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