Merger Tactics Lecture2(06)

MERGER TACTICS Nov. 2006

Takeover Methods Tools Used To Acquire Companies Proxy Contest

Tender Offer

Acquisition

Leveraged Buy-Out

Merger

Management Buy-Out

Friendly Mergers 

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Merger Between Two Firms with Approval of Two Boards of Directors One Firm May Merge with the Other Two May Merge to Form Another Corporate Entity

Tender Offers 

Since Merger Regulations Became Widespread (Williamson Act, SEBI Regulations) Many Countries Encourage Tender Offers as a Way of Discovery of True Value of Firms

Tender Offers 

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Active & Widespread Solicitation of Public Shareholders Solicitation made for substantial percentage of issuer’s stock Offer Made at Premium to Market Price Terms of Offer are Firm (not negotiated) Offer may be contingent on tender of fixed number of shares often subject to a fixed minimum number to be purchased

Tender Offers 

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Offer open for a limited number of days. Target Shareholder subject to pressure to sell his stock Public announcement of a purchase programme concerning the target co. precedes or accompany rapid accumulation of large amount of target co. securities.

Tender Offers 

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Under regulations, tender offers must provide for a window between offer and actual tendering of shares to allow other bidders to enter with counter offers. Higher costs associated with tender offers due to legal filing, publication/mailing costs, etc Tender offer puts a Company “into play”

Cash vs. Securities Tender Offer  

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Can solicit shares in “all-cash” deal Securities may offered in lieu of shares tendered (may be tax-free deal) Option offered to target shareholders Waiting period – 10 days to 4 weeks

Bear Hug 

Bidder sees realistic possibility of negotiated transaction, and Bear Hug is to pressurise management

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Bidder may pressurise target management   

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Offer to merge in a friendly manner Threat to go directly to target shareholders Accompanied by press reports and public statements Offer a price that of rejected by incumbent management may result in shareholder lawsuits.

Target Management Response 

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Typical response is to acquire a “fairness” opinion from a merchant banker and reject the offer. Target Co. Shareholders often see tender offers positively due to premium associated. Market Price does not include “Control Premium”

Target Management Response 

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Target Firm Managers may be right in rejecting the offer is control premium is small Defensive tactics may increase shareholder wealth

Open Market Purchases 

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Open market purchases may not constitute a tender offer or may not trigger one if purchase below a certain percentage “Creeping Acquisition” – where small amounts are bought by controlling group

Tender Offers Agency Problem 

Agency Problem  

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Divorce between ownership & control Managements own only a small %age of shares May work to maximise their own wealth rather than shareholders

Takeover as a Solution 

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Control Functions are delegated to the BOD by shareholders Agency problem may be tackled by 

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Appropriate compensation policies (internal) Market for corporate control acts as an external disciplining devise

Proxy Contest 

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Two Group of Managers Solicit Proxies without actually offering cash Change in BOD if enough votes against incumbent management

Sell-Offs & Divestitures 

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Under takeover threat incumbent managers may restructure operations and reduce value-destroying activities. Sell-off or divestiture of unattractive business

Spin-Offs 

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Co. offers shares it holds in a subsidiary to its shareholders on prorata basis No money changes hands Two companies exist where one existed before

Management Buy-Outs 

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Managers raise resources to acquire shares from shareholders Employees trusts Demonstration of managers Faith in the value of the firm