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8 “Cisco Changes Tack in Takeover Game,” Wall Street Journal, April 17, 2008, A1. 9 For a more thorough discussion of this topic, see Weston et al. (1998), Chapter 5. 10 Wall Street Journal, November 30, 2000, B4. 11 Ibid. 12 See Harvard Business School Case 285053, Gulf Oil Corp.—Takeover, for a complete discussion of this value creation. 13 We assume all cash flows continue in perpetuity. To value a perpetual cash flow, simply divide the amount of the cash flow by the discount rate; in this case, $1.25 million per year ÷ 20% = $6.25 million. 14 For an explanation of Porter‟s Five Forces see www.quickmba.com/strategy/porter.shtml. 15 See Andrade, Mitchell, and Stafford (2001). 16 Prior to June 30, 2001, the pooling of interests method was also permissible. Under pooling, the assets of the two firms were combined, or pooled, at their historical book values. There was no revaluation of assets to reflect market value and therefore no creation of goodwill. 17 Stephen Grocer, “M&A in 2007: Inside the Numbers,” Deal Journal, Wall Street Journal, January 3, 2008. 18 Grant Thornton International Ltd., “Mergers and Acquisitions: Opportunities for Global Growth,” International Business Report, 2008. References Agrawal, Anup, Jeffrey F. Jaffe, and Gershon N. Mandelker. 1992. The post-merger performance of acquiring firms: A re-examination of an anomaly. Journal of Finance 47 (September): 1605-1621. Andrade, Gregor, Mark Mitchell, and Erik Stafford. 2001. New evidence and perspectives on mergers. Journal of Economic Perspectives 15 (2): 103-120.
Bhagat, Sanjai, Ming Dong, David Hirshleifer, and Robert Noah. 2005. Do tender offers create value? New methods and evidence. Journal of Financial Economics 76 (1): 3-60. Coyle, Brian. 2000. Mergers and acquisitions. Chicago: American Management Association, Glenlake Publishing Company, Ltd. Henry, David, and Frederick F. Jespersen. 2002. Mergers: Why most big deals don‟t pay off. BusinessWeek, October 14, 60. Rossi, Stefano, and Paolo F. Volpin. 2004. Cross-country determinants of mergers and acquisitions. Journal of Financial Economics 74 (2): 277-304. Smolowitz, Ira, and Clayton Hillyer. 1996. Working paper. Bureau of Business Research, American International College, Springfield, MA. Weston, J. Fred, Kwang S. Chung, and Juan A. Siu. 1998. Takeovers, restructuring, and corporate governance. 2nd ed. Upper Saddle River, NJ: Prentice Hall. Weston, J. Fred, and Brian Johnson. 1999. What it takes for a deal to win stock market approval. Mergers and Acquisitions 34, no. 2 (September/October): 43-48. Zweig, Phillip L., Judy Perlman Kline, Stephanie Anderson, and Kevin Gudridge. 1995. The case against mergers. BusinessWeek, October 30, 122. For Further Reading Morosini, Piero, Managing Cultural Differences (New York: Elsevier, 1997). A comprehensive discussion of culture‟s role in mergers and other corporate alliances. The focus is on cross-border deals, but the strategies for effective implementation can be used by all. Sirower, Mark L., The Synergy Trap: How Companies Lose the Acquisition Game (New York: Free Press, 1997). Focuses on assessing the potential for synergies and value creation in mergers. Vlasic, Bill, and Bradley A. Stertz, Taken for a Ride: How Daimler-Benz Drove Off with Chrysler (New York: HarperCollins, 2000). A fascinating behind-the-scenes look at the Daimler-Benz /Chrysler deal. Clearly shows the roles of culture, human nature, and managerial hubris in M&A transactions. Weston, J. Fred, Kwang S. Chung, and Juan A. Siu, Takeovers, Restructuring, and Corporate Governance, 2nd ed. (Upper Saddle River, NJ: Prentice Hall, 1998). An excellent reference for developing and implementing an effective M&A strategy. 18
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Table of Contents Title Page Copyri
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Chapter 6 - Planning Capital Expend
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For Further Reading Part IV - Manag
Page 7 and 8:
Successful Postmerger Implementatio
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This book is printed on acid-free p
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Syllabus How Chapter Topics in This
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Some of these experts are full-time
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About the Contributors Richard T. B
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Advances in Quantitative Analysis o
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enterprise development. Dr. Zachara
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The left side shows Nutrimin‟s in
Page 24 and 25:
Gail, let‟s go over this balance
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Gail, do you have any questions abo
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11. Not all expenses are cash outfl
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Financial Statements: Who Uses Them
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profitability to keep investing for
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Financial Accounting Standards It i
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Downloadable Resources for this cha
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Next, we explain each of these thre
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liquidity. Or, more simply, achievi
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If these ratios are seriously defic
Page 44 and 45:
The debt-to-equity ratio is evaluat
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year 1 to year 3. The net effect wa
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to rate of return on the equity. Th
Page 50 and 51:
Other types of comparisons of finan
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income/sales), asset turnover (sale
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successful businesspeople should ha
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More than a decade ago, a special c
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companies is used for illustration.
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The identification of nonrecurring
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The Dow Chemical single-step income
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is a pretax measure, but income fro
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Sources: Companies‟ annual report
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Exhibit 3.11 Examples of discontinu
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amortization purposes, the Company
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Examples of nonrecurring items disc
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During Fiscal 2006, inventory quant
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The nonrecurring items of Boston Sc
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The disclosure presented earlier in
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gains or losses that appear as part
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ecurring as for Kimberly-Clark, the
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Summarizing Nonrecurring Items and
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This example of using the SEB works
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Exhibit 3.27 Other income (expense)
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Source: Pfizer, Inc., annual report
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Exhibit 3.30 Acquisitions note: Pfi
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Source: Pfizer, Inc., annual report
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Exhibit 3.33 Cost-reduction initiat
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Exhibit 3.36 Share-based payment no
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The Pfizer Worksheet Analysis: Down
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Some Further Points on the Pfizer W
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• It is common to treat items as
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FedEx Corporation (2007) First Sola
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1 The American Institute of Certifi
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28 These alternative translation me
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If you need some instruction in Exc
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To solve using Excel, open your Exc
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As you can see from the previous ex
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C6 = 5 • Now enter the “=” si
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Ordinary Annuity An ordinary annuit
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To confirm that the number of payme
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The FV of this first payment into t
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Exhibit 4.15 Finding the future val
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Exhibit 4.18 Finding the present va
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From Exhibit 4.20, we see that as t
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Exhibit 4.22 Amortization schedule
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Exhibit 4.25 Regular cash flows wit
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Internet Links For Further Reading
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Investors who are risk averse will
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considering the risk of a single as
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Portfolio Risk Stand-alone risk is
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In spite of unique or diversifiable
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If a particular stock is highly sus
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The formula tells us that, to begin
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for the entire market of stocks sin
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The dividend per share for preferre
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If you are able to determine the cu
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Debt finance is the lower-cost meth
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We don‟t observe many firms whose
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Capital Structure in Practice Finan
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are able to observe regularities in
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dividends and capital gains. We wil
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where EBIT is earnings before inter
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Since long-term debt holders have a
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accept more investment projects. Re
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A beer company is considering build
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accounts receivable, and tabulates
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profit by the tax rate determines t
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Accounting profit often mixes varia
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The concept that future cash flows
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Like project A, project C also cost
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The after-tax interest rate is the
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equal mix of debt and equity, its d
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The payback period rule stipulates
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The IRR rule is appealing in that i
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complete with its real options is g
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What does it matter that one invest
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Exhibit 7.3 Time line in dollars an
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There are a number of countries in
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eturn of 10% on its investments in
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Exhibit 7.12 Summary of exchange ra
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and so will the value of the liabil
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Source: CIA, World Factbook, availa
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Exhibit 7.18 Net present value of c
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equired interest payments to be pai
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So if the assistant treasurer was r
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This theory is far from perfect, as
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The Consulting Firm Jennifer, Jean,
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part by a statute, the Uniform Limi
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formation in Delaware (or any state
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purpose of requiring qualification.
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Phil‟s death may terminate the bu
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the transfer. This means that if Br
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These rules extend to tort liabilit
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In the absence of a meeting, stockh
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A more detailed discussion on the b
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Partnerships If possible, the resul
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associated with this arrangement ar
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Partnerships are also not separate
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For most start-up businesses, howev
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form, even at the risk of some unli
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likely that our consultants will be
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Thus, the corporation and LLC, with
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It is not possible to fully describ
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usiness corporation for all purpose
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a cash-basis taxpayer to be taxed a
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The Tax Reform Act of 1986 substant
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limit is the product of the value o
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he would have spent anyway. In fact
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protect Brad from the scenario of h
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paying for the privilege. If the st
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The second tax scenario attaches to
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include that nullity in his taxable
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then the capital gain to be taxed h
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Most relevant to Morris is Section
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To begin with, the ESOP will have t
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general partner of a limited partne
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small businesses) is also subject t
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oth Lisa and Brad would be free to
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Assume that a limited liability com
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corporations, and had been audited
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There is plenty of blame from the c
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• An important study about top ma
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• The federal government made at
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$79.7 million for other services, a
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Budgets offer a variety of benefits
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determine the impact of specific pr
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Exhibit 11.2 Budget variance report
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udget, we just add more to it next
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income statement. The financial bud
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For a manufacturing company, cost o
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C&G‟s Gift Shop has a policy to m
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Meeting cash obligations as they co
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was unusually low, say, due to the
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A fixed budget, sometimes called a
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A large part of the budget selling
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• Centralized resource allocation
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Merewitz, Leonard, and Stephen H. S
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This chapter starts with a discussi
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Interestingly the numbers for quart
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Exhibit 12.4 Scenarion analysis.
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Pitfalls Although this analytic tec
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Exhibit 12.6 Variable cost element
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Variable Cost as a Function of Outp
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If scenario 2 yields a lower profit
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Microsoft certainly does not price
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If it is determined that dumping ha
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Leaving government agencies and not
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transaction processing. Each proces
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Exhibit 13.3 E-commerce transaction
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To summarize the analysis, the busi
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Capacity costs are probably the mos
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which it was, but for the inventory
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They called this strategic cost man
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A closer study, however, revealed s
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the benefits of business planning.
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The last type of plan is called a d
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The Business Plan We will progress
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Hook the Reader That means having t
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Industry The goal of this section i
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upscale suburban client who wants p
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Company and Product Description Com
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Exhibit 14.8 shows the competitive
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Exhibit 14.9a Advertising schedule.
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Scope of Operations What is the pro
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Development Time Line A development
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By law, most organization types req
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As mentioned in the development pla
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that can be depreciated, you should
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1 Special thanks to Matt Feczko, Mi
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For better or worse, the business e
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Leeson bet and lost. Japanese stock
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Between February and April 1994, Da
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LTCM could be picky when it came to
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An investor who wished to invest in
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Similarly, the swaps market has rev
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speculator would suffer losses equa
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American manufacturer will suffer l
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The ease with which futures facilit
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Exhibit 15.1 Call option payoff dia
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Exhibit 15.2 Payoff diagram for a w
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Notice that the put option payoff r
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Bank, owns a large block of NASDAQ
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can be tailored so that the money r
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Finally, the last step is to choose
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3 Fischer Black, who co-invented th
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not include assets that the firm ha
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Thus, a business valuation will usu
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Negative • Acme is highly depende
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Exhibit 16.3 Acme Manufacturing, In
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Profitability ratios reflect the re
Page 449 and 450: When we talk about the value of a b
Page 451 and 452: This example illustrates that with
Page 453 and 454: Income Approach: Discounted Cash Fl
Page 455 and 456: Exhibit 16.5 Acme Manufacturing, In
Page 457 and 458: Victoria explains that the second p
Page 459 and 460: Victoria analyzes Acme‟s audited
Page 461 and 462: In summary, the discounted cash flo
Page 463 and 464: Adjustment for Illiquidity As previ
Page 465 and 466: 51% position sells for a higher pri
Page 467 and 468: examples. The proper application of
Page 471 and 472: The subject of this chapter is grow
Page 473 and 474: Finally, an acquisition can be effe
Page 475 and 476: M&A activity has been the focus of
Page 477 and 478: companies continue to make the same
Page 479 and 480: equals was taking on a distinctive
Page 481 and 482: Anatomy of a Successful Acquirer: T
Page 483 and 484: employees kept their original jobs
Page 485 and 486: where ΔCF t is the incremental cas
Page 487 and 488: where it‟s ultimately buried. Suc
Page 489 and 490: The following example summarizes th
Page 491 and 492: make sure that you are at least awa
Page 493 and 494: acquisition, there is no immediate
Page 495 and 496: its vascular business, which was so
Page 497 and 498: While all employees should be part
Page 499: makes strategic and financial sense
Page 505 and 506: The 2008 financial crisis underscor
Page 507 and 508: Source: Plunkett’s Outsourcing &
Page 509 and 510: To summarize: Trends • Large numb
Page 511 and 512: Companies are becoming increasingly
Page 513 and 514: What steps should a company follow
Page 515 and 516: • Results of meetings with vendor
Page 517 and 518: • Breach of contract and remedies
Page 519 and 520: Assuming the project or service rev
Page 521 and 522: The answer is: profits. The company
Page 523: 19 Information Technology and You D
Page 527 and 528: People‟s lives have been turned u
Page 529 and 530: its self-contained rechargeable bat
Page 531 and 532: Random-Access Memory (RAM) Random-a
Page 533 and 534: On laptop computers and PDAs, the s
Page 535 and 536: Operating System An operating syste
Page 537 and 538: the spreadsheet software together w
Page 539 and 540: Exhibit 19.5 Pro forma sales and in
Page 541 and 542: Database Software A database is a c
Page 543 and 544: Internet e-mail addresses often con
Page 545 and 546: Personal Finance Software There are
Page 547 and 548: There are several different approac
Page 549 and 550: One of the major attractions of the
Page 551 and 552:
While not a new version of the Web
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industrial revolution, and has occu
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Dummies Inc. has a series of books
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organization. This chapter is desig
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As technology has evolved, the term
Page 563 and 564:
While the software mentioned earlie
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Most of the focus of the investor c
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Data Access and OLAP Before the lat
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Exhibit 20.5 illustrates a differen
Page 571 and 572:
Productivity Tools Workers expect t
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Client-server technology is based o
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Today, most programmers write in C+
Page 577 and 578:
Exhibit 20.6 is a model of a typica
Page 579 and 580:
No treatment of relational database
Page 581 and 582:
Online analytical processing (OLAP)
Page 583 and 584:
server) and the rest on the users
Page 585 and 586:
the other operational departments w
Page 587:
The world of business has changed d
Page 591:
Chaffey, Dave, E-Commerce and E-Com
Page 595 and 596:
According to the results of the sur
Page 597 and 598:
understand the financial situation
Page 599 and 600:
MBA graduates who are hoping to ent
Page 601 and 602:
Summary Financial services opportun
Page 603 and 604:
Let‟s begin with the “I left it
Page 605 and 606:
MBA student: “Well, I go to [Grea
Page 607 and 608:
Aiming for Your Goals For career ch
Page 609 and 610:
Networking is generally regarded as
Page 611 and 612:
Let‟s begin with some key assumpt
Page 613 and 614:
like, or moving ahead in the compan
Page 618 and 619:
Accrual accounting: An accounting m
Page 620 and 621:
Cash flow: Cash that is spent or re
Page 622 and 623:
Distribution channel: A chain of in
Page 624 and 625:
Goodwill: As it relates to valuatio
Page 626 and 627:
Management’s discussion and analy
Page 628 and 629:
Ordinary annuity: An annuity that p
Page 630 and 631:
Securities and Exchange Commission
Page 632 and 633:
Vertical merger: A merger in which
Page 634 and 635:
about activity-based costing progre
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Application systems ARPAnet Arthur
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Bell Labs Benefit measurement Beta
Page 640 and 641:
goal orientation legal and contract
Page 642 and 643:
segment information note share-base
Page 644 and 645:
process of purpose of real world us
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uy/build decision capital budget in
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written resume Careers in corporate
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Cell Center for Research in Securit
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Compensation and ownership Competit
Page 654 and 655:
Corporate culture Corporate debt in
Page 656 and 657:
profit planning from an internal pe
Page 658 and 659:
Data Data access and OLAP Database
Page 660 and 661:
Askin Capital Management Barings Ba
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market approach publicly traded gui
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Electronic data interchange (EDI) E
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Extensible markup language (XML) Ex
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short term liquidity users and uses
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Fourth generation programming (4GL)
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Going private Going private transac
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Hypertext links Hypertext markup la
Page 676 and 677:
Information technology and the firm
Page 678 and 679:
International Accounting Standards
Page 680 and 681:
Last-in-first out (LIFO) vs. curren
Page 682 and 683:
Long call option payoff Longer-term
Page 684 and 685:
Market risks Market size and struct
Page 686 and 687:
Motivation to outsource Multiple IR
Page 688 and 689:
Nonrecurring items defined disclosu
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Operational complexity Operational
Page 692 and 693:
Outsourcing metrics Overhead Over-t
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Personal end game Personal expense
Page 696 and 697:
Price competition Price decreases P
Page 698 and 699:
Projected cash flow statements Proj
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Relevant range Relevant range assum
Page 702 and 703:
Risk sharing Risk transfer Risk vs.
Page 704 and 705:
Short call option payoff Short part
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Spot price Spreadsheet software Spr
Page 708 and 709:
Summarizing nonrecurring items and
Page 710 and 711:
acquisition the business dividends
Page 712 and 713:
Timmon‟s Model of Opportunity Rec
Page 714 and 715:
U.S. immigration quotas U.S. Intern
Page 716 and 717:
discounting with discount rate form
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