Mergers and Acquisitions

Characteristics of an acquisition

- cash - purchase - tender offer - may not be acquiring 100% of all assets and liabilities - may not be friendly

diversification

- coinsurance of debt - internal capital markets

Should also consider factors other than CF such as

- corporate culture - marketing philosophies - personnel policies

defensive mechanisms (shark repellents)

- fair price provision - white knight - white squire - greenmail - supermajority voting requirements - classified board structure (staggered board) - state of incorporation - pacman defense - scorched earth - blank check preferred stock - poison pill - poison put

Types of mergers

-horizontal -vertical -congeneric -conglomerate

a completely focused firm has an HI of

1

white knight

3rd party takes you over and saves the day - winner often overpays which is good for the company but bad for shareholders

congeneric merger

A merger of firms in the same general industry, but for which no customer or supplier relationship exists.

white squire

A third party that is sought out by the target company's board to purchase a substantial minority stake in the target—enough to block a hostile takeover without selling the entire company.

supermajority voting

A voting formula that requires a two-thirds vote or some other fraction or combination of fractions for passage of a measure. - more than simple majority to vote for something

Which type of merger normally results in higher long-run stock returns?

Focus Increasing

What do we use to measure focus?

Herfindahl Index

greenmail

a payment by a firm to a hostile party for the firm's stock at a premium, made when the firm's management feels that the hostile party is about to make a tender offer

Poison Put

a provision that allows investors to redeem the bond at par in the event of a hostile takeover or the purchase of a large block of shares

fair price provision

a requirement that all selling shareholders receive the same price from a bidder - pay fair price for stock

target firm

firm that is being taken over

One way to help reduce agency issues related to managers of the target firm being afraid to lose their jobs is:

golden parachutes

IF being taken over will yield a high return to target shareholders, how do we insure that target management will comply?

golden/silver parachute - target management do not want to lose their jobs

we want the ______ HI

highest

Which of the following is true? - most mergers destroy value - most states are incorporate in NY - if you receive shares of common stock in exchange for your common stock, you don't have to pay taxes - golden parachutes are an antitakeover measure

if you receive shares of common stock in exchange for your common stock, you don't have to pay taxes

In a contest between multiple bidders, the winner tends to: - overpay - break even - underpay

overpay

termination fees

pay the other party if transaction does not occur, unless the federal government says it is a monopoly

_______ is an antitakeover measures which results in the right for current target shareholders to purchase securities at a discount

poison pill

lockup options

potential acquirer is given the opportunity to purchase additional shares of target

scorched earth

sell crown jewel to leave nothing for the takeover

Who reaps the biggest benefit from mergers

shareholders of target firm - historically get a 30% premium over what shares were trading for

Corporate raiders make money in the ____

short term

anything with a t of 1.98 or > is

significant to the 5% level

no tax implications for

stock for stock exchanges

NPV of merger to acquirer =

synergy - Premium

conglomerate merger

the joining of firms in completely unrelated industries

Herfindahl Index (HI)

the sum of the squares of the proportion of revenues derived from each line of business

Classified boards (staggered boards)

those that elect their members in staggered terms.

poison pill

used by a company to give shareholders certain rights in the event of takeover by another firm - implemented without shareholders approval to make the firm too expensive to buy

synergy

value of the whole exceeds the sum of the parts

in a stock merger when may an acquiring company also have to vote

when the merger involves the distribution of 20% or more of the acquiring company's stock

The Williams Act of 1968

- mergers regulation - acquirers must disclose their current holdings within 10 days of amassing 5% of company's stock - acquirers must disclose source of finds to be used in the acquisition - target firm's SHs must be allowed at least 20 days to tender shares - all shares tendered must be acceptable

synergy could arise from

- operating economies - financial economies - differential management efficiency - reduced competition

Reasons for Merger Failure

- overpay sizable premium - overestimate likely cost savings and synergies - delay over integrating operations after merger - emphasis on cost cutting, damaging the business the business and losing key personnel

Why are anti takeovers a catch 22

- raise premiums if takeover goes through by forcing bidder to pay more - can prevent a takeover from occuring

Characteristics of a Merger

- stock based (exchange stock for stock) - combination of two companies - friendly - acquiring 100% of assets and liabilities

Biggest reasons to pursue mergers

- take advantage of synergy - expansion - break up value

Hostile Merger

-Target firm's management resists the merger. -Acquirer must go directly to the target firm's stockholders, try to get 51% to tender their shares. -Often, mergers that start out hostile end up as friendly, when offer price is raised

Merger Offer Shares offered _____ market price (day prior to announcement)

>

offering price ____ market price (day prior to announcement

>

Target firm payout ____ (alpha x new firm value)

>=

Corporate Raider

An individual who targets a corporation for takeover because it is undervalued. - makes money by buying large firms and dividing them - targets other companies and gets paid for leaving them alone

T/F poison pill is the most effective defense mechanism

T

T/F there may be more than one bidding firm/acquier

T

Tender Offer

bidder attempts to avoid target's BOD by offering to purchase shares for cash held by target's shareholders - almost always hostile

what is the purpose of lockup options and termination fees

both serve to try to complete the deal

For stock mergers acquiring firm may create a new

firm where both sets of share holders get stock acquierer often gets 1:1 stock target gets x:1 stock

acquiring (bidding) firm

firm who is attempting to takeover another firm

in a merger you have a higher stock return with a

focused increase

Are cash or nonvoting securities taxable?

gains are taxable at the time of the merger

merger will _____ the price of transaction stock

increase

companies are trending away from using

investment bankers

statistical signifigance

means that things do not occur by chance

Offers under mergers and tender offers have to offer you _________ prior to the announcement

more than the value of your stock

state of incorporation defense

most states are incorporated in Delaware which has very strong pro firm laws

blank check preferred stock

stock which is authorized but not outstanding - if it has no voting rights can be assigned new voting rights - management could issue stock to sympathetic parties and provide stock with higher voting rights - trigger securities for poison pill

Stock mergers require approval by

target shareholders in a special meeting to vote

pacman defense

target tries to acquire the acquirer

Are voting equity securities taxable?

tax free

Acquirers normally may agree to which of the following to complete a deal? - lock up option - both termination fees and lock up options - termination fee

termination fee

vertical merger

the combination of two or more firms involved in different stages of producing the same good or service

financial economies

creating greater debt capacity or lowering cost of debt due to coverage ratio

corporate focus

devoting time to a specific project

What does a poison pill result in

distribution of rights upon a change in control event with purpose of issuing securities at a lower price

operating economies

economies of scale

When the market decides that the target is out of place, the stock price

falls to pre-merger levels

Acquiring SHs earn ____% in hostile takeovers and ____% in mergers - why?

- 4 - 0 - due to the fact that mergers use stock and tender offers use cash

break up value

Assets would be more valuable if broken up and sold to other companies

Which of the following would be an example of a horizontal merger? - Coca Cola with Pepsico - Ford with Goodyear Tires - Ford with Pepsico

Coke and Pepsi

alpha =

New shares issued/(old shares + new shares)

Premium =

Price paid for B - Value B

Repurchase Standstill agreemtns

contracts where the bidding form agrees to limit its holdings of another firm

Do mergers really create value

acquisitions create value as a result of - economies of scale - synergies - better management

in the long run SHs of acquiring firms experience

below average returns

differential management efficiency

better managers from acquirer

synergy =

combined value of firm - (valueA + ValueB)

golden parachute

compensation packages designed to payoff top executives in the event of a takeover - designed to prevent management from staving off the takeover - can be used as a defense mechanism

Current Merger Wave

- Friendly - Consolidation of firms in the same industry

Which of the following are examples of synergy - use of better management skills of the acquirer - ability to produce more items which lowers cost per unit - ability to. combine assets to increase debt capacity - break up of large unrelated divisions

- ability to produce more items which lowers the cost per unit - ability to combine assets this increasing debt capacity

What are some questionable motives for mergers

- agency issues - diversification - purchase assets below replacement cost - acquire another firms to increase size and make it more difficult to be acquired

Stock Merger

- friendly - acquire approaches BOD of target and has them request SH approval of the merger - acquiring company trades stock for the stock of the target company - assumes liabilitiesFro

1980s merger waves

- hostile - break up large conglomerate firm from the 1970s to increase SH wealth - companies were not happy - often big news

agency issues

- hubris - ego of acquirers execs - overvalued equity - stock price is high so they want to make a purchase

What merger related activities are undertaken by investment bankers

- identify targets - help arrange mergers - develop defensive tactics - value target companies - help finance mergers - invest in stocks of potential merger candidates

Friendly takeover

- merger is supported by the managements of both firms - most mergers now are friendly

what does repurchase standstill agreements usually lead to

cessation of takeover attempts

horizontal merger

transaction between two companies in the same industry