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L E A R N I N G G O A L S 710 M ERGERS , LBO S , D IVESTITURES , AND B USINESS F AILURE C H A P T E R Across the Disciplines WHY THIS CHAPTER MATTERS TO YOU Accounting: You need to understand mergers (including the tax considerations involved), leveraged buyouts, and divesti- tures of assets in order to record and report these organi- zational changes; you also need to understand bankruptcy procures because you will play a large part in any reorganiza- tion or liquidation. Information systems: You need to understand what data need to be tracked in the case of mergers, leveraged buyouts, divestitures of assets, or bankruptcy, in order to devise the sys- tems needed to effect these organizational changes. Management: You need to understand the motives for mergers so that you will know when and why a merger is a good idea. Also you may need to know how to fend off an unwelcome takeover attempt, when to divest the firm of assets for strategic reasons, and what options are available in the case of business failure. Marketing: You need to understand mergers and divestitures, which may enable the firm to grow, diversify, or achieve syn- ergy in ways that will promote marketing’s strategic goals. Operations: You need to understand mergers and divestitures because ongoing operations will be significantly affected by these organizational changes. Also, you should know that business failure does not necessarily mean a cessation of operations but, rather, may require reorganization with funds sufficient for working capital and to cover fixed charges. Discuss the merger negotiation process, the role of holding companies, and international mergers. Understand the types and major causes of busi- ness failure and the use of voluntary settlements to sustain or liquidate the failed firm. Explain bankruptcy legislation and the proce- dures involved in reorganizing or liquidating a bankrupt firm. LG6 LG5 LG4 Understand merger fundamentals, including basic terminology, motives for merging, and types of mergers. Describe the objectives and procedures used in leveraged buyouts (LBOs) and divestitures. Demonstrate the procedures used to value the target company, and discuss the effect of stock swap transactions on earnings per share. LG3 LG2 LG1 17
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711 F or CEO Stephen Bollenbach, the 1999 Hilton Hotels Corp. (HHC) merger with Promus Hotels was “our defining acqui- sition.” It moved Hilton into a position to compete with larger competitors such as Marriott and Starwood . (HHC owns the Hilton name in North America; Hilton International owns the rights in the rest of the world.) “The Promus management was so delighted we acquired them,” says Matthew Hart, CFO at HHC. “We were in the same industry. We knew the business,” he says. Moreover, “they had what we needed, and we had what they needed.” What Hilton needed was more hotels. With only 250 North American properties, it trailed competitors such as Marriott with 1,800 and Starwood with 750. The Promus merger brought Hilton the Embassy Suites, Hampton Inn, Doubletree, and Red Lion chains. The new Hilton had
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