intentions emerged as one of the biggest business scandals in U.S. history. Enron was created in 1985 as a result of a merger between Houston Natural Gas and Internorth Natural Gas. In 1989, Enron started trading natural gas commodities and eventually became the world's largest buyer and seller of natural gas. In the early 1990s, Enron became the nation's premier electricity marketer and pioneered the development of trading in such commodities as weather derivatives, bandwidth, pulp, paper, and plastics. Enron invested billions in its broadband unit and water and wastewater system management unit and in hard assets overseas. In 2000, Enron reported $101 billion in revenue and a market capitalization of $63 billion.

The Virtual Company

Enron was essentially a company whose trading and risk management business strategy was built on assets largely owned by others. The complex financial maneuvering and off-balance-sheet partnerships that former CEO Jeffrey K. Skilling and chief financial officer Andrew S. Fastow implemented were intended to remove everything from telecommunications fiber to water companies from the firm's balance sheet and into partnerships. What distinguished Enron's partnerships from those commonly used to share risks were their lack of independence from Enron and the use of Enron's stock as collateral to leverage the partnerships. If Enron's stock fell in value, the firm was obligated to issue more shares to the partnership to restore the value of the collateral underlying the debt or immediately repay the debt. Lenders in effect had direct recourse to Enron stock if at any time the partnerships could not repay their loans in full. Rather than limiting risk, Enron was assuming total risk by guaranteeing the loans with its stock.

Enron also engaged in transactions that inflated its earnings, such as selling time on its broadband system to a partnership at inflated prices at a time when the demand for broadband was plummeting. Enron then recorded a substantial profit on such transactions. The partnerships agreed to such transactions because Enron management seems to have exerted disproportionate influence in some instances over partnership decisions, although its ownership interests were very small, often less than 3 percent. Curiously, Enron's outside auditor, Arthur Andersen, had a dual role in these partnerships, collecting fees for helping to set them up and auditing them.
Time to Pay the Piper

At the time the firm filed for bankruptcy on December 2, 2001, it had $13.1 billion in debt on the books of the parent company and another $18.1 billion on the balance sheets of affiliated companies and partnerships. In addition to the partnerships created by Enron, a number of bad investments both in the United States and abroad contributed to the firm's malaise. Meanwhile, Enron's core energy distribution business was deteriorating. Enron was attempting to gain share in a maturing market by paring selling prices. Margins also suffered from poor cost containment.

Dynegy Corp. agreed to buy Enron for $10 billion on November 2, 2001. On November 8, Enron announced that its net income would have to be restated back to 1997, resulting in a $586 million reduction in reported profits. On November 15, chairman Kenneth Lay admitted that the firm had made billions of dollars in bad investments. Four days later, Enron said it would have to repay a $690 million note by mid-December and it might have to take an additional $700 million pretax charge. At the end of the month, Dynegy withdrew its offer and Enron's credit rating was reduced to junk bond status. Enron was responsible for another $3.9 billion owed by its partnerships. Enron had less than $2 billion in cash on hand.

The end came quickly as investors and customers completely lost faith in the energy behemoth as a result of its secrecy and complex financial maneuvers, forcing the firm into bankruptcy in early December. Enron's stock, which had reached a high of $90 per share on August 17, 2001, was trading at less than $1 by December 5, 2001.

In addition to its angry creditors, Enron faced class-action lawsuits by shareholders and employees, whose pensions were invested heavily in Enron stock. Enron also faced intense scrutiny from congressional committees and the U.S. Department of Justice. By the end of 2001, shareholders had lost more than $63 billion from its previous 52-week high, bondholders lost $2.6 billion in the face value of their debt, and banks appeared to be at risk on at least $15 billion of credit they had extended to Enron. In addition, potential losses on uncollateralized derivative contracts totaled $4 billion. Such contracts involved Enron commitments to buy various types of commodities at some point in the future.

Questions remain as to why Wall Street analysts, Arthur Andersen, federal or state regulatory authorities, the credit rating agencies, and the firm's board of directors did not sound the alarm sooner. It is surprising that the audit committee of the Enron board seems to have somehow been unaware of the firm's highly questionable financial maneuvers. Inquiries following the bankruptcy declaration seem to suggest that the audit committee followed all the rules stipulated by federal regulators and stock exchanges regarding director pay, independence, disclosure, and financial expertise. Enron seems to have collapsed in part because such rules did not do what they were supposed to do. For example, paying directors with stock may have aligned their interests with shareholders, but it also is possible to have been a disincentive to question aggressively senior management about their financial dealings.

The Lessons of Enron

Enron may be the best recent example of a complete breakdown in corporate governance, a system intended to protect shareholders. Inside Enron, the board of directors, management, and the audit function failed to do the job. Similarly, the firm's outside auditors, regulators, credit rating agencies, and Wall Street analysts also failed to alert investors. What seems to be apparent is that if the auditors fail to identify incompetence or fraud, the system of safeguards is likely to break down. The cost of failure to those charged with protecting the shareholders, including outside auditors, analysts, credit-rating agencies, and regulators, was simply not high enough to ensure adequate scrutiny.

What may have transpired is that company managers simply undertook aggressive interpretations of accounting principles then challenged auditors to demonstrate that such practices were not in accordance with GAAP accounting rules (Weil, 2002). This type of practice has been going on since the early 1980s and may account for the proliferation of specific accounting rules applicable only to certain transactions to insulate both the firm engaging in the transaction and the auditor reviewing the transaction from subsequent litigation. In one sense, the Enron debacle represents a failure of the free market system and its current shareholder protection mechanisms, in that it took so long for the dramatic Enron shell game to be revealed to the public. However, this incident highlights the remarkable resilience of the free market system. The free market system worked quite effectively in its rapid imposition of discipline in bringing down the Enron house of cards, without any noticeable disruption in energy distribution nationwide.


Due to the complexity of dealing with so many types of creditors, Enron filed its plan with the federal bankruptcy court to reorganize one and a half years after seeking bankruptcy protection on December 2, 2001. The resulting reorganization has been one of the most costly and complex on record, with total legal and consulting fees exceeding $500 million by the end of 2003. More than 350 classes of creditors, including banks, bondholders, and other energy companies that traded with Enron said they were owed about $67 billion.

Under the reorganization plan, unsecured creditors received an estimated 14 cents for each dollar of claims against Enron Corp., while those with claims against Enron North America received an estimated 18.3 cents on the dollar. The money came in cash payments and stock in two holding companies, CrossCountry containing the firm's North American pipeline assets and Prisma Energy International containing the firm's South American operations.

After losing its auditing license in 2004, Arthur Andersen, formerly among the largest auditing firms in the world, ceased operation. In 2006, Andrew Fastow, former Enron chief financial officer, and Lea Fastow plead guilty to several charges of conspiracy to commit fraud. Andrew Fastow received a sentence of 10 years in prison without the possibility of parole. His wife received a much shorter sentence. Also in 2006, Enron chairman Kenneth Lay died while awaiting sentencing, and Enron president Jeffery Skilling received a sentence of 24 years in prison.

Citigroup agreed in early 2008 to pay $1.66 billion to Enron creditors who lost money following the collapse of the firm. Citigroup was the last remaining defendant in what was known as the Mega Claims lawsuit, a bankruptcy lawsuit filed in 2003 against 11 banks and brokerages. The suit alleged that, with the help of banks, Enron kept creditors in the dark about the firm's financial problems through misleading accounting practices. Because of the Mega Claims suit, creditors recovered a total of $5 billion or about 37.4 cents on each dollar owed to them. This lawsuit followed the settlement of a $40 billion class action lawsuit by shareholders, which Citicorp settled in June 2005 for $2 billion.


Sunday, November 27, 2011

Government's Authority to Review Acquisitions in USA

The President or the President’s designee may make an investigation to determine the effects on national security of mergers, acquisitions, and takeovers proposed or pending on or after the date of enactment of this section [Aug. 23, 1988] by or with foreign persons which could result in foreign control of persons engaged in interstate commerce in the United States.


A Section in the Defense Production Act of 1950, USA

§ 2170. Authority to review certain mergers, acquisitions, and takeovers

(a) Investigations

The President or the President’s designee may make an investigation to determine the effects on national security of mergers, acquisitions, and takeovers proposed or pending on or after the date of enactment of this section [Aug. 23, 1988] by or with foreign persons which could result in foreign control of persons engaged in interstate commerce in the United States. If it is determined that an investigation should be undertaken, it shall commence no later than 30 days after receipt by the President or the President’s designee of written notification of the proposed or pending merger, acquisition, or takeover as prescribed by regulations promulgated pursuant to this section. Such investigation shall be completed no later than 45 days after such determination.

(b) Mandatory investigations

The President or the President’s designee shall make an investigation, as described in subsection (a), in any instance in which an entity controlled by or acting on behalf of a foreign government seeks to engage in any merger, acquisition, or takeover which could result in control of a person engaged in interstate commerce in the United States that could affect the national security of the United States. Such investigation shall—

(1) commence not later than 30 days after receipt by the President or the President’s designee of written notification of the proposed or pending merger, acquisition, or takeover, as prescribed by regulations promulgated pursuant to this section; and

(2) shall be completed not later than 45 days after its commencement.

(c) Confidentiality of information

Any information or documentary material filed with the President or the President’s designee pursuant to this section shall be exempt from disclosure under section 552 of title 5, United States Code, and no such information or documentary material may be made public, except as may be relevant to any administrative or judicial action or proceeding. Nothing in this subsection shall be construed to prevent disclosure to either House of Congress or to any duly authorized committee or subcommittee of the Congress.

(d) Action by the President
Subject to subsection (d), the President may take such action for such time as the President considers appropriate to suspend or prohibit any acquisition, merger, or takeover, of a person engaged in interstate commerce in the United States proposed or pending on or after the date of enactment of this section [Aug. 23, 1988] by or with foreign persons so that such control will not threaten to impair the national security. The President shall announce the decision to take action pursuant to this subsection not later than 15 days after the investigation described in subsection (a) is completed. The President may direct the Attorney General to seek appropriate relief, including divestment relief, in the district courts of the United States in order to implement and enforce this section.

(e) Findings of the President

The President may exercise the authority conferred by subsection (c) only if the President finds that—

(1) there is credible evidence that leads the President to believe that the foreign interest exercising control might take action that threatens to impair the national security, and

(2) provisions of law, other than this section and the International Emergency Economic Powers Act (50 U.S.C. 1701–1706), do not in the President’s judgment provide adequate and appropriate authority for the President to protect the national security in the matter before the President.

The provisions of subsection (d) of this section shall not be subject to judicial review.

(f) Factors to be considered

For purposes of this section, the President or the President’s designee may, taking into account the requirements of national security, consider among other factors—

(1) domestic production needed for projected national defense requirements,

(2) the capability and capacity of domestic industries to meet national defense requirements, including the availability of human resources, products, technology, materials, and other supplies and services,

(3) the control of domestic industries and commercial activity by foreign citizens as it affects the capability and capacity of the United States to meet the requirements of national security,

(4) the potential effects of the proposed or pending transaction on sales of military goods, equipment, or technology to any country—

(A) identified by the Secretary of State—

(i) under section 6(j) of the Export Administration Act of 1979, as a country that supports terrorism;

(ii) under section 6(l) of the Export Administration Act of 1979 , as a country of concern regarding missile proliferation; or

(iii) under section 6(m) of the Export Administration Act of 1979, as a country of concern regarding the proliferation of chemical and biological weapons; or

(B) listed under section 309(c) of the Nuclear Non-Proliferation Act of 1978 on the “Nuclear Non-Proliferation-Special Country List” (15 C.F.R. Part 778, Supplement No. 4) or any successor list; and

(5) the potential effects of the proposed or pending transaction on United States international technological leadership in areas affecting United States national security.

(g) Report to the Congress

The President shall immediately transmit to the Secretary of the Senate and the Clerk of the House of Representatives a written report of the President’s determination of whether or not to take action under subsection (d), including a detailed explanation of the findings made under subsection (e) and the factors considered under subsection (f). Such report shall be consistent with the requirements of subsection (c) of this Act.

(h) Regulations

The President shall direct the issuance of regulations to carry out this section. Such regulations shall, to the extent possible, minimize paperwork burdens and shall to the extent possible coordinate reporting requirements under this section with reporting requirements under any other provision of Federal law.

(i) Effect on other law

Nothing in this section shall be construed to alter or affect any existing power, process, regulation, investigation, enforcement measure, or review provided by any other provision of law.

(j) Technology risk assessments

In any case in which an assessment of the risk of diversion of defense critical technology is performed by a designee of the President, a copy of such assessment shall be provided to any other designee of the President responsible for reviewing or investigating a merger, acquisition, or takeover under this section.

(k) Quadrennial report

(1) In general

In order to assist the Congress in its oversight responsibilities with respect to this section, the President and such agencies as the President shall designate shall complete and furnish to the Congress, not later than 1 year after the date of enactment of this section and upon the expiration of every 4 years thereafter, a report which—

(A) evaluates whether there is credible evidence of a coordinated strategy by 1 or more countries or companies to acquire United States companies involved in research, development, or production of critical technologies for which the United States is a leading producer; and

(B) evaluates whether there are industrial espionage activities directed or directly assisted by foreign governments against private United States companies aimed at obtaining commercial secrets related to critical technologies.

(2) “Critical technologies” defined

For the purposes of this subsection, the term “critical technologies” means technologies identified under title VI of the National Science and Technology Policy, Organization, and Priorities Act of 1976 or other critical technology, critical components, or critical technology items essential to national defense identified pursuant to this section.

(3) Release of unclassified study

The report required by this subsection may be classified. An unclassified version of the report shall be made available to the public.

For Further Study

By Narayana Rao K.V.S.S.

Case Study: The Challenges of Post-Merger Integration

The Arcelor and Mittal Merger

The focus in the case study is on the formation of the integration team, the importance of communication, and the realization of anticipated synergies during the post-merger period. The discussion centers on the events that followed the merger of steel giants Arcelor and Mittal into ArcelorMittal in mid-2006.

Author of the Case Study
Donald DePamphilis
Clinical Professor of Finance
(Article available under Creative Commons 3.0 license on Knol of Google)

Taken from Mergers, Acquisitions, and Other Restructuring Activities, 5th edition, 2009, by Donald M. DePamphilis. For more information, click here.


The merger of Arcelor and Mittal into ArcelorMittal in June 2006 resulted in the creation of the world’s largest steel company. With 2007 revenue of $105 billion and its steel production accounting for about 10 percent of global output, the behemoth has 320,000 employees in 60 contries, and it is a global leader in all of its target markets.

Arcelor was a product of three European steel companies (Arbed, Aceralia, and Usinor). In contrast, Mittal resulted from a series of international acquisitions. Despite being competitors, the two firms exhibited little overlap in terms of their operations. However, their attributes proved to be highly complementary with Mittal owning much of its raw materials such as iron ore and coal and Arcelor having extensive distribution and service center operations. Like most mergers, ArcelorMittal faced the challenge of integrating management teams; sales, marketing, and product functions; production facilities; and purchasing operations. Unlike many mergers involving direct competitors, a relatively small portion of cost savings would come from eliminating duplicate functions and operations.

Top Management Sets Expectations

ArcelorMittal top management set three driving objectives before undertaking the postmerger integration effort. These included the following: (1) achieve rapid integration; (2) manage effectively daily operations; and (3) accelerate revenue and profit growth. The third objective was viewed as the primary motivation for the merger. The goal was to combine what were viewed as entities having highly complementary assets and skills. This goal was quite different from the way Mittal had grown historically, which was a result of acquisitions of turnaround targets focused on cost and productivity improvements.
Developing the Integration Team

The formal phase of the integration effort was to be completed in six months. Consequently, it was crucial to agree on the role of the management integration team (MIT), key aspects of the integration process such as how decisions would be made, and the roles and responsibilities of team members.

Activities were undertaken in parallel rather than sequentially. Teams from the two firms were identified. The teams were then asked to submit a draft organization to the MIT. The profiles of the people who would occupy the senior positions were defined and selection committees established. Once the senior managers were selected, they were to build their own teams to identify the synergies and to create action plans for realizing the synergies. Teams were formed before the organization was announced and implementation of certain actions began before detailed plans had been developed fully. Progress was monitored to plan on a weekly basis, enabling the MIT to identify obstacles facing the 25 decentralized task forces and, when necessary, to resolve issues.

The integration team leader was selected based on their demonstrated ability to be collaborative and process-oriented, enabling them to manage the weekly reviews and to resolve issues as they arose. The leader would also have to be sensitive to cultural differences in order to be able to get people to work together. Finally, the team leader would have to be someone who had the confidence of the CEO and other top managers.
Developing Communication Plans

Considerable effort was spent in getting line managers involved in the planning process and to sell the merger to their respective operating teams. Initial communication efforts included the launch of a top-mangement “road-show.” The new company also established a Web site and introduced Web TV. Senior executives provided two-to-three minute interviews on various topics giving everyone with access to a personal computer the ability to watch the interviews onscreen.
Owing to the employee duress resulting from the merger, uncertainty was high as employees with both firms wondered how the merger would impact them. To address employee concerns, managers were given a well-structured message about the significance of the merger and the direction of the new company. Furthermore, the new brand, ArcelorMittal, was launched at a meeting attended by 500 of the firm’s top managers during the spring of 2007. This meeting marked the end of the formal integration process. Finally, all communication of information disseminated throughout the organization was focused rather than of a general nature.

External communication was conducted in several ways. Immediately following closing, senior managers traveled to all the major cities and sites of operations (i.e., the road show) talking to local management and employees at these locations. Typicallly, media interviews also were conducted around these visits, providing an opportunity to convey the ArcelorMittal message to the communities through the press. In March 2007, the new firm held a media day in Brussels, which involved presentations on the status of the merger. Journalists were invited to go to the different businesses and review the progress themselves.

Within the first three months folowing closing, customers were informed about the advantages of the merger for them, such as enhanced R&D capabilities and wider global coverage. The sales forces of the two organizations were charged with the task of creating a single "face" to the market.

Achieving Operational and Functional Integration
ArcelorMittal management set a target for annual cost savings of $1.6 billion annually, based on their experience with earlier acquisitions. The role of the task forces was first to validate this number from the bottom up and then to tell the MIT how the synergies would be achieved. As the merger progressed, it was necessary to get the business units to assume ownership of the process to formulate the initiatives, timetables, and key performance indicators that could be used to track performance against objectives. In some cases, synergy potential was larger than anticipated, while smaller in other situations. The expectation was that the synergy could be realized by mid-2009. The integration objectives were included in the 2007 annual budget plan. As of the end of 2007, the combined firms were on track to realize their goal with annualized cost savings running $1.4 billion.

Concluding Formal Integration Activities
The integration was deemed complete when the new organization, the brand, the “one face to the customer” requirement, and the synergies were finalized. This occurred within eight months of the closing. However, integration would continue for some time to achieve cultural integration. Cultrural differences within the two firms are significant. In effect, neither company was homogeneious from a cultural perspective. ArcelorMittal management viewed this diverity as an advantage, since it provided an opportunity to learn new ideas.

This case study relies upon information provided in an interview with Jerome Ganboulan (formerly of Arcelor) and William A. Scotting (formerly of Mittal), the two executives charged with directing the postmerger integration effort. See Jan De Mdedt and Michel Van Hoey, "Integrating Steel Giants: An Interview with the Arcelor Mittal Post-Merger Managers," Mckinsey Quarterly, Februrary, 2008.


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