Mergers and Acquisitions Terminology
Acquisitions:
synonymous with merger (tender offer) **where you are actually buying (paying cash for something) -- compared to mergers which are usually stock based (you are not actually buying)
Voting equity securities (common stock) is...
tax-free
Defensive mechanisms: greenmail:
the practice of buying enough shares in a company to threaten a takeover, forcing the owners to buy them back at a higher price in order to retain control. **T Boone Pickens????**
Defensive mechanisms: Pacman defense:
acquirer is trying to take over the target, but the target turns around and takes over the acquirer
Defensive mechanisms: White knight:
an individual or company that acquires a corporation on the verge of being taken over by a force deemed undesirable by company officials, otherwise known as a black knight. - target firm doesn't like the acquirer, so they find a company they like better (return for white knight shareholders aren't as good --> probably paid too much)
break-up value:
assets would be more valuable if broken up and sold to other companies
In the long run, the shareholders of acquiring firms experience ____________ average returns
below
Defensive mechanisms: Classified board structure:
(staggered board) ??????
Exclusionary Self-Tenders:
- Opposite of a targeted repurchase--targeted firm agrees to buy back some of the shares without buying back shares of the acquirer (buy back shares from someone who is not the acquirer --> do this because it makes the stock price higher and makes shares more expensive for the acquirer) - the target firm makes a tender offer for its own stock while excluding targeted shareholders
**Repurchase Standstill Agreements**
a standstill agreement is a contract that stalls or stops the process of a hostile takeover. The target firm either offers to repurchase the shares held by the hostile bidder, usually at a large premium, or asks the bidder to limit its holdings. This act will stop the current attack and give the company time to take preventative measures against future takeovers. **look at slide!**
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 sometimes be used as a defensive mechanism
Termination Fees and Lockup options both serve to try to _____________.
complete the deal
Market for mergers can be pretty ________.
cyclical
Defensive mechanisms: Supermajority voting requirements:
have to have more than a certain majority of votes in order to approve something
Why pursue mergers? Synergy:
idea that he combined firm is worth more than the individual two firms - value of the whole exceeds sum of the parts. - synergy can arise from: - operating economies - financial management efficiency - reduced competition
stock merger example:
Wyeth and Pfizer
corporate raider:
a financier who makes a practice of making hostile takeover bids for companies, either to control their policies or to resell them for a profit. (people that made a lot of money by going after some of these firms)
horizontal merger
a merger or business consolidation that occurs between firms that operate in the same space, as competition tends to be higher and the synergies and potential gains in market share are much greater for merging firms in such an industry. merging with someone (one of your competitors) who is doing pretty much the same thing that you do
Example of a Conglomerate merger:
Mobil Oil and Montgomery Ward (retail store)
Herfindahl Index (HI) example: If a firm derives 50% of its revenues from chemicals, 30% from oil refining, and 20% from coal mining, its HI would be?
(0.5^2 + 0.3^2 + 0.2^2) = 0.38
Tender Offer:
- A tender offer is when an investor proposes buying shares from every shareholder of a publicly traded company for a certain price at a certain time. The investor normally offers a higher price per share than the company's stock price, providing shareholders a great incentive to sell their shares. Ex. a stock's current price is $10 per share. An investor wanting to take over the company issues a tender offer for $12 per share on the condition he acquires at least 51% of the shares. - Almost always hostile - Bidder attempts to circumvent target's board of directors by offering to purchase shares (for cash) held by target's SHs - offering price > market price - induce shareholders to sell
termination fee: (also known as "breakup fee")
- a common fee used in takeover agreements if the seller backs out of a deal to sell to the purchaser. A termination fee is required to compensate the prospective purchaser for the time and resources used to facilitate the deal. - Usually 1-3% of the deal's value - a company might pay a termination fee if it decides not to sell to the original purchaser and instead sells to a competing bidder with a more attractive offer. sometimes a breakup fee can discourage other companies from bidding on the company bc they would have to bid a price that covers the breakup fee - cash payment
A completely focused firm has an HI of...
1.00
Conglomerate merger:
A conglomerate merger is a merger between firms that are involved in totally unrelated business activities. ... Pure conglomerate mergers involve firms with nothing in common, while mixed conglomerate mergers involve firms that are looking for product extensions or market extensions.
Example of a horizontal merger:
Bayer (pharmaceuticals company) and Monsanto (agricultural company)
Example of a Tender Offer:
Johnson and Johnson and Mentor Corporation
Parties involved in a merger:
- target firm: firm that is being taken over - acquiring (or bidding) firm: firm who is attempting to takeover another firm **there may be more than one bidding firm (acquirer)**
If being takeover will yield a high return to target shareholders, how do we insure that target management will comply?
- target management do not want to lose their jobs - golden parachute - silver parachutes
Friendly merger:
- a situation in which a target company's management and board of directors agree to a merger or acquisition by another company - the merger is supported by the managements of both firms - most mergers now are friendly mergers
Lock-up option:
- a stock option offered by a target company to a white knight for additional equity or for the purchase of a valuable portion of their company - an undesired third party is deterred from acquiring a major portion of the target company due to the very high value of the lockup option
Defensive mechanisms: scorched earth:
- a takeover prevention strategy in which the target company seeks to make itself less attractive to hostile bidders by selling off assets, taking on high levels of debt or initiating other activities that may damage the company if it is purchased - basically target company trying to get rid of whatever they think the acquirer wants so that they will leave them alone
do mergers really create value?
- according to empirical evidence, acquisitions do create value as a result of economies of scale, other synergies, and/or better management - shareholders of target firms reap most of the benefits, that is, the final price is close to full value (acquirer shareholders DO NOT get most of the value) - target management can always say no - competing bidders often push up prices
Methods of acquisition: Open market purchases:
- buy enough shares of the open market to obtain controlling interest without engaging in a tender offer **hostile**
Herfindahl Index (HI):
- computed as the sum of the squares of the proportion of revenues derived from each line of business
Methods of acquisition: Negotiated Mergers:
- contact initiated by potential acquirer or by target firm **will be stock based (friendly)**
Defensive mechanisms: State of incorporation:
- ex. Delaware tends to support the target company
What are some valid economic justifications for mergers? (3)
- expansion - synergy - break-up value
Defensive mechanisms: (9)
- fair price provision - white knight - white squire - greenmail - supermajority voting requirements - classified board structure (staggered board) - state of incorporation - pacman defense - scorched earth
Types of mergers:
- horizontal merger - vertical merger - congeneric merger - conglomerate merger - acquisition **mergers are usually stock based (not actually buying)**
Defensive mechanisms: fair price provision:
- most companies don't use anymore
Main sources of synergy: (2)
- most of them come from the operating side (we think we can cut some costs) - a few come from the financial side (taxes)
Methods of acquisition: Proxy Fights: Proxy for directors:
- proxy fight: an unfriendly contest for the control over an organization. The event usually occurs when corporation's stockholders develop opposition to some aspect of the corporate governance, often focusing on directorial and management positions. - proxy for directors: attempt to change management through the votes of other shareholders **instead of trying to get enough shares to control the firm, I'm just going to fight to win the board of directors (VERY hostile)
Why are anti-takeover devices a catch-22?
- raise premiums if takeover goes through by forcing bidder to pay more - can prevent takeover from occurring - target SHs lose premium
Congeneric merger:
- related enterprises - a merger of firms in the same general industry, but for which no customer or supplier relationship exists
Defensive mechanisms: poison pill: (also known as shareholder rights plan)
- results in distribution of "rights" upon a change in control event with purpose of issuing securities at a lower price - implemented without shareholder approval - makes firm too expensive to buy **makes the companys stock look unattractive or less desirable to the acquiring firm**
Hostile merger:
- the acquisition of one company by another that is accomplished by going directly to the company's shareholders or fighting to replace management to get the acquisition approved - target firm's management (board) resists the merger - often, mergers that start out hostile end up as friendly, when offer price is raised
stock merger:
- usually friendly - acquirer approaches the board of directors of the target company and has them request SH approval of the merger - stock mergers require approval by target shareholders - acquiring company trades stock for the stock of the target company - assumes liabilities **the motivation is an opportunity to pay with stock rather than with cash ---> pays for all of the target company shares with a certain number of its equity shares (acquiring company basically issues new shares (adding to its number of outstanding shares) to provide shares for all the target firm's shares that are being converted)**
example of a vertical merger:
DuPont (scientific company) and Conoco (company who produces crude oil and natural gas)
Example of Congeneric merger:
Duke power and Pan energy
Cash or nonvoting securities:
Gains are taxable at the time of the merger
Defensive mechanisms: White squire:
They act like they will bail you out and merge with you, but they won't actually do it similar to a "white knight", but instead of purchasing a majority interest, the squire purchases a lesser interest in the target firm
Silver Parachute:
a form of severance paid to the employees of a company that is taken over by another company. - include severance pay, stock options, and bonuses - generally extended to a large number of employees - often appear as clauses in hiring contracts that call for lucrative severance packages if an employee leaves the company, or, in particular, after a merger or acquisition or other change in corporate control.
vertical merger
a merger between two companies that operate at separate stages of the production process for a specific finished product. A vertical merger occurs when two or more firms, operating at different levels within an industry's supply chain, merge operations. - technically merging with your supplier ex. if you had a tire manufacturer merging with a rubber manufacturer
____________ financed mergers are __________ than ___________ financed mergers
cash different stock
Defensive mechanisms: Poison put:
defense mechanism in which bondholders are provided with the option of obtaining repayment in the event that a hostile takeover occurs before the bond's maturity date. The right of early repayment is written in the bond's covenant, with the takeover representing the trigger event. - put option on bonds
Focus:
idea that you are concentrating on one particular business - degree of overlapping business
Acquirers can be friendly or hostile. The shares of hostile cash acquirers _________ those of friendly cash acquirers. What is one explanation of this?
outperform - one explanation is that unfriendly cash bidders are more likely to replace poor management
Defensive mechanisms: blank checked preferred stock:
stock which is authorized but not outstanding - if had no voting rights, can be assigned new voting rights - management could issue stock to themselves and provide the stock with high voting rights
