Mergers and Acquisitions

Hostile takeover process

1. Slowly acquire a toehold by open market purchases 2. File statement with OSC at 10% early warning stage 3. Accumulate 20% through open market purchase over a longer period of time 4. Tender offer to bring ownership percentage to the desired level

Control

50.1% ownership, shareholder controls voting decisions under normal voting, can replace board and control management

Amalgamation

66.7%, the single shareholder can approve proposals requiring a 2/3's majority vote (super majority)

Cash cow

A company who makes money doing nothing

Memorandum

A document describing a target company's important features to potential buyers. A lot like a prospectus in an IPO.

Confidentiality agreement

A document signed by a potential buyer guaranteeing it will keep confidential any information it sees in the data room about the company

Break fee

A fee paid to an acquirer or target should the other party terminate the acquisition, often 2.5% of the value of the transaction

Amalgamation

A genuine merger in which both sets of shareholders must approve transaction. This term is usually used in Canada.

Geographic synergy

A geographic roll-up which occurs when a national firm is created out of a series of regional firms

Letter of intent

A letter signed by an acquiring company scoping out the terms of agreement of its acquisition, including legal terms. Include a no-shop clause and break fee.

Cross border

A merger or acquisition involving a Canadian and a foreign firm as either the acquiring or target company

Hostile takeover

A takeover in which the target has no desire to be acquired and actively rebuffs the acquirer and refuses to provide any confidential information

Economies of scope

Able to spread costs over product line. Ex. Pepsi and FritoLay are sold the same ways (vending machines, grocery stores, etc)

Unrelated Diversification

Also known as conglomerate. Favors capitalizing a portfolio of businesses that are capable of delivering excellent financial performance.

Going private transaction

Also known as issuer bid. A special form of acquisition where the purchaser already owns a majority stake in the target company.

Friendly takeover process

Approach target, confidentiality agreement, sign letter of intent, main due diligence, final sale agreement, ratification

Complementary strengths

Buying a company that has a strength we don't have. Ex. Good at marketing but sh*t at finance so you purchase a financial company

Strategic realignments

Permits new strategies that were not feasible prior to the acquisition. Ex. Kraft wanting Cadbury because Cadbury was established in the UK and had a lot of trade routes in India. Access a market they've never been able to before

Exempt takeovers

Private companies, public companies that have few shareholders, purchase of shares from fewer than 5 shareholders

Financing synergy

Reduced cash flow variability, increase in debt capacity, reduction in average issuing costs

Horizontal integration

Related diversification: expanding our product line, company is usually smaller in size, capitalize on synergies. Usually with related businesses. Ex. Pepsi buys FritoLay

Selling the crown jewels

Selling of a target company's key assets that the acquiring company is most interest in to make it less attractive for takeover

Minority squeeze-out

Shareholder owns 90% or more of the outstanding stock, minority shareholders can be forced to tender their shares

Arbs

Specialists who buy and sell shares in target companies looking to earn a premium

Economies of scale

Spreading fixed costs on over more units, reducing capacity, "bigger is better"

No-shop clause

Target agrees not to find another buyer, demonstrates commitment

Friendly acquisition

The acquisition of a target company that is willing to be taken over.

Merger

The combination of two firms into a new legal entity.

Efficiency increases

The combined firm can make use of unused production/sales/marketing channel capacity

Creeping takeovers

Normal course tender offer is not required as long as no more than 5% of the outstanding shares are purchased through the exchange over a one-year period of time. Acquire the target over a long period of time.

Data room

Has confidential information about the company for potential buyers to consult

Managerial motivations for mergers and acquisitions

Increased firm size, reduced firm risk through diversification

Transparency

Information disclosure, ensure complete and timely information be available to all parties while at the same time not letting this requirement stall the process.

Shareholder rights plan

Known as a poison pill or deal killer. Give non-acquiring shareholders the right to buy 50% more shares at a discount price in the event of a takeover, make acquisition more expensive.

Tax benefits

Make better use of tax deductions and credits

People pill

Managers and employees threaten to quit if they are taken over. Usually works well in a knowledge based industry.

Motivations for mergers and acquisitions

Creation of synergies, two or more companies produce a result that would not be attainable individually

Suicide pill

Destroy the company instead of selling it, sell all competitive advantages, etc

Operating synergies

Economies of scale, economies of scope, complementary strengths

Value creation for mergers and acquisitions

Efficiency increases, financing synergy, tax benefits, strategic realignments

Vertical integration

Extends a firm's competitive scope within the same industry whether going forward toward end-users or going backward into source of supply. Ex. Airline purchases a supplier or a distributor of the airline

Share transaction

The offer by an acquiring company of shares or a combination of cash and shares to the target company's shareholders. Often requires the approval of the acquiring firm's shareholders.

Due diligence

The process of evaluating a target company by a potential buyer

Acquisition

The purchase of one firm by another. Completely absorbs the other firm.

Cash transaction

The receipt of cash for shares by shareholders in the target company. Simply like a purchase of a capital asset.

White knight

The target seeks our another acquirer considered friendly to make a counter offer and thereby rescue the target from a hostile takeover

Takeover

The transfer of control from one ownership group to another

Fair treatment

To avoid oppression or coercion of minority shareholders. Permit competing bids during the process and not have the first bidder have special rights. To limit the ability of a minority to frustrate the will of a majority.

Pacman defence

When a company is coming after you, you turn around and try to come after them and buy them

Early warning

When a shareholder holds 10% of the company, must send a report to OSC, alerts other shareholders that a potential acquisitor is accumulating a position (toehold) in the firm, alerts the rest of the investors of a potential takeover

Takeover bid

When a shareholder owns 20% of the shares, no longer allowed to purchase on the open market but must make a 'bid', forces the acquisitor into disclosing intentions publicly before moving to full voting control of the firm